Philip Morris International (PMI) and Imperial Brands have hit back at allegations they are using the Covid-19 health crisis to improve their public image and gain access to politicians, reports Euronews.
Earlier this year PMI subsidiary Papastratos donated 50 respirators to help Greek hospitals cope with the pandemic. The Romanian Red Cross received a financial donation—reported to be $1 million—from PMI. PMI and Imperial Tobacco both donated money in Ukraine.
Critics denounced the gestures, suggesting they were part of a PR effort to lobby governments to loosen tobacco controls. They also said that the donations contravene the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC).
PMI and Imperial Tobacco denied wrongdoing.
“Imperial Tobacco Ukraine, as a prominent employer in Kyiv, was asked to donate one ventilator to the hospital by the regional authority and other local groups,” the company told Euronews.
“The business was happy to do so and did not seek any publicity. It is clear that no regulations have been breached and to be criticized for agreeing to support the Kyiv community in these challenging and unprecedented times is a disgrace,” Imperial Tobacco Ukraine wrote.
Nataliya Bondarenko, external affairs director at Philip Morris Ukraine, noted that the FCTC does not prohibit interactions between commercial operators and government organizations. Instead, she said, it asks parties to protect public health policies from the tobacco industry’s commercial and other vested interests.
“This provision implies that regulators should act with impartiality and transparency,” said Bondarenko. “Our donation was done in full compliance with the law, demonstrating our integrity and transparency.”
Imperial Brands’ adjusted tobacco and next-generation product (NGP) revenue for the six months ending March 31, 2020, was down 1.7 percent from the same period last year.
The company’s total adjusted operating profit also fell 9.3 percent. On a reported basis, revenue rose 2 percent while total operating profit fell 19.6 percent.
“While we delivered against our revised expectations, we are disappointed with these results, and we remain fully focused on all opportunities to strengthen performance,” said Dominic Brisby and Joerg Biebernick, joint interim chief executives for Imperial Brands.
“We would like to thank our employees for their hard work and commitment in these challenging times. Their support has been outstanding, and we continue to prioritize their health, safety and well-being.
“Our enhanced focus on tobacco has driven stronger in-market execution and an improved share performance, with gains in most of our priority markets. We have reduced our NGP spend following the poor returns on investment last year, and this, together with recent weaknesses in the vapor category, has resulted in lower NGP revenue.
“Overall, Covid-19 has so far had only a small impact on trading, but we expect this to be more pronounced in the second half due to continued pressures on our duty-free and travel retail business, changes in consumption patterns including downtrading and a reversal of some first-half inventory build.”
Imperial Tobacco has put up for sale the site of its Petone factory in Lower Hutt, New Zealand, reports Stuff.
In February, the company confirmed the factory would go through a staged shutdown and the plant would be decommissioned by the end of 2020 with the loss of 122 jobs.
Located in a popular suburb, the site measures 2.25-hectare and includes a warehouse along with manufacturing and office buildings
The site had been an important part of the Petone economy for around 90 years. W.D and H.O Wills Limited started manufacturing cigarettes in suburb around 1930, after establishing their business in Wellington in 1919 and needing to expand.
Imperial Tobacco had owned the site since the late-1990s.
The company has not yet confirmed a date for the end of production.
Stefan Bomhard will join Imperial Brands’ board as chief
executive officer effective at a date to be announced.
“After a thorough search process, which attracted strong,
high-caliber interest, the board is delighted to appoint Stefan as chief
executive of Imperial Brands,” said Therese Esperdy, chair of the board.
“Stefan’s initial priorities will be to strengthen performance and enhance
shareholder value.”
“I’m delighted to be joining Imperial as the next chief
executive,” said Bomhard. “I believe the business has a great future, and I’m
looking forward to working with the group’s employees to maximize the
opportunities that lie ahead and build a stronger, more sustainable business.”
Bomhard was previously the chief executive of Inchcape, the
president of Bacardi’s European region, chief commercial officer of Cadbury,
chief operating officer of Unilever Food Solutions Europe, and he held senior
management and sales roles at Diageo and Proctor & Gamble. Bomhard holds a
doctorate in marketing and is a nonexecutive director on the board of Compass
Group.
Following Bomhard’s appointment, Alison Cooper has stepped
down as chief executive and board director effective immediately. Matthew
Phillips has stepped down as chief development officer and board director
effective immediately. Dominic Brisby, currently the divisional director for
the Americas, Africa, Asia and Australasia, and Joerg Biebernick, the
divisional director for Europe, will assume the roles of joint interim chief
executive officers, reporting directly to Therese Esperdy until Bomhard assumes
the CEO position.
Imperial Brands’ innovation and science director, David Newns, discusses the company’s mission to offer the world’s smokers something better than cigarettes.
By George Gay
I occasionally wonder why, given the obstacles strewn in their path, some of the companies aiming to advance the cause of tobacco harm reduction by developing next-generation products (NGPs) don’t abandon their quest—a thought that was brought into even sharper focus last year by the tribulations surrounding the issues of flavor bans and lung disease in the U.S. Of course, for a number of reasons, the major tobacco manufacturers could not abandon their harm reduction products completely, but, with solid traditional tobacco product businesses behind them, they could surely ease back on the accelerator pedals of their NGP development motors.
And this was the basis of one of the questions I raised when I had the opportunity on Nov. 26 to speak on the telephone with David Newns, group innovation and science director for Imperial Brands. Was it worth investing in NGP innovation and the science underpinning it given the often irrational but effective opposition that was aligned against such efforts? “I think that at times when things get harder, the only option is to double down,” said Newns. “We’ve made a commitment as a company to offer something better to the world’s smokers—that’s our mission—and therefore, we can only double down on our investment and double down on the hard work it takes to do the science and to have those difficult conversations with regulators and government agencies. The business is absolutely committed to delivering on that mission.”
Newns, who joined Imperial Brands two years ago when it acquired Nerudia, the NGP innovation business he co-founded, is responsible for what he describes as a global community of about 300 people involved in two core areas: product innovation and product science. The innovation team, which is based largely in Liverpool, England, is charged with developing products for Imperial Brands’ NGP portfolio, which currently includes vapor products, heated-tobacco products and oral nicotine-delivery (OND) products. The product science team, meanwhile, is responsible for the scientific assessment and safety of those products: ensuring the company delivers products that meet its own product stewardship standards and deliver the potential to reduce, at population levels, the harm caused by tobacco consumption. It also works with regulators on getting those products approved.
Newns’ teams work within all NGP categories, including some not yet in commercial distribution. They work on innovations that can be implemented quickly—steps forward that, for instance, might deliver different nicotine or flavor experiences to consumers—and they work on game-changing innovations whose potential lies further in the future. Imperial Brands’ innovation processes, Newns said, were based on its being consumer led but also on consumer leading. It was a consumer-led organization that spent a lot of time with consumers, understanding their wants and needs. But, at the end of the day, consumers didn’t know what they didn’t know, and it was Imperial Brands’ role to bring them to a place they never knew existed.
Looking outward
Newns readily admits that achieving such game-changing shifts is easier said than done, but he indicated that one way forward was to make a cultural shift. While Imperial Brands operated within an industry that traditionally was quite insular, his company differentiated itself by looking outward, he said. It had a team that scoured the world talking to inventors, potential partners and anybody who could add value to its processes, and it was in touch with agencies that specialized in predicting the future, particularly consumer trends. In fact, he ended the interview with a request to anybody who thought they could help Imperial Brands on its harm reduction “journey” to get in touch. “[W]e are not going to do this on our own,” he said. “No one knows all of the answers, but together, we can certainly make harm reduction a reality.”
Most of the projects Imperial Brands is working on already have some kind of open innovation input. For instance, Newns said, the company was working currently on nicotine droplet size—cooperating with partners who could help the company better understand this aspect of its products. Overall, it was about leveraging those sorts of capabilities and employing Imperial Brands’ skills in putting together the acquired data and knowledge so as to accelerate the pace of bringing better products to consumers.
At the same time, however, Newns cautions about the industry trying to get too far ahead of itself. Ten years ago, he said, when vaping started, the industry made a promise to smokers that it hadn’t yet fulfilled: It was going to make switching from smoking to vaping fairly easy. A lot of people had subsequently tried vaping and discounted it, so it was the industry’s responsibility to make good on that original promise. And in this respect, a lot had been learned about what consumers wanted, and the technology had changed in line with those demands, so some people were returning to vaping. But it was necessary even at this stage to ensure that expectations were managed appropriately. The industry was not going to replicate the combustible cigarette with something that was not a combustible cigarette.
In this regard, Newns said that Imperial Brands was working on, and saw a lot of scope for, technologies that went beyond its current core NGP categories, though he again warned that bringing these to market would take time, partly because of issues to do with consumer acceptance. Vaping was more than 10 years old, and it was still not trusted by a large proportion of consumers, so Imperial Brands would develop new technologies, new products and new categories but commercialize them only when consumers were ready to use them.
Flexible solutions
This idea of consumers being ready—or not—is an interesting one because Newns made the point that once smokers had made the leap of accepting vaping, they were more ready to look at other, perhaps more radical, changes. But each consumer was unique, and products of the future needed to be flexible enough to allow different consumers to use more than one product and use them to suit their particular needs, which might change throughout the day.
Imperial Brands’ Blu vapor brand is said to provide an example of this type of flexibility. The closed system Myblu was a convenient device with a wide range of nicotine strengths and flavors from which consumers could choose what was right for them at particular times of the day, Newns said. And work was under way on a new generation of the brand, with one aim being to develop a device that would make it easier for smokers to switch to vaping.
Blu is available in 21 markets and is said to be doing well in many of those markets. And while 21 might not seem huge given that there are something like 190 countries in the world, Newns tends to look at this issue from the other end of the telescope where your gaze is focused on 169 potential markets. The existence of 21 markets for Blu was the wrong way to look at things, he said, because it represented only a snapshot in time. It was more important to consider where the smokers were than where the vapers were. In Germany, Imperial Brands had created the closed system vapor market from nothing, and that had been highly successful for the company. If you didn’t launch in markets where there were no vapers, you would never create a new market.
Newns accepts that the market situation is complicated by vaping bans, restrictions and simple economics, especially in countries such as India that should offer amazing opportunities, but he said that Imperial Brands’ mission was to convert a billion smokers to better products, even if that meant doing it one smoker at a time.
Focusing on what you can control
The trouble is that there is a major obstacle to such progress, at least in the U.S. and those countries that tend to follow where the U.S. leads. Powerful, influential agencies in the U.S., urged on by various special interest groups, have laid trip wires for the forward steps the vapor industry has tried to make, especially last year. But Newns refused to be swamped by the negative. He accepted that a lack of facts and data had led to initial missteps by some in the U.S. over the outbreak of acute lung disease among a number of people using vapor devices. He said that though the focus of investigative efforts had since narrowed to vitamin E acetate, a thickening agent not used in any Blu products, those missteps had a significant, detrimental effect on harm reduction. But his reaction was to say that it was the industry’s duty to focus on those things that were within its control, and those things were developing products that could be shown scientifically to add an overall population health benefit then trying to convince regulators and governments to join the industry on its harm reduction journey.
When I protested that getting regulators and governments on board had often proved all but impossible, Newns pointed to the ongoing reconsideration of the proposed U.S. federal ban on vaping flavors that had been set in motion after the industry and consumers had made fact-based presentations on the role that flavors played. And in the U.K., the government had been consistently positive about vaping for a sustained period of time. Even when things got tough in the U.S. last year, the U.K. government had doubled down on its support for the vapor category. “And I think that’s the policy that leads to better health outcomes for populations,” he said. “Hopefully that instills the confidence for smokers to move to better alternatives. I think that messages that are not clear lead to confusion and paralysis.”
This makes it sound as if it is all about vaping when it is not. In the spring of 2019, Imperial Brands entered the heated-tobacco product arena with the trial launch of Pulze in Fukuoka, Japan—a trial that, according to Newns, prompted “really great” feedback and led to the nationwide launch of the product at the beginning of November. Consumers were said to have liked the futuristic look of the device and to have appreciated that using it left no lingering smell.
Meanwhile, in the OND category, Imperial Brands’ Zone X tobacco-free snus (branded as Skruf, the company’s traditional snus brand, in some markets) was said to have been launched and well received in Austria and Germany, two countries that are not traditional snus markets. Newns described the product as “exciting,” one that allowed people to consume nicotine while driving or performing other activities that required them to use their hands.
There’s a good chance Japan Tobacco International (JTI) will make a bid for Imperial Brands in 2017, according to a Bloomberg report quoting industry analysts.
JTI has become a distant third in the wake of British American Tobacco’s $49.4 billion takeover deal of Reynolds American Inc., which is set to create a giant rivaling Philip Morris International (PMI).
In addition to steep competition from PMI’s cigarette alternative, iQOS, JTI faces the introduction of plain packaging in the U.K. and record cigarette tax hikes in Russia, weighing on growth in two of its biggest overseas markets.
According to Bloomberg, JTI’s business plan for 2017 states a desire to expand geographically, “notably through acquisitions.”
Eamonn Ferry, an analyst at Exane BNP Paribas, put the probability of a JTI bid for Imperial at 70 percent.
With an acquisition of Imperial, JTI would catch up to PMI and BAT, as well as gain access to the lucrative U.S. tobacco industry.
Imperial has a 9 percent share of the U.S. market.
Subsidiaries of Imperial Brands and the China National Tobacco Corporation (CNTC) have established a joint venture company whose initial aims are to increase sales of Imperial’s brands in China and those of Chinese brands elsewhere.
Imperial said in a note posted on its website that Global Horizon Ventures Limited (GHVL), which it described as a ‘dynamic long-term’ joint venture (JV) business, would look to develop a ‘variety of growth opportunities in China and international markets’.
But initially it would be focused on:
* leveraging the expertise of China’s largest tobacco company, Yunnan Tobacco, to drive the sustainable growth of Imperial’s Growth Brands West and Davidoff in China; and
* maximising the potential of two Yunnan brands, Jadé and Horizon, in markets outside of China.
Jadé was said to be joining Imperial’s portfolio of Specialist Brands.
‘The partnership has the potential to deliver additional meaningful Growth Brand volumes in the JV’s first five years,’ Imperial said in its note.
‘Further tobacco and next generation product launches, as well as potential M&A [merger and acquisition] opportunities, will also be evaluated by GHVL in due course.’
Imperial Brands chief executive, Alison Cooper, and the chief commissioner of China’s State Tobacco Monopoly Association (STMA), Ling Cheng Xin, formally endorsed the JV during a signing ceremony in Beijing. Imperial’s note was dated January 11, but there was no mention of when the JV was established or when the signing ceremony took place.
“We’re excited by the growth potential offered by this new business opportunity and look forward to seeing our co-operation with our Chinese partners flourish for many years to come,” Cooper was quoted as saying.
GHVL, based in Hong Kong, has been jointly founded by ITL Pacific HK Limited, a subsidiary of Imperial Brands, and Yunnan Tobacco International Company Limited and Tian Li International Company Limited, both units of the CNTC, the operational arm of the STMA.
‘The JV builds on a track record of co-operation which began in 2003 between Imperial and Yunnan Tobacco, China’s number one tobacco company with a market share of over 20 percent,’ Imperial said in its note.
‘China is the largest tobacco market in the world with annual volumes of close to 2.5 trillion cigarettes.’
A footnote to the Imperial announcement said that Yunnan Tobacco International Company Limited was a subsidiary of Yunnan Tobacco Industrial Corporation, in turn a subsidiary of the CNTC; and that Tian Li International Company Limited was a subsidiary of China Tobacco International Inc, in turn a subsidiary of the CNTC.
Imperial Brands posts strong results despite declining unit sales—but progress has not been entirely painless.
By George Gay
Alison Cooper
In presenting Imperial Brands’ preliminary results for the year to the end of September, chief executive Alison Cooper said that the company had delivered another strong performance with great results from its expanded U.S. business and had further improved the quality of its growth. “We grew the dividend by 10 percent for the eighth consecutive year and remain committed to this level of increase over the medium term,” she said. “Our strategy is delivering, and we see scope for significant further shareholder value creation by remaining relentlessly focused on the same four strategic priorities.
“We are today [Nov. 8] also announcing further investment behind our strategy to support revenue growth over the medium term. This investment will be supported by a new phase of cost optimization, targeting a further £300 million [$373.5 million] of annual savings by 2020, at a cost of £750 million.
“We have established an excellent platform for sustainable quality growth, which will continue to provide growing returns for shareholders.”
These are the sorts of remarks that are often made by the heads of large tobacco companies—and presumably by the heads of other large companies—when delivering annual results. They make clear that the overwhelming emphasis is on delivering higher dividends for shareholders.
Of course, one thing not mentioned is the fact that Imperial is a tobacco company and that these higher dividends are being predicted even though the company’s tobacco products shipments are in decline. Imperial’s volume shipments of cigarettes and other tobacco products calculated as “stick equivalents” (SE) during the 12 months to the end of September, at 276.5 billion, were down by 3 percent on those of the 12 months to the end of September 2015, 285.1 billion, even though shipments were boosted because the most recent financial year was the first to include full-year figures for its U.S. brand acquisitions. (In June 2015, a subsidiary of Imperial Tobacco, ITG Brands, acquired for about $7.1 billion from subsidiaries of Reynolds American Inc. the KOOL, Salem, Winston and Maverick cigarette brands, along with the Blu e-cigarette brand and other assets.)
The company said that its acquired U.S. cigarette brands had contributed 12 billion SE (compared with 5.4 billion SE in fiscal year 2015 and 17.5 billion SE in fiscal year 2016), or a 4.2 percent increase. However, there had been a 1.5 percent fall during the first half of the year because of the impact of its performance in Iraq and Syria, a 0.9 percent decrease because of a decline in market footprint, and a 4.8 percent drop in the volume across the rest of the business.
Shipments have been slowing for some time. Since 2010, Imperial’s SE shipments have fallen by more than 20 percent, from 348.5 billion to 276.5 billion. But, during the same period, adjusted tobacco net revenue and adjusted operating profit have both increased.
Maintaining revenue
‘Brand migration’ features prominently in Imperial’s strategy
So how can you increase revenue and profits when shipments are going south? Well, one way is to increase product prices either directly, where competition isn’t too fierce, or indirectly through what are known as brand migrations, a strategy at which Imperial has proved successful. For instance, Imperial’s “growth brand” volume during the year to September increased by 4.3 percent, from 145.1 billion SE to 151.3 billion SE, partly because of the company’s brand migration program, which basically encourages consumers to move from brand A to brand B, where brand B is at least as profitable, if not more profitable, than brand A. Such a migration allows, too, brand A to be delisted, which reduces portfolio complexity and, therefore, costs.
This has been an important strategy. As Cooper reported in a results presentation, growth brands continued to outperform the market with volume and share growth. “We further simplified the portfolio through our successful brand migration program so our growth and specialist brands now represent more than 60 percent of net revenues,” she said.
This strategy might seem harsh in respect of the loyal consumers of brand A, but even if it weren’t necessary to try to cut costs, the strategy would probably be inevitable given that regulations in a growing number of countries, such as those requiring standardized packaging and the covering of retail displays, make it more difficult to keep a lot of brand names visible.
And there is evidence that consumers are not overly distraught by the migrations. “We have successfully completed 49 migrations to date, with a further 15 underway,” said Cooper. “These have achieved excellent consumer retention rates, continuing to average more than 95 percent.”
Portfolio management is a major strategy that Imperial will be employing into the future. Cooper said that it was planning to cut radically the number of its SKUs, which can mean delisting whole brand ranges or just some variants within a brand. Imperial did have 250 brands; it is now down to 184 and is aiming to bring that down to 125.
Reducing complexity
Imperial is reducing complexity, too, through its brand chassis strategy, in which it harmonizes brands across different markets, while keeping the individual names of those brands where they contribute to their market success. So, the West chassis, as well as containing West, includes also L&B, Bastos and News. As Cooper said, “Our brand chassis approach enables us to leverage our marketing spend across a range of growth brands.”
Imperial is looking also at its market footprint, at market prioritization, because it generates almost 95 percent of its profit from 32 markets. The U.S. market was large and profitable with high affordability and further pricing opportunities; so a decision had been made to expand the company’s presence in that market last year and to continue investing in the U.S. business, said Cooper. Russia was also a large market where affordability was good and profitability would grow over time.
The footprint strategy meant investing to grow but also investing to defend share where necessary, as in the U.K., which was an attractive market with a large profit pool and where Imperial had strong in-market capabilities. In contrast, Imperial had highlighted markets such as Ukraine and Turkey where a combination of competitor discounting and adverse currency movements had caused the company to reassess its investment plans in the short term. Imperial had not withdrawn from these markets but had decided that investment to grow or defend at this time did not meet its criteria.
But it isn’t all about product and market consolidation. Cooper said that Imperial was building its Blu electronic cigarette brand, which she described as “a very powerful brand in a nascent category,” one that was “well-positioned as a premium offering.” It was encouraging, she said, to see its brand equity building and how well it compared with competitor brands. Imperial had consolidated its presence around its second-generation product, Blu Plus+, “which we believe is the best closed-system vaping experience in the market,” and was investing in its third-generation product, Blu Max, “which we believe will further improve the consumer experience.”
Feeling the heat
Imperial has come in for some criticism because, for the time being at least, it has not extended its vapor product development into the field of heat-not-burn devices, as have Philip Morris International, Japan Tobacco International and British American Tobacco. This criticism, I take it, concerns the fact that these products seem to have met with good consumer acceptance, at least in Japan, as well as the fact that the business model of selling the consumable elements of these devices perhaps better reflects that of selling traditional cigarettes. However, looked at another way, Imperial should be admired for so far refusing to get drawn into offering a type of product that, despite its obvious attractions and benefits, tends to blur the divide between nicotine and tobacco products, much in the way that the U.S. Food and Drug Administration has done and for which it has attracted considerable criticism.
Another way to reduce costs is to introduce efficiencies into your manufacturing processes directly, as well as through reducing portfolio complexity, and Cooper mentioned that Imperial was reviewing its manufacturing capacity and adopting lean operating principles across its factory footprint.
But if such efficiencies aren’t enough, it’s always possible to close factories and reduce your workforce, and, toward the end of last year, several stories started to appear indicating that Imperial intended to do just that in France, Germany, Russia and the U.K. BBC Online reported that up to 100 jobs could go at Imperial’s Bristol, U.K., headquarters in what it described as “structural changes” that were part of its new phase of cost optimization. The BBC story made the point that the announcement about the structural changes followed the closure in May of Imperial Tobacco’s Horizon factory in Nottingham, U.K., with the loss of more than 500 jobs, a closure that bosses at the factory were said previously to have blamed on falling sales and an increase in the illegal tobacco trade.
In addition, a Reuters story reported that Imperial had said it was closing its plant at Yaroslavl, Russia, this month. Imperial was said to have cited “regulatory hurdles such as higher taxes” as being behind the proposed closure, which, according to the story, was expected to result in the loss of 284 jobs.
And then a Le Monde du Tabac story reported that Imperial’s French subsidiary, Seita, had said that it would close its Riom manufacturing facility and its Fleury-les-Aubrais research center, citing a “decline in sales and a resultant drop in production.” The restructuring moves in France were expected to affect a total of 339 jobs.
Asked about whether these stories of closures and job losses were correct, Imperial issued an emailed statement: “We are talking to our employees about a number of proposed restructuring projects as part of our new phase of cost optimization, which we announced in early November,” the statement said.
“These projects include the potential disposal of our factory and research laboratory in France, the closure of a factory in Russia, and structural changes in Bristol head office and Hamburg [Germany]. This will result in the potential loss of several hundred of the 34,000 roles we currently have across our global operations.
“Potential job losses are always extremely regrettable, and we will ensure that anybody affected is treated fairly.
“These are difficult but necessary steps for us to take to strengthen our competitiveness and sustainability.
“Consultations with unions and works councils are ongoing, and we are therefore unable to make any further comment.”
There are at least two ways of looking at this. One is to say that the phrases “extremely regrettable” and “treated fairly” sound rather hollow when people are being put out of work so as to “support revenue growth” that “will continue to provide growing returns for shareholders”—shareholders who, I take it, include at least some of the people making the closure decisions.
On the other hand, Imperial is right in saying that it needs to strengthen its competitiveness, because otherwise it would simply become the target of a takeover by a bigger, more aggressive company that would almost certainly create even more factory closures and job losses when it restructured the acquired Imperial.
The problem here is the system under which the globalized economy operates—a system that rewards companies for closing factories and reducing workforces (and then, in the case of the tobacco industry, whines about these impoverished people downtrading or heading toward the illegal trade for their cigarettes). It is a toxic, failing system that needs to be restructured, if it’s not too late.
