IQOS USA: Commercial Strategy

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Note: This is a live write-up. More details and explanations are added on a regular basis.

Philip Morris International (PMI) has come a long way in building up the IQOS franchise since the first-ever IQOS device was sold at a store next to the Nagoya main train station in Japan in the early days of November 2014. IQOS is now available in more than 70 countries and the number of IQOS users is approaching to 30 million threshold. However, most notably, IQOS has been absent from the US market. For further details: IQOS USA: History

PMI is getting ready to test market IQOS 3 in a few US cities this year. Although the USA is a large & complicated market, PMI has become increasingly proficient in IQOS commercialization over the past decade and developed an effective commercial toolbox (ranging from omni-channel distribution to loyalty/advocacy-based pricing & promotion schemes, from buzz / word-of-mouth generation to targeted external engagements) – which is tested & validated all across the world. PMI will obviously take benefit of its hard-built IQOS experience and, thereby, IQOS US commercialization is unlikely to be remarkably different than what we have observed elsewhere – barring a few idiosyncrasies (such as, the US FDA oversight).

However, IQOS is undeniably late to the market. Assuming that IQOS will be able to reach nationwide distribution only in 2027, American consumers will meet IQOS almost two decades after they met vapes and almost a decade after nicotine pouches. The early adopters and, even, the early mass / majority (in terms of social strata) are already been captured by these two alternative nicotine products. The obvious question is: which consumers will IQOS target to build itself a base in the complex US market? We expect PMI to target two specific consumer profiles:

(1) E-cigarette rejectors: This is a very large segment. 40% of the smokers in the USA have tried, but ultimately rejected e-cigarettes. This group definitely has proven openness to innovation & change; that is to say, high interest in RRPs (i.e. not a claim-based, but a behavioral proof of desire to “move forward”). Presumably, taste & flavor satisfaction and negative public sentiment (in the post-EVALI era) were the most important reasons for rejection. PMI will focus on “real tobacco taste” and the FDA-authorized reduced exposure claim (as the benefit of switching completely from cigarettes) to attract this segment. Altria’s initial IQOS commercialization in the USA (- which was presumably guided by PMI in terms of commercial strategy development) provides some cues for the approach: “Real Tobacco Enjoyment” and “The only [aerosol / inhalable] product in the USA that can make a reduced exposure claim”.

(2) Menthol smokers: Almost two out of five smokers prefer menthol cigarettes in the USA and the intense controversy around the menthol cigarette ban is keeping the idea of “need for change” alive. Moreover, switching to heated tobacco requires “acquisition of a new taste” and the acquisition process is – undeniably – easier for menthol smokers as the menthol flavor dominates the tobacco flavors in both combusted and heated cigarettes. Don’t be surprised to see a lot of point-of-sale fixtures and materials dressed up in “50 Shades of Green” in IQOS-branded retail points.

We expect PMI to focus firstly on the densely populated metro areas (in-person engagements) and then expand the launch outwards to less densely populated urban and rural areas – based on the principle of progressive expansion: i.e. commercial investment to be proportionate to the volume and revenue pool of the launch geography. Although PMI’s commercial approach is likely to be superficially similar to Altria’s initial IQOS launch, we expect the execution to be significantly better considering the great deal of commercial experience that PMI has accumulated in other markets. Yes, the USA is not similar to any other country; but, it is not very different than a weighted mix of the UK, France, Spain, Germany and Italy.      

We also expect the early stages of the IQOS launch to involve a massive amount of one-to-one engagements (for extensive product explanation & guided trials) – until a consumer base is established and “word of mouth” (peer or influencer marketing) kicks in. Boutiques and Mobile Retail (expert kiosks, educational vehicles, mobile retail units) are likely to play a key role in creating physical engagement space. Moreover, an array of digital tools, including video chats with customer care experts and virtual guided trials, could be deployed to create remote engagement opportunities. Recall that, most recently at the Jefferies Virtual Reduced Risk Seminar, PMI’s Chief Consumer Officer underlined the importance of “consumer interactions in a very targeted and focused manner” when asked about the IQOS US launch.

The very first challenge for IQOS in the USA? Initial (device) purchase cost – which could cause hesitation among some smokers (especially, in a market where coupons and deep discounts run rampant). Device lending, device + pack bundles, first-time purchaser discounts (with registration) are typical tools/tactics that PMI is likely to deploy to address this hesitation. 

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