Reduced-Risk Products Front of Mind for C-store Retailers

NEW YORK — Philip Morris International's (PMI) iQOS is still waiting approval to come to backbars across the United States, but there is already a buzz about the heat-not-burn product with U.S. tobacco retailers.

According to Wells Fargo Securities LLC's Tobacco Talk, nearly 70 percent of retailers are optimistic about iQOS as the next growth catalyst for the industry and plan to carry it in their stores once commercialized in the U.S. — and more than one third are planning to increase Altria Group Inc.'s shelf space to accommodate the new brand. 

"We see this as strongly positive for Altria given its alliance with PMI on iQOS and reiterate our view that iQOS is worth an incremental $12 per share to Altria, most of which is not yet priced in Altria's stock," said Bonnie Herzog,  managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

Additionally, more than half of the retailers surveyed believe an Altria-PMI combination is likely in the next few months, she added.

In December 2013, Altria and PMI reached an agreement to establish a framework to commercialize reduced-risk products and electronic cigarettes. At the time, subsidiaries of the two tobacco companies entered into a series of agreements to address intellectual property licensing, regulatory engagement and contract manufacturing. Specifically:

• Altria is providing PMI with an exclusive license to commercialize Altria's e-vapor products internationally.
• PMI is providing Altria, on an exclusive basis, two of PMI's heated tobacco products for commercialization in the United States.
• The companies are cooperating on scientific assessment, regulatory engagement and sharing improvements regarding those products.

The two tobacco giants expanded the pact in July 2015 to include a joint research, development and technology-sharing agreement.

Interest in reduced-risk products aside, the survey found that the overall tobacco environment remains largely stable but signs of heightened promotional activity at the premium end of the cigarette spectrum and increased pressure from lower-priced competitors are having a negative impact on topline volume, according to Herzog.

Tobacco Talk surveys retailer and wholesalers representing roughly 25,000 convenience stores in the United States.