Sales of e-cigarettes in the U.S. are set to grow 24.2% per year through 2018, according to a projection from market provider Research and Markets Ltd.
Those are promising figures for many convenience retailers who continue to take stock in data from such groups as StatisticBrain.com, which estimates that 2.7% of U.S. adults have tried e-cigs and that some 2.5 million U.S. adults are e-cigarette smokers.
However, emerging market factors are rising to challenge the developing category—in the forms of ongoing regulation, soft repeat business and the growing popularity of tank products.
In c-stores and other retail channels, scan data shows the e-cigarette category continuing to experience softness, according to Vivien Azer, managing director with the Cowen Group Inc. in New York City. “They’ve gotten a lot of trial but the repeat has not been robust.”
CATEGORY CHANGES
Recent moves by e-cig makers have retailers watching the market closely. Reynolds Vapor Co., a subsidiary of Winston-Salem-based Reynolds American Inc., earlier this year reported it had completed the final wave of expansion for its Vuse digital vapor cigarette, increasing the brand’s presence to about 100,000 retail outlets nationwide.
“I can’t say that they have taken off, but they’re not doing badly, either,” said Tim Greene, category manager/area manager for Boulder, Colo.-based Smoker Friendly. “They’ve got new flavors coming out. And MarkTen released its 2.5% NBV (nicotine by volume) deal last fall, and that’s just kind of going along, if you will.”
Four more Vuse flavors—mint, rich mint, crème, and chai and mint—were launched in Colorado and Utah this past December.
Reynolds and Lorillard Inc. are continuing to spend hard on e-cig advertising.
Most stakeholders are looking at the $27 billion acquisition of Newport menthol cigarette maker Lorillard Inc., a deal that would combine the No. 2 and No. 3 U.S. cigarette companies. Shareholders of both Reynolds American and Lorillard, last month, approved proposals related to the merger of the two tobacco giants.
The merger will allow the two tobacco companies to better compete with Altria Group, parent of Philip Morris USA and Nu Mark LLC, producer of MarkTen.
Greene explained Lorillard’s position with blu is illustrative. “They are trying to become more competitive as far as bringing out the blu PLUS and the blu PLUS basic kit to get it to a price point that more or less matches where the MarkTen and the Vuse are. They have come out with the new economizers that supposedly add a bigger punch, and they are packaging them in three instead of five. The consumer is getting more puffs out of three than they did the five,” he said.
ALTRIA MOTIVES
On Feb. 19, Altria announced plans to expand its MarkTen brand nationally in the second quarter. The company was able to get its MarkTen products into 60,000 retail stores in the western part of the U.S. While this is still a small portion of Altria’s overall business, it opens a door for the tobacco company into the burgeoning e-cigs market.
Earlier this month, the company also said its Nu Mark subsidiary had acquired the e-vapor brand Green Smoke for $110 million.
Greene predicted deep-pocketed competitors to emerge more in 2015.
“Vuse is coming out with a big direct-mail campaign at the end of (February) and into March, and they are asking retailers to do buy downs. So yes, I think you’re seeing retailers narrow in on three or four brands at the most,” he said.
Tariq Khan, CEO of Sentar Oil Inc., an eight-store chain based in Rockville Centre, N.Y., has seen the big three brands take market share from smaller companies due solely to marketing dollars. “They are advertising, creating more awareness. The category is not growing; it’s already shrinking.”
The strongest-selling line he carries is Logic, Khan added. Indeed, the most recent results from Nielsen’s C-Track Database show Logic holding onto the No. 1 position for unit share in the c-store channel nationwide for another consecutive month, continuing to rank second in dollar share nationally.
TRIAL AND TRIBULATION
Steven Montgomery, president of b2b Solutions LLC in Lake Forest, Ill., said that there are quite a few smaller makers of electronic cigarettes seeking a foothold in the c-store industry.
“Some of these will succeed, but it is likely in a field this crowded many will fail, leaving retailers carrying products that no one can provide the necessary refills for.”
Montgomery suggested c-store retailers treat electronic cigarettes the same as they have the more traditional tobacco products.
Cowen Group’s Azer said product innovation could help maintain interest in the category.
“On a national level, the (nicotine delivery systems) NDS’s also face headwinds,” said Montgomery. The Surgeon General has been touring the country talking about the need for clarity regarding e-cigarettes. The issue is, ‘Do they help people stop smoking or serve as a gateway to cigarettes?’ The middle ground is that they do neither, and are simply an alternative way for adults to enjoy what is still a legal experience.”
States, however, are not waiting for the U.S. Food and Drug Administration to determine how nicotine delivery systems should be regulated.
EMERGING VAPE
Growth has come only because the category is benefitting from new products like Vuse and Altria’s MarkTen, Azer continued. “If you strip out those two product offerings, the category remains in double-digit decline.”
“I anticipate a continued decline in e-cigs in 2015 as more consumers explore new technological advances in the vapor category,” said Rich Jacobs, Atlanta-based RaceTrac Petroleum Inc.’s director of tobacco and packaged beverages. “With more closed vapor systems hitting the market, c-stores will start to see their combustible cigarette consumer try, and like, these products. After trying these closed vapor systems, I think consumers will demand more choices in flavor and nicotine levels, leading to more growth in the total vapor category.”
Jake Sharp is the co-owner of The Cube, a drive-through convenience store in Lawton, Okla., and a pair of smoke shop/c-stores called Chiefs Smokin’ Icehouse. Sharp believes the e-cig category will continue to prosper in retail channels.“I always thought that the majority of the market was in the drips and the different flavors. It’s trendy now to mix the flavors and come up with your own flavor to make the user experience more fun.”
Sharp said he and his partner have decided that they want to stick with e-cigs.
“That’s my business model,” Sharp said. “Society is into the drips and that type of product, but I don’t know if that’s a phase that will soon be gone. I hope so, because we don’t want to get involved in that.”
Amer Hawatmeh, president of St. George Oil in St. Louis and operator of six Coast to Coast convenience stores, employs a strategy with electronic cigarettes he has used successfully with other product lines in the past.
“I believe in bundling,” Hawatmeh said. “That’s what I’ve always done. I’ve been successful with that for years. Here’s a price for one, here’s a price for two, here’s a price for three. In our business nobody buys more than three, especially these days. Two-fers and three-fers help keep the volume moving. You’re making less of a margin, but you’re making more dollars, obviously.”
