PM USA Raises Pack Prices Across All Brands

Reynolds American, Lorillard follow Philip Morris' lead

RICHMOND, Va. -- Altria Group Inc.'s Philip Morris USA is pushing through a price increase of six cents per pack across all of the company's cigarette brands, the second round of price rises the tobacco producer has taken on those products this year, reported Dow Jones. The maker of Marlboro and L&M cigarettes confirmed it would enact the price increase on shipments effective Dec. 3. The move was matched by rivals Reynolds American Inc. and Lorillard Inc., which have also now raised prices twice in 2012, said the news agency.

Reynolds American confirmed it would raise the list price on all cigarette brands by six cents per pack and increase the price of Camel Snus by five cents per tin. Lorillard, meanwhile, raised the list price by six cents per pack for all cigarette brands with the exception of Old Gold, which the company left unchanged.

The list-price hikes enacted by Winston-Salem, N.C.-based Reynolds American and Greensboro, N.C.-based Lorillard each go into effect on Friday.

Altria, the largest U.S. tobacco producer, typically leads on pricing decisions. In June, it raised the list price on cigarettes by six cents per pack, an increase that was matched by Reynolds American. Lorillard has been pushing through generally higher prices of late, the report said.

All three firms have heightened price promotions in a battle to win or defend market share as consumers remain under pressure due to a weak economy, Dow Jones said.

Though all three players enacted two rounds of list price increases last year, over that same period, the higher prices have not necessarily hurt consumers. Richmond, Va.-based Altria has kept a lid on the per-pack price for Marlboro with pricing promotions that have helped the company gain market share.

Stifel Nicolaus analyst Christopher Growe said he was relieved by Altria's pricing decision given the heightened promotions in recent months. Though Reynolds American and Lorillard ultimately raised their list prices, as many observers expected, Growe said he expects those rivals will keep spending on promotions to remain competitive.

"Raising prices on time and in line with history and our model should put investors' minds at ease," Growe wrote in an analyst note cited by the news agency. "We believe the threat of no or low pricing in December at least somewhat weighed on the valuations of U.S. tobacco companies."

UBS analyst Nik Modi in a research note cited by Dow Jones said pricing is a key driver to the sector's profits and stock performance. Modi said ultimately the larger tobacco firms should be in a position to take market share from deep-discount peers who are struggling with higher costs related to new U.S. Food & Drug Administration (FDA) regulation.

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Wells Fargo Securities analyst Bonnie Herzog said in a research note that the firm expected the price increase based on the results of its recent "Tobacco Talk" industry trade surveys. "The timing is slightly earlier than anticipated, although not too surprising given we had been hearing about wholesaler loading."

She said that PM USA is offering MLP Option Stores the opportunity to maintain their existing Marlboro retail selling prices through Dec. 15, 2012.

Other findings:

  • "We expect 4Q12 industry cigarette volume should be strong given inventory building by wholesalers in advance of this price increase. We expect overall cigarette net price realization to accelerate in 2013, and we have further conviction industry top line will improve during Q4 and beyond driven by stronger volume trends, higher list prices and easing promotional spending."
  • We believe [PM USA] will get more aggressive--offering creative, innovative products in 2013 to maintain its reign at the top of the U.S. tobacco market."