While cigarette sales have been steadily declining in the U.S. for years, the rate of decline is likely to accelerate over the next few years, reports the Dow Jones Newswire. The declines mean that even the biggest cigarette companies may face a much tougher fight for revenue and market growth in the U.S.

"We have highlighted accelerated volume declines as one of the bigger risks the industry faces," said Janice Hofferber, a Moody's Investors Service Vice President who closely follows tobacco and consumer products. She added that, historically, tobacco companies had been able to raise prices quite easily, but "there is a limit to the pricing flexibility these companies have."

Altria Group Inc., which will spin off its Philip Morris International business tomorrow, is transforming itself into a domestic tobacco company. The company says it expects unit volumes of the overall U.S. cigarette industry to decline by 2.5% to 3% a year for the next several years. That decline is greater than the historical rate which ran about 2% a year. 

In general, the decrease in cigarette sales has been driven by public smoking bans, more health-conscious consumers, and the steadily increasing prices charged by cigarette sellers in order to offset higher federal and state taxes and to make annual payments under a 1998 settlement agreement with states.

International growth is no longer a panacea for the declining U.S. market. Altria will be a domestic tobacco company after this week’s March 28 spinoff of Philip Morris International; Lorillard sold the international rights to substantially all of its brands, including Newport, back in 1977; and Reynolds does business mainly in the U.S.

The U.S. tobacco companies have been adding smokeless tobacco products to their product lines but the smokeless tobacco market is still far smaller than the cigarette market and cannot offset the challenges of weaker cigarette demand, reports the newswire. Altria, which has a “relatively small presence so far in smokeless tobacco,” according to the Dow Jones Newswires, has a controlling share (41%) of the cigarette retail market with its Marlboro brand.  Marlboro’s market share is larger than the combined share of the next 10 largest cigarette brands. In 2007, Altria's U.S. tobacco segment saw revenue net of excise taxes rise 1.2% to $15 billion.

After Altria, Hofferber reports that Lorillard is in the next best position due to its dominance in menthol cigarettes. Late last year, Loews Corporation announced plans to spin off Lorillard, its tobacco unit.

Reynolds American Inc., which sells popular brands like Camel and Kool, acquired smokeless tobacco maker Conwood in 2006 but the smokeless tobacco market is still far smaller than the cigarette market so Conwood, by itself, cannot offset the challenges of weaker cigarette demand, reports the newswire.