According to the Wall Street Journal, inflation combined with changing smoking habits has made it more difficult for tobacco companies to offset declining cigarette sales with higher prices.
It is reported that one of the attractions of investing in tobacco stocks is that cigarette manufacturers seem to have unlimited ability to continue to grow profits by raising prices amid a long-term decline in overall cigarette sales.
However, the recent larger-than-expected decline in U.S. auto sales is increasingly testing this strategy. In the three months through September, U.S. cigarette sales fell 8% year-on-year, nearly double the long-term average.
Altria suspects many smokers have turned to illegal disposable e-cigarettes, a market that has recently grown by a fifth. In October, the cigarette maker announced a "comprehensive lawsuit" against 34 manufacturers, distributors and online retailers for illegally marketing and selling illegal disposable e-cigarette products in California and other U.S. states.
The U.S. Food and Drug Administration's (FDA) stepped-up crackdown on illegal e-cigarettes may stabilize cigarette sales.
In addition to competition from illegal e-cigarettes, premium brands such as Marlboro face additional pressure as inflation makes consumers more price-sensitive. Smaller brands offering discounts have been gaining market share, with sales of the cheapest cigarettes rising 15% last year.
According to Altria, the national average price of Marlboro is now $8.77 per box, including tax, making it 43% more expensive than cheaper competitors, up from 31% five years ago.
One of the beneficiaries of the downside trade was Vector Group, whose Montego brand is now the largest discount cigarette in the United States.
Despite the pressure, the Wall Street Journal believes Altria is unlikely to take major action. Thirty years ago, the company cut the cost of Marlboro by 20% to close the gap with cheaper brands.
Traumatized investors dumped the company's stock, an event that became known as "Marlboro Friday."