What Retailers Think of iQOS

Express enthusiasm for Philip Morris International’s heat-not-burn technology

By 
Melissa Vonder Haar, Freelance Writer

iqos heat-not-burn electronic cigarette

NEW YORK -- Philip Morris International’s iQOS has garnered a lot of excitement after recent investor presentations. Yet, the heat-not-burn products are only available in limited international test markets—meaning retailers and investors alike must look abroad for information on iQOS’ potential.

Cowen Group recently surveyed more than 100 retailers currently selling iQOS in Tokyo, Japan, and Milan, Italy, to get a better read on retailer and consumer response. The results suggest robust enthusiasm in Tokyo (where iQOS has already achieved a 2.4% share of the cigarette market), but a more tepid response in Milan.

“Across a variety of measures, our survey of over 50 retailers in Tokyo showed high levels of optimism around the potential for iQOS and strong consumer adoption early days, consistent with the robust share data that Philip Morris has offered out of Japan,” Cowen analyst Vivien Azer wrote in a research note.

Of those 50 Tokyo-based retailers, 85% said they were positive about the long-term outlook for iQOS. Equally encouraging, 75% predicted iQOS to achieve at least a 4% market share (with 52% predicting 4% to 6% and 19% predicting a 7% to 10% share).

“In large part, this optimism seems to reflect better consumer adoption and retention in Japan,” Azer said, pointing to the fact that 80% of Tokyo retailers said consumers find iQOS easy to start, and 90% described consumer retention as “somewhat good.”

“Given the strong start iQOS has seen in Japan, we expect that over time Japan will account for approximately 25% of iQOS sales by 2020,” Azer said.

“In contrast to the strength seen in Japan, Italy has gotten off to a slower start for iQOS (with very modest 0.3% share in December 2015),” she continued. “Retailer feedback from our survey supports a more cautious view for Italy.”

Unlike in Tokyo, 44% of Milan-based retailers predicted iQOS will not take any shares away from the premium cigarette market. Additionally, 40% of Milan-based retailers said consumers find iQOS easy to start, and 40% said consumer retention is “somewhat good.”

Still, Azer expressed optimism that iQOS will succeed as it further expands into new markets.

“While only in seven markets today, Philip Morris targets 20 markets by the end of 2016,” she said. “We expect two more years of investments behind iQOS, with the product achieving modest profitability in 2018, growing to roughly $900 million in profits by 2020, given the higher level of investments that we anticipate as PM continues to expand distribution for the product.”