E-Cigs: Not So Fast

Published in CSP Daily News

Tobacco analyst Modi sees slower growth for industry's hottest segment (Part 1)

By  Mitch Morrison, Vice President & Group Editor

NEW YORK -- Could the electronic-cigarette craze be the dot-com bubble ready to burst or tobacco's version of energy drinks to the cold vault less than a decade ago?

Somewhere in between, said tobacco analyst Nik Modi.

Presenting at CSP's Tobacco Update webinar sponsored by Swedish Match on Dec. 19, Modi noted how it took 45 years for cigarettes to overtake smokeless in the 20th century. Such perspective has propelled the RBC Capital Markets analyst to douse the flames on those prognosticating an e-cig takeover.

[ To view an OnDemand replay of the webinar, please click here. The program is free for retailers and wholesalers; others, $49.]

"There's been a lot of talk about e-cigarettes taking share from cigarettes," he said during Thursday's webinar, which also featured a presentation by Swedish Match category management director Joe Teller.

"But the numbers don't suggest that," said Modi. "We found that the actual industry decline rate for cigarettes improved as 2013 progressed--at the same time everyone was claiming e-cigs were taking shares away."

In other words, Modi suspects that while electronic cigarettes are enjoying a phenomenal trial period, the percentage of smokers sticking with e-cigarettes is relatively small and yielding far less impact on the cigarette category as initially believed.

"The advocacy of the product is still very poor and the repeat rates are not very good" with e-cigs, Modi said, adding that significant innovation in quality and consistency is still needed if e-cigarettes are to enjoy the staying power many hope for. "These transitions take a lot of time, and there's still a lot of uncertainty involving this category."

Despite his caution, Modi said e-cigarettes will continue to grow and that retailers, notably in convenience, are increasing space for the nascent segment. In an exclusive study conducted with CSP earlier this month, Modi shared that 80% of convenience retailers are expanding their e-cigarette offerings and that 95% said they planned to carry Vuse, the e-cigarette product by RJ Reynolds that is to be rolled out nationally this coming year.

"There's a clear demand for a big player getting into the category," he said of Vuse.

Other factors are potentially in play when it comes to e-cigarettes. While the FDA grabs the most attention as to how the agency will regulate this yet-unregulated segment, there is another, less publicized dynamic.

Vaping.

Could vaping--and the rise of vaping lounges--deliver an entirely new business model that potentially undercuts the sale of disposable and rechargeable e-cigarettes in c-stores?

In a Google search of both "electronic cigarettes" and "vapor shops," Modi said interest in the former peaked between February 2012 and January 2013, while the latter continues to climb.

"The consumer work we've done in this area shows [vaping] is catching up like wildfire. It's cheaper, the consumer can customize it, there's an experience involved [with the vape shops]," he said.

Modi added, "You have all the consumer dynamics that are in vogue in this day and age, especially with the customization. I think this is a real trend--the question is whether or not regulations come in and stop it."

Coming up in CSP Daily News, read what Modi has to say about menthol regulations and how Joe Teller can help you grow your OTP section.

By Mitch Morrison, Vice President & Group Editor
View More Articles By Mitch Morrison