Is This the Future of Big Tobacco?

Philip Morris, Reynolds American, and British American Tobacco are innovating to drive growth.

Jun 15, 2014 at 9:04AM

Big tobacco companies like Philip Morris (NYSE:PM), Reynolds American (NYSE:RAI) and British American Tobacco (NYSEMKT:BTI) are well known for their defensive nature and hefty dividend payouts. But with the volume of cigarettes sold in some markets around the world in almost continual decline, big tobacco is innovating in an attempt to entice customers back to its products. The development of e-cigs is one way in which these companies are innovating to drive growth, but they are also spending hundreds of millions of dollars on the development of 'reduced risk' products.

Research and development
Philip Morris has spent a grand total of $650 million during the past three years to develop reduced risk products. The company is ramping up spending to get these products to market within the next few years.

Designed around the thought that the products must look, taste, smell, and burn like regular cigarettes, Philip Morris is counting on its new innovative products to help boost sales.

Both Philip Morris and British American have decided the best way to meet these goals is by creating devices that burn tobacco at lower temperatures. Philip Morris' new device heats tobacco to around 400 degrees Fahrenheit instead of the 1,600 degrees of a conventional cigarette.

A lower burning temperature ensures that the user still receives the same amount of nicotine and the flavor of tobacco but fewer harmful chemicals, which are usually the result of burning. 

Not that new
These initiatives are not new. Reynolds has tried to develop these kinds of devices before, although they never really took off and came under scrutiny from regulators. Reynolds made the mistake of labeling them as 'safer' than traditional smoking.

That cost the company an $8.3 million fine.  Philip Morris has been very careful to ensure that its products are labeled 'reduced risk'.

Philip Morris' first product is set to hit the market next year in a national test market and we'll have to wait until then to see how this new dawn in the tobacco industry pans out. The company has already started construction of a 30 billion unit HeatStick tobacco stick factory in Bologna, Italy, which the company plans to complete by 2016. It expects the factory to cost $800 million in total, so the company obviously has big things planned. 

Across the pond
Meanwhile, British American is adapting the technology found within asthma inhalers to produce another hybrid product similar to Philip Morris' offering.

Both Philip Morris and British American aim to create products that lessen the health risks of smoking while at the same time mimicking, as closely as possible, the taste, nicotine delivery, and behavioral experience of traditional smoking.

How will shareholders benefit?
Unfortunately, due to the facts that these products have not yet hit the market, and big tobacco is trying to keep its secrets to itself, as of yet, data on the size of the market, potential sales and profit margins are not in the public domain yet. 

Now, as these products are more technologically advanced than normal cigarettes, their profit margins are likely to be thinner. There are also start up costs to consider, so to begin with, it's likely that these products won't be a money spinner for either Philip Morris or British American. 

Over the longer term, it is likely that these products could prove to be more popular than traditional cigarettes, and this could lead to wider profit margins. What's more, governments may try and promote these products as the 'healthy' alternative to smoking, levying lower taxes on them.

Over the long-term then these products could prove to be very lucrative, although as of yet, they are still in their infancy. 

Foolish summary
So as the volume of cigarettes sold around the world continues to decline, Philip Morris and British American are innovating to drive growth. 

This new range of reduced risk products has been under development for some time now and these two tobacco giants have spared no expense in getting their development processes just right. 

Unfortunately, we will have to wait a few years before the results come through, but with Philip Morris' construction of a 30 billion unit factory within Italy, it would appear that the company has every confidence in the success of these products. 


Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers