Most of its revenue still comes from traditional cigarettes. But
CEO André Calantzopoulos says they aren't the future.
By Saabira Chaudhuri
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 30, 2017).
Cigarette maker Philip Morris International Inc. is betting big
on smokeless products with a device called IQOS that heats but
doesn't burn tobacco.
The number of cigarettes big companies sell is declining and,
with regulations continuing to tighten, the companies are focused
on future-proofing their business, investing in e-cigarettes and
"heat not burn" products that they say are less harmful than
traditional cigarettes. Philip Morris has joined with Altria Group
Inc. to apply for Food and Drug Administration approval to market
IQOS in the U.S. as a less risky alternative to cigarettes.
Philip Morris, spun off from Altria in 2008, sells cigarettes
only outside the U.S.; Altria sells cigarettes only in the U.S. If
Philip Morris's IQOS wins FDA approval, it will be sold in the U.S.
by Altria in a licensing agreement with Philip Morris, which will
receive royalties from U.S. sales.
Making IQOS -- pronounced eye-koss -- a success has become an
obsession for the company's chief executive, André
Calantzopoulos.
A tobacco industry lifer and former smoker, Mr. Calantzopoulos
is a walking advertisement for his new product, puffing away on the
cigarette-shaped device through the day. He's counting on lower
taxes and looser marketing restrictions than those levied on
traditional cigarettes to push smokers to switch to these new,
higher-margin products.
He's also betting many smokers will prefer IQOS, which heats
tobacco, to existing e-cigarette options that heat a nicotine-laced
liquid but contain no tobacco, making for an experience that's less
like traditional smoking.
Philip Morris has poured money into clinical trials that have
shown IQOS is safer than smoking. The company maintains that
combustion, rather than the tobacco or nicotine in cigarettes, is
what's harmful. Critics say more long-term studies and independent
research are needed to evaluate IQOS's health effects.
The company in January relaunched its website, stripping away
prominent mentions of big moneymakers like Marlboro and Benson
& Hedges cigarettes and touting its decision to "develop,
market, and sell smoke-free alternatives, and switch our adult
smokers to these alternatives, as quickly as possible around the
world." Last month, Philip Morris pledged $1 billion to create a
foundation to encourage people to switch to smoke-free
alternatives.
Critics note the company is still aggressively selling
traditional cigarettes while challenging display bans and rules in
some places that require plain packaging with graphic health
warnings.
"I don't see any sign at all they're backing off the very
aggressive effort to sell as many traditional Marlboros to as many
people as they can," says Matthew Myers, head of the Campaign for
Tobacco-Free Kids.
In an interview with The Wall Street Journal, Mr. Calantzopoulos
discussed how Philip Morris sees the future of smoking and why he
thinks IQOS is the key to the company's success. Edited excerpts
follow.
Filling a gap
WSJ: With e-cigarettes already available in so many markets, why
do we need IQOS?
MR. CALANTZOPOULOS: The problem we had with electronic
cigarettes since the beginning of development was the satisfaction
of the smoker. Because the taste is dramatically different and, at
the initial stages, the nicotine pharmacokinetics were very slow.
You could not get the satisfaction. It's not so easy to crack this
code.
The taste satisfaction is very important. The closest you are to
this, the more chances you have to switch people. It's very nice to
have a zero-risk product, but if nobody uses it, you don't have any
reduction in public health risk.
WSJ: Which markets are likely to be the biggest ones for these
new, alternative products?
MR. CALANTZOPOULOS: When you look at the potential of these
products you need to understand what is the readiness of smokers to
switch. That relates to public-health concerns, social pressure,
concern for people around you and many other more subtle things.
You cannot say that Indonesia is at the same level of readiness as
the U.K, Western Europe or the U.S.
The potential is in every market, because eventually I think
people will switch to these products as they become available.
There are two unmet needs in smokers: something that is much better
for my health and something that bothers others much less or
doesn't bother them. These are things cigarettes can't resolve.
These new products are developed to address these needs.
WSJ: What's more profitable for you, IQOS or traditional
cigarettes?
MR. CALANTZOPOULOS: Today it's IQOS because of the lower
taxes.
WSJ: You say you don't want to encourage new cigarette smokers.
If that's true, will you have a business in 40 years? What's the
long-term plan?
MR. CALANTZOPOULOS: First, I don't think it's 40 years we're
talking about here. It's much longer. Second, we only have, if you
include China, a 15.4% share of the world [cigarette market outside
the U.S.] With [alternatives to traditional cigarettes] we have
seen we can grow our market share even if the market reduces. Plus
we've started introducing accessories for the product.
WSJ: At over $100 for the starter kit, IQOS isn't cheap. Can you
explain your pricing strategy?
MR. CALANTZOPOULOS: Innovation, in the minds of people, cannot
be something extremely cheap. If you are an average person and you
hear that something that is much better than cigarettes comes to
the market at the cheapest possible price, you'll not trust it.
This is the reason we didn't initially manufacture in China,
because you need to create that credibility.
Over time you need to make the products available and affordable
to different categories of people.
The big shift
WSJ: You redesigned your website recently to describe yourself
as "committed to a smoke-free future" even though most of your
business is still in traditional cigarettes. Why?
MR. CALANTZOPOULOS: We developed the website because we needed
to make clear to our own stakeholders and employees here that this
is the direction of the company.
This is not an easy thing, because we are entering into a
territory that is very unknown. It's not your traditional
competitors.
Our industry has been a fairly linear and predictable industry.
You know what's going to happen every year. You know from time to
time you are going to have a tax increase, you are going to have
regulatory restriction, but, as it applies to everybody, I think we
are doing very well.
But now you move to a model that from linear can become
exponential for a period of time. It's much more technology-driven,
much more digital-driven. Competitors other than our traditional
competitors can come in, whether legitimate or fly-by-night ones,
and you have to anticipate all those things. We are the first ones
to be in the category, so we anticipated quite a lot. We are
learning every day. The whole organization has to gear up to this
new reality and these new competitive rules around it.
WSJ: There are still many regions of the world where you're
actively trying to grow revenues in your traditional cigarette
business. How do you reconcile those actions with your mission
statement of switching adult smokers to alternatives as quickly as
possible?
MR. CALANTZOPOULOS: Shifting the company to these products
doesn't mean that I will give market share to my competitors free
of charge. In the markets where we are not present with IQOS yet or
the other reduced-risk products, you still need to defend your
share of the market.
They still represent the bulk of our income, and so far they
have financed the billions of dollars we have put behind these new
products. But once we go national in a market, and absent capacity
constraints, then you shift your resources and your focus to these
new products.
WSJ: But isn't there an inherent contradiction here? Your new
efforts are being funded by your traditional cigarette business, so
it's important that you keep that going.
MR. CALANTZOPOULOS: Take a market like Indonesia as an example.
If I just take my foot off the pedal completely, nothing is going
to happen to the total market except that I lose share.
The logic says you don't do this until you go with IQOS.
We are focusing the organization much more on the new business.
We will have very few new traditional product introductions, and as
markets switch to IQOS we would remove resources [from the old
business] completely.
Next year IQOS becomes profitable, so even the financing from
these traditional businesses isn't necessary anymore, because it
becomes fully self-sustaining.
Ms. Chaudhuri is a Wall Street Journal reporter in London. She
can be reached at saabira.chaudhuri@wsj.com.
(END) Dow Jones Newswires
October 30, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Altria (NYSE:MO)
Historical Stock Chart
From Apr 2024 to May 2024
Altria (NYSE:MO)
Historical Stock Chart
From May 2023 to May 2024