Smoke-Free Products: The Future of the Tobacco Industry

Current Market Trends in Smoke-Free Products

Smoke-free products are experiencing significant growth, with a rapidly expanding consumer base and increasing market availability. Companies like Philip Morris and Altria report rising demand for smoke-free alternatives, leading to reduced demand for traditional tobacco. However, regulatory challenges, such as FDA delays, hinder the market's full potential.

"This progress of smoke-free product is reflected in a rapidly growing consumer base, with around 36.5 million estimated adult users as of June 30, and our products now available across 90 markets worldwide.Our combustible business also overdelivered, with a return to gross margin expansion ahead of plan in Q2 after two years of significant inflationary headwinds." --- (PM, earning call, 2024/Q2)

"In addition, as consumer demand increases for innovative smoke-free products and decreases for combustible and MST products, the volume of tobacco leaf required for production of these products has decreased, resulting in reduced tobacco leaf demand." --- (MO, sec filing, 2024/Q1)

"Combined with the increasing bottom line smoke free contribution, this highlights our excellent trajectory as we continue to expand our portfolio and geographic reach.As of December 31, 2023, our smoke free products are available in 84 markets worldwide with around 33,000,000 estimated legal age users." --- (PM, AGM, 2024/05/08)

"In addition, the FDA’s failure to clearly define product pathways and accelerate PMTA decision making has resulted in a market with few authorized smoke-free products available to adult tobacco consumers." --- (MO, sec filing, 2024/Q1)

"Our smoke free products have commercial presence in 84 markets. We reached 33,000,000 smoke free users, and we have a net revenue accounting for 36.5 percent of the total with 39.3 in quarter 4 2023 being in smoke free products." --- (PM, conference, 2024/05/07)

Regulatory Environment and Its Impact

Despite the lack of an effective regulatory environment, companies like Altria and Philip Morris are advocating for risk-proportionate regulations and harm reduction. Regulatory initiatives could significantly impact financial results and demand, prompting proactive measures to address potential regulatory changes and enhance competitiveness.

"In spite of the absence of an of effective regulatory environment, we saw continued early momentum from NJOY and believe our businesses are on track to deliver against full year plans." --- (MO, earning call, 2024/Q1)

"The report called for a risk-proportionate regulatory environment for both e-cigarettes and heat-not-burn products and noted that e-cigarettes should remain the least taxed, cigarettes the most taxed, with heat-not-burn products falling between the two." --- (PM, sec filing, 2024/Q1)

"We also engage with the FDA and other government agencies to advocate for a well-regulated U.S. tobacco industry that embraces harm reduction and the enforcement of existing regulatory frameworks." --- (MO, sec filing, 2024/Q1)

"Our financial results could be materially affected by regulatory initiatives resulting in a significant decrease in demand for our brands." --- (PM, sec filing, 2024/Q1)

"In light of the growing momentum toward EPR laws addressing tobacco waste, Altria can position itself, mitigate financial risk and enhance future competitiveness by taking steps now to address the impact of EPR laws on tobacco waste, including voluntarily embracing EPR for its products." --- (MO, event transcript, 2024/05/16)

Technological Advancements in Smoke-Free Products

Years of innovation and scientific research have led to complex technologies that control tobacco heating without burning, providing satisfactory alternatives for smokers. Bold, science-based innovations are accelerating the decline of smoking rates, aligning with Philip Morris's mission to replace cigarettes with smoke-free products.

"Years of innovation and scientific research have led to the development of products that can provide an alternative to adult smokers who don't quit." --- (PM, Twitter post, 2024/05/20)

"It's time for change. Bold innovations led by science have the power to accelerate the decline of smoking rates." --- (PM, Twitter post, 2024/05/02)

"The technology is much more complex in order to control how you are eating, not burning the tobacco, how you have best eat in order to put the temperature profile to extract the base and nicotine and generate this satisfactory expense for people who were used to smoke NTA then." --- (PM, conference, 2024/06/04)

"For those who choose not to quit, we want to replace cigarettes with science-based, #smokefree products. This is our mission. https://t.co/zQ2Tl2yMQS" --- (PM, Twitter, 2024/07/05)

"It's time to help adult smokers abandon cigarettes. Research and innovation has paved the way for better alternatives for those smokers who don't quit. #smokefree https://t.co/MD74mcMZCs" --- (PM, Twitter, 2024/05/08)

Consumer Preferences and Demand

Consumer preferences are shifting towards smoke-free products, with companies like Philip Morris and Altria innovating to meet this demand. Philip Morris is confident in consumer demand and is developing a diverse product portfolio, while Altria is committed to reduced-risk products, reflecting evolving consumer preferences.

"We believe, given what we see from the potential consumer demand today, that in terms of what we produce at a certain point in Q4 versus what the consumer offtake could be without restriction, we're going to be good." --- (PM, earning call, 2024/Q2)

"PLUS applications underscores Altria's commitment to addressing consumers' evolving preferences through innovation in potentially reduced risk products." --- (MO, press release, 2024/06/26)

"It's all more complicated than that, but that's the starting point. It frustrates me that the dominant conversation around your business is the transition from a combustible product to a non combustible product, all the benefits that entails, everything you guys are doing to educate the consumer, the market, etcetera, but it still feels like non consumer stakeholders led by investors aren't discounting the future of your business and where it should be, what value that attracts, what multiple it should be, etcetera, etcetera." --- (PM, conference, 2024/06/04)

"MST products, including Skoal, have continued to be negatively impacted due in part to evolving adult tobacco consumer preferences, which has resulted in consumers increasingly moving across tobacco categories." --- (MO, sec filing, 2024/Q1)

"We recognize that no single product will appeal to all adult smokers. Therefore, we are developing a portfolio of products intended to appeal to a variety of distinct adult consumer preferences and achieve population harm reduction." --- (PM, sec filing, 2024/Q1)

Health Implications of Smoke-Free Products

Scientific findings and regulatory assessments indicate that smoke-free products (SFPs) have a harm-reduction potential compared to traditional cigarettes. Lower lung cancer rates in Sweden, due to a shift to oral tobacco, support this. While nicotine is addictive, it's the other chemicals in tobacco smoke that cause most harm.

"To date, several governmental agencies have published their scientific findings that analyze the harm-reduction potential of certain SFPs versus continuing to smoke cigarettes, including: In December 2017, at the request of the U.K. Department of Health and Public Health England, the U.K. Committee on Toxicity published its assessment of the risk of heat-not-burn products relative to cigarette smoking." --- (PM, sec filing, 2024/Q1)

"look very different. When we look at just lung cancer incidence, one of the most highly related smoking related diseases with smoking, what you see is by 2020 in the male population, Sweden has the lowest rate of lung cancer because in the 1990s, you have cigarettes being surpassed by oral tobacco products that deliver a lot lower levels of harmful and potentially harmful constituents." --- (PM, conference, 2024/05/07)

"It regulates heated tobacco products and bans e-cigarettes. The amendment particularly specifies that designated tobacco products (including heated tobacco products) that are not cigarettes, cut tobacco, cigars, snuff nor chewing tobacco, must undergo a health risk assessment as part of an authorization system." --- (PM, sec filing, 2024/Q1)

"They're talking about, although nicotine is addictive and relatively harmless to health, it is the other chemicals that contained in tobacco smoke that are causing almost all of the harm." --- (PM, conference, 2024/05/07)

"It is smoking is very dangerous and smoking is very harmful to health. And this company and my company is doing utmost effort to resolve this problem." --- (PM, event transcript, 2024/05/08)

Marketing Strategies for Smoke-Free Products

Philip Morris International focuses on responsible marketing aimed at adult smokers, converting them to IQOS through improved customer satisfaction and loyalty. Their strong trade partnerships have led to market leadership in five countries for close pods, showcasing effective marketing strategies for smoke-free products.

"At PMI, we're committed to responsible marketing practices, which are only directed at our intended audiences - existing adult smokers who don't quit cigarettes." --- (PM, Twitter post, 2024/05/16)

"So I would say we continue to have more ammunition to convert smokers to IQOS, to improve the experience, to improve customer satisfaction that is triggering of course, more loyalty that can have some impact on the average daily consumption, so a number of positive effects." --- (PM, earning call, 2024/Q2)

"is a great product, and strong partnership with the trade that is giving this very good start as we mentioned, the number 1 position in five countries for close pods. That's really what I can share with you at that stage." --- (PM, earning call, 2024/Q2)

Future Outlook for Smoke-Free Products

Philip Morris International envisions a sustainable future driven by smoke-free products, emphasizing their commitment to delivering a smoke-free future as a fundamental opportunity.

"As we deliver a #smokefree future, we see sustainability as a fundamental opportunity." --- (PM, Twitter post, 2024/04/10)

"A message from our CEO, @j_olczak on our newly released Integrated Report 2023 🌱 Download the full report to learn about our commitment to a sustainable #smokefree future 👉 https://t.co/NSq5jhbTZz https://t.co/zEf3PvxH97" --- (PM, Twitter post, 2024/04/02)