One of the central plotlines for the tobacco industry in 2015 will be the evolution of large manufacturer responses to the steadily increasing prevalence of e-cigarettes and their efforts to wrestle back control of the future incarnation of the cigarette. This week had the feeling of a watershed moment in that ongoing narrative as the potential silver bullet for tobacco manufacturers, heat-not-burn technology, took a further step into the minds and mouths of consumers with major announcements from Philip Morris International on its iQOS platform and Reynolds American on the launch of a specific heat-not-burn brand, Revo.
Reynolds American announced at a Wells Fargo investor conference on Monday 17th November that it would begin test marketing the heat-not-burn product next February in Wisconson. However, unlike PMI’s iQOS system which appears to represent a genuine advance in tobacco technology (and of which more presently), it’s a case of back to the future for Reynolds with Revo being an update and rebadging of RAI’s failed Eclipse heat-not-burn effort from the early 2000s.
However, the rationale for each product is equivalent with PMI and RAI both clearly believing that heat-not-burn tobacco offers a superior proposition to consumers, primed by the emergence of e-cigarettes to entertain a sensory experience at a discount to traditional combustible cigarettes. Reynolds had remained committed to Eclipse, despite its public failure and it continues in circulation to this day, albeit in infinitesimal quantities. The company clearly feels circumstances are now more favourable to its wider adoption and The Associated Press quoted J. Brice O’Brien, head of consumer marketing at R.J. Reynolds as saying “Heat-not-burn technology was 20 years ahead of when consumers were ready for it. It needed the mass presence of vapour products to open up an experience-base that smokers understood”
Effectiveness not timing key?
Taking an ungenerous viewpoint, this line of thinking is simply question-begging on RAI’s part. As has become common currency by now, Herbert Gilbert filed a patent for a smokeless tobacco cigarette back in the early 1960s so it is not immediately obvious that a product launched in 2001 was ‘ahead of its time’. The concept of a tobacco or nicotine vapour product is not a new one and it could be that the difference between the failure of previous heat-not-burn products and the success of electronic cigarettes was not simply timing but that the latter are (albeit incompletely) effective products whereas the former were not. Should this be the case and should RAI not have overhauled Eclipse’s functioning, rather tweaked the packaging, then it risks compounding forgivable initial failure with the greater sin of supplying an intrinsically flawed product to an inarguably broader and more receptive market.
Sticking with the provenience of products for a moment, PMI’s iQOS and HeatStick system does bear more than a passing resemblance to one of its own previous heat-not-burn efforts, the Heatbar, in that it is a handheld device into which tobacco cigarettes are inserted. Mercifully for PMI’s investors, this is where the resemblance seems to end. The company has indeed invested substantially in iQOS but tentatively, it appears to be money well spent. After several years in development, during June’s Investor Day the company revealed that initial clinical trials suggest the product has a similar nicotine delivery profile to that of combustible tobacco with a fraction of the risk profile. If borne out this would amount to nothing less than a revolution in cigarette technology. Reports of trial markets in Italy and Japan over the last year have been positive and having been on general release in the Japanese city of Nagoya since November 4th, the product is launched to the public today in Milan, Italy.
Benefits all round
While the value proposition to consumers of a cigarette with all of the satisfaction at none of the physical cost is not inconsiderable, the iQOS system represents for PMI (and by extension the wider industry) a panoply of benefits. The system enjoys a tax advantage in Japan due to its lower risk profile and while it is currently taxed as a tobacco product in Italy the company are apparently hopeful of an impending legislative change which would confer preferential status there too and is optimistic that other markets would follow. This would allow PMI to enjoy both a financial as well as (an albeit subjective) ethical dividend from selling a lower risk product.
However, as it is still a tobacco product the company can continue to use tobacco brands such as Marlboro with the device, requiring they only build trust in and acceptance of the technology rather than developing brand equity from scratch. PMI state that over the next 5 years they plan to enter markets with a total cigarette consumption of over 1 trillion sticks. Net of cannibalisation and assuming adoption of 3-5% of consumers they see an incremental volume of 30-50 billion sticks as a baseline for the product. In truth however, it may be much more significant than that.
A brave new front
The company is using the strapline ‘Cease Fire’ for iQOS’ marketing launches in Japan and Italy, a metaphor which may well prove strangely inappropriate for a product which is opening a new front in the battle for the future of the industry, one in which it has every chance of prospering.