Philip Morris Boosts Cigarette Prices by 7 Percent

This industry-wide cigarette price hike should result in a 2%-3% decrease in nationwide cigarette sales (and settlement payments to states) and a 1%-1.5% decrease in the nation's nicotine addiction rate (i.e. 450,000 - 675,000 fewer smokers), saving several hundred thousand lives. But don't expect to see any Philip Morris "we care" ads touting this public service.

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New York, Dec. 18 (Bloomberg) -- Philip Morris Cos., the world's largest tobacco company, boosted U.S. cigarette prices to distributors by about 7 percent, or 14 cents a pack, to pay for rising legal settlement costs and increase profits. The price increase on Marlboro, Benson & Hedges and other Philip Morris brands went into effect today, spokesman Michael Pfeil said. R.J. Reynolds Tobacco Holdings Inc., the maker of Winston and Camel cigarettes, said it will raise wholesale prices by the same amount.

Today's increase includes 8 cents a pack to cover higher costs from U.S. cigarette makers' $206 billion settlement with 46 states in 1998, analysts said. The rest will go to boost profit and marketing, they said. The increase will translate into retail prices that are 17 cents to 18 cents higher, analysts said.

"That's a pretty healthy price increase," said analyst Marc Cohen at Goldman, Sachs & Co., who said it was about 5 cents a pack more than he had built into his earnings estimates of $4.10 a share for Philip Morris in 2001.

R.J. Reynolds said it will increase wholesale prices by 14 cents a pack starting with cigarettes being shipped tomorrow, spokesman Seth Moskowitz said. The increase is only 7.5 cents for Monarch, Best Value and all of its Forsyth Tobacco Products brands, he said. The company also makes Winston, Camel and Salem cigarettes.

Shares of New York-based Philip Morris rose $1.25 to $41.31. The company, the top performer in the Dow Industrials Average this year, also makes Kraft cheese, Miller beer and Maxwell House coffee. The shares have risen 80 percent this year.

R.J. Reynolds, the No. 2 U.S. cigarette marker, rose 25 cents to $45.75. American depositary shares of British American Tobacco Plc, owner of Brown & Williamson, rose 6 cents to $14.94. Lorillard parent Loews Corp. rose 69 cents to $95.

Higher Profits
Philip Morris has led industrywide price increases totaling about $1.15 a pack in the past three years. The company has boosted cigarette prices three times this year, with the other two increases coming in the form of a 6 cents-a-pack increase in July and a 13-cent boost in January.

The higher prices have helped Philip Morris push U.S. cigarette profit up for four straight quarters, even as consumers balked at paying more and bought fewer cigarettes. Consumption fell about 8 percent in 1999 after the industry's largest increase -- 45 cents a pack -- was levied to pay for the 1998 settlement. Checkout counter sales are now estimated by analysts to have cooled off to about a 1 percent to 2 percent decline per year.

"Demand is not very sensitive to moderated price increases," Cohen said.

Philip Morris increased wholesale cigarette prices by 18 cents a pack in August 1999. Increases in 1998 were as follows: 2.5 cents in January, 5 cents each in April and May, 6 cents in August, and 45 cents in November.

by Will Edwards
Bloomberg News
Tuesday, 12/19/00

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