The Electronic Age

With Swisher on board and Reynolds testing the waters, have major manufacturers validated e-cigarettes?

By
Melissa Vonder Haar, Tobacco Editor

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Just months ago, Swisher con­firmed what many had long spec­ulated: The little-cigar specialist, which has seen its primary segment hit by high federal taxes, is now branching into the electronic-cigarette business.

Mere weeks after that July announce­ment, the Winston-Salem Journal leaked news that Reynolds American was testing its own e-cigarettes, branded Vuse, in lim­ited “lead markets.” These announcements came less than three months after Lorillard announced its acquisition of blu eCigs.

“As these well-known tobacco com­panies get into the category, it really vali­dates the market,” says Lou Maiellano, a former tobacco buyer for Sunoco and president of Sevierville, Tenn.-based TAZ Marketing & Consulting Group. “Sud­denly, consumers with no interest in the category see a sign for a Swisher e-cig and will try it because it’s their brand.”

At a time when Scottsdale, Ariz.-based NJOY has been dominating a nascent segment that one Wall Street analyst pre­dicted could someday overtake cigarettes as the preferred choice of smokers, some of the country’s biggest cigarette and cigar makers are showing signs they are now prepared to throw some of their multibil­lion-dollar heft at the e-cig business.

With other major players possibly announcing their own e-cig ventures soon, CSP reached out to Swisher, Reynolds and industry experts to break down the appeal of brand-name electronic cigarettes and what these new endeavors mean for retailers, other manufacturers and the e-cigarette industry as a whole.

A Name You Can Trust

Although it’s one of the first major tobacco manufacturers to launch a line of electronic cigarettes and cigars, Swisher did not rush the move. In fact, the Jack­sonville, Fla.-based company spent more than a year researching whether it should jump into a still-developing segment. Ultimately, the decision came down to opportunity and consumer demand.

“Looking at the other players in the category, there weren’t any companies selling e-cigs that had any kind of tobacco experience,” says Ed Denk, Swisher Inter­national’s marketing promotions manager. “There were a lot of sentiments expressed by our customers saying, ‘We’d really love it if a major industry player would enter the category,’ someone who had some history with the retailer and distributor channel. That really was a driving factor in us getting into the business.”

Swisher’s initial push will include two electronic cigarettes—traditional tobacco flavor Natural Smooth and Menthol Breeze—and an electronic cigar mod­eled after Swisher Sweets called Sweet Essence. The cigarettes are available in both rechargeable and disposable models, while the cigar is sold only as a disposable.

While Lorillard opted to acquire an established e-cigarette company in blu, Swisher built its line from within. How­ever, this came as no surprise to experts such as Maiellano.

“Swisher’s a well-known brand name,” Maiellano says. “Why not have a line extension?”

As such, Swisher intends to use that well-known brand name to differentiate itself from other products on the market.

“We’re positioning it as a name you can trust in Swisher,” Denk says. “We’ve been around for 150 years. We pride ourselves in making the highest-quality products with our cigars, and we intend on doing that with our e-cigarettes and e-cigar. This is going to be a quality product, a consistent product, from a company you know is going to be there the next time you walk in the store. It’s what we’ve built our business on.”

Under Pressure

With Lorillard and Swisher e-cig products already in stores and Reynolds likely to have its own offering in the near future, it’s logical to question if other tobacco manufacturers are feeling pressure to get into the game. Maiellano believes plans may already be in the works for several big players—plans that were probably in place long before Swisher or even Lorillard made their announcements.

“I know there are other manufactur­ers already working on this,” he says. “You never know what’s happening behind the scenes.” While nothing is official, many analysts believe both Altria and Swedish Match will at least test e-cigs before the end of 2013.

Indeed, Swisher was already deep into its e-cigarette development when news of Lorillard’s entrance into the category broke. “We were already showing our product internally and discussing it with our distributors when Lorillard came out [with the blu acquisition],” Denk says. Instead of allowing Lorillard’s news to force a quicker release, Swisher took its time to develop a quality product to release once the company was ready.

“People are still evaluating the business; some are a little slower than others,” says Maiellano. “Larger companies take longer to make the decision.”

That might be the reason behind Reynolds’ reluctance to go on the record, despite the report by the Winston-Salem Journal. Asked to comment, a spokesper­son for the Winston-Salem, N.C., manu­facturer spoke in general terms: “We have developed a pipeline of new smokeless and other product innovations that cover a broad spectrum, including heat-not-burn cigarettes, vapor, tobacco extract products and nicotine replacement therapy tech­nologies. We are not currently in a position to comment on specific brand names or retail locations at this time as things are still a work in progress.”

Although larger companies will con­tinue to move at their own pace, Maiellano predicts there will come a point when even these players feel rushed to put product on the shelves—because right now there’s a very limited amount of retail space dedi­cated to the rapidly growing e-cig segment.

“How big is that pie, really?” says Maiel­lano of e-cigarette retail space. Up until now, the category has been dominated by small companies who market only e-cigs. Maiellano questions what happens when companies such as Lorillard, Swisher and Reynolds come into the picture: Will they leverage existing retailer relationships and contracts to ensure retail space for their electronic cigarettes?

Before the products were even avail­able, Swisher had commitments from several of the c-store chains it has built relationships with, including Murphy Oil, Sprint Mart and RaceTrac.

What remains uncertain is what effect the Goliaths will have on the definite e-cig David, NJOY.

As the clear leader of the e-cig industry, with placement in more than 30,000 retail locations and cutting-edge products across the rechargeable and disposable e-cig seg­ments, NJOY does not feel threatened by competition from “big tobacco.”

“We’ve found our ability to get a merchandising footprint—in c-stores in particular—has not been impacted by cig­arette contracts,” says Roy Anise, NJOY’s executive vice president. “The retailers want us to be successful, and they’re will­ing to allocate real estate to grow our brand because it’s in their long-term interest for our category to be successful.”

While the potential of e-cigs is certainly part of the reason behind such retailer enthusiasm, Anise believes the real appeal for retailers is that e-cig manufacturers do not require the rigid contracts many traditional tobacco players demand.

“The retail trade would like to see a more flexible model in general,” Anise says. “In my opinion, the contract model will begin to erode. Technology and innovation is coming in e-cigs in ways [manufacturers] haven’t seen with tradi­tional tobacco products. The system has to be modified.”

Legitimate Buzz

Strict contracts or not, Anise ultimately views Swisher’s entrance into the segment as a big plus for the e-cigarette industry as a whole. “The involvement of traditional tobacco players brings legitimacy,” he explains, saying the presence of compa­nies such as Swisher breeds consumer confidence. “Well-established and more responsible players are going to bring a level of responsible business practices that this category needs. In that respect, it’s a very welcome development and is a testament to the category’s potential.”

Maiellano echoes Anise’s sentiments. “When ‘big tobacco’ gets involved in the alternatives, it validates the category and puts capital behind it,” he says. “Seasoned tobacco manufacturers have a platform, marketing expertise, can provide research and development, and have the finances to support the products.”

Swisher reports that its consumers have already responded to such valida­tion. “The interest has been extremely high,” says Denk. “We’ve already had a number of people interested in where to find our e-cigarettes and cigars. As the word gets out, there has been a positive response from the consumers.”

While Swisher’s e-cig news may not be a game changer, it’s an important step in the validation of a growing category.

“Times are changing,” says Maiellano. “Moves like this open up the door.”

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