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Good News For Cigarette Makers: The Minimum Wage Is Rising In 23 States

Smoking rates are down, but it's still more common among low-income consumers, who are set to get pay rises in 23 states this year.

Posted on January 20, 2016, at 5:14 p.m. ET

Fried Dough / Via Flickr: 42787780@N04

This year, the minimum wage will rise in 23 states — welcome news not only for the hourly workers who will get raises, but all the companies who sell things to them.

One of those beneficiaries will be tobacco companies, according to a report by investment firm Cowen and Co., with smoking more common among the country's low-income consumers, who'll suddenly have a little more money to spend.

"Looking ahead, we believe higher minimum wages will disproportionately benefit these consumers," Cowen stated in the report. To the chagrin of anti-smoking groups, this is likely to support better cigarette volume sales, trade ups to premium cigarette brands, and higher pricing for the U.S. cigarette industry in 2016, the firm expects.

Data from the Centers for Disease Control and Prevention show 26.3% of people below the poverty line smoke, compared to 15.2% of those who live above the poverty line.

Cowen and Co.

Discount retailer Dollar General, which is focused on serving low-income consumers, started selling tobacco products in 2013 to increase visits by existing customers and draw new customers, particularly as other stores like CVS stopped selling tobacco. In 2014, tobacco was among Dollar General's fastest growing product categories, and these products continued to boost sales in 2015.

Despite such boosts for cigarette makers, the overall gains remain limited. As the chart above shows, the number of smokers in the U.S. is declining. In 2015, volume sales of cigarettes fell less than 1%, according to Cowen, and they are expected to drop another 2% to 4% this year.

Cowen and Co.

The bright side for the cigarette industry is although volume sales are down, "declines have eased and have returned to pre-recession levels," according to Cowen (the drop was steepest in 2009, during the depths of the recession), and those who still smoke are buying higher-priced cigarettes like Natural American Spirit, which has helped owner Reynolds American gain market share in the West.

Other industries that could benefit from the minimum wage increases, according to Cowen, include energy drinks (popular with young consumers, who tend to earn less) and fast food restaurants.