Could the e-cigarette segment rebound now that federal regulations are finalized?
By Anne Baye Ericksen, Contributing Editor
On May 5, the U.S. Food and Drug Administration (FDA) issued its deeming regulations, concluding that e-cigarettes fall within the same purview as other regulated tobacco products.
Also of note, recent research results out of the United Kingdom (UK) validate what many e-cigarette supporters have touted: non-combustible tobacco devices are less harmful than traditional combustible cigarettes. While the two positions characterize the diametric views of e-cigarettes, both views are important points of discussion for the convenience store channel.
Within the FDA ruling, e-cigarette manufacturers will have to complete a pre-market tobacco application (PMTA) for each product introduced to the market since Feb. 15, 2007, to gain approval for legal sale. The agency has established a two-year application period for producers and an additional 12 months for FDA review, after August.
During this time, products remain available for sale. Critics assert the deeming criteria place unreasonable burdens on manufacturers due to the associated costs.
“The expense of complying significantly raises the barriers to entry. However, cost is simply the first hurdle as the next is getting approval for various applications, which can be challenging for even larger manufacturers,” said David Bishop, managing partner of Balvor LLC, a sales and marketing consulting firm based in Barrington, Ill.
Of course, some view the situation as being less problematic for Big Tobacco because the corporations have greater financial resources to navigate regulatory channels. The result is that smaller companies might not be able to shoulder the financial requirements—the byproduct of which would be smaller product selections available to retailers and the potential shrinking of the e-cig customer base.
“One unintended consequence of the deeming regulations is that consumer demand down the road transfers back into cigarettes,” said Bishop. “This issue would likely be a concern for those who believe that electronic nicotine devices represent a potentially effective harm-reduction strategy.”
Ironically, just days before the FDA announcement, the Royal College of Physicians (RCP) of the UK released research addressing e-cigarettes. The report determined that any potential harm presented by e-cigarettes is unlikely to account for more than 5% of the dangers posed by combustible cigarettes. Although e-cig cartridges and e-liquids may contain nicotine, nicotine alone presents a substantially reduced risk than the byproducts associated with cigarettes.
RCP researchers also evaluated previous studies examining whether e-cigs function as a gateway to the use of combustible tobacco products, especially among youth. They concluded that a direct relationship couldn’t be substantiated. Rather, they voiced concerns that the studies were too small, utilized poor methods, or failed to exercise adequate controls measuring other influential factors that might persuade teens to start smoking.
In the U.S., the Centers for Disease Control and Prevention (CDC) released the 2015 National Youth Tobacco Survey, which states the number of middle and high school students using e-cigarettes tripled between 2013 and 2014.
However, the survey has its critics. For example, the American Council on Science and Health takes issue with the agency’s interpretation of data, especially in light of the fact that the report also reveals conventional tobacco use among teens showed no increase.
“For a full picture of tobacco and vapor product usage in 2015, these results should be read in conjunction with those from the 2015 Monitoring the Future (MTF) study,” said Gregory Conley, president of the American Vaping Association.“In contrast to [the] NYTS data, the MTF study found decreases in teen smoking and a slight decrease in teen vaping from 2014 to 2015. The CDC knows that key findings from these two widely respected surveys are in conflict, but the agency would rather politicize the issue than give all the facts.”
Not surprisingly, one of the reasons e-cigarettes became popular in c-stores is the segment has generated impressive margins for several consecutive years in a row.
“The e-cig subcategory has been a source of good margin since they were first introduced. Product selection and the proper SKUs helped generate margin dollars while cigarettes were declining,” said Peter Tamburro, general manager of convenience store operations for Clifford Fuel Co. Inc., which operates 20-plus c-stores and fuel retailers in New York State.
Sales of e-cigs have softened in the past year, including for the first quarter of 2016. According to Nielsen data, reported by Wells Fargo Securities, sales dollars in all channels dropped 6% for the four weeks ending April 23.
For the previous three months, sales dollars fell 8.1%. Part of that loss was driven by negative net pricing (-7.3%) even though unit volume for the period marked a gain of 1.4% across retail.
Analysts attribute the downward slide to multiple factors, including an uneasiness regarding regulations and consumers returning to conventional tobacco offerings.
“Many cigarette smokers use other tobacco products, which means changes that impact demand in one area will likely be felt elsewhere,” Bishop said. “The industry witnessed this in 2015 as some consumer demand returned to combustible cigarettes due to satisfaction issues with electronic nicotine devices.”
Within the subcategory, VUSE still holds firmly to the top spot, with nearly 45% of unit share for the four weeks ending April 23. Following next was blu which earned 15.1%, trailed by Altria Group (MarkTen) with 14.1%. blu and Altria also reported decreases in average equivalized price in a year-to-year comparison for the period, -3.4% and -11.4%, respectively.
Although it’s too early to identify or measure the consequences of the FDA regulations or responses to the RCP research, industry watchers maintain a positive long-term outlook. The “E-Cigarette Market in the U.S. 2015-2019” report by Technavio cites Big Tobacco’s investment in research and development as an indicator of future growth. Last year, Altria and Philip Morris International agreed to share research efforts, and British American Tobacco and Reynolds American Inc., announced a partnership to develop vapor technology.
“Innovation will improve the e-cig experience and the category will remain viable if retail pricing stabilizes,” concluded Tamburro.