Philip Morris USA, the nation's biggest tobacco company, raised wholesale prices of Marlboros and its other cigarette brands by a record 45 cents a pack on the day the industry sealed a mammoth legal settlement with the states.
No. 2 R.J. Reynolds Tobacco Co. joined the move Monday and others were expected to follow suit on what one analyst called the biggest U.S. cigarette price hike ever. It could push the average retail price of cigarettes to $2.45 a pack, and the price of premium brands like Marlboro 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 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 25.6 percent.
"This is the biggest tobacco price increase in dollar terms in the history of the United States," he said.
He said the price increase more than offsets the decrease a few years ago 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.
Philip Morris offered no explanation for its price increase. "We never comment on our pricing strategy," said spokeswoman Mary Carnovale.
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 five 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 ater 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.
Written By Skip Wollenberg