Cigarette makers fighting fire

Philip Morris International is struggling to persuade people to stop smoking cigarettes. During quarterly results last week, the tobacco company highlighted the “more conservative adult smoker” as the problem. In Japan, over-50s are still setting fire to cancer-causing sticks like there is no tomorrow.

This has taken Philip Morris by surprise. Its shares fell as much as 18%, their worst decline since it split from Altria in 2008. British American Tobacco and Altria fell in sympathy. Yet Martin King, chief financial officer of Philip Morris, is not quitting. “It just doesn’t make sense” to think they will keep smoking cigarettes, he reassured investors.

It’s a strange world. In Fahrenheit 451, the firefighters set fire to things. In 2018, cigarette companies battle to get rid of cigarettes and investors punish them when they fail.

There is method to the madness. Philip Morris is no longer simply a peddler of Marlboros outside the US (Altria handles the US market). It now has several “reduced-risk products” that typically heat rather than burn tobacco, aiming for a lower chance of user death. Japan is the test bed for IQOS, an electronic product. After a positive start, only tight inventory appeared to be holding back greater sales. Then the inventory arrived but the sales growth “plateaued”, in Philip Morris’s assessment. Heated tobacco units in the country fell from 13.1-billion in the fourth quarter to 6.2-billion in the first.

In Philip Morris’s estimation this is a temporary setback. It must try harder to convince older smokers to switch. It has 68% share of the heated tobacco category in Japan. Overall, net revenues grew at 8.3% in the quarter. After the sell-off it has a dividend yield of 5%.

There must, though, be a nagging doubt. Cigarettes, it turns out, are quite addictive. And younger people are failing to pick up the habit at all — high-tech or otherwise. Philip Morris’s overall cigarette units fell 5% in the quarter; newer products failed to offset the decline. The nicotine withdrawal is on. London, April 20