Smokeless Pricing Is Upwardly Mobile

Published in CSP Daily News

Altria announces increase, Reynolds expected to follow

NEW YORK -- Altria Group Inc. has announced a smokeless price increase, according to an industry alert issued by Christina McGlone, an analyst with Deutsche Bank Securities Inc., New York. The increase, effective May 25, is five cents per can on all moist smokeless tobacco and snus brands (Copenhagen, Skoal), including value-tier SKUs.

"While some of this could be promoted back at retail, on a list-price basis, it equates to more than 1.9% on Skoal/Copenhagen, more than 3% on promoted SKUs (Skoal Xtra, Copenhagen Wintergreen) [and] more than 2.7% on snus."

While Reynolds American Inc. has not yet followed suit, "we expect this imminently," said McGlone.

Smokeless is 12% of pretax profit for Altria and 12% for Reynolds American. In terms of company-reported revenue per can, this five cents would equate to a 2.4% quarter-on-quarter lift for Altria, more than3.3% to Reynolds American, close to Deutsche Bank Securities' existing estimates, it said.

"We see this as indicative of confidence in smokeless category volume (currently trending at more than 5%) and consistent with our view that smokeless pricing rationality is stabilizing between [Altria and Reynolds American]," she said.

"It should also help sentiment that the overall tobacco sector remains rational. While the cigarette category is more promotional this year, we continue to view smokeless profit as a partial offset, and growth outlet. We note that--certainly not coincidentally--this price increase was announced the same day that [Altria's] new CEO Barrington assumed his new position."

(Following the May 17 annual meeting of shareholders, Martin J. Barrington succeeded Michael E. Szymanczyk as Altria's chairman and CEO. Earlier this year, Szymanczyk had announced his decision to retire after 23 years with the company, including four years as chairman and CEO of Altria and 12 years as president and CEO of Philip Morris USA Inc. [See Related content below for previous CSP Daily News coverage.])

McGlone explained what the smokeless price increase could mean for cigarettes. "While the cigarette environment is promotional, we continue to expect a modest midyear price increase on premium brands (perhaps five cents per pack). Further, this smokeless announcement may encourage wholesalers to build up some cigarette inventory in Q2 in anticipation of pricing, improving Q2 cigarette shipments for the Big Three (against a tough Q2 lap)."