The Big Three tobacco manufacturers are again testing the elasticity of smokers’ habit and budget by raising their list prices by 8 cents per pack, effective tomorrow (Sunday).
The list price is what wholesalers pay manufacturers for their products. The increase typically is passed on to customers at retail.
It is the first time in 2020 that Philip Morris USA, R.J. Reynolds Tobacco Co. and ITG Brands LLC apply a strategy that has become at least a semiannual occurrence since 2014.
During 2019, the manufacturers raised their prices by 9 cents to 11 cents per pack in April, 6 cents in June and 8 cents in October.
As typical, Philip Morris USA raised its list price first, followed by Reynolds and ITG.
That includes top-selling Marlboro, which owns a 47.4% market share according to Nielsen data on convenience store sales.
The continuing decline in traditional cigarette-industry sales was reflected in the latest Nielsen four-week report at 7.5%, compared with a 6.2% decrease in the Nov. 30 report and a 6.8% decrease in the Nov. 2 report.
Nielsen reported Altria’s volumes were down nearly 9% for the latest report compared with a year ago, while Reynolds was down 7.5% and ITG down 6.5%.
Philip Morris’ market share was at 52.3%. Reynolds remained at 32%, and ITG at 7.3%. ITG has said its market share is closer to 10%.
British American Tobacco Plc, parent company of Reynolds, and Altria Group Inc., parent company of Philip Morris USA, have said the decline would be between 4% and 5% for 2019.
“Tobacco manufacturers will likely face even greater pressure under the Food and Drug Administration’s effort to lower nicotine levels in combustible cigarettes, an event we continue to view to be several years away given the complexities of issues ahead,” Goldman Sachs analyst Bonnie Herzog said.
“We believe pricing will remain a critical driver of revenue and earnings growth, particularly as manufacturers realize almost three times the leverage on earnings from a point of pricing than a point of volume.”
Some anti-smoking industry analysts said they believe Philip Morris USA was stirred to conduct a quicker-than-normal price increase with electronic cigarettes facing heightened societal and regulatory scrutiny.
“By any measure, the pricing power of the U.S. cigarette companies is extraordinary,” said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.
“That it does not trigger Federal Trade Commission actions, even more so.”
However, some anti-tobacco advocates consider each per-pack hike as an increasing disincentive for buying traditional cigarettes, particularly among low- to moderate-income individuals.
“Anyone thinking these companies really want to see a transition to new non-combustible technologies is failing to ‘follow the money,’ ” Sweanor said.
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