Why Did Altria Hike Its Cigarette Prices Earlier Than Expected?

by Trefis Team
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Altria Group, Inc.
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Cigarette manufacturer Altria (NYSE:MO) announced an increase of $0.08 per pack beginning on March 19. While tobacco companies regularly update their prices upwards, what is more surprising this time around is the timing of this hike. Normally Altria undertakes price increases twice a year, in May and in November. Following Altria’s footsteps, other tobacco companies, such as Reynolds American, Imperial Brands, and Vector Group, followed suit. The former two’s price hike was implemented earlier than Altria’s, on March 16 and March 17, while that of the latter came into effect on March 20. This chain reaction has been driven by the higher excise taxes in California, which was put into action on April 1.

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Cigarette Tax Hike Kicks In In California

California Proposition 56 had sought to raise the cigarette tax by $2 per pack, more than tripling the tax from its current level of $0.87. It also aimed to impose similar tax hikes on other tobacco products, as well as electronic cigarettes. The revenue earned from this tax would go primarily into funding healthcare programs,  tobacco use prevention and control programs, and tobacco related research. California voters supported this proposition, voting 63% to 37% in its favor. This may be perceived to be bad news for big tobacco companies such as Altria, since the California cigarette market is the second largest in the nation, after Texas, and constitutes 8% of the US cigarette market. However, in an earlier article, we assessed that this hike would have a marginal impact on Altria’s revenue. The California initiative, coupled with the excise tax hike in Pennsylvania last August, is expected to reduce industry volumes by 1% this year. Three other tobacco tax initiatives were defeated in other states, and so this hike in California may be a one-off.

California Tax Hike

Dominant Position In The US

Altria’s Marlboro brand is the number one brand in the US, and has a 44% share in the country’s tobacco market. The addictive nature of cigarettes not only builds a high level of brand loyalty among customers, but it also makes the products less price elastic. Given the massive share that Altria has in the market, its Marlboro cigarettes can be considered even less vulnerable to price hikes. This ensures that the revenue of the company can continue to increase, despite the declining volume of cigarettes sold.

Marlboro Share

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Altria.
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