Internet Tobacco Sales Burned By ATF Agreement

May 16, 2005

Prudential Equity Group said Internet cigarette sales have reached a "high water mark" after a recent government agreement ended the use of major credit cards for Internet tobacco sales. "The new agreement, worked out by the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the major credit card companies and states attorneys general will prevent the use of credit cards to buy cigarettes over the Internet," said Prudential. "This agreement is the first initiative that we have seen that we believe will significantly curtail cigarette sales over the Internet, to the advantage of the major cigarette manufacturers as well as state governments." The research firm estimates about 3.1% of total industry volume was sold over the internet in 2004. "Virtually all credit cards" including MasterCard, American Express, Visa, Discover and PayPal, owned by eBay (nasdaq: EBAY - news - people ), will no longer allow transactions with cigarette and tobacco Web retailers. Prudential said Internet retailers also negatively impact major manufacturers by actively "down-trading consumers" to bargain cigarette brands, which have higher profit margins. "Of the approximately 120 independent Internet cigarette retailers we identified back in 2002, virtually all advertised a very competitive price on Marlboro and, to a lesser extent, Camel and Newport," it said. "It appears to us that Internet retailers use the price of popular premium brands as a 'hook' to attract customers to the online purchasing experience as well as to the site." Marlboro is manufactured by Phillip Morris, a unit of Altria Group (nyse: MO - news - people ). Camel is produced by R.J. Reynolds, a unit of Reynolds American (nyse: RAI - news - people ). Newport is made by Lorillard Tobacco, a subsidiary of Loews (nyse: LTR - news - people ). Prudential rates Altria at "overweight" with a $70 target price while Reynolds American and Lorillard (nyse: CG - news - people ) are rated at "neutral weight" with price targets of $72 and $34, respectively.