Access to smoke-free products

Perception and behavior assessment studies help us evaluate risk perceptions of smoke-free products among various adult consumer groups. The results of our studies to date show that the adult consumer groups tested have a very good understanding that IQOS presents less risk than cigarettes but is not risk-free and that it is riskier than smoking cessation. Additionally, when assessed in the context of specific communication materials, more than 90 percent of participants in consumer studies understood that IQOS is not intended for nonsmokers, and more than 80 percent comprehended that quitting the use of all tobacco is the best way to reduce the risk of tobacco-related disease. 

We do not conduct studies on individuals under the legal age to purchase tobacco. We have conducted studies of our heat-not-burn product IQOS among young adult never smokers (age 18-25) and these tests indicate a very low or no intention to use or try IQOS among these young adult never smokers. However, our FDA MRTP exposure modification order required that we submit a post-market surveillance and studies plan, which had to be approved by the Agency. As part of that plan, our commercialization partner in the United States, Altria, will conduct a secondary analysis of Altria’s existing Underage Tobacco Use Survey (UTUS), which is nationally representative survey of U.S. household-dwelling individuals 13-20 years of age. IQOS-specific questions were added to the UTUS and will be used to estimate awareness and use of IQOS among underage individuals. This information is part of the FDA’s ongoing post-market surveillance efforts related to IQOS, which were deemed necessary to grant the MRTP exposure modification order.

Our premarket and post-market studies guide all our consumer-facing activities and communication, including the internal assessment of consumer messages. The opinions expressed about smoke-free products by public health organizations, regulatory bodies, and NGOs have a big impact on individual smokers’ decisions, so it is critical that these organizations avoid contributing to category confusion or misinformation. To illustrate existing misconceptions: A study found that “the proportion of U.S. adults who perceived e-cigarettes as less harmful [than cigarettes] declined from 39.4 percent in 2012 to 33.9 percent in 2017” and that “during the same period, the proportion of adults who perceived e-cigarettes as equally harmful as cigarettes more than tripled from 11.5 percent in 2012 to 36.4 percent in 2017.” Another study also found that “the proportion of U.S. adults who correctly perceived e-cigarettes as less harmful than cigarettes decreased each year from 41.1 percent in 2013-2014, 31.5 percent in 2014-2015, and 25.3 percent in 2015-2016.” It is of paramount importance that science and facts prevail for the 1.1 billion smokers worldwide.

In addition to the IQOS stores, there are premium resellers—select stores in which we provide information about our smoke-free products to adult smokers, offering them an opportunity to have a session with trained staff to learn about the product, its benefits, and how to use it within the environment they regularly visit to purchase tobacco products. Additionally, these locations offer IQOS users access to related services such as device cleaning and replacement (in the case of defects). These sites also permit current users to experience and access new device ranges and accessories with which to personalize their IQOS products.

Digital capabilities help us become more efficient in serving consumers. In 2020, we shifted our focus in this direction as COVID-19-related lockdown measures inhibited other means of connecting with consumers. In countries where this is permitted, adult smokers who express an interest in IQOS are offered an online session with a remote IQOS coach. Consumers can also benefit from additional services via other digital touchpoints. With the consumer’s consent, we use customer relationship management (CRM) to offer tailored communication and promotions to consumers, according to their specific interests and the stage they have reached in their conversion journey. CRM also allows us to process, analyze, and respond swiftly to consumer feedback collected across all touchpoints.

As of December 31, 2020, IQOS heated tobacco units were available in over 30 taste variants to cater to a variety of tastes and maximize the probability that a smoker will switch. In 2020, we launched a flavor adviser tool, both at retail and online, to guide consumers in selecting the variant that best matches their preferences. Flavors are essential to encourage adult smokers to switch, and their use should be preserved; however, certain flavors, such as candy- or dessert-like, could be particularly appealing to youth and should not be used. In all circumstances, heated tobacco units, as any tobacco or nicotine products, should be regulated, including the way they are marketed to ensure they do not particularly appeal to youth.

At PMI, we have implemented a central governance system, under which new flavored heated tobacco products and e-vapor products are assessed, and by which those product variants are subject to a specific assessment framework that requires data and checkpoints in the process to demonstrate premarket that a new flavored product proposition is not particularly appealing to minors or other unintended audiences. As part of the assessment, we review literature and market data and we also conduct behavior research assessment by “online” consumer testing on a case-by-case basis. Only once this review and validation process is done, new flavored heated tobacco or e-vapor products are commercialized. To confirm premarket findings, we also conduct post-market studies to verify that flavored tobacco and nicotine products commercialized by PMI are not particularly appealing to unintended audiences, including youth.

From concept design to commercialization at scale, our efforts to continuously enhance the experience of our smoke-free products are guided by consumer insights. We regularly incorporate product updates and new features designed to address consumer pain points to help adult smokers switch from cigarettes more seamlessly. In recent years, we have broadened our portfolio of IQOS heat-not-burn devices, and we are currently commercializing four models. In 2020, we focused on finalizing a major product update: A new heating technology that addresses consumer pain points related to the need for regular device cleaning and the risk of breaking the heating blade. We will launch this new technology in 2021.

Production capacity

Expanding the sale of smoke-free products requires significant investment in our production capacity. In particular, the manufacturing of smoke-free product consumables requires that we build new factories or convert existing cigarette factories and increase our capital expenditure—for example, to purchase new machinery. In 2020, eight of our 39 factories were dedicated—either partially or fully—to the manufacture of our smoke-free product consumables. 

Market launches 

In 2020, we launched IQOS in 12 additional markets, including Lebanon and the Philippines. This brought the total number of markets in which the product is commercialized to 64. Of these markets, 52 percent are in non-OECD countries. Several countries, including Australia, India, and Singapore, do not permit the sale of heated tobacco products. We nonetheless continue to engage with stakeholders to advocate for regulations that would allow under a well-defined framework the sale of IQOS and other scientifically substantiated smoke-free products in these countries. We do not believe that banning such products is a rational policy, especially considering that these countries permit the sale of the most harmful tobacco product: cigarettes.

In addition to external factors, internal constraints affect the rate at which we can roll out smoke-free products globally. PMI is present in over 175 markets, but the size and capacity of our local organizations vary. Not every market has the resources and capacity to launch smoke-free products immediately. We evaluate the commercial viability of launching smoke-free products in each market to decide how to prioritize internal resources internationally.

Distribution channels 

By the end of 2020, there were 27 markets in which our heat-not-burn product, IQOS, and its consumables were available for purchase nationwide in physical channels or e-commerce, where allowed. In the other markets in which we have launched IQOS, the product initially is offered in key cities, allowing us to gain experience and build capacity before we proceed with a nationwide rollout. 

Expanding the geographic availability of our smoke-free products requires that we leverage a variety of retail channels. In 2015, we started opening and running our own retail stores in markets where IQOS was present. These consumer touchpoints allow us to communicate and engage directly with adult smokers. They enable adult smokers to see, touch, and test the product where allowed. We rely on both stationary and temporary sales areas, with established flagship stores and pop-ups. As of the end of 2020, we had 259 permanent IQOS boutiques and stores worldwide, mainly in key cities and areas of high consumer traffic. Where legally permitted, we also run e-commerce sites for IQOS, allowing adult consumers, where allowed, to purchase the product online and have it delivered to their homes (51 markets in 2020).

The indirect retail environment consists of our traditional trade partners (e.g., tobacco retailers) and key account chains (e.g., convenience stores, petrol/gas stations). Based on the product portfolio handled and the services provided to consumers, we classify the general trade and key accounts universe into three groups: Consumable sellers, service points, and premium resellers. At consumable sellers, the main focus is to provide IQOS users with a convenient option for everyday purchases of the heated tobacco units. At service points, consumers can also access services related to IQOS, such as device replacement in case of defect. Premium resellers offer consumers the full spectrum of services, including device cleaning and learning sessions, along with a full brand experience.

At the end of 2020, there were over 2,200 exclusive IQOS retail touchpoints and 3,800 indirect retail brand experience touchpoints worldwide, and around 749,000 points of sale at which IQOS heated tobacco units were sold.

The second aspect of affordability is the price of the consumable. Currently, the production costs of the heated tobacco units used with IQOS devices are, on average, somewhat higher than those of cigarettes. Heated tobacco units undergo a special manufacturing process that is vastly different from the manufacturing of cigarettes, and the products require an increased level of quality assurance in factories. We also incur other costs that are not applicable to cigarettes, such as the costs of scientifically substantiating the reduced-risk profile of these products.

Importantly, IQOS has much higher commercialization costs compared with cigarettes due to the need to properly introduce consumers to this new product and explain its functionalities. These costs include our customer care call centers and follow-up to ensure users do not fall back into smoking during their conversion journey. Beyond production and commercialization costs, a key factor driving tobacco product retail prices is the excise tax. Excise taxes on cigarettes are generally higher than those on smoke-free products. Within the smoke-free category, electronic cigarettes tend to be taxed at a lower rate than heat-not-burn tobacco products.

Differential taxation is an appropriate fiscal policy considering the fundamentally different risk profiles of combusted tobacco products and non-combusted alternatives.

This approach plays an important role in incentivizing adult smokers, who would otherwise continue smoking, to switch away from cigarettes and other combusted tobacco products, and encourages manufacturers to channel their future investments and R&D towards better alternatives.

The combined effect of cost and tax differences is such that the price to the consumer of IQOS heated tobacco units is typically below that of premium cigarettes and is sometimes, as in New Zealand and the U.K., at the low end of cigarette pricing. We estimate that heated tobacco units are priced the same as or lower than a smoker’s current cigarette brand for 58.6 percent of smokers in the geographies where we currently commercialize IQOS.⁴

To help address potential affordability barriers, we are also expanding our heated tobacco unit consumables range by offering brands at multiple price points in certain markets. The most notable example is in Japan, where we introduced a mainstream-priced brand in 2019, and we view this as a necessary strategy for a broader range of markets over time. We have also leveraged our agreement with KT&G in this regard, by offering HTU brands at price points below our HEETS consumables in both Russia and Ukraine, as part of our strategy to grow the heated tobacco category by offering a wider range of product choices, including based on price.

Clearly, to achieve our vision of a smoke-free future, our smoke-free products must be affordable to all adult smokers within each market. The same reasoning applies across countries. Our efforts aim to reach all adult smokers in all countries, both in the OECD and outside the OECD. We are only at the beginning of commercializing a full-fledged portfolio of smoke-free products at a global scale and are actively seeking partnerships to accelerate a smoke-free future. In addition to our cooperation with Altria Group, Inc. on the commercialization of IQOS in the U.S., we secured an agreement with KT&G in January 2020 to commercialize its portfolio of smoke-free products outside its home country of South Korea. In 2020, we successfully commercialized KT&G’s heat-not-burn product, LIL SOLID, in Russia and Ukraine alongside our IQOS product, offering consumers a wider range of taste, price, and technology choices.