C-store Cigarette Revenue Ticks Up With Price Hikes

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C-store Cigarette Revenue Ticks Up With Price Hikes


NEW YORK -- One month after the three major tobacco companies implemented cigarette price increases, the majority of convenience store retailers participating in a recent survey reported an uptick in cigarette per-pack revenue.

According to Bonnie Herzog, managing director, beverage, tobacco and consumer research at Wells Fargo Securities LLC, nearly 90 percent of respondents to Wells Fargo Securities' recent “Q2 2012 Tobacco Retailer Survey” said the recent price increases generated incremental per-pack revenue. Full realization of the increased pricing should occur in the third quarter, she added.

In addition, Herzog stated that 92 percent of respondents said they passed the entire increase on to consumers, although the amount passed through seems to be largely dictated by manufacturer pricing contracts. Half of those surveyed also indicated they were able to build additional inventory in advance of the price increases, likely driving better than expected reported volume in the second quarter, Herzog noted.

The survey included tobacco retailer and wholesale trade contacts representing more than 10,000 convenience stores across the United States.

The survey also found that second-quarter cigarette industry volume growth will likely be above historical trends, primarily due to inventory levels being de-loaded at the end of the first quarter, as well as Wells Fargo Securities’ estimate that half of the trade was able to build inventory positions ahead of the mid-June price hikes.

"Bottom line, we expect reported industry volume to be down 3 percent in Q2," Herzog said.

As for specific brands, "Marlboro's reinvigorated brand architecture is yielding positive results as we continue to see signs that [Philip Morris USA] is achieving a better balance between leveraging Marlboro to profitable growth and maintaining strong brand equity," she said.

R.J. Reynolds' Camel volume trends are weak on "flattish" promotions, she explained, and Pall Mall is still feeling the pressure with volume expected to be down in the second quarter.

As for Lorillard Inc.'s brands, Newport Menthol is still going strong with volume up on flat promotions, and Newport Red volume is showing steady momentum with higher promotions, Herzog added.

Aside from cigarettes, smokeless volumes are increasing, as the segment is being helped along by increased promotional support. Specifically, Grizzly remains the growth driver in the category, according to Herzog. “However, we remain concerned due to [the] increasing downtrading trend, particularly with the launch of value-priced line extensions of Copenhagen and Skoal -- is another battle of the brands brewing? -- and [due to] category pricing environment as promotions continue to heat up," Herzog said.