3 Key Markets for Philip Morris International

By Markets Fool.com

Cigarette maker Philip Morris International (NYSE: PM) has built a truly global business, serving customers on six continents. Yet some of the nations in which Philip Morris sells its cigarettes and other tobacco products are more important to the company's overall success than others, and investors need to watch those markets particularly closely to make sure that they catch any potential changes that could help or hurt the company. Below, we'll look at three key markets for Philip Morris to see how they've fared recently.

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Image source: Philip Morris International.

1. Indonesia

Indonesia has one of the largest overall cigarette markets of any country that Philip Morris serves, and unlike many areas of the world, that market is growing. In the second quarter of 2016, Philip Morris estimated the size of the total cigarette market at 83.6 billion units, up 5 billion in just the past year. For its part, Philip Morris shipped more than 28.5 billion units to Indonesia during the quarter, claiming about a third of the overall market with brands like Sampoerna and Dji Sam Soe. In particular, Philip Morris has had success with what it calls the Whites segment, claiming four-fifths of the market in that category. The key Machine-Made Kretek market, which makes up about three-fourths of Indonesia's total market, has been less successful for Philip Morris, but the company still claims about 30% of that segment.

Indonesia has suffered from a sluggish economic environment lately, and Philip Morris has seen its market share fall by a full percentage point over the past year. Gains in the size of the market were largely due to the timing of the Ramadan period compared to last year's second quarter, and Philip Morris expects long-term trends to be closer to flat. Nevertheless, Indonesia's sheer size will make it an important market for Philip Morris to target going forward.

2. Russia

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Russia also has a strong culture of smoking, and its size makes it an essential element of Philip Morris International's overall strategic vision. The Russian cigarette market sold about 72.1 billion units in the second quarter, and Philip Morris was responsible for 20.5 billion of them, climbing market share of 27%.

Oddly enough, though, Russia is one area in which the Marlboro brand has been almost inconsequential. Marlboro has a market share of just 1.4%, compared to 8% for Bond Street and 3.9% for Parliament. Other brands, which include L&M, Chesterfield, Optima, and Next/Dubliss, were collectively responsible for more than half of Philip Morris sales in Russia.

Troubling for Philip Morris is that the Russian cigarette market is shrinking quickly, posting a nearly 7% year-over-year drop compared to last year's second quarter. The price increases that Philip Morris has implemented to try to offset falling volume have resulted in a hit to market share, and the company will have to balance competitive pressure against its desire for higher profit in order to get the most from the nation.

3. Italy

By contrast, Philip Morris' markets in the European Union are relatively small. Yet the EU is an essential component of Philip Morris' success because of the company's ability to squeeze higher profit margin from many countries there. As an example, in the second quarter, Philip Morris' sales in the EU and in Asia were roughly the same, but EU operating company income of $1.07 billion was more than $320 million higher than the corresponding figure in Asia.

Within the EU, Italy stands out. The Italian cigarette market sold only about 18.7 billion units in the second quarter, but Philip Morris was responsible for more than half of them, at 10.1 billion. Marlboro had market share of nearly a fourth all by itself, and the Chesterfield and Philip Morris brands were responsible for another 20 percentage points of share.

The good news for Philip Morris in Italy is that efforts to reduce the level of illegal trade in cigarettes has paid off somewhat. With the new PMI Impact campaign, Philip Morris hopes to engage a broader set of interested parties to fight smuggling, and the likely result is potential further gains in legitimate sales volumes of its tobacco products. Investors should watch results in Italy closely for additional signs of success on the illicit trade front.

Philip Morris wants to serve the whole world, and it will continue to reach out to customers everywhere it can find them. These three countries will be especially important for Philip Morris in its efforts to capture as much growth as possible going forward.

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