Abstract

EXECUTIVE SUMMARY: PERSPECTIVE AS IQOS ENTERS THE US MARKET The Changing Tobacco Marketplace The global tobacco industry is undergoing rapid change. The historically dominant product, combustible cigarettes, is being joined by two rapidly growing alternative nicotine delivery technologies: electronic cigarettes and heated tobacco products (HTPs). The principal difference is that e-cigarettes aerosolize nicotine containing liquid, whereas HTPs utilize a chemically treated rod of shredded tobacco made to smolder by a heating element. These emerging categories are growing rapidly as the sales of traditional cigarettes decline. Three major tobacco companies (Philip Morris International, Altria, and JUUL) are collaborating via reciprocal agreements to dominate both the traditional and emerging tobacco products markets. Together they control the world’s leading brands in each of these categories: cigarettes (Marlboro), e-cigarettes (JUUL), and heated tobacco (IQOS). Reasons for Studying IQOS Marketing While the marketing of Marlboro and JUUL has been thoroughly studied, IQOS promotion has yet to be subject to comprehensive academic analysis. Philip Morris International’s (PMI) effort to gain market share for IQOS, which was introduced in 2014 and is currently on the market in 52 countries, has been aggressive, multilayered, and has spanned an impressive spectrum of media and methods. The IQOS brand has broad global reach spanning Europe, the Middle East, Asia, and both North and South America. After IQOS entered US test markets in the fall of 2019, it plans nationwide rollout during 2020. Although IQOS is categorized as an electronic cigarette in many countries, it was allowed on the market by the US Food and Drug Administration (FDA) only as a traditional cigarette product in the US. PMI’s application to have IQOS marketed as a reduced risk product in the US has not yet been authorized by the FDA. This categorization constrains the brands’ marketing activities. Over a 10 month period, we conducted an intensive evaluation of the various forms of IQOS marketing. The methods, targets, and goals of IQOS marketing campaigns are set by corporate leadership and are executed with the assistance of an impressive array of advertising agencies, social media promoters, event coordinators, media content producers, brand managers, modelling agencies, and talent recruitment companies. The campaigns make liberal use of artists, musicians, social media influencers, and celebrities in promotional roles. Our goal in providing a thorough examination of IQOS global marketing practices was to help inform American regulators and legislators to monitor closely the brand’s promotional activities. In addition, revealing the scope, scale, and targeting of IQOS marketing may help nations around the world to consider whether additional constraints are warranted. Promoting IQOS as a Smoking Cessation Device: Throughout its global marketing, PMI states the goal of IQOS is to help adult smokers transition to a less harmful product. “IQOS” is an acronym widely understood to mean “I Quit Ordinary Smoking.” Although PMI denies the brand name IQOS has any specific meaning, overwhelming evidence suggests otherwise. IQOS emphasizes its signature tobacco leaf shaped letter Q in its brand extensions and numerous other promotions (eg. Qreator, Qollection, Qoins, DisQovr, Q-labs). (see illustration page 12) IQOS campaigns rely heavily upon proxy terms for smoking cessation (“This changes everything,” “alternative,” and “switch”) which do literally say “use this product to quit smoking” but have little if any ambiguity to consumers. The implied presence of the word “quit” within the brand name itself reinforces the message to cigarette smokers that IQOS is a safer and healthier alternative. Contrary to PMI’s marketing claims, studies of IQOS use among smokers show that it is most often complimentary to smoking and infrequently leads to abandoning combustible cigarettes. Indeed, dual use of cigarettes and IQOS, such as in “IQOS Friendly Places” where smoking is prohibited, may actually serve to deepen nicotine addiction and make cessation less probable. Promoting IQOS as Healthy: As cigarette smoking kills nearly half a million Americans per year, claiming to be healthier than smoking is indeed a low bar. IQOS promotions imply that the product is both healthier and even healthy - downplaying the obvious health risks associated with its use. Advertisements promote IQOS as “smoke- free,” and only “steam” (#iqosteam has 31,050 posts). IQOS aerosol is a mixture of glycerin, nicotine, flavorant chemicals, and other compounds. As the aerosol from IQOS is derived from smoldering tobacco leaves at 350 degrees centigrade, it emanates combustion products which means that IQOS does technically emanate smoke. As steam is merely water vapor, IQOS is certainly not steam as their advertisements have stated, and when they suggest otherwise, they are striving to deceive their customers. IQOS also is described in advertisements as “cleaner” – another health proxy claim. Because of the negative press about the health threat posed by traditional cigarettes and vaping, IQOS seeks to position itself as neither: a “smoke-free” nor a “vapor-free” product. There is nothing “free” about the aerosol emanating from IQOS. In reality, IQOS is a hybrid product with attributes of both combustible cigarettes and e-cigarettes. PMI’s choice of the term “heat not burn” for its IQOS device is part of its marketing strategy to reinforce its “smoke-free” descriptor. A more accurate term for the category would be “heated tobacco” product. The brand slogan “IQOS is always a good idea” is manifestly false as the use of IQOS by non-smokers, especially nicotine nai¨ve adolescents, would be a notably bad idea. Evidence to date suggests that youth adoption of IQOS has been less than with vaping products. Marketing IQOS as an Elegantly Fashionable Lifestyle Product IQOS claims that its marketing exclusively targets adult smokers. The majority of smokers are between the ages of 30 and 60 with lesser prevalence among other age groups. To preferentially reach an audience of middle-aged smokers, a targeted message would be delivered by a middle-age smoker describing how IQOS helped them with their cigarette smoking addiction. IQOS advertising practices differ markedly from this formula. IQOS advertisements are dominated by chic, attractive young models, especially females, in fashionable dress and elegant poses. These models are often pictured holding an IQOS as though it were a precious object. IQOS advertising positions the brand as stylish, trendy, high tech, and a favorite of beautiful people. Another prominent IQOS advertising theme is that of social acceptability with advertisements claiming it has less odor, no ash, and lacks concern about secondhand exposure. Traditional cigarette advertisements often convey the message that if one uses their brand they will be more successful in their love life. IQOS advertisements explicitly say that it will “Change your kisses” and their “Hello beauty” campaign unsubtly promises that it will enhance a user’s looks. Advertisements also imply that if you love your mother, father, or spouse you should encourage them to use IQOS. IQOS product design, packaging, and retail locations position it as a high-end luxury brand. The product’s design and its stores closely emulate those of Apple, while it makes use of Tiffany’s distinctive blue color in its employees’ dress, in brand extensions such as IQOS high heels, event invitations, and even in its logo and hummingbird icon. IQOS markets itself as being pleasurable. Advertisements often show the device adjacent to food, desserts, coffee, or alcoholic beverages. IQOS tobacco containing HEETS come in multiple flavors typically SRITA Global Marketing of IQOS 7 named for colors with descriptors of menthol, citrus, nuts, dried fruit, vanilla, cocoa, and herbs. The use of colors rather than flavors in the product names emulates sister brand Marlboro and is perhaps intended to circumvent limits placed on flavored tobacco in some jurisdictions. IQOS suggests pairing its flavors with macaron cookies, chocolates, and coffee flavors endorsed as being complementary to IQOS flavors by famous chefs. The Extensive Ecosystem of IQOS Places and Events IQOS is heavily marketed in hundreds of branded locations, including stores, boutiques, cafes, lounges, and co-working spaces all of which employ attractive young salespeople to explain the intricacies of the device and to offer free samples of IQOS HEETS flavors. These are sophisticated store designs, placed in premium, high traffic shopping locations in major cities. Sales ambassadors make claims of IQOS healthfulness and theatrically perform “laboratory tests” from which potential customers are supposed to conclude that IQOS aerosol is free of harmful chemicals while cigarettes leave a nasty brown stain. Direct retail is supplemented by pop up stores in shopping centers and salesperson attended displays in tobacco shops, and kiosks at major entertainment events. IQOS Cafes feature branded mugs, napkins, and coasters and suggest pairings between IQOS and coffee flavors. “IQOS Friendly Places” in which IQOS may be used, but not cigarettes, are located in numerous countries in bars, cafes, restaurants, clubs, and even beaches. Underlying the IQOS Friendly Places program is the concept PMI promotes that IQOS is “unsmoke” and “smoke-free” and thus does not lead to harmful secondhand exposure from the exhaled plume. IQOS use is associated with a substantial exhaled volume of aerosol containing nicotine, glycerin, and combustion products from smoldering tobacco leaf. The goal of the Friendly Places program is to undermine regulations which forbid indoor smoking.This allows smokers of regular cigarettes an alternative way of smoking when in bars, restaurants, etc. Such dual use, common among IQOS users, closes nicotine exposure gaps during the day and actually deepens addiction. This study identified 270 IQOS sponsored events of varying types including music concerts, art exhibitions, fashion shows, food and wine festivals, film festivals, sporting events, and even Germany’s Playboy Playmate of the Year Awards in 2019. Many of these events are attended by underage children and a few, such as Tel Aviv’s TLV Student Day, are clearly youth-oriented. IQOS joins its sister brand Marlboro through sponsorship of motorsports. IQOS Advertising Via Social Media Most smokers are mature adults, the group PMI describes as its sole marketing target. As smoking is most prevalent among the 30-60-year-old demographic, one would anticipate that their advertising campaigns should be designed to possess special appeal to this audience and use media channels most heavily frequented by them. The marketing channels favored by this age group are printed magazines and newspapers (or their digital equivalents), television, and radio. Instead, IQOS marketing is most heavily present in social media channels such as Instagram, which have strong youth bias. PMI initiated Instagram accounts and hashtags, such as #iqos which has 440,000 posts (as of 1-24-2020). Aside from company postings, IQOS social media is heavily supplemented by numerous community fan sites such as #iqosfriends, #iqosstories, and #iqoslovers which may, or may not, be supported by paid brand representatives. It is important to realize that passive viewership of Instagram hashtags is many multiples of the number of posts. Engagement via likes, comments, and sharing of posts amplifies viewership across multiple social media platforms such as Facebook and Twitter. IQOS hashtags promote the product across many millions of viewers including a sizable underage population at little or no cost to the company. SRITA Global Marketing of IQOS 8 An internal PMI document reveals that PMI did not use social media to market its products prior to the launch of its IQOS product. In the US, Congress banned tobacco advertising from broadcast mass media (TV, radio) in 1970. Social media is a contemporary form of mass media that, unlike earlier forms, is minimally regulated, incurs a minimal cost, and knows few national boundaries. It is interesting to note that some IQOS promotional social media posts emanate from countries in which IQOS is not officially on the market, such as Egypt and Iran, but are shared internationally via hashtags. IQOS partners with the cross platform instant messaging app LINE, which is number one in Japan, where it places targeted advertisements on smart phones. As a Bluetooth connected device, IQOS forwards to PMI reams of data about the users smoking habits. Such data is highly valuable for targeting marketing campaigns. Influencers and Celebrities PMI uses an army of influencers, brand ambassadors, celebrities, and coaches. Some are employees, while others are members of the community who are offered discounts, gifts of IQOS products, and invitations to special events where they promote IQOS to their network of friends. IQOS’s “Refer a friend” program encourages users to act as members of their sales team by offering gifts or cash rewards from recruiting friends. Advertisements suggesting making a gift of IQOS on Mother’s Day, Father’s Day, and Valentine’s Day ask the user to recruit family members. IQOS also sponsors contests with prizes and offers discounts and incentives. PMI created an IQOS Club to build a community among its customers, with loyalty awards scaled according to silver, gold, and platinum levels analogous to airline or credit card rewards programs. IQOS also has created clothing and accessorylinesasbrandextensionsincluding,highheeledshoes,backpacks,andcaps. Theseofteninclude a stylized letter “Q” in their design under the Qreator space program. IQOS Public Relations In September 2017, PMI launched what it dubbed a “Foundation for a Smoke-Free World.” The company pledged to spend $1 billion over 12 years, $80 million per year, purportedly to support tobacco harm reduction by accelerating research into alternatives to cigarettes. It seems clear that PMI’s “unsmoke campaign” is not focused upon smoking cessation, but rather legitimizing and promoting an alternative nicotine delivery system, especially its IQOS brand. As PMI remains active in undermining policies intended to reduce cigarette use, many public health advocates believe that the company created the “Foundation” as a public relations measure to burnish its image while promoting IQOS. It should be emphasized that if PMI were serious about achieving a “smoke-free world,” it would halt its aggressive worldwide marketing of Marlboro, and its other major tobacco brands, and also curtail its generously funded political lobbying efforts to suppress governmental actions to protect public health. As part of its public relations efforts, PMI buys so-called “vanity awards” with supposed “honors” purchased from companies whose business model is fee-based awards designed to burnish the reputation of their business clients. PMI has had a particular focus on environmental “awards” (e.g. 50 Climate Leaders, One Planet Award). It is ironic that PMI commissions environmental merit awards when its cigarette, cigar, and heated tobacco products deliver concentrated smoke-polluted air directly into the lungs of millions of their customers. PMI engages in partnership with magazines (e.g. Vogue, VIVA, PINK, Marie Claire), to create content in support of their marketing messages for IQOS. Its $6.5 million agreement with Vice Media, which describes itself as the “Fast growing, #1 youth media company in the world,” involves its magazine, SRITA Global Marketing of IQOS 9 SRITA Global Marketing of IQOS 10 blogs, and film documentaries. A periodical named IQOS Magazine is filled with glowing stories about the product. Comparing IQOS and Traditional Tobacco Advertising The overall impression is, with the sole exception of the change/switch theme, IQOS advertisements faithfully recapitulate the techniques used by the tobacco industry during the 20th century. While youth-appealing material and health claims appear most bold in countries with lax tobacco control regulations and enforcement such as Japan, Romania, Armenia, Ukraine, and Russia, they are nevertheless present in all countries where IQOS is marketed. While the advertising content resembles time honored messages of tobacco advertising, the distribution channels IQOS uses are unmistakably modern innovations (e.g. social media, smartphone apps). Comparing IQOS With JUUL PMI’s business strategy for IQOS has dual purposes: retaining its current customer base and recruiting new ones. As it is not in their business interest to transition Marlboro smokers to IQOS, PMI’s strategy may well be to lure customers from competitive cigarette brands to become PMI customers via IQOS. There is also data suggesting that IQOS recruits lapsed smokers to resume. As IQOS enters the US market the question arises as to whether or not it might follow a trajectory similar to JUUL in terms of youth adoption. The heavy use of social media platforms favored by youth to promote IQOS suggests that the brand is attempting to attract young customers. Indeed, IQOS advertising has numerous similarities to that which JUUL used to become a youth fad, both in terms of its messaging and channel use. There are important differences between these two nicotine delivery devices in their current forms. JUUL is simple to use, IQOS is quite complicated. JUUL is small and stealthy, resembling a USB drive, while IQOS is bulkier and unmistakably a smoking device. Adolescents are highly price sensitive. The IQOS device sells for approximately $100 - 150 while JUUL, which used to sell for $50, is now is offered on the JUUL website at $15 (1/24/2020). A pack of HEETS containing 20 sticks sells for $4.50 - 9.90 per pack, depending upon the flavor, while JUUL, which is marketed as delivering an equivalent dose of nicotine to a pack of cigarettes, sells for $4 per pod. Other small vaping devices sell nicotine pods for considerably less. Finally, while IQOS comes in a variety of flavors, unlike JUUL all include a base of tobacco flavor which has limited appeal to non-smoking youth. While IQOS is likely to evolve in future generations, in its present form is unlikely to achieve the viral youth uptake witnessed for JUUL. PMI's Adherence to its Corporate Marketing Standards “Our marketing practices worldwide follow four core principles:” 1. We market and sell our products to adult smokers 2. We warn consumers about the health effects of our products 3. Our marketing is honest and accurate 4. We respect the law Our research illustrates that PMI’s marketing of IQOS has strayed from its corporate standards substantially. Its use of youth-oriented social media channels, trendy pop music festivals, and celebrity influencers are misaligned with their commitment to exclusive “adult smoker” targeting. PMI’s claims of cigarette cessation efficacy and the healthfulness of IQOS fail the “honest and accurate” standard. PMI’s efforts to circumvent indoor smoke free ordinances via its innumerable IQOS Friendly Spaces (e.g. in restaurants, bars) is incompatible with PMI “respect for law” doctrine. As the world’s largest tobacco company (by dollar value) the company certainly has the resources to compel adherence to its marketing principles across their entire international marketplace. As a global company professing company-wide standards for its marketing should consistently sustain its policies regardless of the permissiveness of the country in which its products are being marketed. Their senior leadership of PMI in New York City and Neucha^tel, Switzerland are fully accountable for the marketing practices of its 77,000 employees wherever their products are sold. When investigative journalist Chris Kirkham of Reuters in May 2019 revealed widespread use of underage social media influencers to promote IQOS, PMI responded that: “No laws were broken . . . we set high standards for ourselves and these facts do not excuse our failure to meet those standards in this instance.” While they suspended their most visible influencer programs, youth appealing marketing continues worldwide. As typical of tobacco industry, PMI only apologized and changed practice when caught and compelled by public criticism and unwanted regulatory attention to correct their marketing excesses. Regulatory Implications of IQOS Global Marketing As Altria, through its reciprocal agreements with PMI, commences selling IQOS in America, we plan to closely observe their marketing practices. As IQOS was only authorized by the FDA as a cigarette equivalent, the brand is captive to all limitations placed on the marketing of traditional cigarettes such as no advertising on radio or television and no flavors other than tobacco or menthol. The lack of FDA authorization for IQOS modified risk claims means that they must tread lightly in promoting the use of IQOS in smoking cessation. Recently, the FDA took action against JUUL for unauthorized marketing of modified risk by using proxy terms such as “alternative” and “switch” as well as endorsements by smokers claiming to have transitioned to JUUL from cigarettes. In response to an explicit FDA warning in late September 2019, JUUL was compelled to end its “switch” campaign. With the letter “Q” for Quit in IQOS’s name and its prominence throughout its marketing domains, together with its globally pervasive heath and cessation claims, the FDA would be well justified keeping IQOS off of the US market unless and until scientific evidence accumulates qualifying it for the modified risk designation. The examples of IQOS advertisements submitted to the FDA during its approval were notably restrained and most certainly did not convey the true nature of its promotional activities for the brand globally. Indeed, given the excesses of IQOS marketing around the world, the FDA would have ample public health grounds to either withdraw the IQOS marketing approval or insist upon stringent post- marketing monitoring with a low threshold to take it off the market if its promotional activities fall out of bounds. Prospects for IQOS Commercial Success The business goal of PMI in creating IQOS was to compensate for the declining revenue of its globally dominant Marlboro cigarette brand via rising sales of its IQOS HEETs. In response to the progressive decrease in cigarette sales, PMI has invested “over $6.0 billion in research, product, and commercial development” of its portfolio of heated tobacco product line over the decade 2008 – 2018. (ref. PMI Investor Information). Effectively, PMI has clearly made a big bet that its future vigor depends upon the success of its HT products. During the 3rd quarter of 2019, PMI’s global cigarette unit shipment volume declined 5.9% (183,519M in 2019 versus 195,068M in 2018) while heated tobacco sales grew 84.8% (15,985M in 2019 versus 8,652M in 2018). (ref Bloomberg 3rd Q 2019). While IQOS is showing an impressive growth rate SRITA Global Marketing of IQOS 11 it still represents a small fraction of PMI’s worldwide cigarette sales. PMI reports estimated number of users of IQOS has grown from 2.9M (Q1 2017) to 12.3M (Q3 2019). However, unlike Marlboro smokers, a sizable fraction of IQOS users do so only part time and continue to use their customary cigarettes in parallel. Being first to popularize HT over the mass market may confer PMI an advantage. Positive indicators for IQOS market position include its rapid growth in selected markets (e.g. Japan, Russia) and its early FDA approval in the US at a time when many vaping products have yet to even submit applications. Growth in PMI’s customer base may occur if IQOS captures cigarette smokers of competitors’ brands. PMI’s “Smoke Free World Campaign” public relations effort may sway the public and regulators to enable the IQOS brand to enjoy wider latitude in marketing and tax advantages compared with combustible products. However, it is far from certain that over the long-term HT products will prove successful, or that PMI will lead the pack even if it does. The profit margin for current generation HT products is almost certainly lower than for traditional cigarettes. With a slim margin, downward pressure on price is a threat to PMI’s profitability. The sales price of the IQOS device is quite high: IQOS 2.4 (UK 59£, Germany 60€, Canada $102, Japan ¥4,980); IQOS 3 (UK 89£, Germany 89€, Canada $147, Japan ¥9,980). (PMI Investor Information. October 2019). The current price of IQOS HEETS is approximately the same as a pack of Marlboros. As numerous competitive HT products emerge on the market, PMI is likely to have difficulty in sustaining these price levels. In addition, IQOS is taxed favorably in many countries compared to cigarettes, a circumstance which is unlikely to sustain as the market share for HT and vaping products increases and governmental revenues decline. The growth of IQOS has been driven by intensive marketing which, no doubt, has incurred large expenses. Their sales workforce includes an army of coaches, brand ambassadors, and influencers. They have hosted many hundreds of luxurious IQOS promotional parties at which PMI hired popular entertainers. Physical locations such as IQOS stores, boutiques, lounges, cafes, shopping center popups, and co-working spaces do not come cheap. Many are located in premier shopping locations with high rents. The sophisticated interior design of these facilities must be costly. Paying innumerable restaurants and bars incentives to carry “IQOS Friendly” signs adds up. IQOS also maintain clubs and offers discounts and promotions both to reward brand loyalty and to recruit new users. All of this means that the high customer acquisition costs of IQOS may not be sustainable. Cannibalization of existing customers from among PMI’s current cigarette smokers is likely adverse to the bottom line. The co-branding of its flagship cigarettes brand Marlboro and IQOS Marlboro HEETS may tend to foster this conversion. Worse still, some smokers may use IQOS as a bridge to tobacco cessation. The categorical exclusion of emerging tobacco products from the world’s largest markets, China and India, is another challenge to sustained growth. Competition is a major threat to IQOS. In the HT category, PMI faces steadily increasing competition from other major tobacco company HT brands such as Glo (BAT), Pulze (Imperial), and Ploom (JTI). Technically innovative startups are also infringing on this space. Some brands make IQOS compatible sticks, which undersell HEETS. This is important as the profits in HT lie in the consumables rather than the device. Ultimately, the largest competitive threat to IQOS may prove to be vapor-based nicotine delivery systems which are cleaner, less complicated to use, and require less maintenance. Refillable vaping systems offer much lower cost for the equivalent nicotine delivery of a pack of Marlboros (or IQOS HEETS). The limited attractiveness of IQOS to youth may have long term pipeline implications. Vapor products are likely to remain favored by youth due to their simplicity or use, sweet and fruity flavors, lack of SRITA Global Marketing of IQOS 12 tobacco flavor, reduced harshness, and lower cost. If PMI’s campaign to undermine smoke free laws become effective, resulting in emerging tobacco product use in bars, restaurants, and even workplaces, vaping products will also benefit. Faced with stiff competition from the vaping segment, HT well may not succeed in becoming a dominant part of the tobacco marketplace. Limitations of this Study While this white paper provides a comprehensive picture of IQOS Global marketing through February 2020, it is certainly not exhaustive. As we do not have access to PMI’s marketing plans for IQOS, our study of its promotional activities is essentially a reverse engineering of the company intentions through study of their consumer facing promotional activity. Fortunately, with the vast quantity of material amassed over our 10 month study, we feel that we have sufficient insight to make many important inferences and to reach informative conclusions. We acknowledge that many additional events, social media channels, influencer/brand ambassador programs, point of sale promotions, etc. may well exist for IQOS that our research did not uncover. Indeed, over the course of this study we continually discovered new IQOS promotions and, despite the impressive scope of what we uncovered, we suspect that much more IQOS promotion may be lurking in the corners of the internet and offline. A particular area of limited visibility is what IQOS salespeople (coaches and brand ambassadors) say to potential customers. While PMI specifies guidelines for their employees, we strongly suspect that one-to-one and small group marketing conversations routinely transgress boundaries regarding the healthfulness of IQOS and its efficacy in achieving smoking cessation. Even adhering to the PMI party line on these important issues strays far from what is supportable by the scientific evidence.