PM USA Raises Cigarette Prices

All brands see increases, promotional reductions; other manufacturers likely to follow suit

RICHMOND, Va. -- Calling it strictly an effort to achieve its business objectives, Altria Group Inc.'s Philip Morris USA announced price increases or reductions in its wholesale off-invoice promotions for all its cigarette brands.

As reported in a CSP Daily News Flash yesterday, PM USA is taking a 5-cent-per-pack or more price increase on all of its brands. We're trying to achieve our business objectives and we're always analyzing the market placeto help us determine the appropriate level of promotional spending, Bill Phelps, Richmond, Va.-based PM USA's [image-nocss] manager of media affairs, told CSP Daily News.

The increases, which go into effect Monday, September 10, and continue through Sunday, October 28, include:

A reduction in the off-invoice allowance of 50 cents a carton for the Marlboro, Parliament, Basic and L&M brands, reducing the total allowance from $4 a carton to $3.50. A reduction of the off-invoice allowance for Virginia slims by $2 a carton, reducing the total allowance from $4 to $2. And while the company is not changing its allowances for its other brandsincluding Benson & Hedges and Chesterfield Box, among othersit is increasing the list prices for those brands by 50 cents a carton, according to Phelps.

This price increase comes as a bit of a surprise considering a FET [Federal Excise tax] increase is likely, but could be a precautionary measure by the company, tobacco analyst Bonnie Herzog of Citigroup said in a research note Wednesday.

There is a consensus view among the trade that an FET increase will occur, Herzog said. In overwhelming fashion, over 92% of our trade contacts believe there is at least a 50% likelihood that there will be an FET increase on cigarettes effective in early 2008 based on a proprietary survey we just conducted. We also believe there will be an FET increase (80% probability).

Phelps would not comment on the proposed FET increase as it relates to the new prices. He also would not speculate on what will happen to prices after October 28. Herzog, however, said she believes the new pricing will be extended for some time. While recent trends have shown that manufacturers have not always followed each others' pricing actions, we believe that in this case it is likely that PM USA's competitors will take up pricing, she said.

She added that the price increases are a positive sign for the tobacco industry. It indicates to us that the industry still has some pricing power, she said. Furthermore, it suggests that even in the face of a potential federal excise tax increase (which we believe is likely) pricing power exists.

The last price increase (off-invoice reduction) taken by PM USA was a $1 per carton in December 2006 (60 cents per carton of this increase offset the step-up in MSA payments). Such increases have become an almost annual event for the cigarette industry.

To view a chart breaking down the changes in PM USA's off-invoice promotional allowance, click the Download Now button below.

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