Cig-Goliath Phillip Morris Wants Out of the Smoking Business

“While the idea of heating tobacco (instead of burning it) has been around for more than two decades, it took years of research and development to create a product that is acceptable to adult consumers. Around 11.7 million consumers have already chosen to switch from cigarettes to this product: our tobacco heating system IQOS”

Philip Morris is welcoming a new CEO in 2021, when the current COO, Jacek Olczak, will slide in to steer the ship. Expect a smooth transition with the company’s continued focus on moving smokers toward reduced-risk products.

In May, Olczak, 55, will supplant André Calantzopoulos, who was named executive chairman of Philip Morris’s [$PM] board as part of a deliberate succession. Olczak noted that all leadership transitions are significant in some way, but he worked conjointly with Calantzopoulos to develop the blueprint guiding the company today. “We’re executing from the same book, and that’s very important for the company.”

The strategy focuses on moving smokers around the world away from traditional cigarettes. “The vision—which is very important and serves the company, the shareholders, and the public very well—is to leave cigarettes behind us,” Olczak says. “We really want to replace combustible cigarettes with a better product.”

So far, the biggest achievement for Philip Morris on the reduced-risk front has been the IQOS heated-tobacco system. iQOS takes specially formulated tobacco and heats it to a lower temperature than would be required for combustion. The resulting vapor offers some of the same taste characteristics as traditional cigarettes, but avoiding outright burning reduces some of the harmful chemicals that result from regular smoking.

The linchpin of that plan is iQOS, the heat-not-burn tobacco product that the FDA said could be marketed as a better alternative to smoking earlier this year. Olczak says that it forecasts to sell between 90 billion and 100 billion heated tobacco units in 2021, a 20% to 30% increase from this year and a target that the company is drawing nearer to.

As anticipated, 2020 was a challenging year for the company, as it has been for so many others. The pandy disrupted consumers’ routines and in some cases reduced their income—two factors that bogged down big tobacco in some areas, Olczak notes. It also presented Philip Morris with supply chain challenges related to shutdowns. Yet the company overcame these headwinds, he says. It has adjusted well to more digital sales of iQOS, partly because of the public’s renewed focus on health during the crisis.

That has motivated the company to harvest tight-knit relationships directly with consumers. While the tobacco industry was traditionally a business-to-business model, Philip Morris is moving more toward a B2C model. This “differentiates us from the competition,” says Olczak. The pivot to a consumer-focused model will benefit future products, as shoppers come online to a platform that offers “brand recognition and trust”—bolstered by a resilient customer service response and online presence.

THS is a tobacco heating system available in two versions. The first has three main components—a heated tobacco unit (called HeatSticks), a holder, and a charger. The second is an integrated product that combines the holder and charger and allows multiple uses without recharging the battery.
Both work in the same way: a consumer inserts the heated tobacco unit into the holder, which contains an electronically controlled heater.

Those future products should include its Veev vaping product that has already on the market in New Zealand. Olczak highlights Philip Morris’s use of technology in combating the problem of e-cig’s ending up in the hands of underage users. The Veev device needs to be activated—like a new iPhone—by users who can verify their age. This built-in layer of protection should give “a level of confidence to regulators in various geographies, that they can offer a solution to adults while excluding audiences that shouldn’t have access.”

Speaking of regulators, he is particularly proud of the company’s iQOS approvals from the FDA, whose standards are “on the highest end, and unmatched by any other regulator.” He also asserts that the company’s voyage to a tobacco-free future began under the Obama administration, and while the company is agnostic in terms of politics, he is encouraged by President-elect Joe Biden’s embrace of science. “He has talked about scientific facts as a guiding principle for policy-making …iQOS is the most viable scientifically verified alternative to smoking,” Olczak says. “I hope I’m not reading into the tea leaves too much, but I think we’re moving in the right direction.”

Philip Morris stock increased a mager 1% YTD, trailing well behind the S&P 500. Olczak argues that investors are belittling the market opportunity ahead of Philip Morris. He adds that, with iQOS, the company has the “most advanced reduced-risk product,” with the most meticulous science backing it. He foreshadows the company’s valuable first-mover advantage in many markets, which should also help it rebuff competition from smaller rivals. Ultimately, he says, Philip Morris’s transformation toward a smoke-free future has been “a massive investment, but it equips the company with the right assets going forward.”

THS has been launched in key cities in Andorra, Albania, Armenia, Austria, Belarus, Bosnia and Herzegovina, Bulgaria, Canary Islands, Canada, Colombia, Costa Rica, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominican Republic, France, Georgia, Germany, Greece, Guatemala, Hungary, Italy, Israel, Japan, Jordan, Kazakhstan, Korea, La Réunion, Lebanon, Latvia, Lithuania, Malaysia, Mexico, Moldova, Monaco, the Netherlands, New Zealand, North Macedonia, Montenegro, Palestine, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Serbia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Ukraine, the United Arab Emirates, the United Kingdom, the U.S., and in some Duty Free shops.

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