Vector Group: Traditional discount collapsing
Will Montego price increases make up for the decrease in Eagle 20's and Pyramid volumes?
The traditional discount segment is being pressured. Although Vector Group (VGR) has seen its overall volumes meaningfully increase since December 2021 when KT&G exited the US cigarette market, all of Vector Group’s unit volume gain (and then some) has come from its deep discount brand Montego. The unit volumes of its more traditional discount brands, mainly Eagle 20’s and Pyramid, have decreased significantly during that time:
There is some seasonality in the company’s sales: Q1 tends to be the weakest quarter. To remove seasonal effects, we can look at year-over-year changes (Montego is not shown because its growth was so high in 2021 it would overshadow the other curves):
The figure shows just how dramatic the decline in volume has been for Eagle 20’s and especially Pyramid. According to my calculations, Pyramid’s unit volumes decreased by 30% in Q4 2022 versus a year earlier and by an astonishing 49% in Q1 2023. The corresponding declines for Eagle 20’s are 36% and 28%, respectively.
A caveat on the data I’m presenting — I estimate the number of cigarettes sold for each brand by multiplying the total number of cigarettes sold by the company (reported in its earnings releases) by the volume share of each brand (reported in 10-Qs and 10-Ks). The volume share is usually reported with integer precision only, which means that when the volume share is low (for instance Pyramid represented only 8% of Vector Group’s Q1 2023 unit volumes), the estimates can be inaccurate.
Just as worrying for the company, industrywide the traditional discount segment has shrunk by 14.3% yoy in the 52 weeks ended March 31 2023, less than the decrease experienced by Vector Group. Devin LaSarre provides insightful explanations for the large decreases in industrywide cigarette volumes. Management also touched on economic conditions during their conference call (emphasis mine):
The combination of inflation and reduced COVID benefits has put lower-income consumers in an increasingly difficult position. As a result, we are seeing both growth of the deep discount market and a reduction in overall consumption within the total combustible cigarette market. We believe economic pressures on consumers will persist as inflation remains high and these COVID benefits end.
These economic pressures will likely continue impacting Pyramid and Eagle 20’s:
We expect this migration to continue as the deep discount segment presents an attractive price option for consumers
The reduction in traditional discount volumes is important for the company because prices per pack are much higher for Pyramid ($7.51 in non-EDLP stores during Q1 2023) and Eagle 20’s ($6.06) than Montego ($4.50).
Having said that, the company continues to increase prices across all its brands. It has increased the price of Montego four times in the past 12 months for a total of $0.52 per pack.
It remains to be seen whether the company can continue increasing Montego’s price at the same rate and whether those price increases can more than compensate for volume losses among its other brands.
The usual disclaimer — I am an anonymous Substack account. I do not know your personal situation and you do not know mine. Therefore this is not investment advice.
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