Combustible Cigarette Environment Stays Healthy

NEW YORK  — The market for combustible cigarettes at convenience stores remains strong, according to the latest Tobacco Talk survey released Friday by Wells Fargo Securities LLC.

The investment firm surveyed tobacco retailer and wholesaler contacts representing 30,000 U.S. c-stores. The findings concluded that combustible cigarette sales at c-stores are robust for three reasons:

1. Strong manufacturer net price realization of about 5 percent to 6 percent in 2016’s first quarter, driven by favorable macro tailwinds supporting increased tobacco consumption, consumer uptrading to premium brands, and relative promotional stability;

2. Solid industry volume, with an expected first-quarter decline of only 1.5 percent, despite lapping a tough year-over-year comparison; and

3. Moderating growth in vapor sales as disenchanted consumers return to combustibles.

“We remain bullish on the U.S. tobacco sector and believe the risk/reward is favorable ahead of both [Altria Inc.] and [Reynolds American Inc.] first-quarter results based on incrementally more positive feedback from our retailer contacts,” wrote Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities. “We reiterate our ‘Outperform’ ratings on [Reynolds American] and [Altria] and expect both companies' first-quarter calls will be upbeat.”

The new Tobacco Talk survey also concluded the following:

• Retailers expect Newport to gain 125 basis points of incremental share in 2016, up from their previous forecast of a gain of 95 basis points in December. “We believe this more bullish outlook reflects Newport's faster growth as part of RAI's every-day-low price (EDLP) retailer program, which has driven greater shelf space for the brand and share gains for Reynolds American’s entire portfolio.”
• Marlboro’s MHQ mobile app is promising. “While still early, we're encouraged by retailers' feedback on the app, which suggests [Altria] is improving on customer engagement (63 percent using app in stores vs. 51 percent in December). “Retailers cite increased consumer loyalty, incremental traffic, ease of use and quick repayment, but are somewhat wary that it targets a rather narrow segment of the smoking population (tech savvy, younger, urban) and may take time to meaningfully catch on.”
• More retailers (63 percent) expect ITG to lose cigarette share, up from 60 percent in the fourth quarter of 2015. Nearly 80 percent of retailers surveyed say ITG lost the most shelf space this year with 80 percent of shelf resets for 2016 now complete. “We continue to believe ITG's woes largely stem from a lack of brand focus and loss of leverage to powerhouses Reynolds American and Altria.”