RICHMOND, Va. & WINSTON-SALEM, N.C. -- The major tobacco companies have announced cigarette list price increases.
Altria announced to the trade on Nov. 11 that it will raise list prices across its core brands cigarette portfolio by seven cents per pack or 70 cents per carton (approximately 2% to 3%) effective Nov. 15.
"From a timing perspective, this price increase is in line with Philip Morris USA's cigarette price increase last year, which was announced on Nov. 12, 2014, and became effective on Nov. 16, 2104," Bonnie Herzog, Wells Fargo Securities analyst Bonnie Herzog. "We also find PM USA’s timing interesting given that Reynolds American Inc.'s new retailer contracts become effective next week as well as given ITG’s stepped-up promos behind Winston."
She continued, "This price increase is positive and demonstrates the industry still has very strong pricing power, which is coming on the heels of several quarters of very strong net price realization for the manufacturers (6% to 7%). Given that underlying cigarette industry consumption will likely revert towards its long-term trend of declining, pricing remains a critical driver of revenue and earnings growth."
This is the second price increase this year, consistent with the company’s strategy of raising prices twice a year, RBC Capital Markets analyst Nik Modi said in a research note.
As expected, R.J. Reynolds Tobacco, Santa Fe, Ligget Vector Brands and ITG all announced cigarette price increases of seven cents per pack.
Reynolds took a seven-cents-per-pack increase on its key growth brands; Camel (excluding Non-Filter), Pall Mall Box (Savings), Newport, Doral and Red Kamel, but took an 8.8-cents-per-pack increase on Camel Non-Filter, Pall Mall (Full-Price) and several other of its non-growth brands, said Herzog, "which is to be offset by slightly higher discount terms on these non-growth brands except for the brands acquired from Lorillard."
Reynolds' price increase became effective on orders placed after Nov. 12.
ITG announced a seven-cents-per-pack increase on Winston, Kool, Salem and Maverick, effective Nov. 13.
"ITG made no changes to its current off-invoice discount values for any of its brands and reminded its customers that the full value of all off-invoice promotional allowances must be passed on to their customers," Herzog said.
Santa Fe also took a seven-cents-per-pack increase on its Natural American Spirit brand, which became effective for orders billed after Nov. 12.
Liggett also took a seven-cents-per-pack price increase on its brands except on Eagle 20s. "We expect this continued pricing power to help drive momentum in tobacco stocks," she said.
Concerning ITG's greater discounting behind Winston, Herzog wrote, "We don’t believe the overall strong pricing environment will be negatively impacted given ITG Brands’ anticipated greater discounting behind Winston and possibly on one of its menthol brands such as Kool. In fact, based on dialogue with our numerous industry retailer contacts, most believe that ITG has an uphill battle given the brands it acquired and given RAI’s new Every Day Low Price (EDLP) retailer contract, which will make it more difficult for ITG to price aggressively and to secure shelf space. Having said that, we anticipate ITG could drive accelerated profitability as it strikes a balance between stabilizing Winston’s share and milking its other brands."
All of the announcements "are generally in line with the timing of price increases last year," said Modi. "We see these announcements as a positive for our bullish thesis on the tobacco pricing environment and expect strong fundamentals for the category to continue to be driven by a boost in c-store traffic and higher disposable income for low-income consumers (due to lower gas prices and wage inflation).
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