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Philip Morris to Boost Cigarette Prices by 6 Cents

by Will Edwards
Source: Bloomberg News, Friday, 7/28/00

New York, July 28 (Bloomberg) -- Philip Morris Cos., the world's largest tobacco company, is raising U.S. cigarette prices to distributors by about 3 percent to boost profit and help pay for rising legal settlement costs.

The maker of Marlboro, Benson & Hedges, and Virginia Slims raised wholesale prices by 6 cents a pack, effective Monday. Analysts expect rival U.S. cigarette makers to follow. The increase comes after increases of 13 cents in January and 18 cents last August.

cigarette prices increase
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The increase could come out to about 8 cents a pack at checkout counters, said Credit Suisse First Boston analyst Bonnie Herzog. It's Philip Morris's eighth increase in about two and a half years, totaling more than $1 a pack. Cigarette makers have increased prices to pay for legal costs and, lately, to fund promotions to keep smokers from switching to discount brands, analysts said.

"This is largely a margin-related increase," said Martin Feldman, tobacco analyst at Salomon Smith Barney Inc. "It also begins to take into account the almost 10 cent-per-pack rise in settlement costs that the industry will have to pay in 2001."

Officials at No. 2 R.J. Reynolds Tobacco Holdings Inc. and No. 3 Brown & Williamson, a unit of British American Tobacco Plc, weren't immediately available for comment.

Distributors helped push Philip Morris's second-quarter U.S. cigarette sales up 3.6 percent, buying ahead of an anticipated price increase, the company said earlier this month. Analysts had expected Philip Morris to lead an increase of as much as 12 cents a pack by the end of August.

Price of Success
"I was looking for a little bit higher, but I'm not changing my forecasts," First Boston's Herzog said. "They're going to promote a lot of this away."

Philip Morris is currently holding a 45 cent-per-pack promotion to temporarily lower the prices of its cigarettes at U.S. checkout counters, Herzog said.

U.S. cigarette makers boosted prices by 45 cents a pack in November 1998 after agreeing to a $206 billion settlement agreement with 46 states to help them recoup costs treating sick smokers. Other increases in 1998 included 2.5 cents in January, 5 cents each in April and May, and 6 cents in August.

Shares of New York-based Philip Morris rose 1/4 to 25 11/16 in New York Stock Exchange trading.

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