Don't expect Philip Morris International (NYSE:PM) to quit smoking cold turkey, but the global tobacco giant says it's moving forward toward the day when it becomes cigarette-free.
For a company that's generated over $26 billion in trailing revenues from cigarette sales around the world, kicking the habit sounds like a pretty tall order, particularly when global governments are throwing roadblocks in its path to do so, but it is launching new products that may help make smoking cessation possible.
The ash bin of history
It's no secret that cigarette sales are in decline. Philip Morris said third-quarter cigarette shipment volumes fell 5.4% to 207.1 billion units, while they're down 3.9% year to date. Volumes were down sharply in its Asia market, falling 9% in the quarter, as well as in the Eastern Europe, Middle East, and Africa segment, where they were off 8%.
Although British American Tobacco (NYSE:BTI) had slightly better results -- quarterly volumes were flat while year-to-date volumes were up 0.9% -- the industry remains in contraction even as legal risks remain an ever-present threat to the financial health of the cigarette companies.
Decade-old agreements with the European Union to fight cigarette smuggling have expired or are poised to, and the smoking regulators on the continent may soon pursue litigation against the tobacco companies. Although Philip Morris, British American, Imperial Tobacco, and Japan Tobacco have paid out almost $2 billion since the agreements were signed and smuggling has been dramatically reduced, anti-smoking activists contend it was a low-cost way to insulate themselves from lawsuits. As the deals expire over the new few years, litigation costs could rise dramatically.
Kicking the habit
So having a goal to get out of the cigarette business isn't such a bad idea, as far-fetched as it sounds. But to do so, Philip Morris is investing heavily in smoking alternatives such as electronic cigarettes, specifically its iQOS device that's being sold as HeatSticks under the Marlboro brand name.
Rather than burning tobacco like regular combustible cigarettes, or even heating up a nicotine-flavored e-liquid as do traditional e-cigs, the iQOS device heats actual tobacco to produce a tobacco-flavored vapor. Since it's the burning of the tobacco that creates all the toxic chemicals associated with smoking, e-cigs, whether old or new, are thought of as a healthier alternative, though clinical studies have yet to be conducted to prove that, and e-cig companies don't market their products as such.
The benefit of the iQOS, as well as other similar devices such as the iFuse from British American, which heats up an e-liquid but then draws it through tobacco leaves for flavor, is that they address one of the main complaints users had about e-cigs -- their taste. With these next-gen devices, users get real tobacco flavor, which may help more smokers to switch to them.
Vaporizing the industry
While that would seemingly be something regulators would promote, considering the societal costs associated with smoking, governments are still erecting barriers.
In the U.S., the FDA's so-called "deeming regulations" are expected to devastate the nascent electronic cigarette and vaping markets. So onerous and costly are the regulations -- Philip Morris' application to the FDA for a reduced-risk label for the iQOS runs to 2 million pages -- that only the biggest, best-financed companies will be able to comply. Smaller manufacturers will probably be wiped out, as third-party estimates put the cost of compliance somewhere between $3 million and $20 million per application.
Elsewhere, e-cig users are being treated just like regular smokers, segregated to special areas where they can use their devices, or being banned altogether from using the devices in public places, just like with cigarettes.
A brave new world
Philip Morris, of course, is big enough that it can afford complying with the new rules, but even it recognizes the changeover to a smoke-free future won't be easy, or quick. Bloomberg News quotes CEO Andre Calantzopolous as saying the tobacco company can't stop selling cigarettes immediately, as "decades of history are not going to be changed in one afternoon."
And though critics might be wary of any pronouncement a tobacco company makes, any increase in the number of people quitting smoking has to be a benefit. Many people will just find it odd that it's Philip Morris International that may be leading the way forward.