Cannibalize yourself in a quest for more profitability—but not too quickly. That’s an apt way to describe marketers’ shift from cigarettes to non-combustible nicotine formats.
The concept was on full display this week when tobacco giant Philip Morris International updated the investment community on its progress with such non-combustibles as iQos heat-not-burn devices and oral nicotine pouches.
“The combustible category is shrinking worldwide. And that is great news,” Philip Morris CFO Emmanuel Babeau said at the annual Consumer Analyst Group of New York conference. “We are trying to reduce this category. But at long as it does exist, we want to retain leadership.”
Philip Morris already has the world’s #1 smoke-free brand with iQos and, with its recent $16 billion acquisition of Swedish Match AB, #1 nicotine-pouch product Zyn.
“We’re not moving away from combustible cigarettes to replace it with a business of lower quality,” said Babeau. “On the contrary, we are coming with a business that has the potential to be significantly better in terms of growth, of course, and in terms of profitability than the combustible business. The most profitable user is coming with iQos.”
As for controlled cannibalization, he noted that “If we want to convert smokers—whether directly to the consumer or through the trade—we need to keep this connection with a strong market share in combustible. Otherwise, we’re going to become irrelevant.”
According to Cowen and Company, prior to acquiring Swedish Match, Philip Morris had made organic investments in heat-not-burn devices of roughly $9 billion.
Along with the Swedish Match U.S. sales force, the deal delivered a “super situational” way to use nicotine in the form of oral pouches.
“This is a way to enjoy nicotine wherever you are, whatever you’re doing. You can be in a restaurant, you can be in a plane, you can be in an office,” said Babeau.
Launched in 2016, Zyn got its initial foothold in Western U.S. states. “It’s gradually progressing through the country,” Babeau added
Lowest on Philip Morris’ priorities list is vape devices, which Babeau described as having the highest volatility when it comes to consumer loyalty.
“Two years ago, disposable was very, very limited. It seems like a category where loyalty is low and things are moving very, very, very fast.”
The Rutgers Center for Tobacco Studies and the University of Kentucky Markey Cancer Center recently released a study on the sale of disposable vapes—whose brand leaders are Puff Bar and Vuse.
The study cited data showing that in 2021, disposables were used by 54% of youths who used vape devices.
Researchers conducted audits at 242 retail locations in Kentucky, New Jersey, New York and North Carolina.
Among other findings, they determined that disposables were “significantly more likely” to be sold by specialized tobacco and vape stores as opposed to convenience and grocery stores.