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In addition, Lorillard's off-invoice promotional allowance on Newport Non-Menthol remains at $1.50 per pack, according to Bonnie Herzog, managing director of tobacco, beverage and consumer research at Wells Fargo Securities LLC.
The pricing moves by Greensboro, N.C.-based Lorillard and Winston-Salem, N.C.-based RAI come hours after The Altria Group Inc.'s Philip Morris USA (PM USA) revealed it would begin reducing its off-promotion allowances by 6 cents per pack effective June 10.
According to Herzog, many investors have been questioning Richmond, Va.-based PM USA's choice to implement a promotional reduction vs. a list price increase. After speaking with several industry trade contacts, she said a wholesale promotional allowance decrease can be a more effective mechanism for the market leader to increase its margins without the typical price elasticity of demand coming into play. The eventual retail price is not marked up as much as it moves though the supply chain, as it would be with a list price increase.
The eventual price increase to the consumer from a wholesale promotional reduction should be closer to 6 cents per pack. This compares to a list price increase, which results in closer to a roughly $0.085 increase to the consumer as it moves through the supply chain.
As a result, the consumer could see less of a retail price increase on Marlboro and L&M vs. Lorillard's and RAI's brands, Herzog explained.
"Overall, these promo decreases [and] list price increases are positive and indicate continued pricing power. Given that consumption will likely continue to decline in the mid-single-digit range, pricing is necessary to drive top line," she concluded.