Here's How Philip Morris Is Innovating to Drive Growth

There is no denying that cigarette sales are in terminal decline as consumers become increasingly aware of the negative effects associated with smoking. This trend has sent cigarette companies into somewhat of an arms race as each tries to find the new "wonder product" for the tobacco industry.

For most big tobacco firms, electronic cigarettes have been the new technology of choice. However, while other companies are working on the development of e-cigs, Philip Morris (NYSE: PM  ) is moving away from the pack and developing a 'hybrid' style of smoking.

Industry leader
As the world's biggest tobacco company outside of China and the world's most profitable company as a percentage of sales, Philip Morris has plenty of cash to dish out for the development of new products.

Indeed, during 2013 the company spent $250 million to develop and test what it calls reduced-risk products. Additionally, the company plans to spend as much as $810 million over the next few years to build factories to produce reduced-risk alternatives.

Still, at present these products remain under development and not much is known about them ahead of their launches; the company has slated these launches within the next two years. According to sources, Philip Morris has three reduced-risk products in the pipeline, and the first could come to market as early as 2016.

Now, these reduced-risk products are nothing like the e-cig products currently hitting the market. Philip Morris' products are based around a traditional cigarette, which is inserted into an aerosol device; then the tobacco is heated, just as with traditional smoking. However, the temperature of the burning tobacco is significantly below the temperature at which a normal cigarette burns; this reduces some of the risks associated with smoking.

Note that Philip Morris and its peers carefully call these products "reduced-risk" and not "risk-free."

Not just Philip Morris
While Philip Morris has attracted media attention with its plans to spend up to $1 billion to develop reduced-risk products, the company's smaller peer British American Tobacco (NYSEMKT: BTI  ) is also going down the same route.

British American is adapting the technology found within asthma inhalers to produce another hybrid product. Nevertheless, both Philip Morris' and British America's projects have the same aim of creating a product that lessens the health risk of smoking while at the same time mimicking, as closely as possible, the taste, nicotine delivery, and behavioral experience of traditional smoking.

The demand is there
It seems as if demand exists for this kind of product. According to some, one of the bigger problems with e-cigs is the fact that although consumers want to try them, they don't necessarily stick with them. E-cigs are not very effective at delivering nicotine.

What's more, while the e-cig market is expanding rapidly, with global sales expected to hit $10 billion by 2017 after hitting $2 billion this year, the unregulated status of these products around the world has created a "Wild West" market -- according to one analyst.

Faulty e-cigarettes have been known to explode, causing second-degree face burns, and new regulations being forced upon the industry are likely to put many smaller e-cig sellers out of business as they lack the resources to comply with them.

Hopefully, the combined efforts of British American and Philip Morris will produce a product that can replicate the effects of smoking while reducing its negative effects and helping users avoid some of the concerns surrounding e-cigs.

Foolish summary
So as the volume of cigarettes sold around the world continues to decline, big tobacco is working hard to ensure that its profits continue to grow.

Philip Morris is spending a billion dollars to develop products and build manufacturing facilities which will enable the company to manufacture its reduced-risk products; this is a huge vote of confidence and one that will hopefully pay off.

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