Traditional cigarette prices are on the rise again as tobacco manufacturers continue to try to offset increasingly lower demand for their product.
The largest U.S. tobacco manufacturer, Philip Morris USA, raised the list price by 8 cents per pack on Sunday for most of its brands for an unusual third time this year, according to a leading industry analyst.
That includes top-selling Marlboro, which owns a 47.4% market share according to Nielsen data on convenience store sales. R.J. Reynolds Tobacco Co. and ITG Brands LLC typically match the price hikes quickly.
The list price is what wholesalers pay manufacturers for their products. The increase typically is passed on to customers. The increase was unexpected since Philip Morris USA typically raises prices every six months. It raised prices by 9 cents to 11 cents per pack in April and by 6 cents per pack in June.
The price hike also affects 11 other Philip Morris USA brands, including Basic, Chesterfield, L&M, Parliament and Virginia Slims.
“We expect R.J. Reynolds and ITG Brands will follow MO’s lead and increase prices in the next few days, but possibly not as robust of an increase,” Wells Fargo Securities analyst Bonnie Herzog said Friday.
Reynolds could not be immediately reached for comment on its price plans. ITG spokesman Mark Smith confirmed Friday a price increase but did not say by how much.
It is the 11th confirmed increase for Philip Morris USA since May 2014, and likely will be for the other Big Three manufacturers.
“Overall, we expect tobacco stocks will react favorably to this list-price increase since it affirms the industry’s continued strong pricing power,” Herzog said.
“This trend is important given ongoing secular declines in volume.”
Herzog has said cigarette volumes could be down as much as 6% this year.
British American Tobacco Plc, parent company of Reynolds American Inc., and Altria Group Inc., parent company of Philip Morris USA, have said the decline could be between 4% and 5%, while Imperial Brands Plc, parent of ITG, has said it could be between 4.5% and 5%.
The manufacturers are again testing the elasticity of their customers’ disposable income, Herzog said.
“Tobacco manufacturers will likely face even greater pressure under the Food and Drug Administration’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.
“We believe pricing will remain a critical driver of revenue and earnings growth, particularly as manufacturers realize almost three times the leverage on earnings from a point of pricing than a point of volume.”
Some anti-smoking industry analysts said they believe Philip Morris USA was stirred to conduct a quicker-than-normal price increase with electronic cigarettes facing heightened societal and regulatory scrutiny.
“By any measure, the pricing power of the U.S. cigarette companies is extraordinary,” said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.
“That it does not trigger Federal Trade Commission actions, even more so.”
However, some anti-tobacco advocates consider each per-pack hike as an increasing disincentive for buying traditional cigarettes, particularly among low- to moderate-income individuals.
“Anyone thinking these companies really want to see a transition to new non-combustible technologies is failing to ‘follow the money,’” Sweanor said.
Herzog said that for all their buzz, electronic 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.