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Philip Morris International's Future in the Cigarette Market

By Dan Caplinger - Oct 12, 2016 at 10:53AM

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In its investor day presentations, the tobacco giant talked about its lineup of traditional tobacco products.

Image source: Philip Morris International.

The tobacco industry has been going through a major upheaval recently, and Philip Morris International ( PM 1.75% ) has been at the forefront of advocating for reduced-risk products that differ dramatically from regular cigarettes. Yet Philip Morris is also counting on its traditional portfolio of cigarette brands to remain profitable, and keep bringing in the bulk of its revenue for years to come.

At its recent investor day presentation, Philip Morris executive Werner Barth spent a lot of time talking about the company's plans for its cigarette sales, and what it expects to see going forward. Below, you'll find three of the key aspects of Philip Morris' plans for its cigarette business.

1. Philip Morris is the leader in three key high-growth segments of the cigarette business.

Philip Morris is among the leaders of the global tobacco industry, but it doesn't have a commanding presence in the world market. As Barth explained, Philip Morris gets about 16% market share of total cigarette industry volume outside the U.S. and China from its top brands, which include Marlboro, Parliament, L&M, and the namesake Philip Morris brand. It has much higher penetration in the premium-and-above market, where Marlboro and Parliament combine to take more than 51% of the segment.

Yet Barth pointed to three areas in which Philip Morris is No. 1 and aims to build its lead. First, low-tar cigarettes have become an important way that some smokers have aimed to address their concerns about potential health impacts of smoking.

Second, slimmer-diameter cigarettes have taken off in some markets, having grown by half over the past five years, and with Philip Morris commanding about a third of the market. And finally, Philip Morris is a leader in what it calls its capsule segment, which involves flavor capsules incorporated into the cigarette filter in order to add a new taste dimension to the smoking experience that has resonated with many traditional cigarette consumers.

2. Philip Morris is working on offering more products in connection with its most popular brands.

Philip Morris has been incredibly successful in building brand awareness of its top cigarette offerings, and it's doing everything it can to take full advantage of its name recognition. Barth described several initiatives designed to use the power of Philip Morris brands to drive sales of new and innovative products, and he expects them to do well.

For instance, with Marlboro, Philip Morris has developed several concepts. Marlboro Smooth caters to those seeking lower tar, smoother taste, and slimmer proportions. Marlboro Advance is designed for those who are more sensitive to the effects of their smoking on others, offering special paper for less ash dispersal, a blend of tobacco that doesn't have as strong a smell, and SmartSeal proprietary features to ensure freshness. The Marlboro Fusion offering is Philip Morris' entry to taste capsules, and other region-specific campaigns will include Marlboro Dry capsules in Japan and Marlboro Filter Black kretek-blend cigarettes for Indonesia.

Similarly, Philip Morris is doing similar things with its other brands. Parliament Carat is a super-premium product that will offer an innovative pack shape and contemporary design. By making the most of all of its audiences, Philip Morris expects to find growth wherever it can.

3. Philip Morris will strengthen its commercial operations to support both regular cigarettes and reduced-risk products.

Barth closed his presentation by looking at the way that Philip Morris makes decisions about its operations. The company first gives its sales force the training and tools to serve its store-level customers best. From there, Philip Morris seeks to increase the amount of communications between its internal sales and marketing teams, allowing the company to market products in a way that's consistent with what its sales force is seeing on the ground. Finally, by knowing where and how its end-customers get its products, Philip Morris believes it can build stronger partnerships with retail outlets, with the final result of boosting overall sales.

Barth discusses two specific initiatives in this area. The Trade Engagement Network allows retailers to make orders while also learning about the products, and getting tools they can use to boost their own sales success. In addition, the TaskApp tool gives retail partners rewards for doing things that used to require Philip Morris salespeople to perform. Both of these moves make Philip Morris more efficient, while also empowering retail outlets to take more command of their cigarette sales, and the company also sees that working well as reduced-risk products roll out.

Philip Morris is moving forward in many directions, but cigarettes will remain critical to its near-term success. By making the most of the cigarette market, Philip Morris intends to be successful well into the future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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