Despite lagging industry-wide sales in 2015, some e-cigarette brands are primed to post impressive numbers this year.
By Anne Baye Ericksen, Contributing Editor
Year-end figures confirmed what many convenience store operators have guessed for some time: the allure of non-combustible tobacco products, including e-cigarettes and vaporizers, has been burning lower than a few years ago.
Seemingly, what once was a low-maintenance, high-performing category has turned into a segment seemingly more susceptible to market shifts and whims.
“After witnessing an exponential growth for more than half of this decade, the e-cigarette market in the U.S. has finally climbed down the wall of unprecedented growth with further fragmentation of the competitive landscape in the region,” said Apoorva Awasthi, a division research analyst for the Bloomington, Minn.-based advisory and research company, BIS Research.
A strong rebound of regular combustible cigarette sales, new state regulatory laws and too much inventory are expected to join to cut the rate of e-cigarette growth in half next year, to 57% from its compound annual growth rate of 114% over the past five years, according to the research firm Euromonitor International.
While it’s hard for any category to maintain such stratospheric growth, some brands such as Vuse were buoyed by strong sales. E-cigs produced by large tobacco makers continue to demonstrate positive traction in the c-store channel.
“It’s still the Big Tobacco dominance over the U.S. e-cigarette market,” said Awasthi.
Early last year, analysts had forecasted the total U.S. non-combustible tobacco market would ring up $3.5 billion, with $700 million coming from e-cigarette sales in c-stores, food, drug and mass retail channels. These channels were also projected to contribute $400 million from vapors/tanks/mods (VTMs). Due to lackluster sales, however, expectations were downgraded significantly. Wells Fargo Securities LLC anticipated the c-stores, food, drug and mass retail channels would cash out 2015 with $600 million in e-cigarette sales, and $300 million for VTMs.
Recent figures also confirm the category’s ongoing slowdown. While combustible cigarette sales in all retail channels posted a 3% increase for the four-week period ending Dec. 26, according to Nielsen data cited by Wells Fargo, e-cigarette sales in all channels fell 14.7%.
Year-over-year growth continued to be fueled by 2015’s national launches of Vuse and MarkTen, industry figures show.
According to data collected by Nielsen C-Track Database, Reynolds American, maker of Vuse, maintains its stronghold in the category, especially in c-stores. For the four weeks leading up to Christmas, Reynolds American accounted for at least 42% of dollar share, nearly $50 million of the whole category. This dollar share represents a 26.7% increase over the same four-week period in 2014.
Imperial Tobacco’s blu followed, recording 18.3% of dollar share in the month of December. That equated to more than a 20% decrease in dollar share over December 2014 earnings. Logic had a similar market performance—boasting 16.3% of dollar share during the last month of 2015.
“Vuse is up hugely,” said Jon Fleck, merchandising manager for Cenex Zip Trip, the retail division of CHS Inc., headquartered in Inver Grove Heights, Minn. The company operates 70 stores in seven states, predominately throughout the West. “We’re up 200% on that brand. That’s helping us stay in the ballgame. However, blu, which has always been a good product for us, is down substantially. We’re down 40% with that one.”
John Tomlinson, director of purchasing and merchandising for Heath, Ohio-based Englefield Oil Co., which operates 122 Duchess Shoppe locations, stocks five brands of e-tobacco products. Of those brands, Vuse and blu are the top sellers.
“[Sales in 2015] were very slow except for Vuse, which couponed to increase their sales,” Tomlinson said.
Of course, vape shops still present stiff competition for the non-combustible tobacco customer demographic. To win over some of that base, Tomlinson has initiated various in-store strategies, such as increasing product visibility on shelves.
“We’re doing a trial in a couple of stores,” Tomlinson said.
What Tomlinson thinks might make more impact with shoppers is broader promotions from manufacturers.
“Companies need to do more consumer engagements, coupons and buy-downs to grow this category,” said Tomlinson.
Unlike cigarettes, non-combustible tobacco customers don’t really exhibit dominant brand loyalty. Rather, purchasing motivation seems to be driven more by price and intent, such as nicotine cessation and curiosity.
“Brands have a mixed reaction from consumers. Although e-cigarettes are rapidly shifting away from the hype cycle, brand loyalty is growing more dependent on customers’ satisfaction. Wherein users looking to quit smoking rely on established brands and gain more trust in such products, first-time vapers and price-sensitive buyers opt for products that are lesser in price without giving much preference to the brand,” said Awasthi.
What’s more, for c-stores, non-combustible purchases remain mostly a convenience purchase, along with fuel fill-ups, quick lunches or snack indulgences.
The vaping segment also has experienced notable downward fluctuations. Just a few years ago, kits were a reliable performer for c-stores. However, as the consumer base matured, this component has fallen off. Wells Fargo Securities reported that rechargeable refills—tanks and mods through which users can add e-liquids—continue to gather greater market share. For the four-week period ending Dec. 26, 2015, rechargeable refills commanded 62% of the $57.7 million sales of vaping products in all channels.
However, in the convenience store environment, e-liquids are proving to be a more reliable profit generator these days.
“The vaporizers themselves are not big sellers for us. Most people have already gotten the hardware and buy the liquid refills from us. We’ve had good growth with e-liquids,” said Fleck. “I don’t know if it’s because we didn’t do a lot with them prior to 2015…but if we didn’t have them, we’d be down probably 30-50%.”
In addition to shifting purchasing habits among consumers, there are several outside factors affecting the category’s potential. As of mid-January, the U.S. Food and Drug Administration’s ruling regarding whether non-combustible tobacco products should be deemed the same as cigarettes lingers in the review stage by the Office of Management and Budget. Taxes remain a concern, too.
“Earlier in 2015, Minnesota and North Carolina levied taxes on e-liquids. The dawn of 2015 also brought about new taxation policies, particularly in Washington D.C., while Indiana and New Mexico are next in the line to implement taxation structure for these smoking alternative devices in the first quarter of 2016,” said Awasthi.
“We do business in Minnesota, and they do tax at a high rate. Sales there are just about nothing,” added Fleck.
Still, Awasthi thinks the c-store industry is primed to see a boost in vape sales this year.
“E-cigarette aftermarket, consisting of e-liquid, atomizers and other components, will be the next high-growth area for the industry, starting in 2016.”