Heat-Not-Burn iQOS Showing Success
We covered the progress of Philip Morris International’s iQOS a number of times, most recently in late March.Years in the making, the idea of the so-called heat-not-burn cigarette has come to fruition. This isn’t news on its own. That was when the product first hit stores, in a very limited way, in a few Italian and Swiss cities. It later expanded to the Japanese market, all of which was more or less a test to see how popular this technology can be.
Well, the verdict so far is that people will go for iQOS and its burn-not-heat idea. But before we get to the market results Philip Morris International, or PMI for short, has achieved, let’s take a look at how it got here. We don’t mean how iQOS got off to a hot start after it was introduced in limited markets in the spring. No, we mean the entire heat-not-burn concept. Because it didn’t start back in 2014 when PMI announced their plans for a new type of cigarette that wouldn’t burn. No, it goes back way beyond that.
RJ Reynolds even tried for a third time to break the heat-not-burn market by reintroducing it yet again – as a product called Revo. That was just last year, and Revo has failed already. With all of that background, you would think PMI’s try at this was bound to fail as well. But heat-not-burn, driven by the new iQOS brand, has acquitted itself very well so far.
The history of heat-not-burn products actually begins in the late 1980s, if you can believe it. That’s when a product called Premier was introduced by tobacco giant RJ Reynolds. The idea was to take tobacco or tobacco flavor by heating and aerosolizing it so that it would emit this vapor, but not burn anything. It flopped badly and was off the market a year later. The idea was re-introduced under the name Eclipse in the 1990s and actually stuck around, if only in small numbers.
It’s not Japan that is feeling the heat-not-burn. Cities in Italy and Switzerland are also seeing massive acceptance of iQOS, and PMI claims users in these countries are also adopting it at a 68-70% rate. Due to these results, PMI has already announced that they are “on track to launch in key cities in around 20 markets by end of 2016.”
After being on the market for only three months in Japan, iQOS has remarkably grabbed a 2.7% share of the country’s tobacco market. Those are incredible results in such a short timeframe, especially considering the fact that this is a new technology in Japan that consumers have to adjust to. Yet, they’re doing it in droves. PMI estimates that 70% of iQOS users in Japan have converted to it either fully or “predominantly.” The result of this does eat into PMI’s market for traditional tobacco cigarettes, but with users mostly trading up from cheap brands to heat-not-burn, it’s a net positive for the tobacco giant.
Of course that decline really coincides with the introduction of the electronic cigarette, which has helped millions of Americans make the switch to vapor. Millions worldwide who have also hopped on the vapor train join them. Don’t think PMI hasn’t noticed. They’ve got some success so far with iQOS, but they know that electronic cigarettes aren’t going anywhere. By having both of these technologies in their pocket, they’ll better be able to face up to increasing competition.
This has to be a huge relief for Philip Morris International, as it saw revenue for 3.1% this past quarter, raising fears of market contraction. Another way they’ve planned to keep from losing revenue has been to look at electronic cigarettes. PMI signed a deal back in 2013 giving them access to Altria’s ecig brands. The deal with their former parent company means they’ll be able to sell Mark Ten and Green Smoke brands in the international market. This adds a lot to their viability as traditional tobacco smoking rates continue to decline.
Yes, it can be said that so far, iQOS is driving a heat-not-burn comeback. But the sample size is small and nobody is willing to put all their eggs in that basket. Nor are they wiling to put all their eggs in the traditional tobacco cigarette basket. Electronic cigarettes make up a key component of this strategy, and rightfully so. Ecigs have come far, but there is still an even bigger and brighter future ahead. We’ll keep our eyes on iQOS and see how it could change things. We may even see a release here at some point. Certainly if they keep up this success, it wouldn’t surprise us one bit.