NEW YORK -- Nearly 90% of the respondents to a Wells Fargo Securities LLC survey of tobacco retailer and wholesale trade contacts, representing more than 10,000 U.S. convenience stores, said the recent major tobacco price increases have generated incremental per-pack revenue which, given the mid-June timing, should provide a small pricing benefit in the second quarter with a full realization of improved pricing in the third quarter.
The "Q2 2012 Tobacco Retailer Survey" said that 92% responded that they passed the entire increase on to consumers, although the amount passed through seems to be largely dictated by manufacturer pricing contracts. Half indicated they were able to build additional inventory in advance of the price increases, likely driving better than expected reported volume in the second quarter, said Bonnie Herzog, Wells Fargo's New York City-based managing director for beverage, tobacco and consumer research.
The survey also said that second-quarter cigarette industry volume growth will likely be above historical trends, driven primarily by two factors--inventory levels at the end of the first quarter had been de-loaded; and "we estimate about half of the trade was able to build inventory positions in advance of the June price increases," said Herzog. "However, we do note that the [year-to-year] volume comparison for Q2 2012 is tough since inventories during Q2 2011 had been loaded. Bottom line, we expect reported industry volume to be down 3% in Q2."
Meanwhile, based on feedback from contacts, Herzog said that Marlboro is positioned for further share gains. "Almost 60% of our contacts indicated low-to-mid single digit volume growth in Marlboro during Q2. Marlboro's reinvigorated brand architecture is yielding positive results as we continue to see signs that PM USA is achieving a better balance between leveraging Marlboro for profitable growth and maintaining strong brand equity. Although there is continued promotional activity in Marlboro Special Blends, it appears to be moderating somewhat."
Camel volume trends are weak on "flattish" promotions. "Half of our contacts indicated a low-to-mid-single-digit volume decrease in Camel in Q2 despite continued growth from Camel Crush and flat-to-down promotional support. Thus, RJR may need to strike a better balance between volume growth and promos on Camel. Also, Pall Mall volume is still being pressured and our contacts indicate Q2 volume was down mid-single digits. We think RJR needs to continue to heavily support Pall Mall which could further pressure its margins."
Newport Menthol is still strong with volume up on flat promotions. "Almost 70% of our contacts indicated Newport Menthol volume will be up low-to-mid single digits during Q2. We remain concerned about deterioration in [Lorillard Inc.'s] margins as its mix continues to shift to lower priced brands."
Herzog added that downtrading pressure appears to have eased from the first quarter. "While undoubtedly the U.S. consumer remains challenged, more survey respondents said downtrading had stayed the same or decreased sequentially vs. Q1 2012. [PM USA's] innovative line extensions have likely enticed consumers to stay in its Marlboro brand family vs. downtrade which should lead to further share gains."
The survey also said that smokeless tobacco, driven by the Grizzly brand, is "still on fire."
Around 89% of Wells Fargo's contacts noted category growth during the second quarter driven by continued promotional activity. "Grizzly remains the growth driver in the smokeless category; however, we remain concerned due to [the] increasing downtrading trend particularly with the launch of value-priced line extensions of Copenhagen and Skoal (is another battle of the brands brewing?) and [the] category pricing environment as promotions continue to heat up," said Herzog.