Originally created 09/24/98

Cigarette makers offering discounts



NEW YORK -- Cigarette makers are giving smokers a chance to curb the rising costs of lighting up.

Tobacco companies have repeatedly boosted prices to wholesalers over the past year, in part to defray the costs of legal settlements with states that have sued them to recover the costs of caring for sick smokers.

But securities analysts said Wednesday the tobacco makers have also stepped up their promotional offers -- giving away coupons or giving an extra pack with the purchase of every two or three -- at the same time.

The net effect is that the price smokers pay for cigarettes has been rising more slowly than the pace of the wholesale price increases.

Roy Burry, tobacco analyst at Brown Bros. Harriman, estimates that wholesale prices for cigarettes have gone up 30 percent over the past year but that retail prices are up only about 11 percent.

The companies have two solid reasons for increased promotional activity -- protecting their market shares and reducing consumer sticker shock, the analysts say.

One is that tobacco makers are anticipating restrictions on their marketing activities, and want to make sure their brands are well established and growing before their marketing freedom is limited.

"They are trying to get whatever market share they can," said John Maxwell, tobacco analyst for Davenport & Co.

Four states have settled suits for Medicaid costs with the tobacco makers for a price approaching $40 billion, and 37 additional states have suits pending.

Eight state attorneys general have been negotiating with the industry for about three months over a possible national settlement of state Medicaid suits. Those talks, which continue this week, could result in limits on billboard advertising of cigarettes, sponsorship of events and giveaways of T-shirts or other merchandise carrying cigarette brand names.

David Adelman, who covers the industry for Morgan Stanley Dean Witter, said the experience with marketing restrictions abroad has been that cigarette brands that are growing continue to grow afterwards while those that are declining tend to continue lose share of market.

Philip Morris Cos., the industry leader with the best seller Marlboro, accounted for about 49 percent of U.S. cigarette sales as of the end of June, up from 48.5 percent a year earlier, according to figures from Maxwell.

R.J. Reynolds Tobacco Co., the second-biggest cigarette company with brands like Camel and Winston, saw its share rise to 24.3 percent from 24.2 percent, Maxwell's estimates showed.

The third-biggest tobacco maker, Brown & Williamson Tobacco Corp., saw its share sink to 15.7 percent from 16.5 percent a year earlier, Maxwell said. It makes Kool, Capri, Lucky Strike and Pall Mall cigarettes.

Spokesmen for the tobacco makers said competition in the industry has always been intense and generally declined to discuss pricing policies.

Mary Carnovale, a spokeswoman for Philip Morris, said her company's "marketing activities have been fairly consistent over the years." She said even if marketing restrictions are imposed, they are expected to leave room for companies to compete for market share.

Burry said the tobacco companies are boosting promotions to "wean consumers to higher prices very gradually."

He said they don't want to anger smokers and tempt them to do something drastic. "Some smokers will quit if they get mad," he said.