By Anne Baye Ericksen, Contributing Editor
If one were to describe the current state of the e-tobacco industry, “mixed results” might be the most accurate description. On one hand, year-to-year pricing for the past 12 consecutive periods is down, according to research released last month by Wells Fargo Securities.
Conversely, sales dollars of e-cigarettes for the period ending May 2, 2015 spiked 25%, while unit growth rose 57%, according to Wells Fargo.
And of course, you can’t ignore the uncertainty still hovering over the industry as manufacturers and retailers alike wait for the official announcement regarding federal regulation of e-cigarettes and other electronic nicotine devices (ENDs).
CRUNCHING THE NUMBERS
So why the apparently incongruent financial trends? Analysts attribute the pricing decline to product expansion. As competition grows with more SKUs on shelves, there’s often price adjustments downward. Meanwhile sales totals indicate growth for the category.
According to Wells Fargo, ENDs, including cigalikes, closed systems and vapor/tanks/mods (VTMs), accounted for $2.5 billion in 2014. That figure is expected to climb to approximately $3.5 billion by the end of this year. Of course, convenience stores remain a vital economic contributor. Experts project c-stores to report more than $600 million in sales in 2015.
“These are products our customers have requested. They are an alternative to combustible nicotine and are becoming socially acceptable,” said Jeff Arnold, customer benefits manager for Maverik. The North Salt Lake, Utah-based retailer operates mor at least 270 sites throughout the West.
Arnold believes e-cigarettes are helping c-stores bolster declining tobacco cigarette sales, saying “[e-cigarettes have] higher profits, which help recuperate shrinking margins on cigarettes.”
CLIMBING THE LADDER
Recent data from Wells Fargo indicates Reynolds American Inc.’s Vuse is No. 1 in both dollar sales and unit shares, at 33.5% and 44.4%, respectively. Additionally, in a year-to-year comparison ending May 2, 2015, Vuse registered an astounding 2,736% spike in unit shares performance in convenience stores.
Second is blu eCigs, which claimed 23% of sales dollars and 18% of unit shares. The popular brand was bought by Imperial Tobacco Group after last year’s merger between Reynolds American Inc. and Lorillard Inc.
Altria’s MarkTen and NuMark earned 8.6% of unit shares at c-stores for the 52-week period ending May 2, 2015—impressive since MarkTen was only rolled out last year. If growth statistics are any indication, big tobacco makers are probably committed to e-tobacco products for the long haul.
“Big tobacco did a lot of marketing in advance of releasing their products. We received some small shippers that were the right fit for c-stores and that was a success,” said Jim DeFilippis, vice president, general manager of NOCO Express, the 36-store retail division of NOCO Energy, headquartered in Tonawanda, N.Y.
That’s not to say that smaller brands don’t still appeal to customers.
“Cig2o was a very early item we carried and we had customers who were pretty passionate about it,” DeFilippis said. “While sales for Cig2o are down, we still have folks who are glad we didn’t pull the rug out from under them by dropping the brand.”
While some users develop brand loyalties, other have evolved their purchase preferences. Previously, a large percentage of customers concentrated on kits and disposable cigalikes. The majority now has either ventured into VTMs or graduated to closed systems that can be recharged and refilled.
“Closed tank vaping devices like the LogicPro are coming onto the scene, [and] members of our focus group like them because they are a no-mess device,” Arnold said. “You are not exposed to the juice so there is no leakage and they are [more] child-proof. Also, we are a fill-in for tank and juice purchases. Right now, vape shops and the Internet are the destinations for major purchases.”
Research appears to back Arnold’s observations. The Balvor Retailer Composite reports that disposables and rechargeable e-cigarettes swapped sales positions. In 2014, disposables recorded more than half of the dollar shares within the category and rechargeables about one-third.
In 2015, rechargeable units are experiencing strong sales and unit growth year-over-year due to significant product innovation and promotional support from manufacturers.
The units now account for more than half of the dollar sales, up from one-third of that level last year.
Still, the Balvor report shows that END dollar sales were up 7.1% last month in the c-store channel, while retail units sold grew 26.4%. As customers become savvier, they seek further product innovation to bolster the experience. For example, some manufacturers are trying to improve power and temperature control.
“We’ll continue to see more innovation of vapor products as new technologies enhance the vaping experience to mimic smoking, such as the hand-to-mouth sensation, vapor plume and nicotine delivery helping to further drive the category,” said Cynthia Cabrera, executive director for the Smoke-Free Alternatives Trade Association.
U.S. Food and Drug Administration (FDA) announced late last year a proposed ruling that in certain instances, would classify e-cigarettes and vape systems as tobacco products, thus subjecting them to the same regulation as combustible cigarettes, roll-your-own and smokeless tobacco. Since then, retailers have adopted a wait-and-see stance while the FDA sponsors more than 50 research projects assessing different component parts of the market.
Mitch Zeller, director of the FDA’s Center for Tobacco Products, said in an interview with Convenience Store Decisions that what the future holds for e-tobacco is still up in the air.
“The FDA does not comment on future rulemaking; however, we can say that we do not currently have sufficient data about e-cigarettes and similar products to determine what effects they have on the public health, including potential risks of e-cigarettes when used as intended, how much nicotine or other potentially harmful chemicals are being inhaled during use or whether there are any benefits, including smoking cessation, associated with using these products,” Zeller said.
History of the FDA & Electronic Nicotine Devices
2009 – The U.S. Food & Drug Administration (FDA) detained shipments of electronic cigarettes, claiming the products were “adulterated, misbranded, or unapproved drug-delivery devices” per the Federal Food, Drug & Cosmetic Act.
2009 – The FDA began testing e-cig cartridges that revealed variability in nicotine content and raised concerns within the government agency regarding possible chemical toxicity.
2010 – An appeals court upheld an earlier decision that ruled the FDA would have to regulate e-cigarettes as tobacco products unless a therapeutic claim was made.
2014 – The FDA announced a new rule proposal that would expand its authority by deeming e-cigarettes and vapor devices as tobacco products. The final rule could require, among other regulations, ENDs to carry health warnings and restrictions on sales to minors.
2015 – Sometime this summer the FDA hopes to publish its final rule whether it deems ENDs as tobacco products that require the same oversight as combustible tobacco products currently under TCA.
2015 – Once deeming rules are finalized, it moves to the Office of Management & Budget for a cost/benefit analysis, which could take 3-6 months.
Source: The U.S. Food & Drug