Strong industry volumes and pricing in the fourth quarter help boost the category, according to Wells Fargo Securities.
Wells Fargo Securities LLC recently conducted its “Tobacco Talk” survey of tobacco retailers and wholesalers representing about 30,000 convenience stores in the U.S. to gain insights into the health of the category.
“Tobacco Talk” survey results found the overall combustible cigarette environment remains healthy, thanks to a number of factors:
(1) strong industry pricing power of +6% in Q4 driven by a stronger tobacco consumer, continued up-trading to premium brands, and lower retail gas prices;
(2) solid industry volume, with an expected Q4 decline of only 1.2% despite lapping a relatively tough year-over-year comparison; and
(3) moderating vapor category growth as consumer disillusionment continues, highlighting that continued innovation is critical.
Bonnie Herzog, a senior analyst with Wells Fargo also noted signs of increased competitive activity “given Reynold American Inc.’s (RAI) push behind Newport and Altria defending its turf.”
“Bottom line, we believe the risk/reward ratio is favorable ahead of both Altria and RAI’s Q4 results since we expect both companies will report earnings above management guidance with RAI generating double-digit EPS (earnings per share) growth in Q4,” Herzog added, noting Wells Fargo remains bullish on the U.S. tobacco sector.
The “Tobacco Talk” survey also found that the Newport brand is poised for greater than expected share gains and growth.
“Our retailer contacts now expect Newport to gain 95 bps of incremental share in 2016 under RAI’s ownership, up from 80bps when posed the same question in early December. This incremental share will likely be driven by greater participation in Reynolds’ new every-day-low price (EDLP) retailer program, which is driving greater shelf space and share gains for RAI’s entire portfolio,” Herzog said.
Herzog added, “We believe RAI is now very well positioned to drive share gains and margin expansion while managing its growth brand pricing structure and accelerating growth for Newport and its entire portfolio.”
The New Marlboro MHQ Mobile App should also help drive consumer engagement. “While early days, we’re encouraged by retailers’ initial feedback on the app (51% using app in stores). Retailers cite improved customer engagement, ease of use, positive impact on Marlboro volume/sales, and point of differentiation, but are somewhat wary that it targets a rather narrow segment of the smoking population (tech savvy, younger), and conditions consumer to buy on coupon. Bottom line – We believe MHQ’s app-based profile has a leg up on hardware-driven platforms like RAI’s “Spot You More” program, which retailers so far find less appealing,” Herzog said.
Meanwhile, Imperial Tobacco Group (ITG) Brands are reported to be falling behind. A majority of retailers (60%) via the Tobacco Talk survey said they believe ITG will lose cigarette share, up from 50% in 3Q of 2015. “Survey respondents also expect to trim ITG’s shelf space allocation by about a point this year, while raising RAI’s by the same,” Herzog said.