PM USA Confirms Price Increase

Prices raised across brands; L&M promotional allowance reduced

Linda Abu-Shalback Zid, Senior Editor

RICHMOND, Va. -- Altria Group Inc.'s Philip Morris USA has confirmed that the company is raising its cigarette prices, effective December 12. Pricing will increase five cents per a pack across all cigarette brands, according to company spokesperson Greg Mathe. L&M took a change in its off-invoice promotion allowance by 21 cents per a pack. He declined to comment on the reasoning behind the changes.

During a CSP CyberConference earlier yesterday, Nik Modi, analyst at UBS Securities LLC, New York, had predicted cigarette increases from the Big Three would come this month, as part of a "normal pattern" of increases.

In a followup report, Modi and associate analysts Benjamin Schmid and Russell Miller said they "continue to expect the major cigarette players to maintain a rational pricing environment."

The five reasons cited included that cigarette pricing is key to stock outperformance, price gaps between premium and discount are at all-time lows, Reynolds American Inc. and Altria are more than cigarettes, the Big Three have taken more share of the discount segment and Altria could trip debt covenants.

According to Wells Fargo senior analyst Bonnie Herzog, "PM USA's list price increase is encouraging in light of its recent modifications to its controversial [Marlboro Leadership Price] program since this increase should appease most retailers as it allows them to increase their margins."

As previously reported in CSP Daily News (see Related Content below), the program's modifications go into effect January 1.

"Overall, we believe this price increase is positive and the industry still does have some pricing power. Given that consumption will likely continue to decline in the mid-single-digit range, pricing is necessary to drive top-line growth," said Herzog.

A report from Christina McGlone and Andrew Kiely, research analysts at Deutsche bank, equated the  increase to an incremental 2% list-price increase, bringing fiscal year 2011 to +5%. (The company had a nine-cent increase in July.) This latest increase "comes late in the quarter to have much impact on Q4 estimates," according to the report.

All of the analysts predict Reynolds and Lorillard Inc. will follow with their own increases. At press time, Reynolds spokesperson David Howard said the company had nothing to report; Lorillard Inc. had not yet responded.