PMI is attempting to create a direct relationship with its customers using its latest product range. Nick Shanagher wonders if retailers will rebel.

Dressed in a bright ‘Marlboro red’ top and skinny white jeans, Ebru Alpay Oraman, director of marketing and sales strategy at Philip Morris International (PMI), certainly stood out at the National Federation of Retail Newsagents conference in June.

Her purpose was to persuade the retailers attending to become advocates of PMI’s innovative, reduced-risk, ‘heat not burn’ tobacco product IQOS, and its Heets refills.
Oraman had a pitch-perfect start, complimenting the 200 shopkeepers in the audience on their dancing prowess at the gala dinner the night before.

The numbers from Japan were impressive – IQOS has a remarkable 10% market share there. The numbers from Italy were less impressive, though, and PMI’s UK launch is being carefully orchestrated.

Oraman says the strategy here is about carefully balancing the numbers of coached converts to IQOS with supplies of the starter pack and Heets refills.

It made some kind of sense, but the house of cards was wobbling when retailers started to ask the key question on their minds: ‘What sort of margins are on offer?’ Oraman resolutely avoided answering the question.

The product is being rolled out in London, first by three major wholesalers and a selection of retailer champions. One of the latter is unimpressed with the marketing ideas – selling starter packs for £89, or at £45 if he can get his customers to hand over their email addresses.

This is disappointing at a time when the convenience channel is hungry for the next big thing to rescue it from a long period of attrition. To put the issue into a word, the whole launch seems complex – and overly so.

The independent convenience channel, from distributor to wholesaler to retailer to customer, is very simple to understand until it is closely observed. Like physicists trying to determine where sub-atomic particles might be at a given point in time, brand owners get frustrated when they try to be definite about where shoppers meet their products.

The relationship of retailer to wholesaler provides a network that has great resilience. It is also not rigid, unlike the complicated supply chain in a chain store. Independent retailers become loyal to several wholesalers, some large, some small, and these relationships are underpinned by cost-price advantage.

While brand owners are often uncomfortable talking about margin, it is a fundamental marker in their route to market. Everyone understands that there is a trade-off between a guaranteed volume of business and the price charged. This is the oxygen that fuelled the rise of the German discounters and helped the major supermarket chains to dominate UK grocery sales.

For those wholesalers that handle tobacco, it has been an important part of their sales mix, attracting repeat business from stockists. However, it is also a highly regulated and lower-margin product, with the ever-present threat that users may simply stop using it at some point.

The arrival of reduced-risk products to the UK market does not appear to be a new market opportunity, but more a disruption to the existing tobacco market – which may see a large part of the current portfolio displaced by IQOS/Heets.

If this was business as usual, with growth in market share due to product innovations that carve out a new market, such as when Red Bull created the energy drink market, then that would be that.

However, there seems to be something more going on here. PMI wants a direct relationship with its IQOS users. This potentially creates a conflict of interest with retailers down the line, in which they and PMI might dispute whose customer the Heets buyer is.

What you can say is that IQOS looks like being good news for PMI, which has margins of more than 40% in the UK. But as a wholesaler, is it good news for your customer base?
Amazon already sells the starter kits at prices from £60 to more than £170. What do customers say? ‘Love it’, says one. ‘Cannot find the heat sticks,’ says another.

PMI has got the industry’s attention, but no-one is quite sure where this story will end up.

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Nick Shanagher
As managing director of Newtrade Publishing Nick has over 20 years’ experience of covering retail markets, Nick helps shopkeepers and wholesalers of all sizes to think about what questions are important for themselves and their businesses, and to find answers that work in their shops.

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