Philip Morris Targets Aging Japan Smokers With Cultural Spin

(Bloomberg) -- Philip Morris International Inc. is trying on a new strategy to appeal to more conservative smokers in Japan who aren’t willingly exchanging their cigarettes for high-tech gadgets.

Even though the country is the largest and most prominent market for its flagship reduced-risk product -- iQos -- sales there are not growing as quickly as the company had forecast. The reasons behind the deceleration: increased competition and difficulty breaking into an older, more rural demographic, according to Chief Executive Officer Andre Calantzopoulos.

“You always have a phase where you have to convince the more conservative people: the people who live on salaries, have lower incomes, are in rural areas, in different communities,” he said in a telephone interview. “Every product category is facing exactly the same problem everywhere in the world at different places and in Japan in particular.”

More than 5.4 million Japanese consumers were using iQos as of March, and investors see it as a test case for how it could expand across the globe. The problem is, Japan isn’t as easy a market for the product as it used to be. The tobacco giant’s stock fell the most in a decade after first-quarter results showed the slowing iQos growth.

Two-Part Plan

So Philip Morris is taking action. Step one: introduce a lower-price offering. Step two: Revamp marketing to attract an older, more rural audience that’s been more immune to word-of-mouth advertising. One way to do that is to appeal to a cultural sense of community, he said.

“We need to elevate a little bit our communication to give them an incentive like, ‘Let’s make Japan smoke-free,’” Calantzopoulos said. “Because for them, that counts more than just the individual, ‘It’s good for me.’”

Proving that iQos can appeal to that older demographic is important for Calantzopoulos to achieve a “smoke-free future.” He has said that he sees a time when all 1 billion of the world’s smokers have switched to higher-tech products. Philip Morris has spent more than $4.5 billion developing iQos and three other reduced-risk platforms.

Heating Competition

IQos, which holds the majority of the heated-tobacco market share, is also up against more competition. British American Tobacco Plc released its Glo product nationwide in Japan last year. The company has since struggled with severe capacity constraints.

Japan Tobacco Inc., the former government monopoly that controls over 60 percent of the cigarette market in the country, has been rolling out its own Ploom Tech product, which vaporizes liquid to pass through tobacco capsules to deliver nicotine. Although availability has been beset with delays, Ploom Tech will begin nationwide sales in June.

The Japanese company is focused on offering its Ploom Tech as an alternative choice for smokers, and is not targeting a specific demographic for sales, a Japan Tobacco spokeswoman said. It also plans on introducing a heated product similar to iQos as early as the end of the year.

Shares of Philip Morris have declined 23 percent this year, while Japan Tobacco stock has dropped 16 percent.

“Clearly consumers having a choice, they try different products,” Calantzopoulos said. “This is just a period of churn in the category because all these products are very new and until consumers settle and know what they want to do, we will have a little bit of churn.”

--With assistance from Lisa Du

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, Lisa Wolfson

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