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Cigarette Competitiveness Ticked Up in Q3, Retailers Say

NEW YORK -- With the third quarter now in the history books, a recent survey of tobacco retailers found that almost 70 percent of respondents stated the competitive environment was more competitive during the quarter compared to the second quarter.

Wells Fargo Securities LLC's tobacco retail survey cited several factors for the increased competitiveness: higher gas prices, channel shift to drug and dollar stores, manufacturing pricing programs, and new product introductions.

And when all is said and done, third quarter reported cigarette volume growth will likely be above historical trends, according to Bonnie Herzog, managing director of beverage, tobacco and consumer research at Wells Fargo Securities. She pointed to inventory build ahead of several new product introductions; and other inventory fluctuations including de-loading post the mid-June price increases and third quarter 2011's industry shipment volume decline of 6.5 percent which provides the third quarter 2012 with an easy comp. "We expect reported industry volume to be down -2 percent (better than historical declines of about 3.5 percent)," she said.

Despite the increased competitive environment, the majority of Wells Fargo Securities' contacts expect cigarette prices to tick up in December. Philip Morris USA is expected to lead the price moves, with estimates putting the increase at 7 cents per pack, Herzog said.

As for specific brands, Herzog said that Marlboro is likely positioned for future share gains. In addition, Newport Menthol volume is up, but decelerating on slightly higher promos; and Camel volume trends are lukewarm on heightened promos, she added.

On the electronic cigarette front, Wells Fargo Securities found that more retailers are accepting e-cigarettes and allocating more space. The news is not surprising, Herzog notes, since retailer gross margins on the e-cigarettes are 25 percent higher than traditional cigarette margins. "We continue to expect consumption of e-cigs will surpass traditional cigs in the next decade," she added.

Furthermore, the smokeless category is still experiencing robust growth trends with Grizzly driving the bulk of growth. Promos have accelerated slightly, although reduced buydown rates on Copenhagen and Skoal started in September, Herzog added.


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