Category: Markets

BAT-Led Price Hike Hints at Strength U.S. Market

Photo: CarolRobert – Dreamstime.com
British American Tobacco (BAT) announced an average cigarette list price hike of $0.13 per pack, according to Goldman Sachs. The move reflects a price increase of between 2 percent and 3 percent.
According to the investment bank, it is the first time in recent history that BAT and its subsidiary, RAI, have led a price increase in the U.S. The price increase is BAT’s third this year.
Morgan Stanley said BAT’s move underscores the strength of the U.S. cigarette market. “U.S. cigarette fundamentals have been unusually strong throughout 2020, with industry volumes declining 2.5 percent in 2020 year-to-date within measured channels and MO [Altria Group] estimating the industry will decline by 2 percent to 3.5 percent year-on-year in 2020, the best performance since 2016,” the financial firm wrote in an statement.
“Unlike the last several years in which a higher rate of volume declines necessitated greater pricing, we believe manufacturers are being opportunistic in taking pricing this year given the strength of the category. BAT’s pricing decisions may also be influenced by its confidence in its U.S. brand portfolio, fundamentals outside of the U.S., and RRP [reduced-risk products] investments.”
Pricing is a critical driver of revenue and earnings growth in the tobacco industry, particularly as manufacturers realize almost three times the leverage on earnings from a point of pricing than a point of volume, according to Goldman Sachs.
The bank expects other cigarette manufacturers to follow with similar price increases soon.
“We had been expecting a price increase since several of our wholesaler contacts had informed us that they had started loading recently in anticipation of an increase,” the investment bank wrote in a note to investors.
“Given that this price increase is not effective until after 9/28, we expect more loading by the trade (both wholesalers and retailers) in the next couple of weeks, which should have a clear positive impact on Q3 volumes.”
September 15, 2020
Cigarettes Selling Better Than Expected

Photo: Joan Parker from Pixabay
Cigarette sales continue to perform better than expected despite a slight decline in recent weeks.

The U.S. sales volume for traditional cigarettes was down 2.1 percent for the four-week period that ended Aug. 22, according to the latest Nielsen survey of convenience stores. By comparison, the sales volume was down 0.8 percent in a four-week period in May.

The recent decline in cigarette sales is likely linked to a June list price hike by the leading tobacco manufacturers. Philip Morris USA raised its list price by $0.11 a pack for several brands. R.J. Reynolds Tobacco Co. and ITG Brands raised their prices by a similar amount.

Despite the recent acceleration in the contraction of cigarette volumes, the rate of decline is considerably lower than it was last year.

David Sweanor
“The Nielsen data continues to show the decline in cigarette sales moderating to a pace that is only about a quarter of the rate of contraction in the second quarter of last year—before the much-enhanced attacks on vaping,” David Sweanor, an adjunct law professor at the University of Ottawa, was quoted as saying by The Winston-Salem Journal.

“This is fascinating as there is very strong evidence that current tobacco control policies are leading directly to higher rates of smoking than would have otherwise been the case.”

Meanwhile, sales of electronic cigarettes declined 17.4 percent for the four-week period. The category has struggled since the Food and Drug Administration (FDA) tightened regulations on Feb. 6.

The FDA regulations have depressed the demand for closed pod cartridges.

Traditional cigarettes had $60.27 billion in sales at convenience stores over the past 52 weeks, representing 80 percent of all U.S. tobacco sales, according to the Nielsen report.

Moist snuff and chewing tobacco were at $7.59 billion and 10 percent while electronic cigarettes were at $3.72 billion and 5 percent and cigars at $3.63 billion and 5 percent.

When the first round of stay-at-home orders were issued by numerous governors in mid-March to slow the spread of the Covid-19 virus, the sales volume of traditional cigarettes rose 1.1 percent for the week that ended March 22.
September 3, 2020
Australian Cigarette Prices Hit New Records

Photo: Taco Tuinstra
Australian cigarettes are 12.5 percent more expensive following a price hike on Sept. 1.

Successive tax hikes from April 2010 have made Australian cigarettes among the most expensive in the world. Following the most recent increase, a 25-stick pack of Marlboro Gold cigarettes now costs AUD48.50 ($35.63) while the average 20-pack costs around AUD35.

That means a pack-a-day smoker will spend AUD12,500 over the course of a year.

Australian tobacco taxes generate around AUS17 billion per year in tax revenue. According to Cancer Council Victoria, they also contribute to declining smoking rates.

Smoking among Australians aged 14 and over declined from 17.87 percent of the population to 13.3 percent between April 2020 and April 2017, according to the charity.

The Covid-19 crisis could drive smoking lower still. Health Minister Greg Hunt revealed that four times as many smokers have tried to quit during the pandemic amid concerns that smokers will be hit harder by the virus should they contract it.
September 2, 2020
Cigarette Market Poised for Disruption

Photo: Cheryl Holt from Pixabay
The cigarette industry is likely to suffer disruption in 2020 with high single-digit volume declines expected and intensifying commoditization up to 2024, according to a new report.
Last year was a relatively strong year for the business. Volume decline, excluding China, of 1.9 percent was the best performance since 2016 and made 2019 the third best year in the past decade. However, 2020 is expected to be considerably worse as global cigarette sales face the impact of the coronavirus.
Average pack price growth accelerated marginally in 2019, with the global average up by 1.5 percent (versus 1.1 percent growth in 2018) to reach $2.6 ($3.30, excluding China). However, this uptick still represents the second-slowest unit price growth on record since 2008, and despite some short-term respite in 2020, year-on-year unit price expansion is expected to slow to just over 1 percent by 2024.
At 2.7 percent, cigarette value decelerated slightly in 2019, with more sluggish growth in developed markets such as Western Europe and North America balanced by quicker expansion in China, the rest of Asia-Pacific and Eastern Europe. In constant terms, revenue remains challenging for the industry to deliver—particularly in the context of the disposable income pressures that will follow the Covid-19 pandemic, according to the report’s authors.
Absolute volume growth of illicit volumes surged by almost 7 percent (excluding China) in 2019 to reach 400 billion sticks globally. This represents the largest single-year growth in illicit volumes in decades, even ahead of the upcoming Covid-19 effect and was driven by a significant shift in the Russian market, which accounted for 45 percent of the additional volumes.
September 2, 2020
Indian Committee Mulls Foreign Investment

Photo: Taco Tuinstra
A parliamentary panel in India has proposed foreign direct investment (FDI) in tobacco cultivation and cigarette manufacturing for exports
Tobacco-related FDI is currently restricted in India.
Headed by V. Vijaysai Reddy, the Upper House’s standing committee on commerce recommended 100 percent FDI in tobacco cultivation on the lines of tea, coffee and rubber with the safeguard that tobacco produced with the help of foreign capital should be marketed at auction.
In case of cigarette manufacturing, the panel has backed overseas investment on the condition that it takes place only in special economic zones and that the products are sold outside of India.
Lawmakers are also mulling proposals to set up “export only” tobacco farms to generate revenue.
I
September 1, 2020
Eyes on the Ball

Photo: PMI
Even as cigarette dollar sales increase during the Covid-19 pandemic, IQOS expansion remains Altria’s primary focus.
By Timothy S. Donahue
Covid-19 has slowed the traditional decline of U.S. cigarette sales. With less opportunity to spend on travel and entertainment, consumers have had more money to purchase tobacco products, according to Billy Gifford, CEO of Altria Group. Since the start of pandemic lockdowns in mid-March, traditional cigarette sales have increased over the same period last year, breaking a longstanding trend.
During Altria’s second-quarter earnings call, Gifford said that the cigarette category has proved resilient during the pandemic. Based on year-to-date industry volume performance, the largest U.S. cigarette manufacturer has adjusted its estimated 2020 volume decline rate to a range of 2 percent to 3.5 percent, down from its previous estimate of 4 percent to 6 percent. The company also increased its annual dividend by 2.4 percent, saying it had more clarity on the pandemic’s effects on consumer demand. It is the company’s 51st consecutive annual dividend increase.
“Remember, last year, the cigarette category peaked its decline at 6 percent, then it receded to 5.5 percent in the third, and then down to 4.5 percent in the fourth,” Gifford said. “So a little bit tougher comparisons were also included in that forecast. But it’s a fluid environment and it’s something that we’ll continue to monitor.” Altria’s forecast was lower than its prior outlook, which was withdrawn due to the uncertainties around the pandemic’s economic impact.

Advertisement
Cigarette sales have seen a series of ebbs and flows through the first half of 2020. When some U.S. state governors began issuing stay-at-home orders in mid-March, combustible cigarette sales volume rose 1.1 percent for the week that ended March 22, according to Nielsen. Those sales were likely generated by consumer stockpiling, according to Gifford. For the four-week period that ended May 16, Nielsen reported only a 0.2 percent decline in sales volume for traditional cigarettes. Comparatively, sales volumes in 2019 fell 8.8 percent over the previous year (2018) in the four weeks to March 23, according to Nielsen data.
Bonnie Herzog
Bonnie Herzog, managing director at Goldman Sachs, stated in an email that the cigarette category is now holding steady. All channel cigarette dollar sales growth was up 3.1 percent for the two weeks ending on July 25. “Higher pricing more than offset a deceleration in cigarette volume, which was down 2 percent during the same time,” she said.
The pandemic is not the only factor driving increases in cigarette sales. Gifford says restrictions on e-cigarette flavors and the Sept. 9 deadline for premarket tobacco product applications (PMTA) to the U.S. Food and Drug Administration (FDA) have come together to create a perfect storm that is driving vapers back to combustible cigarettes.
Gifford told listeners that Marlboro’s second-quarter retail share for the overall cigarette category was 42.8 percent, down six-tenths versus the year-ago period. In April, Altria reported that older smokers who had switched to e-cigarettes were turning back to traditional cigarettes because of negative news coverage and regulatory crackdowns on vaping.
“As you’ll recall, earlier this year we noted an increase in the number of adult smokers aged 50-plus who moved from the e-vapor category back into cigarettes benefiting volumes from Marlboro and the cigarette category,” he said. “This demographic has a greater tendency to purchase discount brands than younger adult smokers, which increased the discount segment share at the start of the year. We believe the effect of this dynamic will have a lingering impact on Marlboro’s year-over-year retail share comparisons through 2020 … when you think about that, it’s a bit early on to tease out the exact impact from both of those, but that’s something that we’ll continue to monitor as we move forward.”

Altria’s headquarters in Richmond, Virginia, USA
Photo: Altria Group
Looking toward the second half of 2020, Altria has high hopes for its IQOS heat-not-burn device. On July 7, the FDA issued exposure modification orders to IQOS. Gifford said he was pleased with the FDA authorization to market IQOS as a modified-risk tobacco product (MRTP) with a reduced-exposure claim. The FDA’s decision includes the device’s holder and charger as well as Marlboro HeatSticks, Marlboro Smooth Menthol HeatSticks and Marlboro Fresh Menthol HeatSticks.
IQOS is the first next-generation product to receive an MRTP. In a statement, the agency concluded that the available scientific evidence demonstrates that IQOS is expected to benefit the health of the population as a whole, taking into account both users of tobacco products and persons who do not currently use tobacco products.
According to the FDA website, a reduced-risk claim authorization would generally allow a company to say a product is less harmful than combustible cigarettes. However, according to the FDA, the current reduced-exposure claim authorization allows the manufacturer to only state that IQOS heats rather than burns tobacco and significantly reduces the production of harmful and potentially harmful chemicals. The decision follows a review of the extensive scientific evidence package Philip Morris International (PMI) submitted to the FDA in December 2016 to support its MRTP applications.
IQOS is produced by PMI and marketed in the U.S. by Philip Morris USA (PM USA), a subsidiary of Altria Group. Gifford said PM USA is making the necessary preparations to communicate the reduced-exposure claim to adult smokers, which includes developing new marketing assets and submitting them to the FDA in advance of being used.
“We’re looking forward to communicating with adult smokers the additional benefits of switching to IQOS. We’re excited to get back on track with our IQOS rollout and our future expansion plans to accelerate adult smoker conversion,” he said. “As many parts of the country began lifting restrictions in June, PM USA reopened the Atlanta and Richmond IQOS boutiques and just last week launched IQOS in its third lead market by opening a boutique in the SouthPark mall in Charlotte.”

Advertisement
Over the next 18 months, PM USA plans to launch IQOS in four new markets with large adult smoker populations and expand the availability of IQOS devices through retail partnerships, explained Gifford. PM USA also plans to expand its HeatStick distribution to the surrounding geographies in all seven IQOS markets. He said the commercialization approach for IQOS is designed to maximize the organic growth potential of the device by focusing first on the densely populated metro areas and then expanding outward as the user base grows.
“In Charlotte, PM USA launched a more disruptive retail fixture that communicates the benefits of real tobacco, no ash and less odor and expects to begin HeatStick distribution to retail stores in the next few weeks. By the end of August, we expect HeatSticks to be in a total of 700 retail stores across the three lead markets,” he said. “PM USA will continue to leverage its IQOS retail ecosystem, including IQOS mobile, pop-up and kiosk retail formats, which allows for more strategic and agile marketing plans. We’re making several digital enhancements to the IQOS website too.”
The IQOS website now includes virtual tutorials, and a new expert video chat functionality will be available this fall, according to Gifford. These digital enhancements and “the ability to have devices delivered to smokers in lead markets with the proper age verification” will provide smokers with a variety of options to “learn about and access IQOS,” said Gifford, adding that PM USA expects to use its “first-mover advantage” to expand IQOS responsibly.
“Our commercialization strategy is based on the learnings from our IQOS lead markets and PMI’s international results paired with our desire to continue avoiding use by unintended audiences. We believe that a sustained focus on the consumer journey from awareness to conversion is the key to achieving our vision,” Gifford said. “Word of mouth among IQOS users and their fellow adult smokers has been a critical factor to the global success of IQOS.”

Advertisement
Timothy Donahue is the assistant editor of Tobacco Reporter. Since joining our team in January 2013, he has become not only an expert on the traditional tobacco business but also a well-respected voice in the rapidly developing vapor industry. Tim spends much of his time on the road, attending conferences and interviewing industry representatives. His networking skills, work ethic and quick mind are valuable assets to our diverse audience.

September 1, 2020
Haste Urged With New Health Warnings

Photo: Taco Tuinstra
Several medical and health organizations have urged Indonesia’s Health Ministry to accelerate its cigarette package graphic health warning revisions to Government Regulation No 109/2012. The groups noted that the draft revision began in May 2018 and should have been completed in a year’s time. The Coordinating Human Development and Cultural Affairs Ministry has also asked the ministry to review the regulations on online cigarette advertising and controlling vapor product consumption.
Tubagus Haryo Karbyanto of the National Commission on Tobacco Control (NCTC) said, “The slow revision process shows the government’s lack of awareness about the urgency of controlling high cigarette consumption in Indonesia. The Health Minister should immediately complete his homework.”
Aru Sudoyo of the Indonesian Cancer Foundation noted the nation’s high incidence of lung cancer among men (at 19.4 cases per 100,000), whole Indonesian Teachers Association chairman Unifah Rosidi said, “The Health Ministry does not seem to take the situation seriously while our children have very [poor knowledge] on the dangers of smoking.” Indonesian Heart Foundation chairman Esti Nurjadin said that the foundation had sent a letter urging President Joko Widodo to push for the revised regulation.
August 31, 2020
Ceylon Sales Recover to Pre-Pandemic Levels

Ceylon Tobacco (CTC) said that cigarette sales are recovering to pre-pandemic levels following a 38 percent decline in sales during the second quarter of 2020.
CTC revenue for the second quarter of 2020 declined by 35.2 percent from the second quarter of 2019 to LKR5.53 billion ($30 million), while profits for the quarter dropped by 33 percent to LKR3.10 billion.
CTC’s sales were impacted due to product access restrictions faced by consumers and retailers because of the island-wide curfew imposed to contain the Covid-19 pandemic from late Mach to mid-May.
“Post June, the business recovery is reverting to nearly pre-Covid-19 levels encouragingly faster than anticipated, and the business is cautiously optimistic of the future in anticipation of revival of the economy,” a CTC spokesperson said.
British American Tobacco holds 84.13 percent of CTC’s shares, with Philip Morris International accounting for an 8.32 percent stake.
August 21, 2020
Ministry OKs Japan Tobacco Price Increases

Photo: Colleen Williams
Japan Tobacco (JT) has received approval from the Ministry of Finance for its application dated July 31, 2020 to amend retail prices of its Japanese tobacco products.
The new retail prices will be effective on Oct. 1, 2020 for a total of 224 products, including 136 cigarette products, 16 cigarillo products, three pipe tobacco products, three cut tobacco products, 18 snuff tobacco products and 48 tobacco vapor products.
In a statement, JT said it will strive to continue to improve the quality of its products and services, in line with the expectations of its consumers.
The retail price amendments are already included in the 2020 consolidated forecast announced on July 31, 2020, along with certain assumptions.
Under the Tobacco Business Act, list prices for any tobacco products in Japan must be approved by the Ministry of Finance.

August 19, 2020
Netherlands: Tobacco Prices up 20 percent

Photo: Ralf Gervink from Pixabay
Tobacco prices in the Netherlands increased by nearly one-fifth this year as the government inches toward its goal of a €10 ($11.77) pack of cigarettes, reports DutchNews.

The 2020 increase is down to two tax increases, taking the price of a pack of cigarettes to around €8.20. A further rise of €0.12 cents will take place on Jan. 1, 2021.

Smokers still account for 22 percent of the Dutch population. Some 35,000 people a year die from the effects of smoking, being overweight or problem-drinking in the Netherlands.

The government aims to reduce the share of smokers and problem drinkers to 5 percent and the share of overweight people to 38 percent by 2040.
August 12, 2020