The Gas Price Crisis Takes a Toll on Tobacco
Friday, July 25, 2008JEFF YASTINE: The House of Representatives could vote next week to give the Food and Drug Administration the power to regulate tobacco. That would allow the FDA to restrict some ingredients used in cigarettes. But as Scott Gurvey reports, that's not the only burning issue facing cigarette makers.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: 2008 has been a tough year for big tobacco. Sales are down and so are tobacco stocks. Reynolds American shares, for example, have lost nearly a quarter of their value so far this year. Sales started to go up in smoke as gas prices soared. Analyst say about 70 percent of Americans buy cigarettes at convenience stores, many of which are located at gas stations. Sticker shock at the pump is hurting tobacco sales, according to Morningstar analyst Gregory Warren.
GREGORY WARREN, TOBACCO ANALYST, MORNINGSTAR: When you're pulling into the gas station and spending $100 to fill up your gas tank on your pickup truck, it's kind of hard to step in and pay $5, $6, $7 for a pack of cigarettes.
GURVEY: That has accelerated a long-term decline in cigarette sales. They are now less than half of what they were at their peak in 1981. To maintain margins, tobacco companies have steadily raised wholesale prices, which have tripled over the last 10 years. Additionally, many states and cities see tobacco as an easy source of revenue. UBS tobacco analyst Nik Modi says that's a serious issue for the industry.
NIK MODI, TOBACCO ANALYST, UBS: Litigation used to be the biggest threat and now it's really legislation. I see taxes at both the state and Federal level as being the biggest issues to think about.
GURVEY: Congress is considering raising the Federal excise tax to $1 a pack. It is now $0.39. State taxes currently average $1.18 a pack. But in some places they're much higher. Here in New York, city, state and local taxes total $4.25. As a result, a pack of cigarettes at this Manhattan newsstand costs more than $8, many brands costing nearly $10. New York state's health commissioner says as a result of the prices, 140,000 state residents will quit smoking. Many analysts agree.
WARREN: When a smoker has to pay $10 a pack and they're a pack a day smoker, we're talking about $3,600 a year that they're spending on cigarettes and if times are tight, they're probably going to look for ways to cut down or actually even quit.
GURVEY: That's one reason Warren is neutral on the outlook for the industry. But others are more bearish.
MODI: In this environment, I love tobacco just because they have really limited commodity cost inflation risk, unlike what you see with the household personal care companies or maybe even the food companies. And they have real pricing power.
GURVEY: Analysts say the real growth in the tobacco industry is in emerging markets like China. But that won't help U.S. tobacco companies. Reynolds and Lorillard sold the overseas rights to their brands more than two decades ago, while Altria spun off Philip Morris International earlier this year. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
