PM – Marlboro Prices Going Up In Japan

PM Wins Approval to Raise Marlboro Retail Prices by 2.2% in Japan Effective October 1 – Should Be A Positive for Margins and Should Help To Accelerate Smoker Conversion to iQOS – We just learned that Japan’s Finance Ministry approved PM’s application on 9/6 to increase retail pricing by ¥10/pack on Marlboro combustible cigs effective 10/1. This price increase is particularly notable because it will occur in absence of an increase in cig excise taxes – a rare event. The price hike will effectively raise the retail price of a pack of Marlboro to ¥470 from ¥460 (+2.2% increase) while leaving the price of a 20-stick pack of iQOS HeatSticks unchanged at ¥460 (and ¥10,000/kit). This compares to Mevius, which retails for ¥440/pack. The key implication, in our view, is this could further accelerate smoker conversion (namely Marlboro smokers) to iQOS, while also helping to protect the profitability of the Marlboro brand family as combustible cig volumes continue their secular decline. For comparative purposes, BAT’s glo product sells for ¥420/pack (Neostiks) and ¥8,000/kit and JT’s Ploom Tech product sells for ¥460/pack (refills) and ¥4,000/kit. Bottom line – We believe this is a positive development and could potentially enhance PM’s net price realization target going forward (+6% for FY17) as well as drive even faster share gains for iQOS in Japan (13.7% offtake share as of the last week of August vs 12.5% as of July 2). We reiterate our Outperform rating on PM, our top stock pick, driven by PM’s pricing power, strong global brands and incrementality of its reduced risk product (RRP) platform under the iQOS umbrella, which we believe should create long term shareholder value and upside in the stock.

Q3 Outlook – Expect A -1% Decline in Combustible Cig Volumes – We also note comments by PM’s CFO Jacek Olczak at a recent conference guiding to a -1% decline in total company cig/Heatstick volumes in Q3 given ongoing pressures in Russia (lack of pricing), the Gulf Cooperation Council (GCC) (prices basically doubled as a result of tax hike at end of June) & Indonesia (macro weakness). The company’s guidance for FY17 volume remains unchanged at “closer to down 3%” for overall cig/Heatstick volumes.

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