Are E-Cigs the Wave of the Future?

Herzog to Big Tobacco: Electronic cigarettes are "more than just a fad"

Published in CSP Daily News

By  Melissa Vonder Haar, Tobacco Editor

NEW YORK -- Use of electronic cigarettes could overtake consumption of traditional cigarettes within 10 years, Bonnie Herzog, New York City-based managing director of beverage, tobacco and consumer research for Wells Fargo Securities LLC, speculated in a research note.

"While difficult to predict, we think it is possible that consumption of e-cigarettes could outpace traditional cigarettes over the next decade, especially given the rapid pace of innovation and consumers' demand for reduced harm products," Herzog said.

She drew a parallel between e-cigs and energy drinks. "We think e-cigs are to tobacco what energy drinks are to the beverage industry; therefore, we think Big Tobacco needs to wake up and recognize the potential opportunity of the e-cigarette category and not make the mistakes of the large beverage companies that overlooked the potential of the energy drink category when it was in its nascent stage."

Herzog's bottom line: "We believe e-cigs are more than just a fad and most of our industry trade contacts agree. Considering both [Lorillard and Reynolds American] have dipped their toes in the e-cig waters, the next move is [Altria's], and we expect it to be big."

In the spring, Lorillard Inc. acquired U.S. e-cigarette manufacturer blu ecigs for $135 million (see Related Content below for previous CSP Daily News coverage).

While the segment is currently small compared to the rest of the tobacco category--Lorillard estimates it generates about $300 million in revenue and the Tobacco Vapor Electronic Cigarette Association cites 2.5 million e-cig users--based on the responses to Wells Fargo's "Tobacco Talk" surveys and a meeting with an e-cig leader, Herzog believes it won't be long before electronic cigarettes represent a substantial portion of tobacco sales.

Retailers' high level of enthusiasm is just one of the reasons Herzog believes e-cigarettes could surpass traditional cigarettes in upcoming years. When asked if e-cigarettes will become the new way to smoke, Tobacco Talk respondents offered many positive sentiments, including "as cigarettes decline in volume, e-cigarettes … will help pick up volume," "it will eventually be the way to smoke since many areas are banning smoking in public areas" and "e-cigs are the new era of smoking."

Such enthusiasm on the retail level is understandable: while many retailers are dealing margin pressure and limiting manufacturing contracts with traditional cigarettes, e-cigarettes offer both healthy margins and significantly more flexible contracts. In fact, Wells Fargo estimates retailers can earn three times the gross profit on e-cigarettes as compared to traditional cigarettes--around a 30% to 40% margin.

One of the major concerns expressed by retailers is e-cigs have yet to fully imitate the experience of smoking a traditional cigarette; however, Herzog--after meeting with the management of Scottsdale, Ariz.-based NJOY--said that she is confident that advances in technology will take care of this issue, and she speculated that NJOY's "next-generation" King E-Cig could represent the first step towards a "true" smoking experience (watch for the upcoming issue of Tobacco E-News for more details on the meeting with NJOY).

"As e-cigs continue to evolve and offer an experience that is increasingly similar to smoking a traditional cigarette, we think consumer acceptance and conversion will accelerate," the report said, going on to encourage major tobacco retailers to get in the game before it's too late.