Philip Morris' (NYSE:PM) recent fiscal third quarter earnings report revealed that the company was struggling on many fronts. The most important factor was the company's sliding number of cigarettes sold in comparison to its peers.
In particular, Philip Morris' volume of cigarettes shipped during the third quarter declined 5.7%. The decline was led by a 2.5% decline in the total volume of Marlboro cigarettes shipped. The Marlboro brand is the cornerstone of Philip Morris' tobacco empire.
What's more, there are two very serious trends emerging right now which are set to impact Philip Morris even more over the next few quarters, years, and decades.
The first emerging trend is a problem that is being actively confronted by Philip Morris' international peer Japan Tobacco (NASDAQOTH:JAPAF). As its name suggests, Japan Tobacco is a big player within the Japanese tobacco market, and the company has a large international division as well. Still, one problem that Japan Tobacco has been preemptive in confronting is the problem of an aging population, especially within Japan.
As health concerns about smoking become ever more prominent, the younger generation is giving up the habit. This is effectively killing cigarette consumption as the older generation passes on and the habit is not passed down to the next generation. With one of the oldest populations in the world, Japan is at the forefront of this trend. Japan Tobacco has acted quickly, recently announcing plans to axe 15% of its domestic work force and close four factories as the demand for cigarettes within Japan wanes. The company also plans to close 15 of its 25 sales offices .
The global population is now aging faster than at any point in history. Indeed, according to the UN Department of Economic and Social Affairs this trend will ensure that we will not return to the young populations that our ancestors knew. While this trend has many worrying effects in general, it indicates that Philip Morris could have to take evasive action similar to that taken by Japan Tobacco if the company wants to improve income as sales slide.
Stealing market share
The other emerging trend is the emergence of cheaper alternatives within the market. In particular, the Marlboro brand, which is the best-selling cigarette brand in the world and accounts for most of Philip Morris' sales, is notoriously one of the most expensive cigarette brands you can buy. With governments imposing ever-increasing taxes on tobacco companies, it is likely that the price of Marlboro cigarettes will only rise in time.
This is where Philip Morris is already feeling the pain. You see, peers like British American Tobacco (NYSE:BTI) have sensed an opportunity here. They have driven forward with their own 'global drive brands' priced lower than the Marlboro brand. For instance, I know in my local area Marlboro branded cigarettes can command up to a 30% premium over the majority of their peers. British American Tobacco is riding this trend, and as such is stealing Philip Morris' spotlight.
British American's four Global Drive Brands are Dunhill, Kent, Lucky Strike, and Pall Mall, and together their sales have expanded 62% since 2002. These four brands represent 24% of the company's total volume. Unlike Philip Morris, which is highly dependent on Marlboro, British American is diversified .
What's more, the sales of these global drive brands grew 2.3% during the first half of this year. This compares to Philip Morris' 2.5% decline in the volume of Marlboro cigarettes sold in the third quarter alone .
So all-in-all, Philip Morris is going to have some problems going forward. That said, these problems are not specific to the company. However, because Philip Morris has not been proactive about confronting these problems head on through methods such as reducing its reliance on Marlboro and aggressive cost cutting, it is likely that the company will be more affected than most.