NEW YORK -- Back in April, 46% of retailers questioned as part of Wells Fargo’s “Tobacco Talk” survey predicted the next cigarette price increase would occur between May 9 and May 16, with 70% anticipating a 6- to 8-cents-per-pack increase. Last week, those predictions came to fruition when Altria Group Inc. announced a 7-cents-per-pack increase across all brands (including Marlboro) on May 11. The wholesale list price increase applies to shipments on or after May 15.
“From a timing perspective, this price increase is roughly in line with [Altria’s] cigarette price increase last year that became effective on May 17, 2015,” Wells Fargo analyst Bonnie Herzog wrote in a research note. “We had been anticipating this price increase based on feedback in our ‘Tobacco Talk’ surveys.”
As predicted by Herzog and retailers alike, fellow manufacturers quickly followed suit. Reynolds American Inc., ITG Brands LLC and Liggett Vector Brands LLC all announced similar 7-cents-per-pack increases to wholesale list prices (including Reynolds’ Santa Fe Natural Tobacco Company products) on May 12. Herzog noted there were no changes to Reynolds’ current off-invoice discount values of $14.40 per carton on Newport’s nonmenthol styles.
Even after the strong cigarette environment of the last year, Herzog sees these price increases as a net positive for the industry, pointing out that manufacturers realize nearly three times the leverage on earnings from increasing prices by 1% vs. earnings from a 1% volume increase.
“Overall this price increase 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 manufactures,” Herzog said. “Given that underlying cigarette industry consumption will likely revert toward its long-term trend of declining, pricing remains a critical driver of revenue and earnings growth.”
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