Philip Morris International (NYSE:PM) took out full-page ads in several U.K. newspapers on New Year's Day declaring that its resolution for the year was to try to give up cigarettes. Saying it is known for its cigarettes, it admits the best action people can take for their own health is to quit smoking them.
For a global tobacco giant that generates $75 billion annually in sales and $11 billion in profits from selling cigarettes, that's a bit of a dramatic declaration. And of course there's more than some altruistic imperative driving Philip Morris. Rather, it's acknowledging that its cigarette business is going away.
Stubbing out cigarettes
Worldwide cigarette shipment volumes fell over 7% over the first three quarters of 2017 for Philip Morris, while Reynolds American, before being acquired by British American Tobacco (NYSE:BTI), had said its U.S. shipment volumes were down almost 4% through June, while industry volumes were off 3%.
The world is already moving toward smoking less, and Philip Morris International sees the writing on the wall. So it is getting ahead of the curve by trying to hurry up the process of getting people to quit. But instead of going cold turkey, the tobacco giant is seeking to have them transition to a different tobacco product -- electronic cigarettes, which are at least nominally safer.
And now's the right time. Philip Morris and the other tobacco companies have invested billions of dollars in technology that can making smoking a safer pursuit for millions of people. The heat-not-burn devices that it and British American Tobacco are pursuing are being used in many countries around the globe.
Philip Morris has ramped up production to produce billions of units annually, and in Japan where they were first introduced, shipments of the iQOS device surpassed those of combustible cigarettes for the first time ever in the third quarter, accounting for about 40% of Philip Morris' total shipments during the first nine months of 2017. The heat-not-burn technology will soon be the biggest product it has in the country.
Up in smoke
Critics are leery of accepting Philip Morris' word on its ambitions. In its response to Philip Morris' creation of the Foundation for a Smoke-Free Future this past September, the World Health Organization noted: "The tobacco industry and its front groups have misled the public about the risks associated with other tobacco products. ... This decades-long history means that research and advocacy funded by tobacco companies and their front groups cannot be accepted at face value."
And to a certain extent, the critics are right. If Philip Morris truly wanted to stop selling cigarettes, it could do so tomorrow. But of course its whole tobacco empire would come crashing down, and it has a fiduciary responsibility to its shareholders to not destroy the company.
Obviously, what Philip Morris is doing is trying to transition away from combustible cigarettes and toward reduced-risk products such as electronic cigarettes and heated tobacco. It's a transition that should be encouraged, even if it's not in line with the bright-line strategy of the anti-smoking activists who want all smoking to stop immediately.
Weaning smokers off combustible cigarettes, even if it means using an electronic cigarette as a temporary solution before quitting, should be the goal of health advocates everywhere. Philip Morris has found that it can now make products that are both safer for users and profitable for it. The world is already moving toward the smoke-free future it has envisioned; Philip Morris just wants to be a part of it.
Philip Morris International is not going to quit cigarettes in 2018, but that doesn't mean the seismic shift in focus it is implementing isn't still a good thing.