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    Pressures on Low-Income Consumers Trigger Cigarette Downtrading

    Weaker confidence, soft job growth among woes.

    NEW YORK — After a stretch of premiumization in the cigarette category, pressures on low-income consumers are leading to gains among value and discount brands.

    "Downtrading in the cigarette category is increasingly apparent, as consumers are opting for deep-discount priced cigarettes," said Vivien Azer, director and senior research analyst at Cowen and Co. "We believe this reflects a softening lower-income consumer, as consumer confidence and the unemployment gap deteriorate for those making under $15,000 year, while job growth slows."

    According to Azer, Cowen & Co. has noted accelerated market share gains for Vector Group, a value-priced cigarette company, over the past nine months. The upswing reflects increased momentum for the company's deep discount Eagle brand, which was launched in 2013. 

    "In part, we think this downtrading reflects the evolving price gaps at the lower-end of the category," she said.

    Since 2014, the average discount for competing low-end brands — like Phillip Morris USA's L&M, R.J. Reynolds Tobacco Co.'s Pall Mall and Vector's Pyramid — have contracted "far more meaningfully" than Vector's Eagle, as these other brands take pricing in line with the category. 

    "While this price discipline should insulate profit growth, the downtrading bears watching as we believe it could reflect a weakening lower-income consumer," Azer explained.

    According to Azer, smoking in the United States materially over-indexes to lower-income consumers. Since 2013, there has been a deterioration in consumer sentiment among lower-income consumers — in particular those making under $15,000 year — which coincides with the deceleration that's been seen in terms of job growth on a trailing 12-month basis. 

    "This consumer confidence gap, relative to the national average, has deteriorated meaningfully in the last year, and now stands at levels we have not seen since late 2006," she said. "What is more, the unemployment gap for lower-income consumers, using education as a proxy, has also started to expand, all of which makes us marginally more cautious on the health of the lower-income consumer in the United States."

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