Philip Morris is counting on Greece going up in smoke

Graphic via Tornos News — When Philip Morris International announced in March that it would invest €300m in its Greek unit, the cigarette maker was betting on an economy that had cratered as the country was struggling to strike a deal with its creditors.

The New York-based company and its wholly owned Greek  subsidiary, Papastratos, didn’t want to wait. Now, with review talks completed between the government and creditors, Christos Harpantidis, Papastratos’s chief executive officer, says the company feels vindicated.

“Our example will be followed by many others,” Mr Harpantidis, who took charge in August, 2015, said in an interview with Bloomberg in Athens.

The investment from the manufacturer of Marlboro and Chesterfield cigarettes is among the biggest such inflows for Greece since the debt crisis in 2009, and is a much-needed boost for a country that has seen its economy shrink by more than a quarter.

 Philip Morris and Papastratos have begun transforming the unit’s factory in Aspropyrgos, a suburb of Athens, into a producer of tobacco sticks to be used in its state-of-the-art smoke-free systems called Iqos.

Iqos are  electronic devices that heat, rather than burn,specially prepared and blended tobacco. As the device starts to heat the tobacco, it generates an aerosol that contains nicotine.

The devices first came to market in 1988, however were not a commercial success. Based on the popularity of electronic cigarettes a number of companies are attempting to market version again as of 2016.

The plan is to use Greece as one of the company’s bases to produce sticks for exports to more than 30 countries by the end of 2017.

Papastratos’s factory currently produces about 12bn cigarettes per year.

When the transformation of the factory is complete, the plant will be producing 20bn Iqos, Harpantidis estimates.

Iqos is a growing market, according to Harpantidis, because these heat-not-burn gadgets are drawing smokers who don’t want to quit but want to limit the harmful effects of smoking.

Iqos have more than 1.8 million users and that market is expanding. Philip Morris, which began acquiring stakes in Papastratos in 2003 and now owns 100pc of the Greek unit, is investing in Greece in spite of difficult conditions. The government has raised the tax on cigarettes to boost public receipts, taking it to 90pc of the price of a packet of cigarettes from 73pc back in 2009.

At the same time, cigarette smuggling in Greece is booming, accounting for 20pc of all sales in 2015 from 3pc in 2009. To top that, Greece slid three notches in the World Bank’s ranking for 2017 of the best countries to do business in, and is at the bottom of the list in Europe.

Greece produces about 30,000 metric tons of tobacco a year, grown mainly in East Macedonia, Thrace and Katerini – all in the northern part of the country.

“Development shouldn’t come just through shrinking costs, but through identifying your comparative advantages and building on them, like the Iqos,” Harpantidis said. “We have already hired 250 employees for the new factory and when the investment is over we will have 400 more.”

Papastratos, the largest manufacturer and distributor of cigarettes in Greece, employs 1,050 people. It had revenue in 2015 of €1.3bn with a 40pc share of the domestic market.

The new jobs at Papastratos will help spur economic activity in Greece, which has seen its unemployment rate surge during the crisis years, taking it to more than 23pc, according to Harpantidis.

Papastratos expects it will be able to produce the new products from January 2018. For Harpantidis, what’s key is that the investment gives Greece an important piece of the emerging trend in the world’s smoking industry.

“We changed our focus because we believe that the future belongs to smoke-free products and in this context Greece will have a key role,” he said.