CANNAINVESTOR Magazine March / April 2017 - Page 184

Tobacco Cos. Up Prices Ahead of Calif. Tax Hike

Multinational tobacco industry leader Altria Group Inc. (MO) has raised its cigarette prices in California earlier than expected, igniting a domino effect that caused industry peers such as Reynolds American Inc. (RAI), Imperial Brands (IMBBY) and Vector Group Ltd (VGR) to follow suit.

The price hike was initially prompted by the state of California’s referendum that resulted in the raising of its excise tax on cigarettes, including e-cigarettes, by a hefty $2 per pack this past November. The newly raised tax is expected to generate $1.4 billion in revenue and will raise excise tax by $0.87 to $2.87 per pack.

California comprises 8% of the total U.S. tobacco market. Wells Fargo’s Bonnie Herzog had estimated the new state nicotine tax would cause an 8% price increase per cigarette pack in the state. In line with the analysts’ predications, Altria led the group of tobacco makers to increase prices at $0.08 per pack beginning March 19.

The leading tobacco makers’ price hikes prior to the onset of the state tax is a direct move to minimize the hit to their profits, as addicted smokers absorb price increases. This willingness from consumers to pay for cigarettes and tobacco products is another reason the government does so well in taxing them.