Tobacco analyst - c-store tobacco sales not as bad as could have been..

August 13, 2009 - On a scale of 1 to 10, in terms of what could have happened in tobacco this past year, UBS tobacco analyst Nik Modi places the actual impact at a three or a four. That is despite the fact that, as Modi said—referring to the downtrodden economy, federal excise tax and state excise tax increases and federal Food & Drug Administration (FDA) regulation—"Everything that could have happened that we didn't want to happen, happened."

But as Modi titled his presentation at the Convenience Store/Petroleum (CSP) Annual Tobacco Category Review Meeting, "It Could Be Worse." In fact, citing an exclusive tobacco survey conducted by CSP Daily News and Modi, which asked c-store retailers how their cigarette trends have been, relative to their expectations of federal excise tax (FET) effects; "90% said in line or better than they expected.... So c-store retailers are telling Modi it's not as bad as you thought," he said.

One impact since the FET took effect on April 1 has been consumers moving either to the premium end or fourth-tier cigarettes. "So you're getting this phenomenon with the middle, which is happening across a lot of other categories," he said. "It's getting squeezed. It's the really inexpensive stuff that's working, or people just saying, 'You know what, the price gaps are narrowed on a percentage basis, I'm just going to buy a pack of [premium]'."

And despite low first-half volume growth, industry profits actually have grown, based on price elasticity, for Reynolds (8.2%), Altria (3.8%) and Lorillard (21.4%). Modi said that although he expects underlying cigarette industry volumes to be soft for three more quarters (reaching -9%), the first quarter of 2010 should show a return to a more normalized decline rate of -4%.

He added, however, that for a continued positive outlook, the industry needs to band together. "The tobacco industry has a massive army of people on the ground, but the industry is way too splintered and there's too much in-fighting," he said, adding that between retailers, managers, wholesalers and tobacco companies, the category has a lot of people behind it. "Given the amount of legislative pressure this industry is under, there is more that the industry can do, but it will require alignment."

Reference: Seeing Through the Smoke
Issues in the tobacco industry haven't had expected impact, analyst says
by Linda Abu-Shalback Zid, CSP Daily News, 8/12/2009.

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