Survey: Cigarette Declines Could Spur List Price Hike

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Survey: Cigarette Declines Could Spur List Price Hike

08/18/2017

NEW YORK — Retailers are on the lookout for another cigarette list price increase, according to a recent Wells Fargo Securities LLCs survey.

According to Tobacco Talk, which surveys tobacco retailer and wholesaler contacts representing approximately 60,000 U.S. convenience stores, tobacco companies could take their next list price hike next month — during the week of Sept. 18, specifically. 

They expect Altria Group Inc.'s Philip Morris USA to lead the way with an 8-cents increase. The last cigarette pricing move was in March.

"We agree as we don't expect manufacturers to wait till the normal November cycle to take a price increase especially given the severity of volume declines in the second quarter  related to the outsized impact of California's tax increase," explained Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

She added the list price increases could be partially offset by strong promotional efforts.

Looking long term, "we see further downside to combustible cigarette volumes if the Food and Drug Administration (FDA) succeeds with its new nicotine mandate," Herzog said. "However, we believe this could be mitigated by smokers potentially smoking more in an effort to get the nicotine levels they require — an "unintended consequence — and increased conversion to reduced-risk products (RRPs)."

Tobacco Talk also found that regardless of the FDA's shift in nicotine policy and its impact on combustible cigarettes, a majority of retailers agree "the outcome will be broadly favorable for RRPs and the vapor category," Herzog noted.

Long-term, Wells Fargo Securities continues to believe the FDA's new regulatory approach will be a positive for the industry given the attractive economics of RRPs, like greater consumption and profits as, presumably: 

  • Consumers presumably live longer; 
  • RRP usage increases as it is deemed less harmful;
  • RRPs receive potential favorable tax treatment; and 
  • Restrictions are relaxed for RRPs on "smoking" in previously forbidden places such as parks and public spaces.

According to Herzog, few retailers view the FDA's new tobacco strategy favorably with most expecting the lower nicotine mandate to have a long-term adverse impact on combustible cigarette sales, while spurring RRP consumption as smokers seek nicotine satisfaction. 

However, any changes could be far off.

"The FDA's desire to minimize "unintended consequences" such as increased illicit market activity and unduly disadvantaging specific demographic groups, as well as to avoid protracted litigation on the scientific and legal merits of limiting nicotine — which many consider a 'de facto ban' on cigarettes — suggests that it could realistically take years for the FDA to devise a sound, science-based and enforceable nicotine policy," Herzog said.