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Major Cigarette Prices on the Rise

November 24, 1998

NEW YORK (AP) _ Cigarette makers wasted little time after sealing a mammoth legal settlement with the states to pass the costs of the deal on to their customers: Wholesale cigarette prices are climbing 45 cents a pack, and smokers may see retail prices rise even more.

Philip Morris USA told wholesalers of the record hike in wholesale prices of Marlboros and its other cigarette brands late Monday afternoon, and R.J. Reynolds Tobacco Co. promptly matched it. They are Nos. 1 and 2, respectively, in the U.S. tobacco market.

One analyst called it the biggest U.S. cigarette price hike ever, and said it could push the average retail price of cigarettes to $2.45 a pack _ with the price of premium brands like Marlboro and Camels moving even higher.

Analysts had widely predicted a price increase of 35 cents to 40 cents a pack to pay for the tobacco settlement to resolve states’ claims for reimbursement for providing health care to sick smokers.

But the increase Philip Morris announced Monday to its wholesale customers, effective immediately, was slightly larger than expected.

David Adelman, tobacco analyst for Morgan Stanley Dean Witter, said smokers may be stuck with an even bigger price rise of about 50 cents a pack as distributors and retailers add a nickel to the wholesale price hike.

He estimated the national average price of cigarettes would rise to $2.45 a pack from the current $1.95, an increase of nearly 26 percent.

He said the price increase more than offsets the decrease in April 1993 on what came to be called ``Marlboro Friday,″ when Philip Morris successfully slashed prices by about 40 cents a pack in an effort to stanch its best-selling Marlboro brand’s loss of market share to cheaper smokes.

Marlboro accounted less than 25 percent of the market at that time, and now accounts for about 38 percent of all U.S. cigarette sales. Philip Morris controls 53 percent of U.S. cigarette sales overall.

Neither Philip Morris nor Reynolds offered any explanation for the price increase. ``We never comment on our pricing strategy,″ said Philip Morris spokeswoman Mary Carnovale. Reynolds also declined to elaborate.

But Adelman said the main reason was ``to fund the settlement payment. That is a significant increase in the cost of doing business and they have to pay for it.″

He said the increase was also designed to encourage wholesalers to get rid of inventories they have been hoarding in anticipation of an increase and to make it politically less palatable for states to boost cigarette taxes.

``Politically, it becomes very difficult if the cost of smoking has already gone up significantly,″ he said.

The nation’s biggest tobacco makers signed the settlement Monday with 46 states, the District of Columbia and five U.S. territories, under which they would pay $206 billion over 25 years to settle unresolved state claims for Medicaid reimbursements.

The companies had earlier signed four separate deals to settle claims by Mississippi, Florida, Texas and Minnesota for a combined $40 billion.

Analysts have speculated that the price increase for the settlement could speed the decline in the number of cigarettes sold.

Analyst John C. Maxwell Jr. of Davenport & Co. has estimated cigarette sales could shrink as much as 8 percent next year after a decline of 3 percent to 4 percent this year.

The industry has already raised wholesale prices by about 18.5 cents a pack earlier this year in four different increments with hikes in January, April, May and August.

Those increases were driven in part by settlement costs in the original four states.

Public health advocates favor a cigarette price increase because it could make cigarettes too expensive for youngsters who may be thinking about starting and could drive some smokers to quit.

But it is not likely to be popular with smokers. Tobacco companies backed advertising during this year’s congressional session that featured smokers complaining that it was unfair to raise taxes on cigarettes.

The ads struck a chord in some districts and Congress failed to enact the legislation required to implement a 1997 settlement deal between the industry, the states and anti-tobacco forces.

The deal reached last week was less expensive for the industry and contained milder restrictions on tobacco marketing than the 1997 deal.

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