How will the FDA’s new deadlines affect the e-tobacco industry, and subsequently, profit margins for retailers?
By Anne Baye Ericksen, Contributing Editor
Ever since Word emerged that the Food and Drug Administration (FDA) was to assume regulatory authority over e-cigarettes, manufacturers, distributors and retailers have been operating on pins and needles, waiting for the final word and resulting impact.
Finally, after many delays, the FDA formally announced in May 2016 that it deemed electronic nicotine delivery systems (ENDS) as tobacco products, thereby subjecting them to the same level of regulations and oversight as combustible cigarettes.
Manufacturers had until August of that year to register their existing ENDS. If companies wished to continue to sell their products in U.S. retailers, including convenience stores, they were required to file a Premarket Tobacco Application (PMTA) or a Modified Risk Tobacco Product (MRTP) application with the FDA. In the interim, c-stores and retailers continued to sell e-cigarettes, vaping devices and e-liquids.
At the time, analysts weren’t sure how the market would respond to the news. Some smaller manufacturers dumped their inventories because the hill to climb toward authorization was just too steep and costly. On the flip side, e-cig brands from Big Tobacco held firm, with some experiencing impressive sales growth.
“We’re up substantially from last year. I stay away from some of the smaller folks because I worry about them not taking returns. I also have a fear they don’t have the money for PMTAs going forward,” said Anna Bettencourt, a category specialist for VERC Enterprises. The family-owned company operates 27 convenience stores, fuel retailers and car washes in Massachusetts and southern New Hampshire.
“We’re on our second consecutive year of significant growth. We made the shift in fall of last year away from combustible cigarettes to e-cigarettes,” said Peter Tamburro, general manager for Utica, N.Y.-based Clifford Fuel Inc., which owns and operates Cliff’s Local Market stores.
“In the Northeast, there’s been a decline in cigarette volume and the profit margin the e-cigarette category provides is a nice bump,” Tamburro added. “It’s important as a retailer to have viable e-cigarettes that can help grow the category. I hope it will get more attention as time goes on.”
Both Bettencourt and Tamburro have highlighted e-cigarettes with product-specific displays in their stores.
“I’ve dedicated space for e-cigarettes in most of our locations where I can call them out, and they’re not just on a cigarette rack or below the moist snuff,” said Bettencourt.
“We converted to a two-foot floor rack behind the counter and planogram with the top-moving products,” said Tamburro.
If one were to solely look at sales figures, you could conclude the e-cigarette category has bounced back from any blip the deeming may have instigated. Per figures collected by Information Resources Inc. (IRI), a market research firm, dollar sales for electronic smoking devices in U.S. c-stores posted a 36.64% gain for the four weeks ending Aug. 13 compared with the same four weeks last year. However, healthy sales do not erase the lingering ambiguity about which products will eventually gain FDA approval.
“Last year the industry was in an enormous amount of uncertainty because the deeming was just taking effect and the countdown to PMTA had begun. There were questions in what needed to be done and how the regulation would be enforced,” said Tony Abboud, executive director for the Vapor Technology Association.
CHANGES AHEAD
Fast forward to this summer when FDA Commissioner Scott Gottlieb M.D. revealed the agency has identified lowering nicotine in tobacco products to below addiction levels as a major goal. He also explained that, in order to reach this objective, the agency is still reviewing its position of ENDS products.
“For a long time, the FDA has taken a parochial view of e-cigarette products and the science associated with them. There’s excitement now that it acknowledges the possibility of the public health benefit e-cigarettes could provide. It’s also coming up with a new process by which to evaluate how products come to market. That gives companies hope that regulations will ultimately be in place that will allow them to innovate because a lack of innovation right now is still a problem in the industry,” said Abboud.
The FDA also announced a postponement for PMTA and MRTP applications. Initially, ENDS manufacturers were given until Aug. 8, 2018 to have their applications completed and submitted for products in the marketplace, as of Aug. 8, 2016. Thanks to the new extension, manufacturers have until Aug. 8, 2022 to submit an application.
“However, the FDA did not change the Aug. 8, 2016, date, which means no new products can come to market in the U.S. without prior market authorization from the FDA and going through its PMTA process,” said Abboud.
Nor does the new time frame alter other elements of the deeming determination. According to the FDA statement, “the new enforcement policy does not affect current requirements from the deeming rule that have already passed. For example, mandatory age and photo-ID checks to prevent illegal sales to minors remain in effect and subject to enforcement by the FDA.”
The agency hasn’t released specifics about how it expects tobacco product manufacturers to lower nicotine levels other than it will begin with soliciting public feedback. That said, analysts view the development as a potential boost to the ENDS market.
“Any level of nicotine reduction would likely negatively impact combustible volumes, offset however, by stronger consumption of reduced-risk products (RRPs)/vapor, in our opinion, as we expect the FDA’s new regulation will encourage consumers to shift more rapidly to RRPs/vapor, which are not subject to lower nicotine mandates and are on the end of the continuum of risk that is favored by the FDA,” said Bonnie Herzog, senior analyst for Wells Fargo Securities.
RESEARCH RE-EVALUATION
There’s been other good news for the e-cigarette category, too. In June, Penn State College of Medicine released a study that concluded e-cigarettes are less addictive than traditional combustible cigarettes in most part because the devices contain less nicotine. Plus, ENDS are devoid of tar and other harmful ingredients in cigarettes. Researchers reviewed data from the Population Assessment of Tobacco and Health (PATH) survey of more than 30,000 people compiled by the FDA and the National Institutes of Health. One of the interesting elements of this research is that officials plan to track participants with follow-up surveys with the intent of examining e-cigarette use over the long term.
Researchers at the University of California at San Diego also reviewed data from surveys of smokers and observed potential relationships between e-cigarette use and smoking cessation. First, they confirmed the number of smokers kicking the habit continues to rise. Between 2014 and 2015, that figure jumped to 5.6%, approximately 350,000 new ex-smokers, which is up from 4.5%, where the rate stalled for years.
Another study from Georgetown University’s Lombardi Comprehensive Cancer Center found that smoking cessation improves with regular e-cigarette use.
The professor leading the research determined that the odds of quitting increase by at least 10% with each additional day of e-cigarette use as a replacement for combustible cigarettes.
However, there’s some doubt about how impactful these findings will be on consumers.
“Under the deeming regulations, retailers cannot talk about these products as safer alternatives to cigarettes. They can’t talk about the possibility of them being a harm-reduction product,” said Abboud. “It’s a conundrum for the industry.”
