British American Tobacco Plc continues to test the spending elasticity of smokers, announcing Thursday plans to raise the per-pack price of most of its key traditional cigarette brands.
BAT’s U.S. subsidiary, R.J. Reynolds Tobacco Co., is increasing on July 5 the list price of those brands by 14 cents a pack, according to a report by Goldman Sachs analyst Bonnie Herzog.
The list price is what wholesalers pay manufacturers for their traditional cigarette products. The increase typically is passed on to customers at retail.
The 14-cent per pack increase affects Camel, Lucky Strike, Newport, Pall Mall and certain lines of Natural American Spirit.
Other styles of Natural American Spirit — Turquoise, Gold, Green and Dark Green — will go up 22 cents a pack, as well as 20 traditional cigarette brands that include Capri, Carlton, Kent, More, Now, Kamel Red, Tareyton, True, Vantage, Dunhill, Eclipse, Misty, Doral, GPC, Monarch and Old Gold.
It’s a pricing strategy that has become at least a semiannual occurrence for tobacco manufacturers since 2014.
However, the latest planned Reynolds increase comes three months after Reynolds raised its list price by 14 cents a pack on April 5 and by 13 cents on Jan 28.
Those increases came on the heels of four price hikes by Reynolds during 2020 that were worth a combined 47 cents a pack.
Altogether, Reynolds has raised the list prices on its main traditional cigarette brands by a combined 88 cents since January 2020.
Herzog said the April list price hike was “not necessarily a surprise given mounting headwinds related to potential cigarette state/federal excise tax increases and cigarette consumer downtrading” to discount brands.
However, Herzog said Thursday that the July 5 increase serves as a surprise.
Herzog expects Philip Morris USA and ITG Brands LLC to raise their list prices at or near what Reynolds is doing.
“We also note, however, that there are more ways for manufacturers to take price than just via cigarette list pricing,” Herzog said.
“We believe Altria, for example, has become more strategic in the way it takes prices, such as reduced buy-downs, promotional allowances and price protections.”
Herzog said investors tend to view price increase favorably because they “are critical drivers of tobacco manufacturers’ revenue and earnings growth.”
“Manufacturers realize almost three times the leverage on earnings from a point of pricing than a point of volume.”
The pricing power of the cigarette manufacturers “remains extraordinary,” said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.
Some anti-tobacco advocates consider each per-pack hike as an increasing disincentive for buying traditional cigarettes, particularly among low- to moderate-income individuals.
As fewer U.S. adults smoke traditional cigarettes, BAT and Altria are shifting more sales toward smokeless tobacco products, such as electronic and heat-not-burn traditional cigarettes, moist snuff and snus.
Sweanor said traditional cigarette manufacturers are benefiting from anti-tobacco advocates’ efforts targeting electronic cigarettes, particularly use by those under age 21.
E-cigarette sales have slumped industrywide, outside of R.J. Reynolds Vapor Co.’s No. 2-selling Vuse, during 2020 and into 2021.
In February 2020, the Food and Drug Administration limited closed-pod flavors to menthol and tobacco. The FDA raised the legal smoking age from 18 to 21 in December 2019.
“The pricing power and resulting profitability of the cigarette trade is extraordinary, and a huge barrier to efforts to move the market to far less-hazardous products,” Sweanor said. “Ironically, it is efforts by supposed enemies of the cigarette business to limit access to those alternatives that helps give the cigarette companies this pricing power.
“It is as if cigarette companies have been able to pick their ideal enemies.”