Philip Morris raises cigarette prices

NEW YORK (Reuters) -- Philip Morris Companies Inc. , the world's largest tobacco company, will raise U.S. cigarette prices to distributors by 6 cents per pack on all of its brands effective Monday, a spokesman confirmed Sunday.

The price move will affect the top-selling Marlboro brand as well as Philip Morris's Benson & Hedges and Virginia Slims brands, and rival U.S. cigarette makers are expected to quickly follow the firm's lead, analysts said.

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Prices at checkout counters likely will go up 6 to 8 cents a pack due to the hike at the wholesale level, the analysts said.

The increase of $3 per 1,000 cigarettes will be charged to Philip Morris' direct accounts, company spokesman Thomas Ryan said. That breaks down to an increase of 60 cents per carton, or 6 cents per pack.

Cigarette companies last raised prices by 13 cents per pack in January, and before that by 18 cents in August 1999.

Analysts had said earlier this month that wholesalers and retailers were increasing their inventory levels on expectations of a possible price increase.

"I think that the company looked at the inventories that the distributors were holding and felt that it had gone high enough, and one way to control it is to actually announce the price hike," Feldman said.

Ryan said the company began informing its direct accounts about the price increase Friday afternoon.

There has been speculation a price increase was on the way to boost profits and help pay for costly settlements of smoker lawsuits.

Ryan said Sunday the company does not comment on its pricing strategy.

But cigarette makers have been hit with a pack of lawsuits claiming compensation for the treatment of sick smokers and damages, culminating in the record $145 billion in punitive damages award by a Florida jury earlier this month in the so-called Engle class action case in Florida.

Analysts had been expecting the increase to be even larger, "I had anticipated a price increase around this time although the increase was less than I had anticipated," Salomon Smith Barney tobacco analyst Martin Feldman said. "By year-end, I expect Philip Morris to raise prices by 6 to 7 dollars per thousand cigarettes in total," including this increase.

"I would certainly expect ... the other major manufacturers to follow this with an announcement today, effective tomorrow," Feldman said.

Other industry analysts had also expected a bigger rise.

Sanford C. Bernstein's William Pecoriello had predicted an increase of $6 per 1,000 cigarettes -- or 12 cents per pack -- sometime between the end of the punitive damage phase in the Engle sick smokers trial and the Sept. 4 U.S. Labor Day holiday.

Credit Suisse First Boston's Bonnie Herzog said in a July 7 note that she expected Philip Morris to lead a price increase of about 10 cents per pack "in the near future, followed by another modest price increase later this year."

Feldman expects any increases from other major cigarette manufacturers, such as R.J. Reynolds Tobacco Holdings Inc. , to match the 6 cents per pack increase put in place by Philip Morris.

"RJR and the other manufacturers do not have sufficient market scale really to be able to hike prices independently of Philip Morris' actions," Feldman said. "They tend to follow the pricing of Philip Morris."

Neither R.J. Reynolds nor Brown & Williamson Tobacco Corp., a unit of British American Tobacco Plc , were immediately available for comment.

Loews Corp., which operates Lorillard Tobacco Co., and Vector Group, which owns Liggett Group Inc., also could not be immediately reached for comment.

"The actual retail price could on average go up by about 8 cents," Salomon Smith Barney's Feldman said. "But given that there is discounting throughout the system at the wholesale level, at the retail level and at the consumer level, it would suggest to me that the effective price hike for consumers may be no more than about 6 cents a pack, after taking discounting into account."

Shares of many cigarette makers closed slightly higher Friday, ahead of the price hike.

Philip Morris inched up 1/4 to 25-11/16, R.J. Reynolds gained 1/8 to close at 28-1/8, British American Tobacco's American Depositary Shares climbed 1/8 to 12-3/16 and Vector Group rose 1/8 to 14-7/16. Meanwhile, shares of Loews Corp. slipped 1/16 to 62-11/16.

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