Smoke-free segment up as Philip Morris fights declining sales
South Korea, where its flagship smoke-free product IQOS launched four months ago, is a bright spot for world's biggest cigarette firm amid grim third-quarter results
The move towards “smoke-free” alternatives to cigarettes shows strong signs of catching on in South Korea, offering the world’s biggest tobacco firm cause for optimism against a backdrop of otherwise grim third-quarter earnings.
Piloted in Japan and Italy in 2014, Philip Morris International’s flagship smoke-free product, IQOS – which heats tobacco instead of burning it – was rolled out in Korea, one of the world’s most ingrained smoking cultures, four months ago and has seen strong take-up. The company claims the product reduces harmful toxins affecting users by around 90%.
IQOS’ performance in Asia in fact offers PMI hope of withstanding a protracted slowdown in its traditional business. Thursday’s results announcement showed a tenth consecutive quarter of declining cigarette sales, as the company cut its full-year outlook for the second time this year. PMI now sees FY earnings per share coming in between US$4.75 and US$4.80, down from the US$4.78-US$4.93 range it forecast in July. Six months ago, the guidance was an even higher US$4.84 to US$4.99.
The pressure for IQOS to perform is therefore intensifying – and Japan and Korea are clearly the bright spots. After its first four months, PMI’s tobacco filler for its IQOS devices has a 2.5% share of South Korea’s overall cigarette market, with that figure set to rise as the product launches across more regions. For Japan, PMI says its market share has now reached almost 12%, a 10-fold increase from its official launch two years ago and an increase of 1.9% on the second quarter. The company claims that well over one million Japanese adult smokers have quit cigarettes and now use IQOS exclusively.
Lausanne, Switzerland-based PMI is clearly banking on expanding demand for its smoke-free products and has focused its efforts on enabling people to switch. At present, it manufactures six of the world’s top 15 cigarette brands, including Marlboro. CEO Andre Calantzopoulos told Asia Times in July, however, that ultimately he does not want PMI be in the cigarette business at all. Globally, IQOS sales accounted for 13% of the company’s total net third-quarter revenues and the product is now available in 31 markets.
Speaking of the company’s “long-term” goals, Martin King, Asia Regional President PMI International, said: “Where we’ve been able to launch smoke-free products in Asia – like Japan and more recently Korea – we’ve seen smokers switch quickly and in large numbers.”
In contrast to IQOS’ success in Northeast Asia, it has been met with outright bans by governments elsewhere in the Asia-Pacific region – including those in Singapore, Hong Kong, Australia and Thailand. Tobacco users, health professionals and lawmakers continue to debate how potentially less-harmful alternatives to cigarettes should be regulated relative to traditional tobacco products.
“[Smokers] deserve the right to choose better alternatives to smoking cigarettes,” said PMI’s King. “Fundamentally, what is key for regulators is to treat smoke-free products differently to conventional cigarettes.”
PMI’s stock fell 4% in US trade on Thursday following the Q3 earnings announcement.