Big Tobacco struggles to convince critics it can get rid of cigarettes

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When one of the biggest tobacco groups in the world claims to want to “smoke the world”, it is doomed to encounter skepticism.

The New York-listed group, which has a market cap of $ 155 billion, qualified its bid for pharmaceutical company Vectura earlier this month as part of its “natural evolution to a healthcare company and of broader well-being “. Nonetheless, the UK government has vowed to keep an eye on the deal for reasons of public interest.

It is part of a series of acquisitions that major tobacco companies have made to diversify beyond their traditional business – into products ranging from vapers and e-cigarettes to oral nicotine sachets – but Philip Morris can rightly claim to have taken the lead in broadening its horizons. Since 2008, it has invested $ 8 billion to support its smoke-free product strategy.

“This is a very bold move on the part of the owner of Marlboro,” Emmanuel Babeau, group chief financial officer, told the Financial Times. “We believe and we will contribute to the phasing out of cigarettes,” he added.

Campaigners, however, wonder how trustworthy an industry that has been accused for decades of lobbying black money and sponsoring questionable university studies should be when it claims to care about health.

“This is not the first time that Philip Morris has said he cares deeply about the health of his consumers,” said Matt Myers, president of the American charity Campaign for Tobacco-Free Kids.

He acknowledged that the group has gone further than most of its competitors in promoting the use of low-risk alternatives, but argued that the company is still heavily marketing cigarettes in many middle-income countries. and low, where about 80% of the world’s smokers live. “A lot of these actions are inconsistent with rhetoric,” he said.

Philip Morris has accused organizations such as Campaign for Tobacco-Free Kids of delaying the transition to smoking by lobbying to prevent the sale of vapers and other alternatives.

Addictive dividend yields

The tobacco industry has faced constant skepticism since evidence emerged decades ago that it lied to the public about the dangers of smoking.

The global tobacco industry, which British American Tobacco claims is worth around $ 818 billion, sells to nearly one in five people on the planet. Meanwhile, smoking, including second-hand, kills an estimated 8 million people a year, according to the World Health Organization. This compares to the roughly 4.1 million Covid-19 deaths recorded to date.

Marlboro advertisement, 1957

A 1957 Marlboro ad. Marlboro maker Philip Morris says he tied executive salaries to his new mission to “smolder the world” © Granger / Shutterstock

The market is divided on the attractiveness of the industry. Many investors pulled tobacco out of their portfolios years ago, but others are drawn to the inordinate cash flow that an addictive product can generate. Cigarette makers have long been known for their staggering dividend yields – 5% for Philip Morris, over 7% for Altria and BAT.

More recently, Philip Morris has sought to broaden his appeal by playing into the investor trend towards sustainability, with chief executive Jacek Olczak hosting a webcast on the topic last month. He told attendees that his company had linked executive pay to its new mission to “smoke the world” by phasing out cigarettes. The company also argued that health-conscious investors would do more good by engaging with tobacco companies than by divesting from them.

“I don’t philosophically believe that exclusion has ever solved a problem,” Andre Calantzopoulos, Olczak’s predecessor, told FT last year: “Engagement is the only way to change human behavior.”

Column chart of annual% change showing decline in fuel sales in Japan with the launch of PMI's heated tobacco

Yet investors continue to move in the opposite direction. ABN Amro decided to stop investing in tobacco stocks in 2018. Ruben Zandvliet, the Dutch bank’s business and human rights adviser, told the FT that the exclusion was not his default option when engaging with controversial companies, but “for tobacco we decided that was the only option. because the negative impact is so extreme ”.

“There is no way to engage successfully, as that would mean forcing them to stop selling tobacco and a complete overhaul of their business model,” he added, calling Philip Morris’ offer for Vectura of “the most cynical form of vertical integration I can imagine”. ”.

Gail Hurley, sustainable finance advisor at the Tobacco Free Portfolios lobby group, said it was “important to remember that new products like e-cigarettes are not harmless” even though they are not as harmful than cigarettes.

Zandvliet said the bank never assessed the financial impact of its decision because customers had not asked it to do so.

Philip Morris manufacturing plant in Neuchâtel, Switzerland

A Philip Morris factory in Switzerland. The group made nearly a quarter of its $ 28.7 billion in net income last year from its reduced risk portfolio, which includes e-cigarettes © Philip Morris

Others stuck with decisions to stay away despite the financial loss. Calpers, the largest public pension fund in the United States, which disengaged from tobacco in 2000, upheld its decision despite a 2018 study showing it lost some $ 3 billion in returns.

Skepticism about a zero-cigarette world

In his pitch for his “beyond nicotine” strategy, Philip Morris was careful to point out to investors that the products he plans to replace cigarettes could be just as profitable, if not more profitable.

The group made nearly a quarter of its $ 28.7 billion in net income last year from its reduced risk portfolio, which includes IQOS, a cigarette-like device that heats rather than burns tobacco. This makes it an industry leader: the proportion of sales of less harmful products is just over 5% at BAT and below 3% at Imperial Brands.

Philip Morris “demands a much higher price / earnings ratio than anything else in the industry,” observed Rae Maile, analyst at Panmure. “In this regard, investors are voting with their feet. “

“The investment case around IQOS has captured the imaginations of investors,” he said, adding that IQOS had been slow to generate profits after its launch in 2014, ”but this year Philip Morris improved its earnings forecast… and announced a share buyback program – now we not only have a story but also a delivery ”.

an IQOS electronic cigarette

The IQOS electronic cigarette produced by Philip Morris © Fabrice Coffrini / AFP via Getty

But few other tobacco companies are as positive about the likelihood of a cigarette-free world as Philip Morris, who has said he supports the UK government’s goal of eliminating almost all smoking by 2030.

Even if today’s market leaders stop selling cigarettes, skeptics say, someone else will.

“I hope there will be a day when we are no longer seen as the tobacco industry and a tobacco company,” Kingsley Wheaton, BAT marketing director, told FT. “Now, the day BAT sells its last cigarette, will it be the last cigarette sold in the world?” I suspect not.

Japan Tobacco International, which manufactures Old Holborn tobacco and Camel cigarettes, does not specify the proportion of sales made from products other than cigarettes, but said “we see [cigarettes], heated tobacco products and other reduced risk products coexisting for the foreseeable future ”.

Imperial Brands, the London-listed group behind Winston and Davidoff cigarettes, has taken a whole different approach. In January, its new chief executive Stefan Bomhard announced that the group was once again focusing on cigarettes, arguing that it had become “too focused” on alternatives. Last week he announced a restructuring of his vaping research center in Liverpool, putting half of the jobs at risk.

Line chart of rebased stock prices, local currency showing Philip Morris outperforming rivals

Who will be the new consumers?

Another concern of critics of the industry is its need for new consumers if existing smokers switch to alternatives to cigarettes.

Moira Gilchrist, vice president of strategic and scientific communications at Philip Morris, asks the same question: “What happens when you run out of adult smokers and convert to reduced risk products? ”

Its answer lies in the company’s research into CBD, a non-psychoactive extract from cannabis plants, and its recent acquisition of the nicotine sachet and lozenge company Fertin Pharma. One avenue would be for Philip Morris to sell products that promote “sleep, energy and calm,” she said.

“I think we are showing the world our way past smoke products,” she added, “We take great care to make sure we reach the right audience. ”

Deborah Arnott, chief executive of UK lobby group Action on Smoking and Health, is still not convinced that the tobacco industry can successfully move away from nicotine products.

“Philip Morris put forward the idea that it is about converting smokers, not about creating addiction for new generations,” she said. “But in the long run, it can only work if you addict the new generations.”



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