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TOBACCO OUTLET BUSINESS
MAY/JUNE 2012
CATEGORY MANAGER
CIGARETTES
According to a recent report on the
industry, competition continues to be
intense among value cigarette brands as
the battle tomaintainmarket share across
all pricing tiers rages. Released on April
17, Wells Fargo’s Q1 Tobacco Industry
Preview reports that industry shipment
volume was down by 3.5 percent
during the first quarter of 2012. “After
a 3.5 percent industry volume decline
in fiscal year 2011 and a 2.8 percent
decline in the fourth quarter of that year,
we expect underlying cigarette industry
shipment volumes will decline at a 3.5
percent rate—slightly less than the recent
historical trend of around a 4 percent
decline,” stated the report.
Most
manufacturers
reported
corresponding volume declines, but
Lorillard reported an increase of 3.7
percent in the first quarter of 2012. While
positive, that increase is much lower than
the 9.5 percent the company reported
in the same quarter for the prior year.
“Competition is heating up among the
second-tier brands including Pall Mall,
L&M, Maverick, Marlboro Special Blend
lines and Newport Red,” wrote Bonnie
Herzog, managing director of beverage,
tobacco and consumer research for Wells
Fargo Securities, LLC, who authored the
report. “Therefore, we expect 2012 to
be the ‘Battle of the Brands’ among the
second-tier price category.”
Herzog seems to anticipate Newport
will maintain its market share. “We expect
Newport Menthol volume to continue
to be strong with minimal promotional
support,” she writes. “Newport Red
volume trends have been robust but
Lorillard has been heavily discounting the
brand and this has continued into Q2 with
an incremental buydown taking effect in
April.”
While acknowledging that smokers
may seek to down-trade to lower priced
brands, Herzog sees the premium brands
as less vulnerable than in previous years.
The price gap between Marlboro and the
deep discount brands is now in the mid-
30 percent range. “Down-trading pressure
persists but we expect the negative
effects of down-trading will be somewhat
mitigated given the very narrow relative
price gap between premium and discount
brands,” she writes. “Furthermore, we
remain encouraged by healthy pricing
power,especiallyinthegrowingsmokeless
category, [where] we continue to expect
robust volume growth.” Smokeless
industry volume grew 5 percent in 2011,
she reports. Herzog anticipates that
Philip Morris will lead a price increase
in premium cigarettes sometime in the
summer of 2012.
Herzog also commented on Philip
Morris’s Marlboro Price Leadership
program, effective April 1, 2011, which
capped the price that certain retailers
could charge for Marlboro cigarettes.
More than 80 percent of Marlboro’s
volume is sold under the MLP program,
she reports, noting that retailer feedback
on the program has been mixed. “About
half sayMLP and its offshoots have helped
drive Marlboro share while the other half
say that MLP has driven down the prices
of RJR and LO brands, thus having the
unintendedconsequenceof aiding sales of
non-PMUSA products,” she writes.
TOB
Cigarettes in 2012
Volume continues to decline for the industry
as a whole, and most manufacturers.
1Q12E
1Q11
Altria Group
-2.0% -6.5%
Philip Morris International
0.9%
1.6%
Asia
-1.0% 14.0%
EEMA
1.5%
-0.8%
EU
1.5%
-7.3%
LA&C
4.0%
-5.5%
Lorillard
3.7%
9.5%
Reynolds American
-7.3% -4.9%
Cigarette Volume
1Q12E
1Q11
Altria Group
5.0%
-1.3%
Reynolds American
7.8%
13.1%
SMOKELESS Volume
Estimated
Volume Growth
of Key Brands
(Q1 2012)
Sales Volume by Manufacturer
Newport +2.8%
Camel -2.5%
Pall Mall +0.5%
L&M+15%
Grizzly + 7.8%
Maverick +12%
0
5
10
15
Source: Wells Fargo Securities