Analyst: PM USA to act on prices, roll out Marlboro Smooth

Philip Morris USA is likely to announce a price increase/off-invoice reduction in the near future, according to a Dec. 8 note by tobacco industry analyst Bonnie Herzog, managing director of Citigroup Investment Research, New York.

PM USA can also be expected to introduce Marlboro Smooth, a menthol brand that will be positioned to directly compete with Newport, according to the note.

About prices, Herzog wrote that, based on conversations with trade contacts, “we anticipate the company will increase prices by around $0.10 per pack and the other cigarette companies will likely follow. Our contacts have also indicated that both Philip Morris and Lorillard have been cutting their wholesaler orders recently, or reduced the amount of inventory wholesalers can purchase (this is typical right ahead of a price increase).”

Herzog added that she believes the industry “still has some pricing power and it makes sense for the manufacturers to take pricing since all of the tobacco companies are facing higher Master Settlement Agreement payments during 2007 of around $0.06 per pack. Furthermore, we believe the manufacturers are more comfortable taking pricing soon given that state excise taxes did not increase substantially in 2006.”

Marlboro Smooth is designed to target Carolina Group’s Newport brand, the leading menthol brand, according to Herzog. It is expected to arrive on store shelves nationwide in February, according to Herzog.

“Our contacts stated that in a consumer test, 40 percent of Newport smokers indicated they prefer the new Marlboro Smooth and would purchase it if they had the opportunity,” Herzog wrote, adding that she anticipates the brand will be introduced at a lower introductory price for the first few months, and then be aggressively discounted.

The analyst’s note also included a summary of proposed state excise tax increases for cigarettes and other tobacco products.

This year, Herzog reported, seven states have already passed higher excise taxes: Alaska, Texas, Vermont, New Jersey, North Carolina, South Dakota and Arizona.

States that have proposed excise increases for 2006 are: Indiana, Iowa, Maryland, New York, South Carolina, Washington and West Virginia.