Tobacco Trends

Smith Barney survey shows categories' ups and downs; PM USA sees quarterly growth

NEW YORK -- Promotional spending for major manufacturers' cigarettes is down, but downtrading is at a minimum. More smokers are entering the smokeless-tobacco category, but smokeless sales growth may not be sustainable. These are just some of the findings of a survey of cigarette retailers and wholesalers conducted by Smith Barney.

Based on the results of the survey, Smith Barney, New York, accurately predicted strong second-quarter results from Philip Morris, which the survey report noted has benefited from the decreased level of promotional spending. [image-nocss] The proof came yesterday as Philip Morris' parent company, Altria Group Inc., posted higher quarterly earnings for the second quarter, mainly on the back of its cigarette sales.

Both our domestic and international tobacco businesses continued to perform strongly, said Louis Camilleri, chairman and CEO of Altria Group.

Philip Morris USA (PM USA) achieved solid income growth and strong share performance for its focus brands, Marlboro, Parliament, Virginia Slims and Basic, according to the company. Shipment volume of 49.3 billion units was up 1.4% from the previous year but was essentially flat when adjusted for the timing of promotional shipments and the timing of trade purchases in advance of the Fourth of July holiday.

PM USA maintained its share of the premium cigarette category at 62.0% in the second quarter vs. the year previous. In the discount category, PM USA's share increased 0.4 share points to 16.4%, driven by Basic. For the total industry, the premium category increased 0.3 points to 73.7% in the second quarter of 2005, while the discount category declined to 26.3%.

In its quarterly earnings report, PM USA also noted that it will begin test marketing Parliament Blue during the third quarter. Featuring contemporary new packaging, Parliament Blue will be available at retail stores in an unnamed test market beginning in late August.

Meanwhile, Smith Barney's survey points out several trends in both cigarette and smokeless tobacco products worth noting for retailers.


Overall promotional spending is down for the major manufacturers during the second quarter vs. the first quarter, likely leading to higher profitability for the manufacturers. Philip Morris' buy-downs on Marlboro and Basic declined during the quarter as reported in CSP Daily News, while other manufacturers' buy-down amounts were mostly flat vs. the first quarter. Higher prices are sticking, and downtrading is at a minimum. Relative and absolute price gaps between premium and deep-discount brands increased very slightly to 48% and $1.22 per pack. Lorillard should take shipment share during the second quarter, while Philip Morris and Reynolds likely lost shipment share to the deep-discount brands. However, Philip Morris' retail share probably increased. The menthol market should remain strong. Newport continues to own the category.


More smokers are entering the smokeless category, but entering the cheaper price category vs. the premium, contrary to what management has indicated. Lower-priced brands are stealing share from Copenhagen and Skoal. United States Smokeless Tobacco Co. (USSTC) has increased promotions to compete with cheaper brands. Innovation may no longer be working: Skoal Apple sales are slowing and Skoal Peach sales are not as strong as Apple. Therefore, USSTC has a difficult comparable to lap this quarter. A majority of respondents stated Husky is the cheapest brand they are carrying. Retailers and wholesalers indicate smokeless growth may be unsustainable.