The largest U.S. tobacco manufacturer, Philip Morris USA, is raising the list price for most of its traditional cigarettes by at least 6 cents per pack, a leading industry analyst said Thursday.
The increase, set to begin Sunday, was unexpected in that Philip Morris’ recent pattern has been to raise prices every six months — the last occurring in April at 9 to 11 cents per pack.
The list price is what wholesalers pay manufacturers for their products. The increase typically is passed on to customers.
It is the 10th confirmed increase for Philip Morris USA since May 2014, and likely will be the same for R.J. Reynolds Tobacco Co. and ITG Brands LLC since they typically tend to quickly match Philip Morris pricing.
The 6-cent per pack increase affects top-selling Marlboro and all Philip Morris brands outside L&M.
Wells Fargo Securities analyst Bonnie Herzog said the latest price hike “reflects Philip Morris USA’s tremendous pricing power.”
The price hike also is likely meant to help the manufacturers offset continuing volume declines.
Philip Morris USA and British American Tobacco Plc, parent company of Reynolds, have both issued guidance of a 4% to 5% volume decline for 2019. Herzog projects volume decline in a range of 4.8% to 6%.
“Given the continued pressure on cigarette volumes, we think this is a key reason Philip Morris USA is being more aggressive with pricing,” Herzog said.
“In fact, we wouldn’t be surprised if they took another increase in the fall or later this year.”
The manufacturers are again testing the elasticity of their customers’ disposable income, Herzog said.
Cigarette manufacturers “likely face even greater (revenue) pressure under the FDA’s effort to lower nicotine levels in combustible cigarettes, an event we continue to view to be several years away given the complexities of issues ahead,” Herzog said.
“Therefore, we believe pricing will remain a critical driver of revenue and earnings growth.”
There had been some retailer concern about raising prices given the increasing popularity of electronic cigarettes, including Juul with its 74.5% market share in May.
Juul’s e-cig dominance attracted a $12.8 billion investment from Altria Group Inc. on Dec. 23 for a 35% ownership stake. Altria is the parent company of Philip Morris USA.
Herzog said that for all their buzz, e-cigarettes remain as just the fourth largest tobacco product with 4% of retail tobacco sales, compared with 83% for traditional cigarettes, 8% for chewing and smokeless tobacco and 5% for cigars.