Cigarette Packs To Jump 22 Cents
RICHMOND, Va. (AP) Smokers already hit hard by price increases stemming from the $206 billion tobacco settlement soon will be hit with another double-digit markup.
The nation's leading cigarette manufacturers have raised wholesale prices 18 cents a pack, anticipating an upcoming excise tax increase and higher costs associated with their settlement with the states over health care costs.
After markups, retail prices are likely to increase by about 22 cents per pack, analysts said Monday. Cigarettes now cost about $2.50 to $3.25 a pack, depending on the region of the country.
Philip Morris USA, the world's biggest tobacco maker, initiated the increase last Friday. Competitors matched the increase, which had been expected but came earlier than some analysts had predicted.
Retail prices are likely to increase immediately in some outlets, such as newsstands, where cigarettes are generally sold per pack. Increases may take longer at tobacco-only stores, said Morgan Stanley Dean Witter analyst David Adelman.
Spokesmen at Philip Morris, Brown & Williamson Tobacco Corp., and R.J. Reynolds Tobacco Holdings Inc. all confirmed the increase but refused to comment further. A spokesman at Lorillard Tobacco Co. did not return phone calls.
The price increase announced Friday to wholesalers is the second largest in industry history, behind a 45-cent increase last November. That increase followed a $206 billion settlement with 46 states suing the industry to recover costs of treating ill smokers. The industry previously settled for $40 billion with the four other states.
Now, the industry faces further cost increases, including a 10-cent increase in the federal excise tax set for Jan. 1, and an increase in settlement expenses from about 46 cents per pack to about 50 cents, Adelman said.
The remaining 4 cents of the price increase amount to a real increase in cigarette prices, or the amount the industry would normally have raised prices, Adelman said.
Roy Bury, an analyst at Brown Brothers Harriman, said experience with past price hikes indicates this increase of about 8 percent is likely to decrease demand by only about 2 percent.
``It clearly shows that the industry has the ability to offset higher costs with higher prices,'' Bury said. ``The key factor here is that profit per unit for domestic tobacco continues to go up.''
The increase will have a significant impact on demand, Adelman said, but overall revenues will still increase.
``The industry has got to balance not only volume but profitability,'' Adelman said. ``The fact is this industry is more profitable when it has moderate price increases.''
Ann Gurkin, an analyst at Davenport & Co., said she did not expect further price increases this year. But increases in future years are likely, Adelman said.
The industry's obligations under the settlement will increase again in 2001 from 50 cents per pack to 58 cents per pack, before decreasing in the following years, Adelman said. A further 5 cent increase in the federal excise tax is slated for Jan. 1, 2002, and state excise taxes may also rise in the coming years.
Adelman said cigarette prices have risen 28 percent this year and predicted increases of 9 percent next year, 6 percent in 2001, and 5 percent in 2002