Big Three Raise Cigarette Prices

Reynolds American, Lorillard follow PM USA with increases

Linda Abu-Shalback Zid, Senior Editor

WINSTON-SALEM, N.C. -- Following an announcement Wednesday that Altria Group Inc.'s Philip Morris USA is raising its cigarette prices, Reynolds American Inc. also confirmed a five-cent list-price increase. And Lorillard Inc. is also reportedly instituting a six-cent increase.

David Howard, spokesperson for Winston-Salem, N.C.-based Reynolds, told CSP Daily News, that its increase affects its growth brands of Camel and Pall Mall, as well as its support brands of Winston, Salem, Kool, Doral and other others. The increase went into effect December 9.

He pointed out that it is a list-price increase to the company's wholesale and direct-buying customers. "We don't set the price at retail," he added. He said the company also does not comment on pricing strategies.

Christina McGlone and Andrew Kiely, research analysts at Deutsche Bank, New York, wrote in a report, "We view this as a further indicator of category rationality, supporting our positive view of the pricing environment in both the premium/discount tiers." They pointed out that this is the second increase for Reynolds, following a nine-cent per pack increase in July.

Analyst Nik Modi and associate analysts Benjamin Schmid and Russell Miller at UBS Securities LLC, New York, reported that Lorillard would also raise prices by six-cents per pack on its entire cigarette portfolio, effective December 12, calling the increase "indicative of the Newport brand's loyalty and potential to continue to take cigarette market share despite a higher price point."

There would be no change in promotional allowances for Newport Non-Menthol, according to the report.

Effective December 12, pricing will increase five cents per a pack across all PM USA cigarette brands, according Greg Mathe, spokesperson for the Richmond, Va.-based company. 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.

According to Bonnie Herzog, senior analyst at San Francisco-based Wells Fargo, "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.

McGlone and Kiely 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.

During a CSP CyberConference late last week, 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, Schmid and 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.