The only cigarette manufacturer to have clearly committed to leaving its traditional product behind has announced that by next year most of its revenue will come from production of smoke-free alternatives. PMI now has a new ambition to make cigarettes the source of no more than a third of its revenue by the end of the decade, writes Nick Powell.
The strategic ambition to make PMI a smoke-free company goes back to 2008, when the company recognised that it had both a duty and an ability to help smokers quit. Products that satisfy smokers’ craving for nicotine but eliminate the smoke that causes most cigarette-related diseases are by far the most effective way of addressing the public health challenge of tobacco.
A new range of products was launched by PMI in 2016, with a pledge to eventually exit cigarette production completely. It was of course revenue from cigarettes that financed the research and development of the new alternatives. Smokers would have simply switched to other brands of cigarettes if PMI had stopped their production immediately.
The approach was to recognise the health impact of cigarettes and that, as with many social problems, business has an essential role as part of the solution. It was not a charitable act but rather a case of a company recognising its obligations to all its stakeholders, .
In fact, it’s an ethos that extends to the impact of how the company produces its products as well as the impact of what it produces. 30% of executives’ compensation is determined by PMI’s sustainability performance.
At a presentation in Paris of its integrated report on its performance last year, Miguel Coleta, PMI’s Global Director Sustainability, pointed out that it’s an EU requirement for a company to assess its impact on society.
In Europe that has meant measures ranging from end-of-life take-back programmes for smoke-free products, and100% eco-design certification to positive steps to increase the number of women in senior roles to more than a third of the total.
Globally, there’s an emphasis on improving the quality-of-life of people in the supply chain. There have been 10human rights impact assessments carried out since 2018, with findings addressed. PMI requires zero use of child labour by its contracted tobacco farmers -and that 100% of the farmers receive a living income.
Reducing carbon emissions to zero is also a priority, as is reducing water consumption by tobacco farms. 100% of tobacco purchased carries no risk of deforestation of managed natural woodland and no conversion of natural ecosystems.
However, Miguel Coleta was clear that PMI is in no doubt that the company’s biggest externality is the health impact of its products, which is increasingly positive.
Tommaso Di Giovanni, PMI’s Vice-President International Communications, has been with the company for more than 20 years and involved in its transformation from the beginning. He told me that with its target of cigarettes becoming the source of less than half its revenue by next year, “we are even looking beyond 2025 already, into 2030, because we’re getting there fast.
“We see that we are advancing according to our plan, so we have decided to move the goalposts so that by 2030 we want to have two-thirds of our revenues, not 50% but two-thirds of our revenues, coming from smoke-free products. And we want at least 60 markets in which revenues from those products represent at least 50%”.
Massive investment in production development and marketing has been crucial, he explained. “For us the biggest and pioneering investment since the beginning has been Iqos, our heated tobacco product. We recently have launched the latest iteration, the best ever, IqosIluma, with new technology that allows the heating from the outside the tobacco stick, that we name Terea, rather than from the inside. The product’s new design, taking onboard consumers’ inputs improves overall consumer experience, which we believe is paramount to prevent heated tobacco users from going back to smoking.
“With Iqos, we’re already at the point where 28 million smokers have adopted it and 73% of them have abandoned cigarettes, so progress is great. But recently we have added another two smoke-free products to our portfolio, when we acquired Swedish Match.
“We already had e-cigarettes and now we have snus and pouches. Pouches, particularly with a leading product called Zyn, are doing extremely well in the US. Zynrepresents 60% of the nicotine market, the pouches market, in the US and Swedish Match 60% of that market globally.
Tommaso Di Giovanni stressed the importance at aiming the products squarely at cigarette smokers to enable them to quit and not as a way of introducing young people to nicotine. He pointed to the findings of the American public health agency, the Centers for Disease Control and Prevention.
“One thing that really encourages us as well is seeing the latest data issued by the CDC, in the US, indicating that the percentage of youth usage is as low as approximately 1.5%, because we don’t want youth to smoke, or to use tobacco at all”.
Although PMI’s expansion plans are primarily based around Iqos and Zyn, the company aims to have acomplete portfolio in the smoke-free arena. It’s important to offer consumers a diverse path away from cigarettes, so that smokers are able to opt for the one that works for them. I asked Tommaso Di Giovanni about vaping, which has not been a big area of investment for PMI.
“It is not as big an investment … but it is part of our agenda. We believe in e-cigarettes because e-cigarettes are a better alternative than cigarettes and there are consumers around the world who prefer e-cigarettes to other products.
“In the UK the vast majority of those who have abandoned cigarettes have done so thanks to e-cigarettes because there’s a preference in that country for e-cigarettes. So clearly, we offer e-cigarettes to those smokers if you want to convince them to quit cigarettes”.
It is of course a market that is affected by public health regulation. In some EU countries there has been an extreme view that all smoke-free alternatives should be banned, or have their regulatory framework equated to that of cigarettes. Other countries rely on high taxation to force smokers to quit cigarettes, although in practice such an approach is certain to create a thriving black market in illicit cigarettes.
Tommaso Di Giovanni does not foresee the European Commission going down that path. “I hope not because it would be a mistake, as those alternatives are all much better than cigarettes for the health of people who smoke.
“The European authorities have actually set a positive, pioneering precedent with the TPD2 directive … to regulate e-cigarettes and novel tobacco products, as they call them, even allowing member states to set an authorisation procedure.
“I hope they will build on the good basis of the 2014 directive and we can leverage the public health potential of the new products for public health among the approximately 100 million European adults who smoke across the member states. At the same time, we need to continue to ensure that non-smokers have limited access to those products because they shouldn’t use them”.
He firmly believes that PMI is winning the argument about how to move towards the ultimate objective of a world without cigarettes. “That group of people, who based on ideology, based on scepticism, doesn’t engage in dialogue is reducing over time. If I look back at the very beginning of our journey, before we embarked on our smoke-free ambitions, the vast majority of public health simply wouldn’t engage with us.
“Right now, I would say that the world is at least divided. There’s a growing number of public health advocates, public health experts, members of the decision-makingprocess, who actually do engage with us because they do see the value of what we are doing.
“This is a trend that is going in the right direction, simply by looking at the countries that have overturned old legislation and implemented new laws to encourage the use of those products. We started with basically one, the US, now I can probably name twenty countries that have changed their legislation in a progressive direction.
“It’s a trend that will continue for one simple reason, those alternatives are clearly better and ultimately reason needs to prevail”.