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Philip Morris gains, while deep-discount competition stagnates
By ASSOCIATED PRESS

RICHMOND, Va. - With help from statehouses across the country, Philip Morris USA is staving off deep discounters that have threatened its industry-leading sales. Dinyar S. Devitre, chief financial officer of Philip Morris parent Altria Group Inc., said Wednesday that these discounters have experienced relatively flat market share in the last two years. More recently, their share has been "slightly trending downwards," he said.

Speaking during a Goldman Sachs conference in New York, Devitre credited legislation passed in recent years by the vast majority of states. A key measure essentially forces many discounters to raise their prices, preventing them from drastically undercutting Philip Morris and other tobacco companies that make payments to states under a landmark $206 billion settlement.

"This has sort of leveled the playing field," Devitre said.

In late March, deep discounters had 11.8 percent of the retail market, down from 12 percent in December 2002. Meanwhile, Richmond-based Philip Morris owned 50 percent of the market in the first quarter, up from 49.6 percent in the year-ago period, driven by Marlboro's sterling performance.

In first quarter of 2005, Philip Morris' tobacco sales rose 3.5 percent to $4.15 billion, while the unit's operating income increased 7 percent to $1.04 billion, primarily due to price increases.

It wasn't clear whether Philip Morris, which focuses on the premium cigarette market, has benefited solely from the deep discounters' woes. Reynolds American Inc., maker of Winston, Camel and Pall Mall, also experienced a decline in market share during the first quarter.

Nevertheless, Philip Morris and Altria executives keep close watch on the deep discount market. That's where competitors thrived after Big Tobacco companies raised prices, partly in response to the 1998 Master Settlement Agreement. The deal settled state lawsuits over health care costs related to smoking.

For Philip Morris, the deep discounters' struggles are one more reason to cheer. Just last month, a federal appeals court in Washington said it wouldn't reconsider a ruling preventing the Justice Department from seeking $280 billion in a suit against Big Tobacco.

Officials at New York-based Altria have stated that the litigation environment must improve before they can break up the company, which also owns about 85 percent of Kraft Foods and all of Philip Morris International.

But some analysts are closely watching the latest developments in the nation's courts. Citing antitrust issues, discounters and other tobacco companies have challenged the legislation that is forcing them to raise prices. In Oklahoma, the enforcement of the law has been temporarily suspended. And in New York, a federal judge issued a preliminary injunction in a multifaceted case that may have broad implications for the industry.

Kevin Altman, a consultant for small cigarette manufacturers, says other challenges have been filed in Louisiana, Kentucky, Tennessee and Arkansas.

Altman says the states' laws have drastically reduced the sales of small tobacco companies that were never a part of the agreement, forcing some out of business.

"That has been beneficial to Big Tobacco -- and the states," he said. "Because when Big Tobacco sells more cigarettes, the states make more money."

Shares of Altria fell 37 cents to close at $65.39 in trading on the New York Stock Exchange. The shares have traded in a range of $44.50 to $68.50 over the past 52 weeks.


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