Philip Morris's Next Challenge: Get Grandpa Stoked to Vape

(Bloomberg) -- After its stock fell the most in a decade on Thursday, Philip Morris International Inc.’s challenge is to convince baby boomers to switch from cigarette smoking to a distinctly millennial activity -- fiddling with high-tech, smokeless gadgets.

The tobacco giant spent $4.5 billion developing devices it says deliver fewer chemicals and potentially more profits. One of them, called the iQos, is big in Japan, with a 16 percent share of the country’s tobacco market. But 40 percent of Japanese adult smokers are age 50 and older, and they’ve been more leisurely about changing habits. Sales growth slowed in the first quarter and company revenue fell shy of estimates. The shares tumbled 16 percent on Thursday and were down less than 1 percent Friday to as low as $84.85.

“Now we’re obviously going to adjust our plans,” Chief Financial Officer Martin King said on a Wednesday call with analysts. “We’re now reaching different socioeconomic strata with more conservative adult smokers who may have slightly slower patterns of adoption.”

Translation: It won’t be easy to wean Grandpa and Grandma from a habit they’ve had for decades in favor of a device that heats a tobacco plug without setting it on fire.

New Products

Tobacco companies have all turned to new, mostly millennial-friendly products for growth as health concerns drive consumers away. IQos is one of four “platforms” that Philip Morris has developed to modify the risk of ingesting nicotine. The company has been seen as a leader in the race to find better-for-you alternatives. It has been released iQos in 38 markets.

Chief Executive Officer Andre Calantzopoulos said he sees a future where all 1 billion smokers in the world have switched to those higher-tech products.

The dependence on gadgets means slowing growth, which is a frightening prospect for Big Tobacco. The over-50 crowd is a big category for the industry. In the U.S., 18 percent of adults between the ages of 45 and 64 and 8.8 percent of adults 65 and older smoked as of 2016, according to data from the U.S. Centers for Disease Control and Prevention. If iQos can’t appeal to those groups, that could mean trouble for Philip Morris’s U.S.-based sister, Altria Group Inc. Shares of the Richmond, Virginia-based company fell 6 percent on Thursday and as much as 1 percent on Friday to $57.18.

Altria plans to sell iQos in the U.S. under a licensing agreement, if the device receives approval from the Food and Drug Administration. The company announces quarterly earnings April 26.

Still, it’s not all bad news for Philip Morris, according to Wells Fargo & Co. analyst Bonnie Herzog. IQos sales are still growing and the company has three more “platforms” that may prove more appealing to baby boomers. At the very least, there’s more opportunity for geographic expansion, she said.

“While all concerns have some validity, our long-term growth outlook for iQos doesn’t change dramatically,” Herzog said in a research note.

--With assistance from Brandon Kochkodin

To contact the reporter on this story: Jennifer Kaplan in Los Angeles at jkaplan84@bloomberg.net.

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Bob Ivry, Anne Reifenberg

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