Tobacco Alternatives Heat Up

The popularity of pod devices and the growing buzz around heat-not-burn products have primed the e-cig/vaping category for a profitable start to the new year.

By Anne Baye Ericksen, Contributing Editor

Philip Morris International (PMI)’s recent announcement was surprising: “We’re trying to give up cigarettes” on display in newspaper ads in the United Kingdom.

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The unexpected declaration generated plenty of click-worthy headlines, but many in the convenience store industry weren’t all that surprised because PMI and other Big Tobacco makers have been touting their commitment to electronic nicotine delivery systems (ENDS) for the past few years.

Wells Fargo Securities forecasts the e-cigarette and vaping category will grow 15% this year, cashing in on more than $5 billion through all retail channels. Furthermore, the market research firm anticipates convenience stores, along with drug stores and mass retailers, will register $650 million in sales of vapors, tanks and mods, and another $800 million from e-cigarettes in 2018. But much of the optimism for the category is tied to the much-anticipated introduction of heat-not-burn (HnB) devices.

“We expect consumers to eventually shift from e-cig/vapor to next generation reduced-risk products, such as heat-not-burn platforms led by iQOS,” said Bonnie Herzog, senior analyst for Wells Fargo Securities.

This time last year, convenience retailers were wondering if the e-cigarette and vaping category would survive the 2016 U.S. Food & Drug Administration (FDA) deeming rule mandating ENDS and e-liquids be regulated to the same degree as traditional cigarettes. The mandate also set various deadlines for manufacturers to apply for and gain FDA approval to continue selling products introduced between Feb. 15, 2007, and when the ruling took full effect on Aug. 8, 2016.

However, FDA Commissioner Scott Gottlieb is setting a goal to lower nicotine content in cigarettes to below addictive levels, and the commissioner expressed a willingness to review how new technology could be used to aid smoking cessation.

“It’s the first time the FDA commissioner not only talked about flavors [of e-liquids] as being negative because of attracting children, but also vaping as a strategy to help adult smokers quit,” said Gregory Conley, president of the American Vaping Association.

Even more impactful was the agency’s decision to extend the deadline for applications of new ENDS until Aug. 8, 2022.

“A change to the grandfather date and view on harm reduction are both very positive signals to the industry,” said David Bishop, managing partner for Balvor LLC, a sales and marketing practice. “Both help protect what many believe—in and outside the industry—is important innovation that has the potential to positively and profoundly impact public health concerns related to combustible cigarettes.”

The announcement appeared to leave an impression at the cash register, too.

“[The category] was really strong from the third quarter on, with JUUL leading the way. JUUL seemed to explode over the summer and into the third quarter, and that carried on into the fourth quarter,” said Tim Greene, category director of tobacco and general manager for Smoker Friendly. The Boulder, Colo.-based business operates 102 stores in five states, including Gasamat c-stores.

The gap continued to widen during last December between JUUL, and Vuse of R.J. Reynolds Vapor Co., according to Nielsen data from all retail channels reported by Wells Fargo Securities. JUUL accounted for 46.8% of dollar share for the four weeks ending Dec. 30. This is a 14% spike over the month of October, in which JUUL generated 32.9% dollar share.

The traditional top-selling electronic-cigarette brand Vuse—part of Reynolds’ and parent British American Tobacco’s (BAT) portfolio—dropped to 20.7% of share in the same four-week period.

While Vuse continues to holds a top spot for many c-stores across the industry, Wells Fargo reported dollar sales gains for JUUL rose 719.6% for the 52 weeks ending Dec. 30. Comparably, Vuse experienced an 18.6% gain for the same period.

“JUUL has created an impression with consumers and it will likely continue to enjoy that loyalty,” said Conley.

With the JUUL device, users snap on a cartridge with nicotine liquid, which uses nicotine extracted from tobacco. To activate the cartridge, users simply draw on the end.

“JUUL is definitely my No. 1 brand,” said Anna Bettencourt, senior category manager for VERC Enterprises. “Personally, I think a lot of its success has to do with the design. It’s very techy looking and not as large as some of the tanks and mods I have seen.”

The Northeastern-based c-store chain operates 27 locations in Massachusetts and New Hampshire.

At fault is the FDA’s regulations requiring new tobacco products released after August 2016 to secure its approval before going on sale in the U.S., which is a lengthy and costly procedure.

“If the approval for iQOS is granted, though, it will be a landscape-changing development and will expand the reduced-risk market,” said Conley.

In December 2016, PMI submitted a modified risk tobacco product application for iQOS, which heats tobacco contained in cartridges instead of burning it. If granted the modified-risk classification, the company will be allowed to market iQOS as a reduced harm or reduced risk product.

At presstime, the application was under review by the FDA’s Tobacco Science Advisory Committee.
“I think the application will be granted in the first quarter,” said Conley.

“I’m very anxious for it because it is so different. We plan to carry it, but I’m wondering how the market will react because it’s an expensive device. I think it retails around $80 in Japan,” said Bettencourt.
BAT also confirmed it will submit a substantial equivalence application to the FDA for its glo-brand HnB device in 2018.