As Goes New York City…CA Getting Closer to Raising Tobacco to 21

Source: The Cowen Insight

March 10, 2016

Earlier today, California passed and sent for gubernatorial consideration, a bill that would raise the minimum age to purchase tobacco products to 21, which would make CA the 2nd state to raise the tobacco purchasing age to 21. While CA accounts for 7% of U.S cigarettes, we estimate the higher legal age will only have a 4 bps impact on volumes, if signed by Gov. Brown.

Key Highlights:

The News: Earlier today, the California Senate passed a bill that would raise the minimum purchase age for tobacco products to 21. The measure was first introduced by Assemblyman Jim Wood (Democrat), and will now be sent for gubernatorial consideration; we expect this measure will be signed into law as it was part of a bigger set of bills that were revived by Governor Brown for a special session to address state health care issues. As a reminder, last week, San Francisco passed a measure raising the legal age to buy tobacco to 21, joining Berkeley and Healdsburg, CA. Meanwhile, a separate bill that would regulate e-cigs as tobacco products was also sent to Governor Brown.

California’s Relative Importance: While California is the most populous state in the U.S., it is the 2nd largest in terms of cigarette volumes, as the state’s smoking incidence trails well below the national average. If Governor Brown signs the measure into law, we do not believe it will have material impact on cigarette volumes. The analysis from our note, Minimum Age to 21? A Growing Trend, But No Immediate Threat, suggests that if the national tobacco purchasing age was raised to 21, it would be a 60 bps drag on industry volumes. Given CA represents ~7% of volumes, this implies an immaterial 4 bps hit to U.S. cigarette volumes. As it relates to companies under our coverage, RAI’s Camel and NAS brands over-index to the West (though the company’s total share is well balanced geographically), while MO’s Marlboro is the leading brand in every state.

Industry Implications. Hawaii became the first state to raise the minimum age to purchase tobacco products to 21 on January 1st, after passing the bill in June 2015. Numerous other states (totaling 24% of U.S. volumes) are currently considering similar measures including Connecticut, Illinois, Kentucky, Maryland, Massachusetts, Mississippi, New Jersey, New York, Oklahoma, Rhode Island, Tennessee, Utah, Vermont, Washington, and West Virginia. The FDA has also commissioned a study to evaluate the implications of raising the minimum smoking age (which research was mandated by Congress, though the agency does not have the authority to make any changes). As discussed in our note, Minimum Smoking Age Research Review, their research found that raising the minimum smoking age to 21 would reduce the smoking population by 3 mm, relative to if the status quo is maintained (which includes 4 states with a minimum smoking age of 19). If the bill is signed and enacted by Governor Brown, we believe other state’s will follow suit, as New York City and California have historically been thought leaders in tobacco regulation. However, we still believe a nationwide minimum age increase would take time, have only a modest impact on volumes, and pricing would serve as an offset.