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May/June, 2010

Philip Morris International
By Evan Dashevsky

Philip Morris International (PMI) remains one of the world’s most profitable tobacco companies. Tobacco International recently had a conversation with Peter Nixon, PMI’s Vice President of Communications on how the company plans to maintain its position in today’s tumultuous industry.

Tobacco International: Currently, what are PMI’s strongest geographic markets? Do you see the market place shifting away or towards any specific geographic regions?

Peter Nixon: Overall, PMI’s volume increased by 0.7% during the first quarter of 2010. We have seen growth in Asia and Latin America & Canada, primarily driven by Indonesia, double-digit growth in Korea as well as in Canada, Colombia, and Mexico.

In 2010, volume in emerging Asian markets is expected to continue to grow. In Western European markets, industry volume is generally expected to follow historic trends and declines in Central Europe are expected to be similar in magnitude to those in Western Europe.

What specific effects has the economic global downturn had on PMI’s business over the past year?

Compared to most consumer categories, cigarettes have proven to be relatively resilient to the economic downturn. Nevertheless, our industry is not immune, particularly to sharp increases in unemployment and consequent decreases in consumer spending.

Will tobacco’s oft-described “recession-resistance” still hold true in a marketplace with higher taxes, regulations, and smoking bans?

It is difficult to generalize as much depends on the market specifics, including purchasing power and also the incidence of illicit trade in the given market. For example, if tax and price levels are very high in a given market where consumers have less spending power, then smokers may turn to illicit trade.

Aside from cigarettes, what are your strongest tobacco products? Do you see any specific trends for OTP arising in the near or long terms?

In 2009, our total shipment volume of other tobacco products (OTP) grew 33.2%, primarily driven by the acquisition of Swedish Match South Africa (Proprietary) Limited, the market leader in the South African pipe tobacco and snuff categories. Excluding acquisitions, shipment volume of other tobacco products was down 8.1%, primarily due to lower cigarillo volumes in Germany, where the segment has declined, and the impact in Poland of the excise tax alignment of pipe tobacco to roll-your-own products in the first quarter of 2009.

Do you feel that snus may be legalized within the EU in the near future? If so, does PMI have plans to pursue that market?

It is of course impossible to speculate if the EU snus ban will be lifted. However, we think the ban should be overturned. Today there are many different tobacco products sold freely across the EU including cigarettes, cigars, RYO and chewing tobacco. It is difficult to see the logic behind banning the sale of a product, which is less harmful when compared to most other products available today, instead of giving smokers the option of buying snus instead.

Australia recently announced radical packaging changes for cigarettes. This has been a trend that has taken place around the world. How have these packaging regulations around the world affected your business? What other packaging regulations do you see taking place in the near future?

Although plain packaging has been discussed in some countries, I don’t think it can be called a trend. The recent Australian proposal stands in isolation since every other country that has considered plain packaging has rejected it due to a lack of evidence that it would have any impact on smoking rates and the genuine concerns about a likely increase in illicit trade and infringement of intellectual property rights.

We hope that any future packaging regulation will focus on continuing to provide clear and accurate information to consumers about the health risks of smoking while allowing manufacturers enough space to display their trademarks.

Specifically PMI has taken on “product display bans.” Have you been successful in taking on these display bans? What specific implications will these have for your business and for the industry?

We believe there are compelling arguments against tobacco product display bans and we are hopeful that courts will rule in our favor.

Product display bans have implications for tobacco manufacturers as such bans severely restrict competition when adult smokers can no longer see the available product range and severe implications for retailers who have to undertake costly store transformations to comply with regulations.

Furthermore, countries that have implemented display bans such as Ireland and Canada are experiencing extremely high levels of illegal tobacco products.

What were the most worrisome tobacco regulations or taxes that affected your business in the past year? What regulations or taxes do you see on the horizon?

Display bans and the recent proposal in Australia to introduce plain packaging are examples of extreme regulations proposals unproven and unlikely to reduce smoking rates. In terms of taxation we have seen extreme increases in Ukraine, Turkey, Romania, and Greece. The consequences, which are often overlooked or ignored to the detriment of public health, is that these measures are just fueling the illegal cigarette market - a market that will not comply with regulations or cooperate with regulators. For 2010 we believe that most of the major tax increases are behind us apart from Japan which will increase tax by 70 yen as of October 1st.

Do you feel that tobacco manufacturers should coordinate to take on increased regulations and taxes, or has/should PMI work/ed within the confines of the market to compete against other manufacturers?

We fully support effective regulation of tobacco products to reduce the harm caused by tobacco use. We are also not opposed to reasonable taxation of tobacco products that is not so excessive that it encourages consumers to turn to illicit trade. We are committed to working with governments and other stakeholders, including other tobacco manufacturers to achieve an effective and comprehensive regulatory framework.

PMI acquired several properties in the past year, such as Protabaco and Swedish Match South Africa. Why did you make the decision to acquire these companies? How do you see them fitting into your business model? Do you expect any major acquisitions in the next year?

We have taken a number of actions within business development in 2009. The acquisition of Swedish Match South Africa in July 2009 represents a strategic fit for our business in that country. The merging of the two businesses provides us with the talent, infrastructure, and expertise to further build and grow our brand portfolio in that market. The agreement announced in July to purchase Protabaco will allow us to continue building our business in Colombia and an opportunity to further develop Protabaco’s brand portfolio. The acquisition, subject to the approval of the relevant government authority, reflects the confidence we have in the future of Colombia, its economy and the tobacco industry. We also announced in February 2010 a new business transaction in the Philippines that unites Philip Morris Manufacturing Inc. with the Fortune Tobacco Corporation into a new company called PMFTC. The newly founded company is the leading tobacco company in the Philippines.

Anything else you would like to add?

I would like to take the opportunity to talk about PMI’s contributions programs. In addition to meeting our business performance objectives, we are also very serious about our commitment to helping the communities in which we operate. We support charitable giving programs that improve living conditions in places our employees live and work, as well as in the farming communities where we source our tobacco. We have identified five areas of giving that we focus on: hunger and extreme poverty, education, environmental sustainability and living conditions in rural communities, domestic violence, and disaster relief. These areas parallel many of the UN Millennium Development Goals, and we have chosen to focus on them because they are among the most critical issues affecting the countries where we operate. We select and manage our programs ourselves, working directly with local NGOs. The process starts with the recommendations of our employees, who we feel are best placed to recognize their communities’ needs. Of course, it would be easier to write a check and let an international charity take care of the details. We prefer to know where the money is going, and to follow the results on the ground.

Today, PMI invests in the range of $25 mn per year in cash to charitable causes all over the planet: delivering food baskets to impoverished World War II veterans in Krasnodar, Russia, providing schoolchildren in the Philippines with access to a high-quality educational TV channel, helping victims of domestic violence find jobs in Switzerland, supporting relief centers for Australian families displaced by the 2009 Victoria bushfires, and teaching sustainable agriculture to farmers, to give just a few examples.

Tobacco International - May/June, 2010

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