After years of stellar growth, the vapor products category responds to changing marketplace dynamics. With one eye on the market, convenience retailers constantly weigh how much shelf space to allot e-cigarettes.
By Anne Baye Ericksen, Contributing Editor
When industry analysts announce in July that a product category is on track for a growth rate of approximately 31% for the entire year, most retailers would welcome the news as an indication that category is performing better than ever. But when that same category finished 2014 with an annual growth percentage of 77%, 31% suddenly looks less impressive.
That’s the figures stakeholders have been contemplating in terms of what’s happening with electronic tobacco products this year.
Sean Bumgarner, vice president of Scrivener Oil Co., headquartered in Springfield, Mo., is one of those stakeholders. The company’s 11 Signal Food Stores carry brands of both e-cigarettes and vapor-tank-mods (VTMs).
“They are selling fairly well, [but there are] lots of places besides convenience stores to buy the products,” Bumgarner said.
To promote the category, Bumgarner has chosen to highlight the top-sellers.
“The brands we want to really focus on are on the front counter. The remainder we work in next to the cigarette display,” he said.
E-cigarettes, VTMs and e-liquids have all experienced softer sales in 2015, compared to last year. In a year-to-year comparison ending the week of Aug. 8, 2015, e-cigarette dollar sales in all retail channels dropped 3.5%.
Meanwhile combustible cigarette dollar sales rose 3.1% for the same period. What’s more, category growth has been decelerating quarter to quarter since early 2014. In fact, according to Wells Fargo Securities LLC, nearly as many retailers reported a decrease in e-cigarette sales as those that recorded increases.
“The apparent slowdown in the U.S. market is mainly attributed to the natural course correction in the industry. The industry has come a long way in a short span where market push forces (new product launches) are being outweighed by pull forces (consumer preference),” said Apoorva Awasthi, lead research analyst for Bloomington, Minn.-based BIS Research.
Meanwhile, a Reuters poll concluded that approximately 10% of adults currently vape, which includes both e-cigarettes with built-in
cartridges, as well as vaporizers that have replaceable cartridges, and users choosing e-liquid flavors. This rate is nearly four-times higher than government estimates.
BEHIND THE FIGURES
Why the discrepancy between sales and apparent widespread use? Bonnie Herzog, senior analyst for Wells Fargo Securities, suggested heavy discounting has driven down dollars. But even in that case, the category remains an important revenue source for c-stores.
At the Vapor Expo International earlier this year, Herzog told attendees that c-stores continue to offer non-combustible tobacco products to not only meet customer demand, but because products offer a sizable profit margin for makers and retailers. Indeed, Herzog anticipates margins from vapor products will approach 39% by 2018—substantially closing the gap with combustible cigarettes, which Wells Fargo estimates will generate margins of 54.5% by 2018.
“Although c-stores offer lesser variety of [e-tobacco] products [than vape shops], the number of [c-stores] and their reach to end-users are clearly contributing to their growth in the market,” said Awasthi. “Moreover, setting up new vape shops requires capital investments that are otherwise eliminated when offering products in already established c-stores.”
VTM MAKES GAINS
Over the past few years, Mike Gancedo, category manager for The Parker Cos., based in Savannah, Ga., noticed a steady uptick in VTM and e-liquid sales in 38 Parker’s stores located in Georgia and South Carolina. In fact, there has been enough sustained customer interest that the company decided to develop a private label line of VTMs and e-liquids and focus less on e-cigarettes.
“We have reduced [e-cigarette] space in most locations because we have discontinued non-performing products,” he said.
Instead, Gancedo showcases VTMs in customized displays placed in prominent positions.
“We found that in stores where we placed a counter display, they sold more than twice the product than in stores without counter displays,” Gancedo said. “We have also made space in all stores on the backbar displays. Larger stores have one-inch to three-inch backbar fixtures; smaller stores have a shelf on our other-tobacco-product fixtures. This gives visibility to our new vape mods from any register in our stores.”
Deciding what brands to sell has become just as important a business strategy for c-stores as how to merchandise the products. While Parker’s has invested in creating its signature line, that is generally the exception. Rather, the majority of c-stores go through distributors or deal directly with manufacturers.
“We go with what our distributor recommends and adjust accordingly,” said Bumgarner. “Also, we bring in customer requests.”
The perception of the e-tobacco industry is still that it’s saturated with startup manufacturers with little official oversight. This quality assurance void has caused some concern for product safety among retailers and consumers.
Manufacturing leaders and industry advocates have been calling for industry-wide standards so retailers can promote the quality of products in their stores.
“Associations such as the American E-Liquid Manufacturing Standards Association, which started functioning in 2012, have been trying relentlessly to create responsible and sustainable practices and processes for the safe manufacturing of e-liquids,” said Awasthi. “Moreover, the packaging should have certain labeling, such as those from ISO (International Organization for Standardization) or if the product is CE (Conformité Européene) compliant, further enhancing the trust of end-users.”
This distinction could become more important as consumers become more brand aware and brand loyal. Evidence of this trend is already noticeable, such as Big Tobacco becoming more prominent this year. Until fall 2014, blu, recently sold to Imperial Tobacco, was the market leader. By the second quarter 2015, Vuse, an R.J. Reynolds Vapor property, assumed the top position. According to Wells Fargo, for the four-week period ending Aug. 8, Reynolds held nearly 40% of the e-cig dollar share, followed by blu (20.6%), Logic (16.3%), Altria, maker of MarkTen (6.3%) and NJOY (4.7%).
“For any growing industry, brand holds paramount importance since the products from established industry players are more trusted among users,” said Awasthi.
One of the interesting phenomena affecting the electronic tobacco marketplace this year is a litany of conflicting factors. For example, the Reuters poll indicated that nearly three-fourths of vapor users started within the past year; however, there’s also been new tax and legislative activity, including age restrictions that have convenience store owners and operators concerned about the future growth of the category’s customer base.
And as of this printing, manufacturers and retailers alike still await the U.S. Food and Drug Administration’s (FDA) official ruling on e-tobacco and any potential aftermath it may have on both manufacturing and sales.
This conglomeration of factors, along with the occasional negative news story, has resulted in mixed messages reaching consumers. Analysts suggest convenience store owners and operators keep these issues in mind when formulating marketing plans.
“Because e-cigarettes have been attracting a large population of youth and adolescents, the advertisements must not be too flashy or something which appears to be a fad rather than an alternative to conventional smoking,” Awasthi said.
At Parker’s, nearly all the e-tobacco promotional materials highlight its private label.
“We customize and print our point-of-sale materials in house for our backbar displays, counter displays, window signage, pump toppers and pump wraps,” Gancedo said.
Not only does he want customers to be aware of the brand, but also the quality.
“We are working hard to let the vaping community know that Parker’s is a destination for high quality VTMs and premium liquids. Everything we print includes ‘vape store quality at your convenience.’ We are able to offer great quality at a price that vape shops cannot compete with,” said Gancedo.