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In 1847, Philip Morris, “tobacconist and importer of fine seegars”, opened a small shop on London’s Bond Street. On nearby Wardour Street, nearly 170 years later, the store that bears his name is selling something quite different.

A “tech guru” guides customers around the gadgets on display, while a colleague offers others a tutorial of the company’s latest product. “This is not a cigarette,” he says, producing a stick, about half the size of a regular cigarette and poking it into a pen-shaped contraption. “It’s not a vaping device either,” he adds, before taking a puff. Tobacco companies have spent billions in recent years in search of the industry’s holy grail — a cigarette that causes less harm, but which has the look and feel of the real thing. In its iQos “smokeless cigarette”, which heats tobacco in a small, handheld device to about 300C, Philip Morris International, thinks it may have found the answer. It might not have cracked the code just yet — “It’s like smoking a hot cross bun,” says one smoker who tried iQos — but analysts say PMI is winning the race to produce heat-not-burn products. And they say the category is “a key catalyst” for consolidation in the tobacco industry, describing it is one of the driving forces behind British American Tobacco’s $47bn offer for rival Reynolds. According to reports, the deal is stalling over the valuation of the technology. Owen Bennett, analyst at Jefferies, says that alongside Reynolds’ US cigarette business, “the added incentive for BAT is access to Reynolds’ Revo V2 heat not burn technology”. In a recent note to clients he said the technology “will be important to keep pace with Philip Morris in the race for global vapour share”. Indeed, André Calantzopoulos, chief executive of PMI, says he is preparing for the day when his company, the maker of Marlboro which had revenues of $26bn last year, will stop selling traditional cigarettes. But transforming the structure and mindset of a business that has remained virtually unchanged for decades is not easy. “Many people have asked the question, why disrupt our business?” says Mr Calantzopoulos. The tobacco industry is moving from a time-tested model — selling easy to make, addictive products and increasing revenues through incremental price rises — to something far less certain. “We are having to work more like a consumer electronics business,” says Kingsley Wheaton, head of next-generation products at BAT. “This has meant we have hired talent from other consumer goods, electronics and pharmaceutical companies.” High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our T&Cs and Copyright Policy for more detail. Email [email protected] to buy additional rights.

In addition to new staff, tobacco groups are moving from a straightforward manufacturing process to one heavily reliant on expensive research and development. PMI has invested $3bn-plus on its “reduced risk products” to date, and BAT more than £500m. “If you have a product, and you can offer a better product to consumers, you have to do it,” says Mr Calantzopoulos. “It also makes business sense. Both short and long term, I believe there will be a lesser tax burden on this product.” He predicts that reduced risk products will add “$700m-$1.2bn to the company’s bottom line” by 2020. The “gurus”, customer service desks and the personalisation options and accessories soon to be launched for the iQos all hint at a future more closely aligned to Silicon Valley than Marlboro Country. The iQos slogan — “This changes everything” — lifted from Apple, is another indication of the company’s inspiration for its approach. And just like a tech company, Mr Calantzopoulos is well aware that competition may come from unexpected sources. “I don’t think we’ll be inventing everything,” he says. “There will be a lot of creativity and innovation coming from start-ups.” He adds that the company runs a scouting programme to spot promising technology in fledgling businesses, and has an investment fund to take positions in these groups. PMI has further inventions of its own planned, including a device that is lit like a normal cigarette, but which again heats rather than burns the tobacco. A carbon tip on the end of the cigarette is ignited, and this warms the tobacco. While ecigarettes make up a tiny percentage of tobacco sales, the signs are promising. Research for Public Health England into ecigarettes shows vaping products are 95 per cent safer than traditional cigarettes, while according to PMI products like iQos release up to 95 per cent fewer chemicals than conventional cigarettes. Yet, Big Tobacco faces an uphill battle to convince consumers that this time, it means it when it claims its products are safe, or at least carry a reduced risk. Tobacco groups have paid out hundreds of billions of dollars to settle claims they misled the public about the dangers of smoking. Mr Calantzopoulos is unfazed. “There is a deficit of trust in the tobacco industry,” he acknowledges. “I’m not asking you to believe me — I’m asking you to verify the data.” Its huge investment into research and product testing are proof that Big Tobacco has moved on from the lies of yesteryear, according to PMI. “I cannot change the past,” says Mr Calantzopoulos. “But I can do something about the future.” Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.

[Source:-the New Yourk Times]