Analyst Says Outlook is Bright for Tobacco Industry Despite Challenges photo by David Hathcox Wall Street analyst Bonnie Herzog, of Smith Barney Wall Street analyst Bonnie Herzog, of Smith Barney, told distributors Friday morning that "current industry fundamentals are the best they’ve been in over two years for the major cigarette manufacturers." Speaking at the closing general session of AWMA’s 2005 REAL DEAL EXPO, Herzog said some "pricing power" has returned, leading to higher margins, while deep discount category growth is continuing to decelerate. Herzog noted that limited excise tax increases were passed by state legislatures in 2004, and predicted "modest" increases this year. Meanwhile, she said, the relative price gap between premium and deep discount brands has narrowed considerably. Inexpensive import cigarette volume growth and incidence counterfeit cigarettes declined during 2004, she said, predicting this will continue in 2005. Herzog predicted that innovation will play a bigger role in 2005, suggesting that Philip Morris and Reynolds American will enter the smokeless tobacco market in the face of declining demand for cigarettes. "Philip Morris recognizes that they need to be more innovative and are now talking about ‘other sources of revenue,’" she said, suggesting a new line of super premium cigarettes may be in the offing, as well as expansion of new technology filter cigarettes that may be perceived as less harmful to the consumer. Herzog said Reynolds American intends to focus on Camel and Kool as the company’s "investment brands," reducing support for some of the company’s other brands. She also predicted that the acquisition of Lane Limited, a manufacturer and distributor of several cigar, roll-your-own and pipe tobacco products, will be a "hidden gem" for RAI. She predicted that impressive growth in the smokeless tobacco category will moderate and return to historical levels of around 2 percent growth. "Bottom line," she said, "the smokeless tobacco category is an opportunity for manufacturers, wholesalers and retailers to make money." Increased tobacco regulation via the Food and Drug Administration could happen in 2005, Herzog said, noting that Philip Morris sees that development as positive, since it would provide a framework for them to make health claims. Such regulations would create barriers for some of the deep discount manufacturers, she said, level the playing field among manufacturers, and possibly help with future litigation. For more information on attending the 2007 AWMA REAL DEAL EXPO, contact customer service at either 800-564-4220 or 703-449-6418 or awmaregistration@jspargo.com