Declining cigarette sales amid rising health consciousness are charring the performance of tobacco players like Philip Morris International Inc. (PM - Free Report) . FDA’s regulations on the companies, which are related to the marketing and manufacturing policies tobacco products, have eclipsed cigarette sales. Even amid such drags, Philip Morris has managed to maintain its position, courtesy of low risk tobacco products and efficient pricing strategies. Let’s take a look.
RRPs as Game Changers
With radical investments toward research and development in the reduced risk products (RRPs) category, Philip Morris is pioneering the radical shift from harmful tobacco products to scientific and low-risk alternatives. In fact, the company’s IQOS — a smokeless cigarette — is one of the leading RRPs in the industry. In 2018, the company launched additional versions of IQOS in Japan, which have been depicting encouraging results. The company expects such advanced and high-quality products to aid adult smokers switch from traditional cigarettes to smoke-free options. At the end of first-quarter 2019, IQOS users totaled more than 10 million, which is an important milestone.
Going ahead, the company expects consistent growth in IQOS and Heated Tobacco category. Therefore, it is committed toward expanding the products to newer geographies. Also, the marketing and technology sharing agreement between Philip Morris and Altria Group (MO - Free Report) , pertaining to the sale of IQOS in the United States, has been approved by the FDA. This is expected to radically boost business of the companies. Moreover, Philip Morris inked a deal with Canada-based Parallax that provides low-risk alternatives of tobacco. To drive growth in the category, the company recently launched ‘The Year of Unsmoke’ — an initiative aimed at creating a better future for smokers.
Philip Morris resorts to higher cigarette pricing to support revenue growth. Moreover, the price hikes enable the company to maintain margins at the desired level. As smokers tend to absorb such price hikes due to addiction, the strategy is likely to continue driving the company in the near term.
Low Cigarette Consumption is a Major Snag
Regulatory bodies around the world are imposing restrictions on tobacco companies, which are lowering cigarette consumption. Markedly, the FDA has made it mandatory for tobacco firms to use precautionary labels on cigarette packets to dissuade customers from smoking. In fact, per court orders, cigarette makers have been directed to put self-critical advertisements. To add to the woes, the FDA is inclined to drastically reduce nicotine in cigarettes to minimally addictive levels. The initiative was proposed in 2017 but was delayed due to ongoing research.
Such headwinds and growing awareness toward harmful impacts of nicotine have deterred Philip Morris’ cigarette shipment volumes, which has dented investors’ optimism. Notably, the stock has declined 5.5% in the past three months compared with the industry’s fall of 7.9%. In addition to Philip Morris, other tobacco firms such as British American Tobacco (BTI - Free Report) and Vector Group (VGR - Free Report) are reeling under declining cigarette sales volumes.
Considering the headwinds in the cigarette category, Philip Morris’ gradual expansion in other business areas, such as RRPs, is expected to offer respite to a certain extent. This along with higher cigarette pricing strategies is likely to continue remain as upsides for this Zacks Rank #3 (Hold) company.
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(We are reissuing this article to correct a mistake. The original article, issued on Jul 5, 2019, should no longer be relied upon.)