Cigarette smokers already smarting from George Osborne's price increases in this year's budget have more pain to endure.
Imperial Tobacco has begun a new round of price rises, adding 25p a packet with effect from 10 July. This comes on top of the 37p budget increase. Analysts at Societe Generale said it was an unusually large rise from the company, a significant step-up from last September's 14p rise led by Japan Tobacco.
Soc Gen said the move would add 4% inflation on an average retail price of 680p a pack, which could put off more smokers. UK cigarette market volumes since the budget have slipped by around 5% to 6%, and Soc Gen estimated this could worsen by another 1% or so.
But overall the move could boost Imperial's UK profits, analyst Chas Manso said, by around 5% and its group profit by 1%, if the new price increases stuck. He said:
Broadly, we estimate the UK government receives 8p of the 25p retail hike through the excise system. Retailers should receive around 2p per pack extra, leaving 15p per pack for Imperial. There is a wide impact on manufacturer pricing by brand given economy brands (e.g. JPS, Windsor Blue) prior to this increase generated around 30p per pack of revenue for the manufacturer, while premium brands (e.g. Embassy) generate around 110p.
So a net 15p adds around 50% to Imperial's take on its economy brands and 13%-14% to its premium take, with an average gross benefit we estimate at around 23%.
Downtrading to cheaper brands typically erodes the effective benefit by about 50%. So this broadly implies a 10%-12% overall pricing benefit to Imperial, as opposed to the 'normal' 5%-6% pricing we would normally expect from Imperial in the UK.
Soc Gen has a buy recommendation on Imperial with a price target of £29. In a weak market, the company's shares have climbed 15p to £25.79.
