Cigarette Pricing to Accelerate in May-June

Wells Fargo survey predicts Philip Morris will lead six-cent increase

Melissa Vonder Haar, Freelance Writer

NEW YORK -- At last month's NATO Show, Wells Fargo Securities LLC senior analyst Bonnie Herzog predicted that cigarette pricing would accelerate by at least 4% in 2013 and that the Richmond, Va.-based Philip Morris USA would lead the charge. Turns out, most retailers agree with that estimate.

In Wells Fargo's most recent "Tobacco Talk" survey, an overwhelming 91% of respondents said the Philip Morris would lead the next round of cigarette price increases--and that those increases are not far away.

"Most of our retail trade contacts are expecting the next price increase towards the end of May or the middle of June," Herzog wrote in her report of the survey. "Almost half or our industry contacts are predicting a list price increase in the range of six cents per pack with 76% predicting an increase in the range of five to seven cents per pack."

Herzog went on to note that it was Philip Morris that initiated the last round of price increases in November 2012 with a six-cents-per-pack raise–which was quickly followed by Winston-Salem, N.C.-based Reynolds American Inc. and Greensboro, N.C.-based Lorillard Tobacco Co.

Most of the 45,000 retailers surveyed recognized that the major manufacturers' ability to raise cigarette prices to offset decreasing volumes has led to an increased pricing power: 85% of respondents said manufacturers had at least the same amount of pricing power as they did a year ago, with 40% indicating they had more pricing power; only 15% believe pricing power is less than it was last year.

"Pricing remains key to the story for tobacco manufacturers since they generate three times the earnings leverage on a point of pricing versus a point of volume," Herzog wrote.

Still, many survey respondents pointed out that this pricing power can only last so long if volumes continue to decline at such a steep rate.

"As total units decline and as a natural function of the 1998 MSA agreement, manufacturers are now seeing more money in their pockets," said one respondent. "Tie to this, less promotional spending and that gives them pricing power … for now. If volume declines repeat second quarter, I'm sure we will see some of that money put back into additional promotions."