As vaping and e-cigarette manufacturers adjust to FDA regulations, c-stores experience a reactionary marketplace.
By Anne Baye Ericksen, Contributing Editor
When the U.S. Food & Drug Administration (FDA) released its final deeming regulations officially classifying electronic nicotine delivery systems as tobacco products, it granted manufacturers and retailers a 90-day grace period before the new restrictions would take full effect.
That window closed Aug. 8, 2016 and the immediate reaction in the marketplace may not have been exactly what industry watchers expected.
During the long buildup to the FDA announcement in May, sales of e-cigarettes and vapors/tanks/mods as well as e-liquids posted soft numbers in the convenience store channel. However, this August registered some of the most impressive numbers in a long time.
Dollar sales for e-cigarettes in the four weeks ending Aug. 13, 2016 rose 16% over the same period last year. The 12-week year-to-year measurement also posted double-digit gains, per Nielsen and reported by Wells Fargo Securities. In the convenience store channel, the figures were even more promising. IRI, a Chicago-based market research firm, reported 22.38% growth of unit sales of electronic smoking devices for the four weeks ending Aug. 7.
So what prompted the turnaround, especially during the FDA grace period?
“Companies that know they’re not going to comply with the deeming dumped their current products into the marketplace,” said Ray Story, CEO and founder of the Tobacco Vapor Electronic Cigarette Association.
Under the new regulations, manufacturers must submit a premarket tobacco application (PMTA) for evaluation against public health standards for each product introduced after February 2007 and before Aug. 8, 2016. The FDA will then determine whether to issue the product an order permitting marketing, which authorizes it to be sold in the U.S. Each PMTA is estimated to cost $330,000, according to the FDA, or as much as $10 million, according to industry watchers. What’s more, the lengthy process is said to take between 1,500 and 5,000 hours per application.
“Those that were paying attention knew that if they didn’t get their products out by Aug. 8, they would not be able to continue to market. That was the period for new products to come out,” said Gregory Conley, president of the American Vaping Association.
Reynolds American took advantage of the window, releasing new versions of its popular VUSE e-cigarette. This was welcome news for a number of convenience retailers as demand spiked, at least in the short term.
“We added new products last year, but have held off on vape, waiting for the FDA. The only new products have been the VUSE line extensions/flavors. These have been very successful,” said Jeff Arnold, category manager for Maverik. The North Salt Lake, Utah-based retailer runs 285 stores in 10 states.
Nielsen indicated VUSE further strengthened its No. 1 position this summer. For the four weeks ending Aug. 13, 2016, the brand registered nearly 21% growth in volume. Also, boosting profitability was a 12% price hike during that time.
“We’ve never done very well with e-cigs or vaping. We have tried several different programs with little success. Currently, the only one selling much is VUSE, and then they only sell when there is significant discounting or coupons,” said Sean Bumgarner, vice president of Scrivener Oil Co., which operates Signal Food Stores, based in Springfield, Mo.
Indeed, several electronic nicotine delivery systems (ENDS) products have experienced price reductions and aggressive coupon programs. Although Altria’s MarkTen XL recorded positive dollar sales, Nielsen noted the manufacturer’s pricing for the four-week period dropped by 16.8%.
“Products have been pushed into retailer stores and are now sold so cheap that retailers are having a hard time making money,” said Story.
Analysts do not anticipate this uptick to sustain long term. Rather, the fallout from the PMTA mandate most likely will result in a market consolidation and reduction of SKU selection.
According to the Wells Fargo Securities “Tobacco Talk” survey in July, more than 67% of retailers were either concerned or very concerned about manufacturers refusing returns. More than 47% were concerned or very concerned about manufacturers going out of business.
“Now that it’s the law and companies have to comply, it’s no longer like the past when there was no barrier to entry [into the industry],” said Story. “That will be the biggest impact.”
“Also the question is who will still be here in July 2018. Some fly-by-night companies that have no idea what the regulation means for the industry could go by the wayside,” added Conley. “Ultimately, the top brands that make up 90% of the c-store vaping products will be on the market until August 2018.”
That said, as the category evolves, c-stores could capitalize on the industry’s new configuration. For one thing, e-cigarette and vaping accessory aftermarket is currently under-realized in convenience stores. A survey by V2 noted only 8% of current ENDS customers purchase items such as e-liquids, batteries and e-liquid cartridges at convenience stores. These are the top three accessories for the category, registering 71%, 59% and 54% of the market, respectively. Researchers also purport that the subset carries a typical markup rate between 200% and 400%.
Rather, e-cigarette and vaping users purchase these items at vape shops. But that could change.
“There’s an adjustment going on because many of the common everyday things vape shops do for customers are considered ‘manufacturing’ and they will not have a license to continue that practice. That includes things like screwing in a coil and putting in a battery. The FDA thinks that’s manufacturing a product. Vape shops already have had to turn away customers,” noted Conley.
The resulting void could create opportunities for c-stores.“C-stores will have to educate customers,” Story said.
In addition to adjusting to the changing regulatory environment, the industry continues to sift through conflicting medical evidence regarding the pros or cons of ENDS as a method to reduce or quit smoking. In the U.S., highly publicized reports issued concerns about electronic smoking devices acting as a gateway to traditional tobacco use among teens.
Other research asserts people continue to smoke as usual even after picking up a vaping habit. It should be noted, though, several scientists have questioned the methodology used in some of these research endeavors.
On the other hand, studies in Britain and Europe indicated positive results when vaping and e-cigarettes are used by smokers with the intent to quit combustible cigarette smoking. A recent Britain’s Royal College of Physicians study states that smokers have a 50% better chance of quitting when switching to ENDS than when relying on patches or without any cessation aids. The 2014 Eurobarometer survey reported that more than one-third of current e-cigarette users quit smoking entirely, while another approximately one-third ENDS users reduced their combustible use.
In fact, such studies have been cited in lawsuits challenging the FDA’s evaluation of scientific evidence to support its determination that e-cigarettes and vaping devices should be deemed as tobacco products. As of late August, seven lawsuits have been filed by industry stakeholders, with a hearing date having been set by a U.S. District Court judge for Oct. 19.
“I think we are all waiting to hear [about the] long-term effects and hope it will be a harm-reduction product,” concluded Arnold.