By Anne Baye Ericksen, Contributing Editor
Before the U.S. Food and Drug Administration (FDA) in 2016 released its final deeming regulations that classified vapors, tanks, mods (VTMs) and e-liquids as tobacco products, sales had been trailing off from the previous year’s momentum.
In 2015, e-liquids was the fastest-growing individual vapor products segment, with a 57% value sales increase to reach $1 billion, according research data from Euromonitor International. The e-liquids category’s countless combinations of flavors and nicotine strengths proved enticing to consumers looking for alternatives to combustible cigarettes.
However, due to market pressures, the vapor category struggled in 2016, the vapor category third quarter growth was 3.2%, but dipped to just 1% growth in the fourth quarter of 2016, according to Wells Fargo Securities.
WHAT’S TRENDING NOW
That was last year. 2017 appears to be producing a more promising environment for vaping products. In its Tobacco Talk Q1 U.S. Retailer Survey, dated April 26, Wells Fargo Securities analysts estimated vaping product sales in the first quarter will reach an impressive 6.9% increase in sales compared to the previous quarter. Still, feedback from retailers leave mixed impressions. Statements to the survey included,
“Only slight growth in c-stores, but still strong in vape shops,” as well as “Lots of our stores have taken these out completely.”
At MotoMart stores, performance for both vapor products and e-cigarettes has improved over 2016.
“Sales are up 30% over last year,” said Todd Badgley, president of the FKG Oil division, based in Belleville, Ill., which owns and operates 79 retail sites throughout six Midwest states. “We look at e-cigs and vapor as one category, so these numbers include both.”
In fact, rather than paring down SKUs like some businesses, Badgley expanded the category by adding VaporX products. The brand includes kits, personal vaporizers and e-liquids.
“The [vaping category] products just keep improving,” Badgley added.
Tim Greene, category director of tobacco and general manager of the Cigarette Store Corp., dba Smoker Friendly, has noticed a growing trend, moving away from open-system devices and toward closed systems. The Boulder, Colo.-based chain operates 103 stores in five states, including 20 Gasamat convenience stores that offer fuel.
“In the past, equipment was changing so fast and everyone wanted the latest and greatest. Now we pretty much have what we had last year. Equipment [sales are] mostly way down, about 15-18%. Liquids are down 8-10%,” Greene said. “However, what we are seeing is a shift toward bigger mods with closed systems. VUSE has Vibe [a prefilled tank system] out now that’s bigger and better.”
So far this year, JUUL continues to be his top-seller, but Greene recently added the Cue Vapor System line. In March, E-Alternative Solutions, a sister company of cigar leader Swisher International, launched a national advertising campaign for its new closed system vaping device. It’s available in four flavor categories: tobacco, mints, desserts, and fruits. It also offers users three nicotine levels: zero-, three- and six-milligrams.
“We’re testing it. It’s gone well, but not gangbusters,” said Greene. “However, we’ve also had some feedback that the pod is not big enough. Users are going through cartridges too quickly for the price. Also, some customers have asked for stronger nicotine levels and new flavors. We’ve launched it with seven flavor SKUs. It’s too early to tell if it’ll be really successful.”
Consumers appear to prefer rechargeable e-cigarettes and vaporizers more than disposables. In year-to-year comparisons for first quarter market share in all retail channels, Wells Fargo Securities research showed rechargeables jumped more than 10 percentage points, whereas disposable e-cigarettes remained steady at 36% for both 2016 and 2017. As Greene noted, VTMs/personal systems fell off significantly over the past 12 months, to 1% from a robust 17%.
The biggest buzz, however, continues to surround the anticipated release of iQOS by Philip Morris, a division of the Altria Group Inc. The company submitted its application to the FDA late last year, and analysts project the product will be approved and ready for sale by late 2017 at the earliest. Even though that’s still months away, retailers are placing high hopes on consumer interest in the reduced-risk product that heats tobacco instead of burning it. Phillip Morris is reported to have already invested in the neighborhood of $3 billion in research and development behind iQOS.
According to the recent Wells Fargo Security “Tobacco Talk” Survey, more than three-fourths of respondents expressed optimism about iQOS representing the next growth catalyst for the industry and plan to add it to their inventory. What’s more, nearly half anticipated increasing shelf space when the device is released.
“On the liquid side, there’s also synthetic nicotine and nicotine salts that are getting some tread. We’re looking at them, but haven’t carried them yet,” said Greene.
Last year was also monumental in the number of bills introduced and passed to increase taxes on tobacco products, including vaping devices and e-liquids.
Additionally, numerous municipalities voted on raising the minimum purchasing age to 21 as well as curtailing where individuals could vape in public. California joined Hawaii in implementing a statewide 21 minimum age requirement, and nine other states have bills aimed at raising the age still pending.
“This year has not been a bloodbath. I don’t think we’ve had any taxes passed this year; however, flavor bans are increasing in California,” said Gregory Conley, president of the American Vaping Association.
Indeed, some of the legislative activity this year has been to lessen the tax burden placed on vaping sales. In Pennsylvania, the Senate Finance Committee advanced a bill that would lower its 40% wholesale tax on all vaping products to five cents per milliliter. According to the Pennsylvania Vaping Association, since the prohibitive tax went into effect last fall, 120 businesses have closed.
“Kansas is one step away from reducing its 20-cents-per milliliter tax to five cents,” said Conley.
Perhaps the most encouraging sign the industry will continue on a positive trajectory is the confirmation of Scott Gottlieb as the new FDA commissioner with a 57–42 vote in the U.S. Senate last month. Gottlieb previously had a relationship with Kure, an e-cigarette manufacturer.
“There’s some reason for optimism about the possibility of smart reform on these products because he’s a nominee who seems to understand these products,” said Conley.
What’s more, the federal government postponed the substantial equivalence exemption application date by three months, from this August to November. The deadlines for both the SE application, February 2018, and Premarket Tobacco Application (PMTA), Aug. 8, 2018, remain unchanged. By all accounts, this is an expensive and timely endeavor, and industry watchers continue to project a percentage of small producers will close shop rather than incur these costs. In fact, ProVape, a vaping device manufacturer, announced it is shuttering operations.
However, the Cole-Bishop Amendment, which proposes changing the predicate date for the FDA deeming from Feb. 15, 2007, to Aug. 8, 2016, so it could grandfather in most products currently on store shelves, didn’t make it into the spring budget bill.
“The number of lawmakers who understand why the predicate date is an issue and think it’s a problem that should be solved is increasing,” said Conley. “The question is how to get them to do anything.”