Philip Morris’ Gamble On iQOS Backfires With Older Smokers

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In January, we reported that one of the largest suppliers of combustible cigarettes, Philip Morris International (PMI), was changing their business model by “quitting” combustible cigarettes and promoting their own line of vapor products. PMI is famous as the parent company of the Marlboro cigarette brand along with a plethora of other vapor and combustible cigarette companies.

PMI’s gamble on quasi-vapor products has, so far, backfired, especially with older smokers. Quarterly reports show that shipments of iQOS systems (a 'heat-not-burn' device that still uses cigarettes but doesn't set them on fire) have slowed since December, though international combustible cigarette shipments have also dropped substantially. These setbacks culminated in their worst trading day in the company’s history on Thursday, April 19. After reports indicated PMI would fall short of industry earnings estimates, company shares dropped almost 16 percent in one day.  

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For their part, company executives admit that they’ve overplayed their hand after initial success with a younger market in places like Japan. Now they have to reassess their marketing tactics going forward, particularly when it comes to convincing an older generation of smokers to put down cigarettes in favor of some newfangled device.

'Now we're obviously going to adjust our plans,' PMI’s Chief Financial Officer Martin King said on a call with analysts. 'We're now reaching different socioeconomic strata with more conservative adult smokers who may have slightly slower patterns of adoption.'

These financial results and King’s reaction illustrate an uncomfortable position tobacco companies have faced over the last decade that's ushered in the rise of a growing vapor industry. On one hand, vapor products as a whole have cut into combustible cigarette sales, with smokers under the age of 50 turning to vapor products as a cessation method while smokers in the above-50 market have been less likely to seek alternatives.

The over-50 crowd is an important category for the tobacco industry to stay above water. In the U.S., 18 percent of adults between the ages of 45 and 64 and 8.8 percent of adults 65 and older smoked as of 2016, according to data from the U.S. Centers for Disease Control and Prevention.

If iQOS can't appeal to older groups, Philip Morris's U.S.-based sister, Altria Group Inc., may be in trouble. The company offers its own MarkTen lineup of vapor products, and their shares fell six percent on April 19 and a further percentage point the next day.

The company announced at the turn of the year that they were going to invest $4.5 billion in competing with vapor companies, largely through tobacco-vapor hybrid heat-not-burn systems, also known as I-Quit-Ordinary-Smoking (iQOS) systems. The systems only heat up tobacco, but don’t burn them which, according to PMI, results in less toxins, although there’s still an ongoing lawsuit in the United States about the safety of these products, which has kept them off American shelves pending approval by the federal Food and Drug Administration.