You may not realize it, but those little rolls of tobacco you buy at your local retailer got there via a wholesaler, and cigarette wholesalers buy the product at discount prices from manufacturers.
Philip Morris had announced some changes to its "Wholesale Leader" program earlier this year, but they were met not just with grumbling and gnashing of teeth by many wholesalers but also with a lawsuit. The company pulled back, but has just announced a new set of changes.
According to this Houston Chronicle story, the new plan "lowers the discount awarded to wholesalers at the company's top performance level and raises the discount for wholesalers at the lower level. Wholesalers that used to get maximum discounts, sometimes as high as 3.5 percent, now can get a discount of only up to 2.1 percent, in line with those of other participants in the plan." In addition, "All wholesalers in the plan get the same initial discount, but those who meet or exceed the target earn more per carton than those who fall below it."
With many wholesalers now paying more for the product they buy, they may choose to up the prices they charge retailers, which may result in higher cigarette prices for consumers. On the other hand, the lower prices that some wholesalers get may end up lowering prices for consumers and helping Philip Morris' premium brands compete with discount brands.
Prudential Securities analyst Rob Campagnino estimates the new plan may save Philip Morris some $175 million in 2004, while other analysts are projecting savings of up to $300 million. That's a lot of money, but it's still a bit of a flicker in the bonfire that is Altria. The company reported operating income of about $4.4 billion in just its third quarter and $17 billion in all of fiscal 2002.
Investors interested in Altria Group should also consider other tobacco concerns, such as R.J. Reynolds
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