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NEW YORK – Philip Morris USA is expected to lead an increase in cigarette prices of approximately 6 cents to 7 cents per pack, equating to a rise of 2 percent to 3 percent, in late May or mid-June, according to Wells Fargo Securities LLC.
The company’s latest "Tobacco Talk" survey, which polls convenience store retailers and wholesalers quarterly, found that net cigarette prices are due to accelerate this fiscal year, with the forecast calling for at least a 4-percent increase for the year. Pricing is key for tobacco manufacturers as they generate three times the earnings leverage on a point of pricing compared to a point of volume, Wells Fargo Securities noted.
Cigarettes are not the only tobacco product facing a price increase. Industry contacts indicate that The Altria Group, parent company to Philip Morris USA, also announced a list price increase of 5 cents per can on its Copenhagen, Cope, Skoal, Husky and Red Seal smokeless tobacco brands, effective May 11. Wells Fargo Securities expects other manufacturers to follow.
As cigarette prices continue to rise, the latest Tobacco Talk poll found that the "affordability gap" between traditional and electronic cigarettes is poised to widen, and should further drive demand for e-cigarettes. Packaging changes are likely to drive consumer awareness and trial of the segment, while more attractive price points for multi-cartomizer and disposable packs have already grown demand. The resulting cheaper per-unit cost, combined with low or no taxes on e-cigarettes, contributes to their affordability.
Improved disposable packaging is also expected to drive consumer acceptance of electronic cigarettes, but the resulting decline in traditional cigarette tax revenue could drive increased regulatory scrutiny, according to Wells Fargo Securities.
Finally, some survey respondents speculated that Altria's entrance into the e-cigarette business could be a "negotiating ploy" that could lead to an eventual acquisition of NJOY.