Another round of cigarette price increases set to begin

Another round of traditional cigarette price increases is set to begin next week, with Philip Morris USA leading the way with a 7-cent per pack increase.

Philip Morris confirmed today that the 2 percent list-price increase begins Sunday on its core cigarette brands, foremost top-selling Marlboro. It also includes a 7-cent per on Marlboro snus.

The list price is what wholesalers pay manufacturers for their products. The increases typically are passed on to customers.

Wells Fargo Securities analyst Bonnie Herzog expects R.J. Reynolds Tobacco Co. and Lorillard Inc. to raise their core cigarette prices by a similar amount. Officials with neither manufacturer could be reached for immediate comment on potential price hikes.

The last time the Big 3 manufacturers raised their prices was in November, also by 7 cents per pack. The manufacturers also raised their per-pack prices by 6 cents in May 2014.

Overall, this price increase is positive and demonstrates the industry still has very strong pricing power, Herzog said. This is coming on the heels of several quarters of very strong pricing.

Herzog said, as she has with previous price increases, that manufacturers remain realistic about the years-long pattern of declining adult consumption of traditional cigarettes.

Pricing remains a critical driver of revenue and remains necessary to drive top-line growth, Herzog said.

Analysts and advocates say price increases, however they come about, typically don’t affect smokers buying habits unless they are at least 10 cents a pack.

Pat Shehan, owner of the Tarheel Tobacco retail chain, has said price increases have pushed some blue-collar smokers to lower-cost brands, whether Marlboro Special Blend and Reynolds Pall Mall, or deeper-discount options. He said it also can help encourage smokers to choose as options roll-your-own, filtered cigars and possibly even electronic cigarettes.

In a separate report, Herzog said sales of e-cigs and vaporizers continued to grow.

The typical e-cig is a battery-powered device that heats a liquid nicotine solution in a disposable cartridge and creates a vapor that is inhaled. A vaporizer can be included and reused through the insertion of a liquid capsule.

Though e-cig year over year pricing has been negative for 12 consecutive periods, we believe it’s at least partially due to difficulty in capturing (SKUs) given the rapidly evolving vapor category and proliferation of vapors/tanks/mods and refills that tend to have a lower retail price/refill, Herzog said.

However, we remain encouraged that category dollar sales continue to grow, driven by Big Tobaccos national e-cig rollouts. We believe the trial and awareness generated by (Reynolds) Vuse and (Nu Mark’s) MarkTen should help elevate the entire category and drive incremental trial.

We continue to believe vapor consumption could surpass combustible cigs by 2025, Herzog said.

Herzog said Vuse remains the top-selling e-cig brand in all distribution channels at 33.5 percent market share, followed by Lorillards blu eCigs at 23 percent and Logic at 14.4 percent. MarkTen was at 6.9 percent.

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