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Philip Morris USA will be the first tobacco company to increase its cigarette prices by about 10 cents, possibly as soon as this week, with other major manufacturers to follow, Citigroup said in a release last week.
Trade contacts told the company that the increase of 10 cents -- four cents more than what is needed to offset higher master settlement agreement (MSA) payments next year -- will be implemented before Christmas. Evidence spawns from the company and Lorillard recently cutting their wholesaler orders, thus limiting the amount that distributors can order, which is typical before a price hike, the company stated.
In addition, Philip Morris held a two-day meeting with its sales representatives last week. Citigroup also noted that it is a possibility that the company will offer a new extension on its Marlboro or Parliament line.
"We have been predicting for some time now that Philip Morris is likely to lead a price increase of around $0.10 per pack by the end of the year. … We believe the industry still has some pricing power and it makes sense for the manufacturers to take pricing since all of the tobacco companies are facing higher Master Settlement Agreement payments during 2007 of around $0.06 per pack," said Citigroup.
Because 2006 was a relatively mild year for state excise tax increases, the tobacco industry would be more comfortable increasing the prices before the turn of the year, it added.
As for parent company Altria's spin off of its Kraft Foods segment, Citigroup expects the company to finalize arrangements as of Jan. 31. "It is now clear that the Board intends to spin off Kraft Foods, and the uncertainty surrounding the timing of this decision is now removed," it stated.