Smokers Switch to Reynolds’ Pall Mall Lower-Priced Brand Due to Higher Taxes

November 19th, 2012 00:00

Reynolds American, the second largest U.S. cigarette manufacturer, should offer investors some information about its top-selling Camel brand and its lower-priced Pall Mall brand when it presents its 3Q results before the stock markets open on Wednesday.

Americans are purchasing fewer smoking products as they are facing increasing taxes, higher smoking bans and health concerns. The majority of cigarette companies has increased prices and reduced costs in order to uphold profits as decreasing demand affects cigarette sales. However the drop in cigarette volumes had also led to a huge advertisement activity by the world’s giant cigarette producers.

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Reynolds American representative declared that those actions brought its cigarette volumes down at approximately 6% to 17.8 billion cigarettes in the 2Q in comparison with an estimated whole industry volume decrease of 1.9%. Within that time, its R.J. Reynolds Tobacco subsidiary sold about 5% less of Camel brand and volumes of Pall Mall dropped 3.5%. Camel’s market share declined to 8% of the U.S. market, while Pall Mall’s share dropped by 8.5%. The manufacturer has advertised Pall Mall as a qualitative and more affordable cigarette brand as smokers are exposed to weaker economy and raised unemployment, and has declared that half the people who try this brand  for once, continue to buy it further. Still Reynolds has encountered pressure from its competitors who are looking to attract more and more smokers looking to economize.

Besides regular cigarettes, Reynolds American also produces Kodiak, Grizzly and other smokeless tobacco products. The volume of its smokeless tobacco brands increased approximately 10% in the 2Q in comparison to the previous year. Its share of the U.S. retail market increased 1.5 percentage points to 33%. As the first domestic cigarette company to present its 3Q profits, Reynolds American’s results will help to demonstrate main tobacco industry trends in the U.S.

Continued great performance from Pall Mall could show that smokes are still switching to lower-priced cigarette brands in order to save their money, and those who smoked the brand during the recession are still loyal to this brand. But if volumes of the premium brands as Camel are rebounding, that could demonstrate that smokers are adapting to more expensive cigarettes following federal and state tax increases. Industry experts, estimate that Reynolds American will report profits of 80 cents per share on revenue of $2.2 billion. For instance in 2011, Reynolds American announced adjusted earnings of 70 cents per share. Its profit constituted $2.2 billion, except excise duties.

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