British American Tobacco Plc is accelerating the pace of price hikes for its traditional and electronic cigarette brands even as inflation continues to put the squeeze on consumers’ discretionary spending.
Goldman Sachs analyst Bonnie Herzog released Monday a detailed analysis to investors of the R.J. Reynolds Tobacco Co. list-price hikes set to go into effect Monday.
Another round of price increases also is set for R.J. Reynolds Vapor Co.’s top-selling U.S. electronic cigarette Vuse.
Herzog’s reports are based on “industry trade contacts” that typically are accurate.
The list price is what wholesalers pay manufacturers for their traditional cigarette products. The increase typically is passed on to customers at retail.
“While there is some increased risk of potential downtrading and concerns that manufacturers have less pricing power today, we believe brands ... with a very loyal customer base and strong/effective promotions should be able to keep those consumers within the franchise,” Herzog said.
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It would be Reynolds’ fourth list-price hike this year after conducting four increases in 2021.
What makes the pending list-price increase noteworthy is that it is occurring after the most recent hike went into effect in early July.
For Reynolds’ top-selling brand Newport, the list price is up 17 cents per pack. Newport is the No. 2 brand in the U.S., trailing just Philip Morris USA’s Marlboro.
Altogether, Reynolds has raised its list price by up to $1.05 over the last 10 months for many of its top brands, as well as a combined $1.62 since January 2020.
Also increasing by 17 cents per pack are all styles of No. 5 National American Spirit, Lucky Strike non-filter brands, State Express 555, Doral, Capri, Camel non-filter, Dunhill and Misty.
Reynolds also is raising by 17 cents per pack the price of its heat-not-burn traditional cigarette Eclipse, which is sold in limited stock.
Going up by 14 cents per pack is No. 3 Camel, while No. 4 Pall Mall’s Box style is increasing by 13 cents per pack.
The biggest per-pack increase at 25 cents is for Pall Mall non-filter, Pall Mall Vintage Gold 100, More, Monarch, Red Kamel, Old Gold, Tareyton, GPC, Vantage, Carlton, True, Kent and Now.
For Natural American Spirit, there will be a 10-cent per pouch increase for its RYO brands, along with a 40-cent per tin.
That tobacco manufacturers are able to consistently raise prices on traditional and electronic cigarettes is not surprising to Roger Beahm, executive director of the Center for Retail Innovation at Wake Forest University School of Business.
Beahm said manufacturers are increasing prices in small chunks more frequently vs. larger increases less frequently, “helping minimize the impact from sticker shock when prices are increased.”
“There’s the willingness on the part of smokers to continue to pay an ever-increasing out-of-pocket price given the benefit of enjoyment they obtain from using the products.
“There’s continued strong loyalty to individual brands in spite of restrictions in marketing and an awareness of the risks of using tobacco,” Beahm said. “The judgments and feelings smokers have toward the attributes, benefits, and imagery are what motivates them to pay more for the brands they buy, even when those brands continue to raise prices aggressively.”
Vuse price hikes
Over the past three months, Vuse has overtaken Juul as the top-selling e-cigarette, according to Nielsen’s monthly analysis of convenience store sales.
For Vuse Alto e-cigarette products, the single pod packs will increase by $3.40 per carton. The two-pod packs will rise by $5.15 per carton, while the four-pod pack rose by $6.90 per carton.
The Vuse Solo cartridges and Vuse Vibe tanks will go up by $7.10 per carton. There is a $3.60 price hike on Vuse Solo and Vuse Vibe power units.
BAT reported in its first-half fiscal 2022 financial report on July 27 that new-category sales, mostly consisting of Vuse, heat-not-burn traditional cigarette glo (not available in the U.S.) and modern oral products Camel Snus and Velo, had an overall 45.4% jump in revenue to $1.55 billion.
“We have a strong and resilient portfolio in the U.S., growing value share in both combustibles and vapor,” BAT chief executive Jack Bowles said in a statement.
“We continue to grow our premium value share in combustibles, and to date we see no acceleration of downtrading in our combustibles portfolio.”
In June, industry analyst Jain Gaurav of Barclays said vapers’ willingness to absorb Vuse price increases is noteworthy given that all of the major U.S. and global e-cigarette manufacturers have been challenged to gain and maintain market share.
Until recent months, increasing per-pod prices has been considered as potentially detrimental to getting smokers to switch over.
Gaurav said the e-cigarette price increases could transform BAT’s bottom line on the category from a $350 million loss in fiscal 2021 to a $200 million profit in fiscal 2022.
Gaurav said the e-cigarette profit could reach $700 million by fiscal 2025.