Philip Morris wants to go “smoke free”: what does that really mean?

“In 10 years, we can completely solve the problem of smoking cigarettes,” said Jacek Olczak, CEO of Philip Morris International. But what does this statement mean? How can a company betray its main product?

Key takeaways on the smoke-free plan

  • Philipp Morris asked the British government to ban cigarettes within the next 10 years, their core product.
  • PM wants 50% of their revenue to be smoke-free by 2025. Smoke free revenue is referring to IQOS, their combustion-less product.
  • The next challenge for the company is that many non-smokers and teens are getting hooked on it, which is now posing major regulatory issues in many countries for Big Tobacco.

 

Phillip Morris: a company profile

Philip Morris International is a Swiss-American tobacco company, the biggest cigarette company on the planet.

Founded in 1947, the company has over 130 brands – including major names like Marlboro, Chesterfield, L&M, Lark and Muratti – and operates in over 180 countries. This cigarette company is so big that it should almost be called a cigar company! Their global reach gives them the ability to aggressively market their products abroad, without having to comply with harsher jurisdictions like the US.

 

Phillip Morris wants cigarettes to be banned

Last week, Philipp Morris asked the British government to ban cigarettes within the next 10 years, their core product. Basically, the message was “don’t let us sell any more of what we sell.” In fact, the company wants to leave classic smoking behind forever. But what does this mean? Has Phillip Morris suddenly become the UNICEF of the throat? Definitely not.

This plan started in 2019, when Philip Morris International came out with a brand-new, rather counter-intuitive campaign called “Unsmoke the World”. Today, what lied behind this Red Hot Chili Peppers album name like slogan is becoming clearer.

What M. Olczak did not say, though, is that he will replace the smoke problem with the problem of vaping.

 

What is next for Philip Morris’s strategy

Philip Morris wants 50% of their revenue to be smoke-free by 2025. Smoke free revenue is referring to IQOS, their combustion-less product. It is like vaping, but it instead heats up actual tobacco leaves instead of this weird sticky oil that smells like mango. Or chewing gum, you name it. This is called vaping. But Philipp Morris also launched a vaping product, meaning that they own both IQOS – heated tobacco – and your conventional JUL-style vaping product.

Both products have a crucial common point: they both bring nicotine along, the molecule that will satisfy existing smokers.

The pivot seems to be: “we’re not going to make money on dirty smoky cigarettes anymore (oh no!), but we do plan on making money once existing smokers switch to our smoke-free alternatives.”

Philip Morris is also backing this strategy pivot with interesting acquisitions: they bought the company behind Nicorette gum, which helps you quit tobacco. Also, they bought an inhaler company, just to make sure they get hold of the complete lifeline of smokers. This is kind of like Coca-Cola or McDonalds buying weightwatchers!

Since Philipp Morris saw that smoking is becoming an issue, instead of planning to make money when you smoke, they switched their business model up to make money while you’re stopping to smoke or even as you suffer from smoking – here thinking about this inhaler product. Finally, the goal will be to keep making money with less harmful products and banking on your smoking gesture habit.

The next challenge for Philip Morris International is that although smoke-free products appear to be less harmful than our OG cigs, many non-smokers and teens are getting hooked on it, which is now posing major regulatory issues, including possible product bans in many countries for Big Tobacco.

 

About the stock

Philip Morris International stock

The stock is already trading at a multi-year high. While many might think that it might be too late to jump in, investors that are bullish on the long-term for the alternative smoking industry might be interested to buy and hold a few stocks, especially as the market keeps growing and that major industry transformation are underway. Indeed, Philip Morris generated 28% of its revenue from smoke-free products in the first quarter, and the company believes those devices will eventually replace cigarettes as its core business. According to Leo Sun, analyst at the Motley Fool, Philip Morris seems like a decent, yet controversial, value stock.

 

Conclusion: tobacco is dead, but the next chapter is opening

Today, it has become well-known that cigarettes are to be avoided for a healthy body, as they still kill more than 8 million people a year. The trend is falling and has been going in this direction for a long time. Remember that in the United States, cigarette sales peaked in 1981, and went on a 40-year decline since then. Cigarette sales are now only a third of what they used to be at their peak in the 80s. At the same time though, the company’s earnings grew 6% last quarter, thanks to their alternative solutions, as well as international sales.

The long-term impact of vaping on the lungs is still to be fully explored. But vaping does not have the baggage of cigarettes and that is why it is growing. It is cigarette’s less dirty, less smelly but still unhealthy reincarnation. Of course, cigarette companies are not saints. They perfectly know that this switch is a forced one to keep the company afloat. It seems like they just want to be first in the transition to maintain their market share. Will sin stocks such as Royal Dutch Shell and Philip Morris manage to wash away their sins? Time will tell, but to summarize PMI’s situation: sink cigarettes, embrace vaping, vaping saved tobacco!

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