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Data Uncovers the Main Cause of Cigarette Volume Decline

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RBC weighs e-cigarette competition vs. price increases

NEW YORK -- Since early 2013, cigarette volume declines have averaged 4.1% per quarter and have recently accelerated to down 4.5%, according to new data from RBC Capital Markets, New York. Historically, cigarette volumes have declined in the range of 3% to 4%, with pricing averaging around +4%. “Many investors have expressed concern about the above-trend decline rate.” The main culprit is typically believed to be the e-cigarette category, RBC reported in a recent Picture of the Week report.

 While we have no doubt the emergence of e-cigs has had some impact on overall cigarette consumption, we believe today's higher rate of decline has more to do with higher than expected price realization,” RBC said. “Initially, we had expected industry volumes to be down about 4% this year on +4% pricing; however, we have seen price realization closer to 6%.”

When adjusting for the increased pricing using historical price elasticity of -0.35, RBC noted that “volume declines have actually moderated to within their historical range. Said another way, we believe it is the increased price realization that is driving the higher volume declines vs. consumer shift to e-cigarettes.”

Here, a look at RBC’s model on cigarette volume decline rates adjusted for higher prices.

Cigarette Volume Decline Rates Adjusted for Higher Price Realization

Pricing change3.0%2.8%3.5%2.7%3.8%4.3%3.8%4.0%4.6%5.9%
Volume change-2.5%-3.0%-3.5%-3.0%-4.5%-4.0%-3.5%-4.0%-4.5%-4.5%
Volumes adjusted for elasticity-2.8%-3.4%-3.7%-3.5%-4.6%-3.9%-3.6%-4.0%-4.3%-3.9%
   2-year average-3.1%-3.6%-3.9%-3.2%-3.7%-3.6%-3.6%-3.7%-4.4%-3.9%
   3-year averageNANANANA-3.6%-3.7%-3.6%-3.5%-3.9%-3.7%

Source: RBC Capital Markets

Note: Pricing calculated as the average of the big 3 net realized pricing. Volumes are industry adjusted volumes. Volumes adjusted for elasticity calculated as the total industry volume growth rate less the impact of incremental pricing above or below the historical average of 4% using an elasticity of -0.35.

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