Another Boost to Cigarette Prices

Philip Morris USA adds 6 or 8 cents to its brands, others expected to follow

CHICAGO -- Philip Morris USA will raise prices on its top-selling Marlboro and other cigarette brands, a company spokesman said on Monday. The Richmond, Va.-based unit of Altria Group Inc. is raising the price it charges wholesalers for Marlboro, Basic and L&M cigarettes by 6 cents a pack and the rest of its brands by 8 cents, Altria spokesman William Phelps told Reuters yesterday.

The average price of a pack of Marlboros was $5.29 in the third quarter, according to Reuters. The new prices take effect on Wednesday.

Phelps declined to comment on the reason for [image-nocss] the increase, but under a law passed in June that gives the Food and Drug Administration regulatory power over tobacco companies, those companies have to pay new fees to the agency.

UBS Research analyst Nik Modi wrote in a report that the price hike should alleviate concerns about discounting.

"Friday night, Altria announced to the trade a price increase across its cigarette portfolio," he wrote. "We expect this move by Altria to be followed by the rest of the industry (e.g. Reynolds and Lorillard), and we expect Altria to lead more price increases or reductions in promotional activity between now and the second quarter of 2010."

He added that the price hike is not a surprise.

"In order to get a clearer understanding on how consumption has fared since the passing of the federal excise tax increase [in April], we believe investors should be paying more attention to "wholesale-to-retail" trends rather than shipments (due to lower levels of inventory in the trade)," Modi wrote. "We estimate the cigarette category is down 8% YTD from wholesale-to-retail, which would put price elasticity squarely in line with its historical -0.3 price elasticity. We estimate Newport, Camel and Marlboro have declined 4-5%, 7-8%, and 9-10%, respectively."

Altria shares were up 16 cents, or almost 0.9%, at $18.09 in Monday morning trading.

Shares of rival Lorillard Inc. fell 5.6% after that company posted profit that missed analysts' estimates as it spent more on promotional offers to boost cigarette sales.