Philip Morris faces major test as it pushes heated cigarettes in U.S. By Reuters

Emma Rumney

LONDON (Reuters) – Philip Morris International (NYSE:)’s target for heated cigarettes in the United States is achievable, analysts and investors say. Even though competitors see limited potential in a market dominated by vaping.

The world’s largest tobacco company by market value will launch its flagship heated tobacco device, IQOS, in the United States in the second quarter, developing the brand almost from scratch.

IQOS is already the best-selling heated tobacco device globally and is central to PMI’s efforts to transform its image from a tobacco manufacturer to a company leading the shift to healthier options.

In the United States, one of the world’s largest markets for alternative nicotine products, heated cigarettes are currently virtually non-existent.

PMI wants to account for 10% of all U.S. cigarette and heated tobacco sales within about five years after launching the latest version of the device, which is not expected until at least 2025.

This would require converting about 2.8 million U.S. smokers to IQOS, based on Reuters’ analysis of PMI figures and Barclays projections.

Rival British American Tobacco (NYSE:) said it did not see much potential for heated tobacco in the United States, where vaping dominates.

Two analysts and an investor at PMI told Reuters there were opportunities for PMI in the United States.

“We will all be watching this test,” said Bonnie Herzog, an analyst at Goldman Sachs.

PMI has poured most of the more than $12.5 billion it has spent so far on smoking alternatives into developing IQOS.

Heated tobacco devices heat shredded tobacco sticks without burning them to avoid harmful chemicals released through combustion.

The U.S. launch will be a key test of the device’s ability to appeal to smokers in a variety of markets. If successful in the U.S., PMI will gain a new, profitable user base and a significant revenue stream. PMI estimates the U.S. industry’s overall profit pool to be about $20 billion.

PMI spokesman Corey Henry told Reuters the company had good reason to believe it could replicate the success seen elsewhere with IQOS in the United States.

“Every market we launched IQOS in, we heard the same song from our competitors, but it didn’t take long for those same competitors to jump into the category,” he said.

performance

Using PMI’s latest annual figures for total IQOS stick sales and total users, Reuters estimated that users consume an average of about 4,379 sticks per year.

At this rate, PMI would need about 2.8 million IQOS users in the U.S. to sell the number of sticks needed to achieve its goal of 10% market share by 2030.

Barclays expects annual U.S. cigarette and heated tobacco sales to reach approximately 122.79 billion sticks by 2030.

Japan, PMI’s largest IQOS market by shipments, has 8.5 million users, putting it on track to meet its U.S. target. However, there is very little vaping in Japan due to regulations.

There is little evidence that high rates of vaping globally are causing harm to heated tobacco use, according to research by Bernstein analyst Callum Elliott. “Maybe 10%…is the goal actually achievable?” he wrote in the note.

Brett Cooper, managing partner at equity research firm Consumer Edge, said PMI could leverage IQOS’ track record of success in multiple countries to help achieve its U.S. goals.

The U.S. Food and Drug Administration (FDA) has authorized PMI to promote IQOS, which reduces exposure to harmful chemicals compared to cigarettes. The FDA hasn’t done the same for vapes.

As a result, IQOS could help alleviate its relatively high price tag by lowering taxes.

The most recent IQOS device costs 109 pounds ($136) in the UK, where a pack of cigarette sticks costs around 5 pounds.

PMI’s former parent company, Altria (NYSE:), previously sold IQOS in a limited capacity in the U.S. until 2021. At Altria, a pack of 20 tobacco sticks costs about the same as a pack of Marlboro cigarettes.

Phil Biedron, a former IQOS salesman in Atlanta, Georgia, said price was the biggest obstacle for those trying IQOS.

But Biedron, who worked for a marketing agency hired by Altria, said the device was generally well-received.

Stefano Volpetti, PMI’s president of smokeless inhalation products, said the company will not initially use price as a means to increase sales.

“Price is not part of the consideration at the outset of category establishment,” he said, adding that PMI will follow the same pricing approach in the U.S. as elsewhere.

huge profit pool

Altria used IQOS stores and pop-up kiosks as well as salespeople to promote its products in the United States. This strategy PMI is similar to our approach in other markets, so we won’t deviate much from it.

Consumer Edge’s Cooper said growing awareness of IQOS from almost zero in the U.S. while operating under stricter advertising laws compared to other consumer products will be no easy task and will be expensive.

However, there is a reason why PMI, which acquired the U.S. IQOS rights from Altria in 2022, can be more successful.

The company is currently preparing to launch IQOS in Austin, Texas, where Altria does not sell.

Sales of products like IQOS could eat into tobacco revenues as smokers switch. This means companies must balance the success of heated tobacco with the threat it could pose to their core tobacco business.

Crucially, PMI can be more aggressive in the U.S. because it was spun off from Altria and therefore has no U.S. tobacco business.

“I believe (that goal) is achievable,” said Sean King, an equity analyst at Columbia Threadneedle, a PMI Top 20 investor.

He said PMI, with a profit pool of about $20 billion and no need to worry about tobacco revenue, could have the firepower to fuel IQOS’ success.

($1 = 0.8022 pounds) (This story has been rewritten to correct a typo in the asset manager’s name in paragraph 35.)