By Anne Baye Ericksen
Between the U.S. Food and Drug Administration (FDA) deeming regulations finally released last year and a bevy of new state taxes and regulations restricting who can sell or purchase tobacco and other-tobacco products, 2016 was a tumultuous year for e-cigarettes.
“Sales in this category fell 20%,” said Todd Badgley, president of the MotoMart convenience chain, which operates 79 MotoMart stores in six states throughout the Midwest. Its parent company, FKG Oil, is based in Belleville, Ill. “Assuming the shift is to open systems, I assume these customers are shopping at vapor stores versus c-stores since there is a much wider selection to choose from.”
While legislation and market pressures on the e-cigarette and vaping products caused a seismic wave in the convenience store channel, stakeholders are curious to see how 2017 shakes out—especially with a new president taking the helm.
Even though current profit margins are lagging compared to a few years ago, e-cig dollar sales across all retail channels for 2016 rose an estimated 9% to $850 million compared to 2015, according to Nielsen data reported by Wells Fargo Securities.
Wells Fargo touts that e-cigarette sales experienced a 17% boost for the last four weeks of 2016. VUSE by R.J. Reynolds Vapor, a subsidiary of Reynolds American Inc. (RAI), again commanded the majority of market share (33.6%) for the same four-week period.
“VUSE’s ability to maintain strong pricing (+15.7%) is a testament to its strong competitive positioning,” said Bonnie Herzog, senior analyst for Wells Fargo Securities.
However, MarkTen XL by Altria also made a notable gain in dollar share, registering a 15.7% increase in distribution, according to Wells Fargo Securities.
Since the FDA announced that neither e-cigarettes nor vaping devices are exempt from the 2009 Tobacco Control Act, smaller and independent producers have filled the retail space with the intent to sell off inventory and close shop instead of submitting a new tobacco product application to obtain FDA approval, which will be required to continue producing and selling.
The FDA granted two years for applications to be submitted and another year for review, during which current products can continue to be sold.
The expected fallout will be drastic, some retailers predict.
“In my opinion, it is clear that the FDA regulations will force smaller companies out of business. It will eliminate smaller manufacturers and a lot of vape shops,” said Anna Bettencourt, category specialist for VERC Enterprises. The Duxbury, Mass.-based company operates 25 locations in Massachusetts and New Hampshire.
“Our company has scaled back selection and inventory in the vapor category,” added Badgley. “Regarding e-cigarettes, we continue to offer and support Big Tobacco only.”
There was some hope legislators could override the predicate date portion of the FDA ruling. Last spring, U.S. Representatives Tom Cole (R-Okla.) and Sanford Bishop (D-Ga.) introduced a federal budget amendment to change the predicate date from Feb. 15, 2007, to a 2016 date, which would grandfather in products that have come to market over the past decade. Industry watchers thought the Cole-Bishop Amendment might pass in a November omnibus bill, however, it failed to be included.
Last year marked the passage of several state laws and taxes against e-tobacco products, and several lawsuits by e-tobacco makers and retailers. In July 2016, Pennsylvania lawmakers voted in a 40% tax on all wholesale vapor products along with another 40% floor tax on existing stock. According to the Inquirer Daily News, more than 70 vaping stores already have gone out of business since the taxes were implemented this past October. As a response to the new law, a family-owned wholesale and retail vaping business filed a lawsuit in December and is awaiting a court date.
In Indiana, a 2015 law mandating that e-liquid manufacturers must obtain a permit from a state-appointed firm to sell in the state triggered several lawsuits from local vape producers as well as accusations of conflicts of interest within certain regions.
The Indianapolis Business Journal reported this past August that the FBI was investigating whether any illegal activity was involved with creating and passing the law. The newspaper also reported in December that state officials have agreed to revise the law in 2017. As of mid-January, a bill that would transfer permitting duties to the Indiana Alcohol and Tobacco Commission has already been introduced.
Last May, California Gov. Jerry Brown signed Senate and Assembly bills that required e-cigarettes and vaping products be classified as tobacco products, and as of Jan. 1, the statewide legal purchasing age is 21. In addition, retailers must now pay a $265 annual licensing fee.
This year appears to be continuing the trend. New York Gov. Andrew Cuomo has stated he wants to define e-cigarettes and vaping products as tobacco products and impose a new tax of 10 cents per milliliter.
Both Texas and Washington State lawmakers are weighing bills to raise their states’ minimum purchase age to 21, too. Elsewhere, cities have passed their own laws raising age requirements.
“Massachusetts has different regulations by town. One town changed the purchase age on Jan. 1. Another town has a flavor ban that will take effect on March 1,” said Bettencourt. “We have others considering different regulations that are still pending. It will hurt our sales and move business to other towns.”
Despite sales slowdown and the slew of new taxes and regulations, analysts express optimism for where the industry is poised to go. Still, they temper the enthusiasm by noting the next year probably will continue the trend of moderate gains. Wells Fargo Securities estimates the total vapor category will top out with 5% growth over the next 11 months.
The source for the long-term confidence stems from Big Tobacco announcing new product development. For example, Philip Morris International released iQOS, a heat, not burn e-cigarette, in Japan last spring and in the United Kingdom this past fall.
Bloomberg reported the company soon plans to submit both a premarket tobacco application and modified risk application to the FDA for future sales in the U.S.
“We continue to expect iQOS to be commercialized in 2017,” said Herzog. “Bottom line, we remain bullish overall on reduced risk products (RRPs) as we expect consumers will shift from e-cig/vapor products to next-generation RRPs led by iQOS.”
RAI announced it has completed clinical trials on Revo2, a heated tobacco product. British American Tobacco, which agreed to pay more than $49 billion for RAI last month, is expected to introduce Vype Raptor later this year. It was unclear, however, as to which markets would be targeted.
This past December, United Tobacco Vapor Group announced its patent for qmos, a new wickless and sponge-less e-tobacco technology.
There’s also supposition about how vaping devices could be adapted for medical and recreational marijuana use. After the November election, eight states and Washington, D.C. have legalized recreational use and sale of marijuana.
“I try to remain optimistic in regard to the category,” said Badgley. “I do believe there is a need/demand for this type of product. The big question is how much.”