Evie Liu
As cigarette sales wane, Big Tobacco is betting on smokeless alternatives -- ranging from e-cigarettes to heat-not-burn tobacco sticks to oral nicotine pouches -- to lead their next leg of growth.
This week, tobacco giants Philip Morris International and Altria Group reported 2024 first-quarter earnings, painting very different pictures of where they stand in the process. Altria, once a major stakeholder in popular e-cigarette company JUUL, is now behind the game.
In the quarter, smokeless sales at Philip Morris increased 21% from a year ago, now accounting for nearly 40% of the firm's total revenue. At Altria, traditional cigarettes still make up nearly 90% of its sales, while the smokeless products -- just one fifth the size at Philip Morris -- grew only 6% from a year ago.
"This quarter is probably the perfect illustration of our growth and the power of our transformation, as our smoke-free products are what's driving our success in the first quarter," Philip Morris Chief Financial Officer Emmanuel Babeau, told Barron's earlier this week.
Philip Morris has made major strides in the heated-tobacco market over the past decade. IQOS, a device that heats tobacco rather than burning it, generated more than $10 billion in sales for the firm in 2023, up 15% from a year ago, surpassing the company's signature cigarette brand Marlboro for the first time.
So far, Philip Morris is only selling IQOS outside the U.S., since a 2013 contract gave Altria the exclusive rights to distribute the product in the country. But the IQOS rollout in the U.S. has been slow due to regulatory challenges and patent disputes. Philip Morris bought back the right to sell IQOS in the U.S. starting from April 30.
This marks great potential for the firm to persuade more American smokers to switch to noncombustible alternatives. Philip Morris said it would launch IQOS in a few cities this year, but a national rollout would wait until the latest version, known as IQOS ILUMA, receives regulatory approval.
Oral products represent another emerging growth opportunity for the tobacco industry. In 2022, Philip Morris acquired European firm Swedish Match for $16 billion, whose nicotine pouch Zyn -- riding on social-media fandom -- is the best-selling brand in the U.S. oral nicotine market.
Following the acquisition, total shipment of Philip Morris' oral products, including nicotine pouches and moist forms of smokeless tobacco, more than doubled last year to 800 million units. The strength continued in the first quarter, when 243 million units were sold. About 60% of those sales came from nicotine pouches like Zyn.
Altria also has a few oral products under its banner, including moist smokeless tobacco Copenhagen and nicotine pouch On!. But they have been losing market share to Zyn. Altria's oral products shipment declined 2% in 2023 from a year ago to 783 million units, lower than Philip Morris for the first time. The number continued to slip in the first quarter to 185 million units.
Still, Altria CEO William Gifford said in an earnings call on Thursday that he "feels good" about nicotine pouch On! that competes with Zyn. "We're going to have better positioning at retail," he said. "We feel good about the existing product, and we feel great about the pipeline to follow."
Altria didn't immediately respond to Barron's request for further comment about its smokeless product business.
Altria has been more focused on e-cigarettes. But the path hasn't been smooth. In 2018, it acquired a 35% share in e-vaping company JUUL Labs for $12.8 billion. But JUUL has since gotten entangled in lawsuits regarding the youth vaping crisis, as the firm was accused of aggressively marketing to teens.
Altria exited its JUUL investment last year with huge write-downs. It didn't give up on the e-vapor market, acquiring another e-cigarette maker NJOY for $2.75 billion last June. But NJOY has a much smaller market share. In the first quarter, it sold 11 million consumables units and one million devices, making up less than 5% of the e-vaping market.
To be sure, the e-cigarette market continues to grow at a fast pace. But much of the growth was driven by illicit flavored products, mostly from China, which makes up half of the market share. The FDA has cracked down on a few unauthorized e-cigarette brands last year. Still, illicit competitors continue to present a big challenge for Altria.
Altria is also aiming to take a share in the heat-not-burn market. The company is developing a heated tobacco capsule product, and formed a joint venture with Japan Tobacco to bring its heated tobacco stick Ploom to the U.S. But it's yet to submit the U.S. application for Ploom.
More than a decade ago, Philip Morris and Altria split up on deals that made sure they wouldn't directly compete with each other. While Altria continued to sell popular cigarette brands like Marlboro in the U.S., Philip Morris would distribute them overseas.
As the competition for smokeless products in the U.S. heats up, the two tobacco giants will continue to race against each other.
Write to Evie Liu at evie.liu@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 25, 2024 17:01 ET (21:01 GMT)
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