Price increase. It is a word that any retailer wants to hear when it comes to tobacco products, particularly with Obama advising 94 cents per package boost to the Federal Excise Tax (FET) in his latest budget.
Bonnie Herzog views minimal price boosts in different ways. “Pricing power has been essential and important to this industry,” she stated during the press conference she attended at the 2013 NATO Show in Las Vegas a few weeks ago. “When it comes to the main thing, one point of pricing gives three times the leverage in comparison to one point of volume.” Indeed, cigarette sales are decreasing, but Herzog-chief manager of tobacco and consumer research for the Wells Fargo Securities LLC mentioned that more than 20% of the population still consumes tobacco products and, more than likely a modest boost will not discourage the vast majority of them. “Mid single digit price boosts more than compensate cigarette volume drops, forcing top-line increase and greater margins for some,” stated Herzog.
Herzog predicts that such price increases will keep on taking place in 2013 according to latest earnings calls by key tobacco companies. During the time of the session, Lorillard and Reynolds had revealed their 1Q 2013 revenue, with Altria soon to present its own results. “I have expected that pricing will speed up by four points this year,” Mrs. Herzog mentioned.
While cigarette pricing will for sure increase in 2013 and 2014, 2015 provides an exciting chance for cigarette producers, shareholders and merchants as well: 4Q 2014 signifies the end of the Federal Tobacco Buyout Fee. “This 10-year, $10.1 billion program costs around 0.06 cents per package,” Herzog stated. “This must lead to substantial great potential to revenue increase in 2015 for all three of the top tobacco manufacturers in the U.S. Thus, in merely a few years, we foresee that cigarette operating margins will be re-based higher by around 250 to 300 basis points,” she added.
It may be too soon to estimate precisely how producers could utilize these cost savings, but Herzog stated they would not apply it to lower cigarette prices that smokers have already become used to. Some ways on how the funds could be utilized consist of financing internal growth projects, compensating possible federal and state excise tax boosts, financing higher advertisements to generate volume or purchasing or investing in a growth business.