Competitive Cigarette Environment Improves

Meanwhile, electronic cigarette category growth is accelerating, says Herzog

NEW YORK -- Respondents to a recently conducted survey of tobacco retailer and wholesaler contacts representing more than 45,000 U.S. convenience stores revealed that the competitive environment improved during fourth-quarter 2012, with fewer respondents indicating a competitive environment versus the third quarter.

"This bodes well for improved net price realization," said Bonnie Herzog, New York City-based managing director of beverage, tobacco and consumer research for Wells Fargo Securities LLC, in the most recent "Tobacco Talk."

The survey also showed that total cigarette industry volumes should be down about 3% during the fourth quarter, in line with long-term trends; 52% of survey respondents suggested overall cigarette category volume was flat-to-up during the quarter, in line with survey responses during the third quarter when where 48% of respondents indicated similar trends.

"We anticipate industry reported volume to be down about 3%, lapping a tough comp of [a decline of] 2.8% in fourth-quarter 2011, due to later timing of the December price increase in 2011 versus 2012," she wrote.

Marlboro volume and promotional trends were "solid" in the fourth quarter, the survey said. "We have further conviction that [Philip Morris USA] is innovating and achieving a better balance between growing Marlboro profitably and maintaining strong brand equity.

Wells Fargo contacts indicated that Marlboro year-to-year volume increased 1.2% in fourth-quarter 2012, accelerating from 0.7% in the third quarter, demonstrating PM USA's continued success leveraging innovation on Marlboro and driving incremental share gains.

A trade contact told Wells Fargo that promotions on certain Marlboro lines are decreasing in January and February by $1 per carton.

Newport Menthol promotions are working to drive volume growth, said the report. Year-to-year volume accelerated to 1.9% during the fourth quarter compared to about 0.5% in the third quarter, driven by higher promotions; 45% of the contacts indicated that volume increased in the fourth quarter compared to only 37% in the third quarter. Promotional support for Newport increased 2.3% in quarter four versus 1.1% in quarter three.

Survey results indicate that promotions on Newport Menthol are driving volume momentum for the brand "and we believe [Lorillard] will continue to maintain its industry-leading pricing power in the menthol segment ... despite higher promotions," Herzog said.

And Camel volumes picked up in fourth-quarter 2012 driven by higher promotions. Year-to-year volume trends are up 0.2% in quarter four from a decrease of 0.1% in quarter three, driven by higher promotional support for the brand. "We believe Camel may pick up some share this quarter due to increased promotions," she wrote. "However, the growth of the brand is expected to remain sluggish."

Meanwhile, the electronic cigarette category growth is accelerating, Herzog said--annual growth is estimated to be more than 20%. Also, it appears that retailers are continuing to carry more SKUs. More than 50% of survey respondents indicated that e-cigarette purchases are repeat purchases versus trial. "Commentary around blu e-cigs was very positive, and we have incremental conviction that blu will be a success for" Lorillard, she said.

 "We continue to expect consumption of e-cigs will surpass consumption of traditional cigs in the next decade, Herzog concluded.