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Philip Morris Reduces Retail Buydowns

Tobacco giant Philip Morris USA Inc. is reducing the retail buydown on its Marlboro and Basic brand cigarettes by 5 cents per pack, effective July 27.

The reduction is not a list price increase, but constitutes a 5-cent reduction in the per-pack promotional allowance that is normally available. The change will affect those retailers on contract, but will not affect Philip Morris's 55-cents-per-pack invoice wholesale promotion allowance.

“We have reduced the current reward fund promotional allowance offered as part of our Retail Leaders Program by 50 cents per carton from $1.50 to $1, which means 5 cents per pack,” said Peggy Roberts, senior director, corporate communications for Philip Morris. “It does not have any impact on the Wholesale Leaders Program, which is at 55 cents per pack.”

"It's effective as of today (June 27), which means that anything sold from today onward will be at the new rate," Roberts said.

Financial analysts are regarding the action as “neutral to negative” for retailers, since it will likely lead to an increase in the retail price for Marlboro and Basic, and a possibility for a slight gross margin decline. Philip Morris, on the other hand, is expected to see some margin expansion as a result.

Retailer reactions to the news varied.

“My initial reaction is that this will not have a major impact on our total business but it will increase the spread between R.J. Reynolds and Philip Morris premium brands,” said Troy Seymour, vice president of Fort Walton Beach, Fla.-based Exprezit! Convenience Stores. “I think RJR may benefit in the short term or until they make a move. It also makes the pricing of mid-tier products more attractive to the consumer.”

“While the tobacco companies are in a constant pinch to stay a financial step ahead of state and federal government mandates, raising prices (cutting buydowns) during this period when c-store customers, indeed all Americans, have far fewer discretionary dollars after filling their fuel tanks than at any time in the recent past, seems unwise,” said Jim Callahan, director of marketing for Fairburn, Ga.-based Geo. H. Green Oil Inc. “Especially so in view of RJR's announcement of holding prices in check at least for July. While tobacco is still king in convenience stores, moves like this bring its reign closer to an end.”

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