Cigarette Volumes Starting Back on Deceleration Trend

NEW YORK — Cigarette sales have been on a high note over the past year or so; however, the run may be over.

Citing recent trends in sales, Wells Fargo Securities LLC's Bonnie Herzog said in a new report that cigarette volumes are starting to decelerate toward historical trends — down 3 to 4 percent. The change has been expected in the tobacco industry. 

Herzog is managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

As she noted, Ankeny, Iowa-based Casey's General Stores Inc. reported a soft first quarter of fiscal year 2017 and management attributed that in part to the deceleration of cigarette sales. This was consistent, she added, with comments made by Altria Group Inc.'s Chief Financial Officer William Gifford during Barclays Global Consumer Staples Conference on Wednesday.

At the conference, Gifford said Altria is "starting to see overall industry volumes move back in the direction'' of long-term trends of down 3 to 4 percent, according to Herzog.

"In our view, this deceleration should be expected given the tough comps from the unusually strong industry cigarette volumes over the past year [essentially flat]," Herzog said. "As such, we continue to estimate total cigarette industry volumes to decline around 2 percent in [fiscal year 2016 earnings] and decelerate to negative 3 percent in [fiscal year 2017 earnings]."

Even with the return to historical numbers, Wells Fargo Securities remains bullish on the tobacco sector despite volume headwinds that should be more than offset by strong industry pricing and continued cost savings, she added.

The uptrading to premium cigarette brands is also taking a hit. According to Herzog, Casey's management also noted a ''migration away'' from trade-up activity to premium brands in its stores and a shift from cartons to pack purchases. 

This echoed retailer comments captured in Wells Fargo Securities' recent Tobacco Talk survey which indicated a slightly more competitive environment, especially between value and deep discount brands as relative price gaps widen, she said.

"However, we believe price gaps between premium and deep discount brands are still quite narrow at 30 percent [vs. mid-30 percent three years ago], which should continue to prevent substantial downtrading pressure," Herzog added.