Cigarette Prices to Rise, as Vapor Takes Sales

NEW YORK — Industry cigarette volume for the third quarter is expected to be down 5 percent, according to Wells Fargo Securities LLC's latest Tobacco Talk survey of tobacco retailer and wholesaler contacts, representing more than 30,000 U.S. convenience stores.

The main culprit for declining tobacco shipments is an inability by wholesalers and retailers to offset the impact from the vapor category, the report concluded.

"The broad vapor category continues to accelerate and our contacts believe 4.2 percent of combustible cigarette volume is being displaced into vapor — up from 3.4 percent in Q1 2014," wrote survey author Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities.

Perhaps as a result of lower volume, Wells Fargo Securities expects the next cigarette list price increase to be 6 cents or 7 cents, and begin on or near Nov. 20, a week earlier than usual.

Overall, Wells Fargo Securities is bullish on the tobacco industry. The Wall Street analyst firm maintained its "overweight" rating on the overall tobacco industry and cited Reynolds American Inc. as its top investor stock pick.

The latest Tobacco Talk research revealed that 97 percent of c-store retailers expect the Federal Trade Commission (FTC) to approve the already announced Reynolds American-Lorillard Inc. merger. However, many survey participants believe some modifications or additional brand divestitures must take place for the transaction to be approved.

Wells Fargo Securities believes the FTC will approve the merger and it will close in early 2015.