NEW YORK -- At this year’s NACS State of the Industry Summit, “flat is the new up” became something of a rallying cry when discussing the huge boost essentially flat cigarette sales are giving retailers after so many years of decline.
Vivien Azer, an analyst for the New York-based Cowen Group, noticed another theme emerging in the first quarter of 2015: mind the gap.
“Price gap management was a key theme in U.S. cigarettes 1Q15 earnings season,” Azer wrote in a research note. “More aggressive pricing at the low end is keeping the pricing landscape rational and driving trade-up.”
Yes, volume declines have eased over the last nine months. But Azer believes the truly promising trend has been the triple threat of better volumes, accelerated pricing and premium up-trades, adding “it is particularly impressive that this volume improvement coincides with accelerating pricing, as it reflects robust and predictable price elasticities.”
Altria Group Inc. reported cigarette volumes were down a modest 0.5% in the first quarter of 2015, while Reynolds American Inc. reported volumes were actually up 0.5%. Either way, these figures “stand in stark contrast” to the 3 to 4% decline rate of the last decade.
Azer said multiple factors could be contributing to improving volumes: narrowing price gaps between cigarettes and smokeless, an improved economic outlook for the core tobacco consumer, and some consumers shifting away from e-cigs.
“While the drivers are debatable, the outcome is clear, as the industry is delivering the best profit growth that we have seen in a number of years,” she said. “Price gaps continue to evolve in the industry, as we are seeing outsized pricing at the low end of the category, which in turn is facilitating trade-up.”
According to Cowen research and company reports from Altria, Reynolds and Lorillard Tobacco Inc., Marlboro, Newport, Camel and Natural American Spirit all gained share in this quarter and the premium segment overall was up 0.7%.
“This positive mix shift reflects in part, we believe, price gap compression that is making it easier for consumers to trade up to more premium priced cigarettes,” said Azer. “Importantly, we view these trends as sustainable, as the market share gains are concentrated among the leading industry brands, which control 100% of the premium tobacco category.”
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