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Competitive Environment Around Cigarettes Lessens

NEW YORK –- A recent survey of tobacco retailer and wholesaler contacts representing more than 45,000 convenience stores indicated the cigarette competitive environment is improving.

According to Wells Fargo Securities' Tobacco Talk survey, fewer respondents indicated a competitive environment during the fourth quarter of 2012 vs. the third quarter. This bodes well for improved net price realization, explained Bonnie Herzog, managing director of beverage, tobacco and consumer research at Wells Fargo Securities LLC.

In addition, total cigarette industry volumes should be down about three percent during the fourth quarter. The 52 percent of survey respondents suggesting overall cigarette category volume was flat-to-up during the quarter was in line with survey responses during the third quarter when 48 percent of respondents indicated similar trends, she said.

Broken down by brands, the Tobacco Talk survey results reveal Marlboro volume and promotional trends were solid in the fourth quarter. "Given our survey results, we have further conviction that [Philip Morris USA] is innovating and achieving a better balance between growing Marlboro profitably and maintaining strong brand equity," Herzog said.

The firm's contacts indicated that Marlboro's year-over-year volume increased 1.2 percent in the fourth quarter, accelerating from a 0.7-percent gain in the third quarter, demonstrating The Altria Group's continued success leveraging innovation on Marlboro and driving incremental share gains, she explained.

"This is all the more impressive given fourth quarter year-over-year promotional support trended lower than the third quarter, which we believe demonstrates that Altria's overall strategy with Marlboro is working," Herzog said. "Furthermore, we just learned from a trade contact that promos on certain Marlboro lines are decreasing in January and February by $1 per carton."

Newport Menthol's promotions are also working to drive volume growth. Its year-over-year volume accelerated to 1.9 percent during the fourth quarter per Wells Fargo Securities' retailer contacts compared to about 0.5 percent in the third quarter, driven by higher promos, Herzog said. In addition, 45 percent of the contacts indicated that volume increased in the fourth quarter compared to only 37 percent in third quarter.

"[Fourth quarter] survey results indicate that promos on Newport Menthol are driving volume momentum for the brand and we believe Lorillard Inc. will continue to maintain its industry-leading pricing power in the menthol segment," she said.

Herzog also noted that RJ Reynolds' Camel brand experienced a volume uptick in the fourth quarter driven by higher promos. She added that while Wells Fargo Securities thinks Camel may pick up some share this quarter due to increased promos, the growth of the brand is expected to remain sluggish.

The firm also remains positive on electronic cigarette category and more than 50 percent of the Tobacco Talk respondents indicated that e-cigarette purchases are repeat purchases vs. trial purchases. "We continue to expect consumption of e-cigs will surpass consumption of traditional cigs in the next decade," she added.


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