Tobacco Facts.

Cigarette makers are raising prices yet again as they adjust to shrinking demand for their products.

Lorillard Tobacco Co. started the latest round by raising the wholesale price of Newport Menthol — the nation’s No. 2 brand — by 5 cents a pack, according to analysts. The cost of Lorillard’s non-menthol Newport brand rose 11 cents, while there was an 8-cent increase on most other brands.

R.J. Reynolds Tobacco Co. said Tuesday that it is raising its list price for wholesale and direct-buy customers by 9 cents a pack on Camel, Pall Mall, Kool, Winston, Salem, Doral, GPC, Misty, Capri and other brands. The price increase is effective today.

“We can’t speculate how it might affect price at retail as we don’t set the price at retail,” Reynolds spokesman David Howard said. “As is our policy, we do not comment on our pricing strategies.”

Philip Morris USA will boost prices on all its brands by 9 cents a pack, effective Friday, Bonnie Herzog, managing director of beverage, tobacco and consumer research for Wells Fargo Securities LLC, said Tuesday.

Even with the recession leaving most smokers with less disposable income, analysts said they expect the price increases to stick because other recent increases have.

For example, the latest increase is Reynolds’ sixth price increase since September 2007. The last increase came in December, when it raised the pack price of most brands by 8 cents.

The pricing decisions also reflect manufacturers’ strategy for handling a continual decrease in shipment volumes and higher state and federal excise taxes.

“Overall, these cigarette price increases are positive, and the industry still does have pricing power,” Herzog said. “Given that consumption will likely continue to decline in the mid-single-digit range, pricing is necessary to drive top-line growth.”

Reynolds, in particular, has a delicate balancing act when it comes to raising cigarette prices.

Its Pall Mall brand has become the No. 3 U.S. cigarette brand this year — surpassing Camel — in large part because its price is lower than Marlboro, Newport and Camel.

Even though Camel remains the brand face of Reynolds, its sales have hit a plateau in recent quarters as adult smokers have turned to lower-priced cigarettes. Pall Mall had an 8.5 percent market share in the first quarter, up from 6.5 percent in the first quarter of 2010. Camel’s market share was 7.8 percent, up from 7.1 percent a year ago.

Some analysts say Pall Mall’s move over Camel could be more than a short-term shift.

“We continue to favor Reynolds American heading into the quarter and remain encouraged by the company’s fast-growing and profitable Pall Mall brand,” Herzog said.

Christopher Growe, an analyst with Stifel Nicolaus, said the increases should “sustain and likely add to profit growth for the industry here in 2011 and continue to support some upside potential to our earnings estimates.”

“We believe our prior volume assumptions were appropriately conservative particularly in the context of slight relief consumers are beginning to feel from lowered fuel prices.”

Jeff Lenard, the vice president of communications for the National Association of Convenience Stores, said price can trump brand and store loyalty with most smokers.

Cigarettes remain the largest in-store purchase at convenience stores, accounting for $50.5 billion in sales in 2010 — more than 2.5 times the sale of packaged beverages and about 3.3 times the sale of beer.

Premium brands account for 75 percent of cigarette sales at convenience stores in 2010, but lost 2.6 percentage points of market share. Branded discount sales, while making up just 13 percent of cigarette sales, posted a 1.6 percentage point gain in market share.

“Cigarettes are probably behind only gas in price sensitivity,” Lenard said. “Consumers will leave you for a nickel a pack. And they will leave you for out of stocks. But they won’t necessarily leave you if everyone else has higher prices.”

By Richard Craver
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