Tobacco companies are staving off the decline of smoking with a stream of exciting new products (which are popular with children).A Jefferies note on Philip Morris talks of “high hopes for Next Generation Products (NPGs).”
NPGs include progress toward “a reduced harm alternative,” but primarily they involve gimmicks.
Examples of conventional cigarette innovation. We were particularly impressed by two of PM’s new innovations for conventional cigarettes. The L&M U-spin cigarette has a unique filter that allows smokers to choose the amount of ambient air that dilutes the smoke, thereby changing the strength of the flavour. Parliament in Russia sold for a very limited amount of time (only about 3-4 weeks) in a specially designed pack that used a so-called “Fresnel lens” printing technique to achieve a unique visual effect and make the product stand out on the shelf. We believe that both products are good examples for PM’s innovativeness that can drive growth in the future.
And that’s just the beginning:
NGP details. PM plans to start introducing within the next five years three different kinds of Next Generation Products, that are currently only called Platforms 1, 2 and 3.
Platform 1 heats tobacco instead of burning it using an external heat source. In that sense, it is similar to the Heatbar, which Philip Morris tested about 5 years ago but which did not gain any meaningful user acceptance. The new product is much smaller, better designed and less “awkward” looking. Executives who used it at the analyst day seemed to be very satisfied by it and claimed to have switched completely from regular cigarettes. The product requires specially designed cigarettes that are much shorter and more densely packed than regular cigarettes
Platform 2 also heats tobacco but uses an internal heat source that a smoker would light with a regular lighter. Similar to Reynolds American’s (RAI, $43.33, hold) Eclipse cigarette, it does not burn down and except for not having to flick off the ash, the user experience is very similar to regular cigarettes.
Platform 3 creates a nicotine aerosol and is the furthest from commercialization. It does not use any heating or burning.
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