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Tobacco analyst says Reynolds set for fourth traditional cigarette price hike of 2021
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Tobacco analyst says Reynolds set for fourth traditional cigarette price hike of 2021

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R.J. Reynolds Tobacco Co. is expected to implement soon its third 14-cent per pack increase of 2021 for most of its key traditional cigarette brands.

Goldman Sachs analyst Bonnie Herzog released Monday a brief analysis to investors that noted the planned list price increase.

Counting a 13-cent per-pack increase on Jan. 28, Reynolds will have had four price hikes this year alone.

The list price is what wholesalers pay manufacturers for their traditional cigarette products. The increase typically is passed on to customers at retail.

Reynolds could not be immediately reached for comment on Herzog’s report, which she said was based on “industry trade contacts” that typically are accurate.

The previous 14-cent per pack increases affected Camel, Lucky Strike, Newport, Pall Mall and certain lines of Natural American Spirit.

Herzog said she does not expect Philip Morris USA to match the third Reynolds price increase given Philip Morris USA just added its second 14-cent per-pack uptick in August.

“We continue to expect stepped-up price increases, especially in light of a potential for a state and federal excise tax increases, including a potential doubling of the federal rate on cigarettes to $2.01 per pack,” Herzog said.

Pricing strategy

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 July 5 and 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 $1.02 since January 2020.

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.”

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.

Traditional cigarette manufacturers are benefiting from anti-tobacco advocates’ efforts targeting electronic cigarettes, particularly use by those under age 21, said said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.

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 FDA did not meet a Sept. 9 federal court-ordered deadline for deciding which premarket tobacco market applications to grant for electronic cigarettes.

E-cigarette manufacturers had to submit by Sept. 9, 2020, their premarket tobacco market applications (PMTA) in order to stay in the marketplace for at least another 12 months.

A statement posted on the FDA’s website Sept. 9 said “while our review of premarket applications is ongoing, we remain vigilant in overseeing the market and continue to prioritize the use of our enforcement resources to curb the unlawful marketing of tobacco products.”

“A small percentage of the more than 6.5 million products that were the subject of timely submitted applications still remain under review after Sept. 9.

The FDA said it “will continue to make enforcement decisions on a case-by-case basis according to our enforcement priorities and individual circumstances, recognizing that we are unable, as a practical matter, to take enforcement action against every illegally marketed tobacco product, and that we need to make the best use of agency resources.”

Tax-equity bill

A Democratic-sponsored bill in the U.S. House, titled the “Tobacco Tax Equity Act,” would not only double the federal tax on traditional cigarettes.

The main design is to raise the federal excise tax on all other tobacco products to equate to the proposed $2.01 per pack on traditional cigarettes.

According to The Tax Foundation, that would result in a 2,034% increase in the excise tax on chewing tobacco, as well as 1,677% increase on snuff and a 1,651% increase on pipe tobacco. The U.S. Treasury has not disclosed what would be the excise tax increase for electronic cigarettes.

“The increase could raise $112 billion over the 10-year budget window,” according to The Tax Foundation.

“But, a large portion of the new tax burden would fall on low-income Americans, as consumption of tobacco is more common in this group.”

“Moreover, the tax base is increasingly narrow given the decades long decline in tobacco consumption.”

The foundation also cited claims from pro-vaping public health advocates who say creating tax parity “between the most harmful tobacco products and least harmful nicotine products would hurt smokers’ ability to switch from cigarettes, which is a problem for public health.”

The pricing power of the cigarette manufacturers “remains extraordinary,” Sweanor said.

“Of course, the measures that limit access to alternative, and far less hazardous, alternatives to cigarettes means a great many nicotine-dependent people have little alternative to simply paying higher prices for a lethal product.

“Which helps facilitate the increasing profits from higher cigarette prices and ... also incentivizes the tobacco industry to focus on the continuation of a cigarette dominated market.”

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@rcraverWSJ

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