From corporate acquisitions and collaborations to local and state regulatory enforcement, it’s been an eventful year for e-tobacco products.
By Anne Baye Ericksen, Contributing Editor
Nearing the end of 2013, sales of e-cigarettes and vapors/tanks/mods (VTMs) were riding high for convenience stores and other tobacco retailers.
As reported by Wells Fargo, unit growth of e-cigarettes for the 52-week period ending Jan. 18, 2014, registered at 54.8%. At the time, blu maintained a strong hold as the No. 1 seller for convenience stores with a healthy 40.6% market share. It was followed by NJOY (26.5%) and Logic (15%).
Why look back two years? It was around this time that e-tobacco products experienced their first drop in pricing. Since then, the category has been slowly losing momentum. Research by Wells Fargo Securities revealed that dollar sales of e-cigarettes for all retail channels, including c-stores, fell by nearly 30% for the 52-week period ending Oct. 3, 2015. Additionally, net pricing dropped by 10.5% and unit sales declined by 21%.
Still, some industry analysts, such as Wells Fargo’s Bonnie Herzog, remain steadfast in the position that the category is primed for future growth—projected to earn $3.5 billion this year from all channels, including online sales. Observers attribute some of the softening in the U.S. market to product diversity, with offerings from Big Tobacco to craft e-liquid producers, and with sales divvied up between c-stores, online outlets and vape shops.
But the economics aren’t the only factor that’s undergone notable change for this category. Since January, Big Tobacco has expanded its footprint, both on retailers’ shelves and on the corporate level through mergers and collaborations. Plus, manufacturers continue to introduce new products, and local and state lawmakers have proposed and passed new regulations.
FOCUSED PRODUCT SELECTION
While in 2013 blu was the top-selling e-cigarette, once Reynolds American rolled out Vuse nationwide in 2014, there was a substantial shift. Vuse quickly commanded the No. 1 position. According to Wells Fargo, Vuse accounts for more than one-third of the category’s dollar shares as of early October. blu remains second with 23.4% of dollar shares, followed by Logic at 14.8%. Comparably, NJOY has fallen to 5% of e-cigarette dollar shares.
Despite its popularity, Ken Johnson at the time opted not to carry Vuse in any of the 36 Friendly Express stores throughout southern Georgia. “At the time of their introduction, the margins offered were lower than blu,” Johnson said. Rather, the director of marketing for the Waycross, Ga.- based chain chose to stock blu as its sole e-cigarette brand. To fill out the c-store’s selection, Johnson now stocks some VTMs and e-liquids. But here, too, he has exercised restraint. “I looked at 50 different programs—like I’m sure the rest
of the world did,” Johnson said. “I looked at the type of sup- port, margins, sustainability and promotions offered. There was either no traction or support from some companies.”
Johnson settled on two core brands, Haus and South Beach Smoke, the latter of which he deals with directly.
“It’s a great product for promotions, such as buy a device and get free juice with the hopes customers will continue to purchase the e-liquid,” said Johnson. “It’s a way to gain traction Johnson is also interested in Mistic’s new Haus Craft
Collection. “Mistic came out with a mod, kit and coil, which is entry level for c-stores. And it has a higher-end vape juice that’s geared for c-stores,” said Johnson.
The Haus Craft collection is being tested in 15,000 convenience stores and mass retailers this fall. Mistic plans to expand distribution to its 70,000 partner locations nation- wide before year’s end. The mod kit sells for $49.99 and includes a vaping device, starter kit and three e-liquid flavors. “I also looked at Juul, and it’s interesting,” said Johnson. “But it’s very expensive, something like $50 for an e-cigarette. It’s trendy, but I don’t know if it will translate in south Georgia.” In addition, Vapestick from Electronic Cigarettes International Group took new steps in the U.S. marketplace. Already a strong performer in Europe, the e-cigarette is being tested at 200 stores throughout the Northeast this fall.
The industry has experienced some noteworthy shifts on the corporate side, too. Over the past several years, there has been a rapid expansion of this relatively new industry as startup manufacturers of devices and juices were introduced. This year, however, not only did expansion slow some- what, but there’s been consolidation, too. Perhaps the biggest move was Reynolds American purchasing Lorillard, the maker of blu. As part of that transaction, the blu brand was sold to the Imperial Tobacco Group’s subsidiary LOEC Inc. Reynolds American also formed a collaborative partnership with British American Tobacco (BAT), a e-cigarette producer in the United Kingdom. The companies agree to cooperate on research and development as well as on scientific manufacturing and regulatory issues. The pair also will mutually cross license items until 2022.
“That likely will be a positive for Reynolds,” said Gregory Conley, president of the American Vaping Association (AVA), an industry-funded advocacy organization.
This summer, Altria Group reported that it’s expanding its strategic framework with Philip Morris International.
Altria Group is the parent company of Philip Morris USA Inc. and produces MarkTen and Green Smoke electronic tobacco brands, which combined generate more than $200 million in annual revenue.
As part of the deal, the manufacturers agreed to share research, developments and technology on e-vapor products. Soon, Altria released the MarkTenXL in lead markets, boasting twice the liquid and battery life over its predecessor.
As a result of such collaborations, Conley expects next- generation improvements to hit the market in 2016.
“The emergence of temperature control is going to be very important going forward, where more advanced users will have some more assurance that products are going to perform at a particular level and not exceed it,” Conley said. “Temperature control will find its way into more and more products as time goes on.”
Conley also believes users are becoming more sophisticated and will appreciate these technical advances.
“For smokers who tried vaping products in 2011, that experience will have no impact on how they will enjoy the products in 2016,” he said.
Johnson also has detected a growing corporate interest in dry herb cartridges, such as Green Smoke.
“Acquisitions are coming from big marijuana companies for dry burners because they’re not currently in the e-cigarette market,” Conley said. “The dry burner technology lately is aligned with the marijuana industry.”
TIGHTENING THE RULES
Regulatory initiatives regarding age restrictions, taxes and designated public use also dominated the year. According to Fortune.com, approximately 200 vaping bills have been introduced in 40 states.
“The impact of 2015 bill proposals have not yet begun to be felt,” said Conley. “There’s a bill that passed in Indiana that will hopefully be beaten down in the courts because the result would be e-liquid companies across the nation will be unable to sell in Indiana. In Kansas, there’s a 20-cent-per- milliliter tax on vapor products that will go in effect in 2016.”
Of course, there’s also the ongoing waiting game for the U.S. Food and Drug Administration’s (FDA) official determination on whether e-cigarettes, VTMs and e-liquids are to be deemed tobacco products, thereby qualifying them to be taxed similarly to cigarettes. This past June, the AVA and the FDA Center for Tobacco Products published an Advanced Notice of Proposed Rulemaking with regard to vapor products in the Federal Register.
Despite the plethora of legislative activities aimed at the industry, the softening numbers, and the corporate shuffling, the category should continue providing c-stores with healthy margins—in the neighborhood of 30%, according to Wells Fargo. “It’s still an interesting category,” concluded Johnson. “There are decent sales even with our limited footprint. My numbers are growing weekly.”