Philip Morris is Building Future on Smoke-free Products

Philip Morris International is building a future on smoke-free products (also referred by the company as Reduced Risk Products or RRPs) that are a much better consumer choice than continuing to smoke cigarettes. In its 2017 Sustainability Report, PMI has stated the ambition that by 2025, at least 30% of its volume would come from smoke-free products.

“We would like to offer better alternatives to adult smokers in Egypt,” Managing Director Philip Morris Misr (PMM) and Levant, Vassilis Gkatzelis, informed Daily News Egypt in an interview at his office.

An INSEAD Global EMBA graduate, Gkatzelis has held key positions throughout his 15-year career at PMI, and enjoys a broad geographical exposure spanning Asia, the European Union, North Africa and the Middle East.

“Philip Morris Misr (PMM) is the number one international player in the Egyptian tobacco industry, with a 22% market share. The company provides numerous job opportunities, as it employs around 2,500 people, whether directly or indirectly, across its value chain, including manufacturing, supply chain, and distribution, among others. This comes in addition to over 100,000 retailers who sell PMI products on a daily basis,” Gkatzelis stated.

DNE interviewed Gkatzelis to learn more about their smoke-free products, the cigarette industry in general and its challenges, as well as PMI and PMM’s future plans, the transcript for which is below, lightly edited for clarity.

Could you please give us a general brief about the tobacco industry in Egypt and how PMM perceives the country’s tobacco market and the manufacturing process, given that this industry is one of the key pillars of the economy, and the country is considered the largest tobacco market in the Middle East and Africa? According to Central Agency for Public Mobilisation and Statistics, the tobacco tax revenue represents over 8.5% of government tax revenues, and is considered the second largest income contributor to the Egyptian state finances, following revenues from the Suez Canal.

The industry has significantly evolved, and PMM has been playing a major role in its development. The Egyptian market is witnessing strong competition, thanks to the presence of international tobacco companies besides Eastern Tobacco Company (ETC). ETC manufactures a total of 86bn cigarettes annually for all tobacco companies operating in Egypt.

PMM is the number one international player in the industry with a 22% market share. The company provides various job opportunities, as it employs around 2,500 people, whether directly or indirectly.

Are all PMM products manufactured locally rather than imported from other countries? Are there any imported brands?

We manufacture all our products locally at ETC, with whom we have a strong, long-term partnership based on mutual benefits.

Import are a possibility; however, imported cigarettes currently available in Egypt are most likely part of illicit trade, which is regarded as a global major issue. Illicit trade represents 10% of the global tobacco industry and is known to fund illegal activities, negatively affecting tax revenues, and posing a risk to adult consumers, since illicit products’ quality are not regulated nor bound by internationally accepted standards.

What are the reasons behind the price increase of cigarettes? What is the difference between the price increase and the tax increase?

There are several factors that determine tobacco prices. For your reference, around 70% of the retail cigarette price is comprised of tax, which has multiple components. So, if the price of a cigarette pack is EGP 30, around EGP 21 would be tax.

The other critical factor relates to the import of raw materials, given that tobacco is not domestically grown in Egypt. Imported tobacco, which is bought with a different currency, represents an increased cost after the floatation of the Egyptian pound. The other expenses that have to be considered are the manufacturing and distribution processes.

Who takes the decision to increase the price? Is it PMM or the government or is it an agreement between both sides?

The market is governed by the price freedom principle, so tobacco companies may set their product prices as long as they are in compliance with the government’s rules and regulations. Sometimes, the price increase is triggered by a tax change.

Governments increase taxes as a tactic to help decrease the number of smokers. In your opinion, did they succeed?

Taxation is one of the tools that governments use to reduce the harm of smoking.

Smoking cigarettes causes serious diseases, and the best way to avoid the harm of smoking is never to start, or to quit.

Smoking prevalence globally, which was estimated at 22.1% in 2010, has been in constant decline for several decades, and the World Health Organization forecasts it will continue declining by 0.2% per annum. At that pace, it will take almost 100 years until the world is smoke-free.

But much more can be done to reduce health risks for the world’s 1.1 billion men and women who would otherwise continue to smoke, thus transitioning faster to a smoke-free future.

If the price increase does not help as all the statistics proved, what else did PMI achieve in that area?

PMI built its reputation as a leading cigarette company, with the world’s most iconic brands in the category.

Still, many would be surprised to know that PMI began to explore the viability and product development of smoke-free alternatives in the early 2000s. And that, in recent years, we have hired over 430 R&D experts, among whom 300 are world-class scientists, and have invested over $4.5bn to ensure adult smokers have better options. In fact, our vision is that these products—which present less risk of harm than continuing to smoke but are still satisfying to smokers—will one day completely replace cigarettes.

And this is not just a theory. PMI’s diverse smoke-free portfolio includes heated tobacco and nicotine-containing vapor products. Our flagship heated tobacco product, the IQOS, is now commercialised in 43 countries.

So far, 5.9 million adult smokers around the world have already stopped smoking cigarettes and switched to one of our alternative products. This number is growing, with approximately 10,000 smokers switching on a daily basis.

Also, the IQOS tobacco heating system has a very high conversion rate, with more than 70% of people purchasing the IQOS and using it exclusively or predominantly.

After a long history of manufacturing cigarettes, is PMI shifting its core mission to produce a different product?

PMI is transforming itself from a cigarette manufacturer to a science and technology-driven organisation. We have two state-of-the-art global R&D centres in Switzerland and Singapore. Additionally, we have published over 250 peer-reviewed scientific papers since 2011, and have been granted more than 3,400 patents.

Smoking is harmful, this is a fact that is commonly known. But people often don’t know the ‘why’ and ‘how’ of this harm. Though there is much misunderstanding, experts agree that nicotine, while addictive and not risk-free, is not the primary cause of most smoking-related illnesses. It is the burning process that creates smoke, which contains harmful toxicants.

Throughout years of testing and learning, we may now heat tobacco to release a satisfying aerosol without burning. This tobacco aerosol, which has dramatically lower levels of harmful toxins than cigarette smoke, still delivers nicotine at the same time as providing the taste and ritual that smokers demand. While heating tobacco is one possibility in developing alternatives to cigarette smoking, another approach is to produce a nicotine-containing aerosol without the use of tobacco.

How does your new the IQOS platform work?

Whereas the idea of heating tobacco, instead of burning it, has been around for over two decades, it is only now that we have finally managed to find ways to heat tobacco which results in products that satisfy adult smokers. The IQOS uses sophisticated electronics to heat specially prepared and blended tobacco. Furthermore, the IQOS heats the tobacco just enough to release a flavourful nicotine-containing vapor but without burning it.

Although the tobacco in a cigarette burns at temperatures in excess of 600°C, the IQOS heats it to much lower temperatures, below 350°C, generating a nicotine-containing vapor without combustion, fire, ash, or smoke. The lower temperature heating releases the true taste of heated tobacco. Because the tobacco is heated and not burned, the levels of harmful chemicals are significantly reduced, compared to cigarette smoke.

The IQOS experience has evolved over time based on consumer feedback. With our fourth and latest product iteration, the IQOS 3, which has just been launched in select countries around the world, we are not just delivering upgrades to the product’s design and functionality, but also to the way we engage with adult consumers. There are few products which revolutionise their sector and change holistically the consumer experience. We believe the IQOS is one of those products.

Do you have a certain criteria which countries must meet to qualify for the IQOS to be launched in?

PMI has made a public commitment to pave the way for a smoke-free future as soon as possible. The shift will take time, given that convincing 1.1 billion adult smokers is a very challenging task on its own.

The science shows that these smoke-free products are a better choice for smokers and those around them. When we can reach a critical mass of men and women who have switched, we can deliver a broader reduction in population harm. Innovation, therefore, has the power to change lives for individuals, and, collectively, the future of public health.

However, innovative products do nothing if people do not know about them. Getting the word out is difficult without support from regulators, public health experts, NGOs, and all those who care about smokers. This support is a key criterion to prioritise investments in countries, so that the related investment pays off not only financially, but also in terms of positive impact on society.

What is keeping you from launching the IQOS in Egypt? What do you need from the Egyptian government in order to introduce the IQOS into the Egyptian market?

From our end, we are committed to offer a portfolio of better alternatives to adult smokers while being transparent in our research and findings. But we can’t do it alone. Governments have a unique opportunity to help facilitate informed choices.

We are working together with the government and our partners to turn this into a reality.

Actually, when I go out, I see numerous adult users of the IQOS who have already stopped smoking cigarettes. Although the product has not been launched in Egypt yet, incoming travellers still manage to bring it into the country.

Are there other tobacco companies that produce alternatives? Why doesn’t the entire industry move together towards achieving one common goal?

We believe that the entire industry will ultimately move in the same direction. PMI has taken a global leading role with regards to the harm-reduction approach, and we will be glad if the industry’s key players follow suit, in order to ensure a sustainable smoke-free vision.

Did you choose Egypt to be PMI’s cluster hub because it is considered to be the biggest regional cigarette consuming country?

We trust the Egyptian economy and its potential to grow and prosper. The capabilities and talents of the Egyptian organisation serve as strong testimonies. We are proud that our people from Egypt have undertaken management roles of increased responsibilities in 12 different countries. The newly established Management Hub for Egypt and Levant in Cairo adds regional accountabilities in key areas like finance, marketing, IT, and human resources.

I am also happy to say that we have been certified for the third year in a row as a ‘Top Employer in Egypt’, in line with our global certification.

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