Hubris before a fall
Sunday, April 22, 2018 at 20:03
Simon Clark

Philip Morris has been in the news again.

A Daily Telegraph investigation found Philip Morris, the maker of Marlboro cigarettes, is supplying newsagents across Britain with window posters promoting new iQOS tobacco heaters ...

The iQOS posters are in breach of a strict long-standing ban on advertising tobacco and tobacco-related products, the Department for Health and the National Trading Standards Institute have confirmed.

Leaving aside the legality or otherwise of the posters (which make no health claims and are as plain as plain could be), what's interesting is the reaction of public health minister Steve Brine and Deborah Arnott, chief executive of ASH.

Brine told the paper:

“It’s completely unacceptable for organisations to be promoting tobacco products – smoking kills, and that’s why we have clear, strict rules in place protecting people from its harmful effects."

Arnott said:

"The legislation is very clear that advertising which has the effect of promoting tobacco products is illegal. That includes iQOS, just as it includes pipes used for smoking tobacco. It’s a barefaced cheek for Philip Morris to argue otherwise.”

Their response was predictable and rather pathetic. For example, although the Committee on Toxicity said in December that heat-not-burn tobacco products were not risk free, it was also reported that:

The advisory panel to the government found that people using heat-not-burn products are exposed to between 50% to 90% fewer "harmful and potentially harmful" compounds compared with conventional cigarettes.

On a scale of risk, heated tobacco clearly lies somewhere between combustible tobacco (high risk) and e-cigarettes (low risk) which makes it, by definition, a reduced risk product.

But Brine and Arnott have no time for nuance. As far as they’re concerned all tobacco products should be treated the same.

A second and far more interesting PMI-related story concerned the company’s latest sales figures. According to Bloomberg:

Shares in the cigarette giant plunged as much as 18 percent after its latest earnings report showed that $4.5 billion spent on four new products are failing to win over new customers. Sales growth of the iQos, a device that heats a tobacco plug without setting it on fire, has been slowing after initial success in Japan.

In a follow-up report published on Friday, Bloomberg added:

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. Shares tumbled 15.6 percent.

“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.

In truth it's not just Grandpa and Grandma who are digging their heels in.

While the concept of heated tobacco is undoubtedly appealing (more so, I think, than e-cigarettes for many smokers), the reality – which I can’t repeat often enough – is that millions of people enjoy smoking and don't want to quit, nor do they want to switch to alternative nicotine products.

How hard is that to understand? Sadly it's a truth many people, and PMI, seem reluctant to acknowledge. Indicative of a rather hubristic corporate culture, the CFO also declared:

“We don't buy the idea that somehow there's a big chunk of consumers that want to continue using combustible cigarettes when offered extremely high-quality, satisfying reduced-risk products. It just doesn't make sense.”

Goodness. In the words of one analyst who emailed me privately, “No arrogance towards the customers there then!”

PMI’s attitude is nothing new. This after all is a company that hopes to stop selling cigarettes in the UK by 2030 following which the goal is a 'smoke free' world.

It’s unlikely but you do wonder whether there may be a tiny connection with the sales figures published last week and PMI consistently belittling its core product and, by association, its customers.

After all, if you declare the future to be ‘smoke-free’ don’t be surprised if many smokers take umbrage and take their business elsewhere. And that includes alternative products. (Other devices are available.)

In recent months we’ve witnessed a very vocal backlash from consumers against drinks’ manufacturers that have slashed sugar content and abandoned popular recipes in favour of 'healthier' alternatives.

It’s too soon to know whether that will be reflected by a decline in sales, but why antagonise your most loyal customers unnecessarily?

In comparison Coca-Cola has played an absolute blinder. The company introduced a range of sugar free products over many years without ever threatening to take the original recipe off the shelves.

Nor, to the best of my knowledge, has the company declared its support for a 'sugar free' world or pledged a billion dollars to a foundation of the same name.

Far from it. Here’s a tweet Coca-Cola posted last week:

Our Classic Coca-Cola recipe has stood the test of time for 130 years, and we’re not changing now. Find out more here - https://t.co/AcrcJv3jim pic.twitter.com/n1ltBsTt0I

— Coca-Cola GB (@CocaCola_GB) April 17, 2018

Tobacco and carbinated drinks are two very different products with different risks and some might say it’s unfair to bracket them together.

The point is, Coca-Cola is treating its customers like adults, defending their right to choose what they buy and consume.

The same cannot be said of some of Coca-Cola's competitors nor indeed PMI whose high-handed attitude is, at best, patronising to those who enjoy smoking. At worst it's downright offensive.

That said, I don’t think PMI’s sales figures are as bad as last week’s headlines suggest. Allowing for the fact that it was always going to be difficult to maintain the early success of iQOS in Japan (where e-cigarettes are banned) sales are actually holding up reasonably well.

As Mark Littlewood, director general of the Institute of Economic Affairs, commented at a recent PMI-supported event, the initial popularity of vaping was based on attracting "low-hanging fruit" - smokers who, generally speaking, wanted to cut down or quit and were therefore open to alternative products that gave them as much pleasure as smoking.

That probably explains why 2.9 million smokers in the UK switched fairly quickly to e-cigarettes, 1.6 million of them permanently, and why the rate of growth in Britain appears to have stalled. (Not declined, note, just stalled.)

Rapid growth followed by a levelling off is far from unusual following the launch of an innovative new product so it's far too early to write off products like e-cigarettes and heated tobacco that are still in their infancy and are developing all the time.

I do however think it's a mistake to blithely assume that most smokers, given the option, will switch to a safer non-combustible product.

As readers know, there is clear evidence that a large number of people smoke because they enjoy it. They know the risks but unless they experience a serious health scare (which isn't as common as many would suggest) the pleasure of smoking outweighs the potential harm.

We know too that a significant number of confirmed smokers have tried e-cigarettes but for various reasons vaping doesn't appeal to them. Not yet anyway, and possibly never.

PMI is also taking a risk if it thinks that lobbying for a ‘smoke-free’ world will have no consequences commercially. Did they even consider the reaction of consumers?

In the last few weeks a major retailer of e-liquids in the UK has posted a number of tweets using the hashtag ‘WarOnCigarettes’. One read:

There are over 2.9 million adults using e-cigarettes in Great Britain alone*, join us and take the first steps to becoming tobacco free.#WarOnCigarettes #Vapril

* Reference from https://t.co/D1czkMFeUf - https://t.co/fphKHVv1eq pic.twitter.com/o4GNiqqBI8

— Vaporized (@vaporizeduk) April 5, 2018

The response included these replies:

“No I won't be joining you, because you've just declared war on me and the tobacco I enjoy. Bring it on.”

“Are you now? Well I won't ever be buying anything off you then. I still enjoy the occasional cigarette and I'm still furious about the smoking ban. The Anti tobacco Industry wants rid of you, too, so don't bother getting pally with it.”

“There’s already more than enough arseholes bashing smokers on a daily basis without this kind of nonsense. Let people decide what they want, it’s all about choice.”

Personally I see very little difference between Vaporized’s ‘war on cigarettes’ (which you can also read as a ‘war on smokers’) and PMI targeting a ‘smoke-free world’.

Compare it with the far less strident approach adopted by other tobacco companies.

British American Tobacco for example talks not of ending the production of cigarettes but of "extending choice" in the form on e-cigarettes, heated tobacco and other devices.

That, it seems to me, is a far better strategy because choice is the key to consumer freedom and there is far less risk of alienating your core customers.

PMI’s anti-smoking grandstanding may have generated headlines throughout the world but I do wonder what impact it will have on the company’s long-term relationship with its customers.

By remaining loyal to those who prefer the company’s ‘classic’ recipe, Coca-Cola sent out a powerful message to its customers. PMI, in contrast, has demonstrated no such commitment.

I am reminded of Gerald Ratner who famously undermined his jewellery chain by joking that one of its products was “total crap” and another “probably wouldn’t last as long” as an M&S prawn sandwich.

After his speech customers rebelled and the value of the Ratner group fell by around £500 million.

Again, two very different products and situations, but the lesson is this. No good can come of undermining your core product because, in the process, you are also passing judgement on the very consumers you hope will keep you in business in the years to come.

To be clear (and I've written about this numerous times), I'm a keen advocate of heat-not-burn products because they contain an important ingredient that e-cigarettes lack - tobacco.

HnB devices therefore strike me as a far more natural alternative to cigarettes. I’m convinced though that even heated tobacco will meet resistance if smokers feel pressured to switch.

Individual choice, as Coca-Cola understands, is paramount. Other companies take note.

Article originally appeared on Simon Clark (http://taking-liberties.squarespace.com/).
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