Mist Opportunities

E-cigarette manufacturers finding foothold while educating retailers.

By
Mitch Morrison, Vice President & Group Editor

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Still a niche player in the United States, electronic cigarettes are gradually breaking into convenience stores and tobacco shops.

The exclusive 2012 NATO-CSP Tobacco Survey shows that 80% of nearly 140 tobacco shops and c-stores, representing more than 15,000 stores overall, are carrying at least one SKU and that some are carrying at least a half-dozen SKUs, reflecting increased interest and, in some cases, broader consumer acceptance.

The news, while positive, must be couched. While garnering greater national and trade media attention, electronic cigarettes remain but a blip in the overall tobacco set. That said, the survey shows some positive news. Consider:

Among 64 tobacco shops surveyed, all but seven reported carrying at least one SKU, and one-third of the respondents stock six to 20 SKUs. (Eleven companies said they carry 21 to 50 SKUs.)

C-stores were not as aggressive as tobacco shops, but they were certainly showing greater willingness to sample e-cigs in their stores. Of 74 retailer respondents, 53, or roughly 72%, said they carry at least one SKU. More than one-third of the c-stores said they carry at least three to five SKUs, and some as many as 11 to 20 SKUs.

Tobacco shops were asked an additional question: How many carry full product kits priced over $50? The answer for e-cig makers was encouraging. Though 59% said zero, 29% responded one or two SKUs; 13% said three to 25.

Fighting for Space

Attend a c-store or tobacco trade show and you’ll find a plethora of exhibitors hawking their electronic cigarettes. Much as the dot-com boom of the 1990s transpired, most of these companies will merge or fall as the market matures and a few leaders climb the ladder of consumer acceptance.

Scottsdale, Ariz.-based NJOY Electronic Cigarettes is the leading U.S. e-cig brand. Nielsen data shows NJOY enjoying 35% unit share and 50% dollar share in c-stores, with a presence across many of the industry’s largest chains, including 7-Eleven, Kangaroo, RaceTrac and Stripes. (Nielsen doesn’t track tobacco shops.)

NJOY executive vice president Roy Anise says, “We offer a thorough presentation first to the executives, then to the store managers, who pass the information down to their employees, who, in turn, educate the consumer.” This educational process is essential, he maintains, because e-cigs are so different from cigarettes that there is an understanding gap that needs to be overcome. “Managers can offer their employees, especially their smoking employees, a sampling program so they can try out the product,” Anise says. “This is exciting, for if the employee uses it himself he’s going to be that much more eager to share his experience with a customer. Our research shows that, on average, each person who uses our product tells about 14 other people about it.” A random survey of retailers, small and large, show mixed reviews so far for e-cigs. Several told CSP that e-cigs remain a tough sell because of price, taste and in-store placement. However, others are pleased and cautiously optimistic about their long-term place in tobacco sets, both in c-stores and tobacco shops.

 “We got into e-cigs about two years ago,” says Mel Beech, national category manager for truckstop giant Pilot Flying J, the Knoxville, Tenn.-based operator of more than 550 stores. “It was a new technology and looked like an opportunity. It’s been a nice, pleasant surprise. It’s doing well, and growing.”

He credits Pilot’s e-cig vendor, Farmington, N.M.-based Mistic. “They do a nice job on the starter kit. And we put out a freestanding sign that says, ‘Here’s what an e-cig is,’ which helps to educate customers. The display itself is a silent salesperson, which does a nice job for us.”

Asked about e-cigs’ potential, Beech is bullish: “This category will grow—our customers are telling us this through their purchasing power.”

This confidence is exuded on the local storefront for Pilot. “The customers who come in here already know a bit about it and tend to know more about it than we do,” says Steve Freant, a Pilot store manager in Midway, Fla. “I think it’s a good product. The majority of people who come in want to wean themselves off cigarettes. It’s been somewhat under the radar here, but about December it started picking up. I think people started making resolutions to stop smoking cigarettes. I see the product as growing.”

Trade association leaders are mixed on the topic. Jim Calvin, president of the New York Association of Convenience Stores (NYACS), says, “E-cigarettes began to emerge in upstate New York about two and a half years ago. I see more and more of our retail members carrying them, but I’m not familiar with their sales performance.”

Meanwhile, Mark Griffin, president of the Michigan Petroleum Association/ Michigan Association of Convenience Stores, says his membership has expressed little interest in electronic cigarettes.

And NACS spokesman Jeff Lenard offered this observation: “At our 2010 trade show, e-cigs were among the hot items on display. They are an obvious trend, but whether they will amount to a shortterm fad or the beginning of longer-term growth is hard to say. The product is so new to c-stores, that many, I think, don’t have a model. So it remains to be seen what will happen in this category, though at the moment it’s generating a lot of excitement.”

Legal Questions

In April 2011, the FDA said it would investigate how it can regulate e-cigarettes as tobacco products. This decision came after a U.S. Court of Appeals decision that the FDA cannot regulate e-cigarettes as a drug delivery device, which is how nicotinereplacement products are regulated.

As a new segment, e-cigs themselves are a bit confusing, and the technology has generated substantial media and legislative scrutiny in part because of their physical similarities to traditional cigarettes.

At its most basic point, e-cigs are electronically delivered nicotine, without any tobacco whatsoever. There are a number of different variations, but, basically, a starter kit comes in the form of cartridges, batteries and chargers.

There is great debate about whether e-cigs pose any health hazards. Many e-cig makers have staked their future on positive health claims that e-cigs are significantly much safer than cigarettes. A study reported in Reuters Health, however, charged that electronic cigarettes produce immediate changes in a person’s airways.

FDA officials told CSP that further scientific study is needed to resolve the health question.

E-cigs have been around for about five years, but they were on hold until early 2011 due to FDA regulations, which classified e-cigs as a health product, thus requiring tests that could cost millions of dollars and take several years for approval.

Toward that end, one manufacturer sought to withdraw e-cigs from the health debate. Ray Story, then owner of Smoking Everywhere, initiated litigation against the FDA, contending that e-cigs were a tobacco product and not a drug delivery device. In December 2010, that suit, which Smoking Everywhere had dismissed but had been continued by Sottera Inc., dba NJOY, won a unanimous court decision, prompting the current stalemate at the FDA.

Story, who today heads the nonprofit Tobacco Vapor Electronic Association, Atlanta, appreciates the current confusion surrounding electronic cigarettes.

“There are a lot of great e-cig companies out there,” he says. However, many aren’t so great, he says. “One of our biggest issues is that there are many companies that want to do business without liability insurance, product testing, longevity, who don’t have a real structure to offer to retailers.”

Along with this, Story says, are those who are outside the law by portraying themselves as a health vendor rather than a tobacco vendor. Moreover, many e-cigs are sold online, without going through the proper procedures of seeking verification that the buyer is 18, the legal smoking age.

The emergence of these “fly-by-night” companies, Story explains, results from the beginnings of sales of e-cigs in this country. They are often made in China, and it’s very easy and inexpensive for anyone to purchase them, pick a standard package in which to merchandise them, and then sell them online.

These companies are not only hurting the industry, Story says, “but c-stores [and tobacco shops] have to weed through a lot of vendors, and if they choose one without a real plan … then the c-stores are only hurting themselves … especially if they buy from a company who’s here today and gone tomorrow.”

That said, Story is pleased that the legal victory has, if not opened the floodgates, at least cracked the door into retail outlets.

“After our legal victory, the large c-stores started to really look into this product,” he says. “Several large brands have national contracts with the leading c-store chains, and the product sales have increased 400% to 500%. By the end of 2012, e-cigs will be a $1-billion industry.”

Getting There

One major stumbling block toward accelerated growth for the e-cig subcategory, beyond regulatory concerns, is price.

While e-cigs themselves are not costly, the price of a starter kit, typically ranging from roughly $40 up to $80, can cause sticker shock.

NJOY’s Anise tries to educate that while the upfront costs are a bit steep for some, in the long run e-cigarettes still come out far cheaper than the typical pack a day of cigarettes.

Still, it is a formidable barrier, especially for smaller e-cig makers. “We started about a year ago. Business is not too bad but is a little slower than anticipated,” says Elizabeth Hathway, president of XEcig, Phoenix, Ariz. “The reason, I believe, honestly, is that when a consumer walks into a c-store and sees he has to pay $25 to start—though we definitely convey that he will eventually save money—what he immediately sees is that $25 compared to the $8 to $12 for a pack of regular cigarettes.”

Kim Thompson, owner of e-cig maker Vaporium, Lakewood, Wash., says, “We offer very high-end products that are cheaper in the long run than cigarettes but are different than disposables in that they are rechargeable and refillable.”

Still, Thompson acknowledges the cost hurdle: “Initial cost ranges from $40 to $110.” 

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