Philip Morris Reportedly Testing 'MLP II' in Two States

Program allows higher retail prices, reduces promotional funding

Steve Holtz, Editor in Chief, CSP Daily News

RICHMOND, Va. -- Philip Morris USA is testing a new version of its Marlboro Leadership Price (MLP) program in two states, according to a Wells Fargo Securities research report.

The program is being tested in Michigan and South Carolina, according to Wells Fargo analyst Bonnie Herzog.

"The terms of the new MLP II program are effectively a price increase for PM USA since it requires retailers to raise their retail price points by [up to] 10 cents per pack on Marlboro and reduces the promotional funding from Philip Morris by 5 cents a pack," Herzog wrote in a research note Friday. "For example, under the current MLP program, a retailer receives 20 cents per pack in promo support on Marlboro if the retailer maintains a certain price point on Marlboros of, say, $5 per pack. However, if that same retailer chooses to go on the new MLP II program, he will receive 15 cents per pack in promo support on Marlboro if he maintains a price point on Marlboros of 10 cents more, or $5.10 per pack."

Herzog called the program a "win" for Philip Morris and a "possible" win for retailers.

"Philip Morris wins since we believe its new MLP II program should drive greater profitability for PM USA," she wrote. "Also, this could be a positive for those retailers who feel they can charge a higher price point per pack without sacrificing volume."

If the test markets are successful, Herzog anticipates the new program will roll out nationwide.

"This new program could also get consumers conditioned to accept higher retail prices for cigarettes and set the stage for the next cigarette list price increase, which we expect early in the summer," Herzog said. "Further, we think PM USA is possibly testing the waters to gauge consumer sentiment and the potential magnitude of its next list-price increase. This gives us further conviction that overall cigarette net price realization will accelerate this year, possibly above our current 4% growth estimate."

Many convenience store retailers were upset by the original MLP, saying it limited the amount they could charge for Philip Morris cigarettes and forced smaller margins.

Brian May, senior manager of communications for Philip Morris parent Altria, confirmed the program is in test. “Although the original Marlboro performance option is aligned with many retailers’ strategies, some retailers have expressed that they would like additional alternatives,” May told CSP Daily News. “PM USA believes that the MLP option addresses retailer feedback and it may better fit some retailers’ strategies.”

Steve Holtz, CSP/Winsight By Steve Holtz, Editor in Chief, CSP Daily News
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