Just a few months ago, Philip Morris International was quick to dismiss electronic cigarettes, claiming that they were low on taste and had questionable manufacturing standards. However, recent headlines show that Philip Morris is doing an about face in regards to e-cigarettes and now they plan to launch their own line of vaping gear next year. So what is the reason for this drastic change? It appears that it all boils down to the dollar sign.
Over the past week, Philip Morris International has been one of the worst performing stocks in the S&P 500. In fact, the company’s shares are down more than 7 percent. So in hopes of a rebound, they plan to enter the e-cig market after watching competitors like Lorillard, Altria, and Reynolds American find success in the vaping industry.
After the October earnings release, Philip Morris cut its guidance for 2013 blaming weakness in the market. The international demand for their products was weaker than competitors with a 5.7 percent drop in cigarette volume in the recent quarter. Competitor Reynolds American saw a smaller drop of 4.3 percent, while Altria and Lorillard reported gains.
Things continued to spiral downward when last week, Philip Morris projected profit growth would drop to 6-8 percent in 2014, a number well below the target of 10-12 percent. Even international sales are expected to drop 2-3 percent thanks to a notably weak market within the European Union. International sales are increasingly problematic for the company with Europe imposing stricter limitations on cigarettes and implementing new rules for larger warning labels.
So it seems that Philip Morris is turning to electronic cigarettes in a last ditch effort to get things back on track. Competitor Lorillard experienced great success after acquiring Blu electronic cigarettes so Philip Morris is inevitably hoping to follow the same path.
At this point, electronic cigarettes are not limited by the same stringent regulations and taxation that is strangling the tobacco industry. Plus these products appeal to health-conscious individuals that have awakened to the dangers of tobacco and tar in regular cigarettes.
Still there is no guarantee that e-cigs will remain an open market with no regulations and exemption from tobacco taxes. If the revenue-hungry government decides to capitalize on this growing trend, new taxes could hit electronic cigarettes driving up costs and potentially impacting sales. The FDA has faced nearly constant pressure to regular e-cigarettes as tobacco products and if this happened, it could counteract Philip Morris’ plan before they ever get an e-cig prepared to launch.
Despite the looming threats and the uphill battle ahead, Philip Morris has made a positive step by working towards a line of electronic cigarettes. The Marlboro-producing empire certainly has a loyal fan base and if they can potentially harness the same quality in an electronic cigarette, the result could be a major boom in sales in the future.
Do you think Philip Morris will be able to get back on track with sales after launching an electronic cigarette line?