Cigarette Price Increase Could Be on Horizon for Cigarette Makers

The three biggest U.S. cigarette makers may sanction a new circle of cigarette price hikes in the next weeks, though the hike won’t necessarily increase profitability as the tobacco companies have improved promotions lately.

Marlboro Cigarettes

Marlboro cigarette pack

Wells Fargo & Co. analyst Bonnie Herzog forecasted the tobacco industry would proceed in December their second circle of cigarette price hikes this year, with the investment bank projecting. Altria Group Inc. leading with a six- to seven-cent per-pack increase.

Altria usually is the leader on pricing action, followed shortly by ads by smaller rivals Reynolds American Inc. and Lorillard Inc. All three tobacco companies haven’t yet replied to the pricing questions.

At first, the price raises could ease concerns investors and analysts have increased some months ago about the power of earnings produced by domestic cigarette makers. All three companies have increased price promotions in a battle to succeed or defend market share as customers are impacted by a weak economy.

Tobacco executives have tried to calm those problems by saying the industry’s about $14 billion income pool is strong and even has benefit as new products like moist snuff and e-cigarettes, as well as cost cutting, can help balance drops for regular cigarettes.

Nevertheless, pricing strength is important. It helps the cigarette companies make cash that the companies give back to investors through dividend payouts and stock buybacks.

All three tobacco companies introduced two circles of list price hikes in 2011, in July and December, and this year in June. Altria and Reynolds American have marched in lockstep recently with the amount of the raise, while Lorillard has deviated from the pack in pushing through typically increased prices.

But during that period, the higher prices haven’t essentially hurt consumers. Altria, which has been gaining market share this year as the firm issues promotions that lower the costs for some of its products, has basically kept a lid on the per-pack price for Marlboro.

The net pack cost for Marlboro in the second quarter of 2011 was $5.63, a number that is higher by 16 cents as of the third quarter of 2012. But over that same period, Altria declared per-pack raises that should have lifted the cost by 20 cents.

Marlboro’s impact over the tobacco industry is large. That cigarette brand led 42.7 percent retail market share in the third quarter of 2012.

Jefferies & Co. analyst Thilo Wrede said any price hike declared by the tobacco companies should be regarded as a grain of salt, as the increase could be discounted in some fashion before making it to tobacco stores.

Mrs. Herzog, whose reports estimating price increases are often proved within weeks by the cigarette firns, said even if a part of the gain is cut by the industry’s promotions, she expects the increase will strengthen profit growth.

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