Next Generation Products: Philip Morris International

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Like its competitors, Philip Morris International (PMI) has been investing in tobacco and nicotine products that, unlike cigarettes, have potential for growth in developed markets.[1] These products are known as Next Generation Products (NGPs), and can include snus, e-cigarettes, and heated tobacco products (HTPs).

NGPs are often publicly linked to tobacco companies' harm reduction strategies. PMI, for example, has marketed its flagship NGP IQOS (see below) since 2016 under its catchphrase “this changes everything” (trademarked in 2017).[2] [3] In conjunction, PMI began making claims of corporate transformation and commitment to social change focussed on a smoke-free future:[4]

“Society expects us to act responsibly. And we are doing just that by designing a smoke-free future.”[5]

By October 2019, PMI had replaced the word “designing” with “delivering” (a smoke-free future), signposting the central role of the company in the realisation of this future.[6][7] Despite the promising language, PMI’s 2018 annual report revealed that the majority of the company’s earnings still came from conventional cigarettes.[8] At its 2019 Annual General Meeting, PMI CEO André Calantzopoulos further confirmed to shareholders that “Our combustible tobacco portfolio remains the foundation of our business”.[9] Marlboro cigarettes remain key to PMI's business model.[10]

In May 2017, Vaping Post quoted Calantzopoulos (from an interview with Nikkei Asian Review), saying that in five years’ time (i.e. by 2022) “PMI could start talking to governments about phasing out combustible cigarettes entirely”.[11] However, in 2020 PMI’s business is still predominantly focused on the sale of conventional tobacco products. There is evidence of new cigarette brands being launched in low and middle income countries, and traditional tobacco products continue to be vigorously promoted.[12][13][14]

Snus

From 2002, a time of increased tobacco regulation and declining cigarettes sales in Europe, the international tobacco companies started investing in a Swedish smokeless tobacco called snus.[15] The product is sold as a paste or in a tiny pouch, and placed between the gum and lip for a period of time.

PMI was the last of the big international tobacco companies to invest in snus, albeit with little apparent enthusiasm. In October 2006, PMI acquired snus manufacturer Rocker Productions, and briefly sold 1847 by Phillip Morris on the Swedish market.[16] Three years later, it sold Rocker Productions to Swedish Match as part of a deal that saw PMI and Swedish Match set up joint venture SMPM International to “globalise snus”.[17] The joint venture never achieved commercial success, and in 2015 the two companies “mutually agreed” to dissolve the company.[18]

PMI has not had snus in its portfolio since, despite a revival of interest in snus-type products in 2018. However, at the Q&A session of the December 2019 Morgan Stanley Global Consumer & Retail Conference Webcast, Calantzopoulos conceded that this is “an emerging category….which we are looking at as well”.[19]

Image 1: PMI’s IQOS Duo which was launched in September 2019 (screenshot taken from uk.iqos.com, February 2020)

Heated Tobacco Products

The year before the snus joint venture came to an end, PMI entered the HTP and e-cigarette (see below) markets. At the time, CEO Calantzopoulos told the Wall Street Journal that he believed the future was in HTPs “because they give uses [sic] a stronger and faster kick of nicotine, more akin to a regular cigarette”.[20]

PMI’s flagship HTP product, called IOQS, was first trialled in Milan (Italy), and then Nagoya (Japan) in 2014.[21]

IQOS uses a battery-operated device that heats tobacco sticks called HEETS, which are available in several flavours and sold under cigarette brand Marlboro. IQOS heats the tobacco up to 350°C, compared to 600 °C for heating cigarettes, and therefore, according to PMI there is no “combustion, fire, ash, or smoke” and “the levels of harmful chemicals are significantly reduced compared to cigarette smoke”.[22] A subsequent peer reviewed study, using PMI’s clinical data, concluded that IQOS was “not detectably different” from cigarettes, in terms of potentially harmful effects.[23]

The company stated in its 2018 annual report that 6.6 million smokers had stopped smoking and switched to IQOS.[8] However, this claim is based on a seven day assessment only,[8] which limits the ability to generalise the findings as a reflection of sustained behavioural change. PMI also stated in the same report that 3 million users were in the process of “conversion” to using IQOS.[8] However, no evidence was presented at the time to support this claim. PMI defines an IQOS user as an adult who has only used IQOS for a minimum of 5% of their daily tobacco consumption in the previous seven days. It is likely that the actual number of people who use IQOS exclusively, or for most of the time, is lower. In PMI’s statements, it is also assumed that current dual users of tobacco and IQOS will all give up smoking cigarettes.[24] In 2020, PMI claimed that 10 million smokers had switched to IQOS, with another 4 million “in conversion”.[25] PMI’s estimates have not been independently verified. PMI’s states that its “aspiration” is for the number of smokers switching to IQOS to exceed 40 million by 2025.[26]

Image 7: IQOS launches by year (Source: STOP report February 2020)[24]

By 2016, IQOS accounted for 99% of the global HTP market, according to Euromonitor data. [27] Although competition increased over the next two years, in 2018 IQOS still had by far the largest share (nearly 80%).[24][27][28] By the end of 2019 IQOS was available in at least 47 markets, including lower and middle-income countries (see Image 8), including the United States (US).[24] This followed approval from the US Food and Drug Administration (FDA) to launch the product on the US market (albeit without the desired “Modified Risk” status).[29][30][31] In December 2019, the most recently launched brand extension was the IQOS Duo (see image 1).

PMI has mainly sold IQOS in high income countries. However, it is also marketing its products in middle income countries (see Figure 1). Although not officially launched, there is evidence that IQOS was available in 2018 in Vietnam, Indonesia and the Philippines, described by PMI as “key markets”.[24][32][33] PMI indicated that it intended to formally launch IQOS in the Philippines in the second quarter of 2020, subject to meeting “some regulatory and legal requirements”.[33] On 6 February 2020, PMI reported that IQOS was available in 52 markets.[25] On 17 February, PMI launched the product in Lebanon.[34]IQOS had been sold previously in airport duty free stores in both Lebanon and Saudi Arabia.[35] However, IQOS is not yet on sale in Indonesia, PMI’s largest market for cigarettes.[35]

PMI has a second HTP product under development, called TEEPS, which uses a carbon heat source to heat the tobacco sticks.[36] The company has alleged that this product is closer to the look and feel of a conventional cigarette than IQOS.[37]

Promoting IQOS and “Smoke-Free”

Although it does not disclose its marketing spend, PMI has allocated a large amount to advertising and promoting IQOS.[8][24] As well as retail websites and distribution deals, it has established dedicated ‘concept’ stores around the world to promote its products direct to its customers, with multiple stores in some cities (see below). It has developed sophisticated, multi-platform advertising campaigns, using traditional and social media.(For examples see images from Stanford University’s research into the impact of tobacco advertising and work by the Campaign for Tobacco Free Kids). It has also promoted its products at music festivals and cultural events in glamourous locations around the world.[24][35][38] PMI has been accused of marketing IQOS and other NGPs to youth, including through the use of paid social media influencers.[24][38][35][39][40]

PMI’s promotion of IQOS is inextricably linked to its “Smoke-Free” public relations strategy, and campaigns such as “Hold My Light” and “UnSmoke Your World”. Research published in February 2020 by Stanford University shows how PMI’s promotional activities not only replicate advertising strategies used in the past to promote cigarettes, but also help to “normalize” the company and its heated tobacco products in the eyes of the consumer.[24][38][41] This normalization increases pressure on policy makers to regulate these products in ways that benefit the industry, particularly in lower income countries.

E-Cigarettes

Image 2: The IQOS Mesh (screenshot taken from pmi.com, December 2019)

As with snus, PMI was the last of the international tobacco companies to move into the e-cigarette market. In November 2013, PMI announced that it was going to produce its own e-cigarette.[42] By 2019 the company had three e-cigarette brands in its product portfolio, two of which were sold only in the United Kingdom (UK) and Ireland, and the other only in Spain and Israel.

The most recent addition was developed in-house: IQOS Mesh (see image 2), the only PMI e-cigarette labelled under the IQOS brand. CEO Calantzopoulos informed investors in December 2019 that Mesh was ready for further commercialisation, but that a global roll-out had been postponed due to the backlash against e-cigarettes following the sudden deaths of a number of vapers in the US.[19] However, in January 2020, the global roll-out of Mesh appeared to be going ahead, with Calantzopoulo announcing “a launch in the coming months”.[43]

Read more detailed information on PMI’s e-cigarettes business here:

Market Expansion and Consolidation

At the beginning of 2020 PMI stated that its “Reduced Risk Products” (RRPs) account for nearly 20% of its net revenue, although it does not disclose publicly the profits from IQOS or other NGPs.[25] It continues to expand the sales of its products through independent retailers and IQOS stores. In January 2020, the company reported that it had opened 26 new IQOS stores in South Africa since launching there in 2017 .[44]

In January 2020, PMI announced a new “collaboration” with South Korean tobacco company KT&G, to commercialize KT&G’s range of “smoke-free” products globally, alongside IQOS.[43] The deal covered KT&G’s e-cigarettes, heated tobacco and hybrid (vapour and tobacco) products. Although KT&G has a US subsidiary, PMI stated at the time of the announcement, in January 2020, that there were “no current plans to commercialize KT&G products in the U.S.”[43][45]

Undermining Tobacco Control Legislation

Although PMI has been promoting a “smoke-free” narrative, including funding the Foundation for a Smoke-Free World and its “Unsmoke” marketing campaign, it has also been working to undermine smoking bans and enable the use of IQOS in smoke-free areas.[35]

Just two months after the public smoking ban was introduced in the Czechia (then the Czech Republic) in 2017, PMI promoted IQOS on Radio Praha to Czech smokers, which according to the radio station “might allow them [smokers] to ‘smoke’ in public places once again”.[46]

PMI has also been courting the hospitality industry to relax smoking bans by allowing the use of IQOS where smoking is banned.[35] Allegedly more than 1,000 hotels around the world were offering “IQOS friendly rooms” in 2018, and “…in some cases, allow the use of smoke-free products in common areas”.[47] The UK IQOS website published a list of the “15 Best IQOS Friendly Locations in London”, venues that are “happy to accommodate users of heated tobacco technology”.[48]

In January 2020, Calantzopoulos argued that advertising regulations should be relaxed, saying that in the UK it was “difficult to talk to a consumer about a tobacco product” if the product could not be easily seen, which would make it “very difficult to switch”.[49] However, although PMI has opened multiple IQOS stores in London, Bristol, Cardiff and Manchester, as an investigation by the Bureau of Investigative Journalist pointed out, as of February 2020 there were none in the UK towns and cities with the highest smoking rates.[35]

In February 2020, an investigation by The Guardian newspaper revealed that, in the UK, PMI lobbied for lighter regulation of IQOS, as a “considerably less harmful novel smokeless tobacco product” (CLHTP). PMI also proposed setting up a UK£1 billion fund for cessation services in exchange for the relaxation of advertising regulations for e-cigarettes and HTPs.[50]

PMI has also taken advantage of tobacco control measures being implemented in the UK in order to promote its HTPs. In January 2019, PMI announced that it would be selling IQOS and menthol HEETS sticks in the UK, ahead of the deferred EU Tobacco Products Directive ban on menthol cigarettes (due to come into effect in May 2020).[51][52][53][54] An “IQOS Menthol starter kit” aimed at convenience stores was available to retailers via a website called “menthol-ban-retail.co.uk”.[51][55] Run by Philip Morris Ltd (PML), the website stated that “From 20th May 2020, the only menthol tobacco you can sell is HEETS” (noting that specialist cigars and cigarillos were exempted from the ban). It also contained a claim that “51% of menthol smokers would replace menthol cigarettes with IQOS after the ban”.[55]


PMI has lobbied to overturn HTP and e-cigarette bans in Australia; and to get IQOS adopted as a cessation product in New Zealand and the UK.[24][56]

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Relevant links

TCRG Research

Notes

  1. Euromonitor International, Global Tobacco Key Findings Part 2: Vapour Products. August 2016 (behind paywall)
  2. Philip Morris International, This Changes Everything: Annual Report 2016, 2017, accessed January 2020
  3. Justia Trademarks, IQOS this changes everything- Trademark details, undated, accessed December 2019
  4. R. Davies, A. Monaghan, Philip Morris’s vision of cigarette-free future met with scepticism, The Guardian, 30 November 2016, accessed September 2017
  5. Philip Morris Products S.A., Delivering a smoke-free future. How long will PMI be in the cigarette business?, PMI website, undated, accessed December 2019
  6. Philip Morris International, Designing a Smoke-Free future, PMI website, archived 30 September 2019, accessed December 2019
  7. Philip Morris International, Delivering a smoke-free future, PMI website, archived 16 October 2019, accessed December 2019
  8. 8.0 8.1 8.2 8.3 8.4 Philip Morris International, 2018 Annual Report, accessed December 2019
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  10. Philip Morris International, Philip Morris International Inc. Reports 2019 Fourth-Quarter & Full-Year Results, PMI press release, 6 February 2020, accessed February 2020
  11. D. Caruana, PMI CEO talks about phasing out cigarettes in Japan & S. Korea, Vaping Post , 18 July 2017, accessed February 2020
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  30. PMI Submits Pre-Market Application for Heat-Not-Burn, Convenience Store News, 31 March 2017, accessed December 2019
  31. U.S. Food and Drug Administration, Philip Morris Products S.A. Modified Risk Tobacco Product (MRTP) Applications, US FDA website, 23 October 2019, accessed December 2019
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  34. The dawn of a ‘Smoke-Free Lebanon’, The Daily Star (Sponsored content), 17 February 2010, accessed February 2020
  35. 35.0 35.1 35.2 35.3 35.4 35.5 35.6 M. Davies, B. Stockton, M. Chapman, T. Cave, The ‘UnSmoke’ Screen: The Truth Behind PMI’s Cigarette-Free Future, The Bureau of Investigative Journalism, 24 February 2020, accessed February 2020
  36. Philip Morris S.A., Carbon heated tobacco product TEEPS, PMI website, undated, accessed December 2019
  37. Philip Morris International, Glossary: TEEPS, PMI website, undated, accessed September 2017
  38. 38.0 38.1 38.2 C. Kirkham, Inside the Philip Morris campaign to 'normalize' a tobacco device, Reuters, 21 February 2020, accessed February 2020
  39. S. Peeters, K. Evans, Russia: snus targeted at young & wealthy, Tobacco Control, 2012; 21:456-459
  40. C. Kirkham, Exclusive: Philip Morris suspends social media campaign after Reuters exposes young 'influencers', Reuters, 11 May 2019, accessed February 2020
  41. R. Jackler, Global Marketing of IQOS The Philip Morris Campaign to Popularize “Heat Not Burn” Tobacco, report by Stanford University School of Medicine, 21 February 2020
  42. S. Cavale, D.K. Kumar , Marlboro make Philip Morris to end e-cigarette business, Reuters, 20 November 2013, accessed May 2019
  43. 43.0 43.1 43.2 Philip Morris International Inc. Announces Agreement with KT&G to Accelerate the Achievement of a Smoke-Free Future, Business Wire, 28 January 2020, accessed January 2020
  44. Cigarette and tobacco giant backs South Africa with R650 million investment drive and retail store expansion, businesstech.co.za, 20 January 2020, accessed January 2020
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  47. D.Szpytma, PMI Calls On The Travel Industry To Join the Journey Toward a Smoke-Free World, hotel-magazine.co.uk, 7 November 2018, accessed December 2019
  48. Philip Morris Products S.A., Blog: 15 Best IQOS Friendly Locations in London, uk.iqos.com, 25 June 2018, accessed December 2019
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  50. S. Bosely, Philip Morris drew up plan for £1bn tobacco transition fund, The Guardian, 24 February 2020, accessed February 2020
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  56. T. Elliott, Big Tobacco’s shadowy new play, The Sydney Morning Herald, 18 May 2019, accessed February 2020