Philip Morris International, which sells Marlboro cigarettes outside the U.S., expects the pandemic to hit its business in several ways.
Photo: JOERG SARBACH/Associated PressThe Covid-19 crisis is speeding up certain structural shifts such as the move to online shopping. Conversely, it may delay how fast smokers make the switch from cigarettes to trendy electronic alternatives.
Philip Morris International withdrew its 2020 guidance Tuesday, sending its shares down 5% in early trading. The move may have surprised investors given early indications that the current consumer lockdowns aren’t hurting cigarette sales.
The seller of Marlboro cigarettes outside the U.S. expects the pandemic to hit its business in a number of ways. Travel restrictions will wipe out duty-free cigarette sales that generate 4% of its revenue. Plans by the Indonesian government to introduce a minimum price on cigarettes have been delayed due to the crisis, leaving unfavorable price gaps between the company’s brands and its competitors’ as the global economy takes a turn for the worse.
Finally, growth of the company’s heated-tobacco brand IQOS, which it has made a key plank in its pitch to investors, will slow. Although shipments of the product increased by 45.5% in the first quarter from the same period last year, Philip Morris International expects the number of new users to be 50% below earlier estimates for as long as stay-at-home rules are in place.
So-called next-generation products such as heated tobacco and vape pens are sold in different ways to traditional cigarettes. As consumers are less familiar with the products, they rely heavily on marketing to attract new users. Out-of-home advertising such as billboards are less effective with half the global population now sheltering in place, making it tough to convert smokers. And IQOS is sold through a network of branded retail stores, many of which are now closed.
Tobacco companies’ core business of selling old-fashioned cigarettes is less directly impacted, given that advertising them is already banned in most markets. Manufacturers have traditionally used their distribution muscle to put brands such as Marlboro in front of consumers at supermarkets, corner shops and gas stations, all of which remain open. So far, cigarette companies such as British American Tobacco and Imperial Brands have registered little change to their core businesses since the start of the year—though they are watching for signs that smokers will trade down to cheaper brands as unemployment rates spike.
The new trend is a setback for companies that have invested heavily in their smokeless portfolios. Philip Morris International has spent $7.2 billion on its noncombustible brands since 2008 and heated-tobacco products such as IQOS made up 10% of the company’s total shipments in the first quarter of the year. Swedish Match, which makes more than half its revenue from cigarette alternatives such as oral nicotine pouches and chewing tobacco and reports next week, may also be hit.
Both companies are prized by investors precisely for their high exposure to “healthier” tobacco products. Shares of Philip Morris International and Swedish Match trade at 13 and 20 times projected earnings, respectively, compared with eight times for British American Tobacco, which has a smaller smokeless business. At least in the short term, the pandemic may take some shine off those premiums.
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