According to the latest news report by Bloomberg, shares of the cigarette giant plunged more than 18% after Philip Morris reported a poor performance in the first quarter. This is the worst drop the company has experienced since the company split with Altria in 2008. In fact, Philip Morris was the second worst performer on the S&P 500, dragging down with it the US tobacco company, Altria.
The company’s latest quarterly earnings report shows that the $4.5 billion that the cigarette maker had invested in four new products did not give the results hoped for. According to the company, these four new products have been designed to deliver less chemicals and higher profits.
One of these four new products, iQos uses a new technology that warms the tobacco to a temperature that is high enough to emit a vapor but not enough to cause the tobacco to combust. It is when the tobacco burns that chemicals that are harmful are released and that is what makes traditional cigarettes so injurious to health.
The iQos made it big in Japan after it was first launched 2014, taking over 16% of the country’s tobacco market share. This product is now available in more than 38 markets across the globe.
The challenge that Philip Morris is facing in Japan is that 40% of the country’s smokers are actually 50 years or older, and this demographic is not eager to change its allegiance to a new-fangled, hi-tech product like the “vape”. Thus, after a big entry, the company’s sales dropped in the first quarter and missed market target estimates.
The cigarette manufacturer reported its first quarter revenue of $6.9 billion – excluding excise taxes vis-à-vis the market target estimate of $7.03 billion.
With global smoking rates on the decline and more and more people moving away from cigarettes, Philip Morris is counting on these new products to keep its business alive. CNBC reported that while the company was expecting growth to slow down at some point after they had captured the early adopters and innovators, they just didn’t expect it to happen this early in the products’ life cycle.
Philip Morris’ CFO Martin King said that the company had analyzed trends of other new innovative product launches to understand their growth path. He said that with almost all those products, it was noticed that the sales growth would plateau after a surging adoption. This is because the product enters the next stage of its evolution, where new customer dynamics and categories enter the fray. King said that once this stage stabilizes, growth begins anew. He said that they believed that their new products were at this stage of their evolution and that growth would resume soon.
The question now becomes how long this plateau will last. Since the sales of the new smoking devices has slowed down, the sale of Heatsticks (the new cigarette replacement tobacco-sticks that are used in the device) will also tend to be lower. If this “plateau” continues, and sales – especially in Japan – don’t improve, then the company would have to revise its guidance from 60 billion heated tobacco unit sales to between 55 billion and 60 billion units.
According to Wells Fargo & Co analyst Bonnie Herzog, things aren’t all bad news for Philip Morris. While sales might not be growing at the expected rates, iQos sales are growing. Additionally, the tobacco giant still has another 3 new products that can prove to be more attractive to baby boomers. This would mean the chance for greater global expansion with the new products.