Sticking Around

E-cigs are settling in, but which brands will survive the bubble? 

By  Traci Carneal, Freelance writer

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In a scenario that echoes the lyrics “another one bites the dust,” loyal customers flocked to Web forums in early February in response to rumors that Safe Cig—a popular online e-cig brand—was out of business. Signs of the electronic cigarette maker’s decline had been apparent over the past 12 months as the company struggled with filling orders due to “out of stocks.”

“Safe Cig is toast,” Chris Hollander, editor of ecigsHQ.com, told CSP magazine. “It’s a shame because they were one of the higher-quality products out there. Online e-cig buyers are a loyal crowd, and many are upset that their favorite brand is no longer available.”

Take Jake, who wrote: “I have been a loyal Safe Cig user for the last two years and loved it! I really hope they aren’t out of business. They ran my credit card for an order and didn’t ship it yet!”

While a business going belly up is not unusual in today’s economic age, industry experts say Safe Cig’s demise is a hint of a bubble that is ready to pop, much like the dot-com crash of a dozen years ago, when frail companies artificially propped up by excess investment funds abruptly crashed. If an e-cig company doesn’t make it, chances are it will be due to an influx of companies—estimated to range from 200 to 350, according to analysts and observers—in a market that simply can’t support them all. Beyond capitalistic Darwinism, most of these brands will strike out due to unpredictable legislation, regulation and litigation.

That said, the issue is no longer is whether e-cigs are here to stay, but which companies will be left standing when the playing field levels.

Why the e-cig invasion in the first place? An extremely low barrier to entry is one reason, as well as the fluidity of the online sales business, says Hollander:“All you need is a couple hundred dollars and an email account, and you can start selling e-cigs.”

Wells Fargo tobacco analyst Bonnie Herzog agrees, pointing out that most of the manufacturing takes place in China, so “nearly anyone can start up an e-cig brand.” She stresses, however, that the real winners will be those companies with a quality product that can achieve product placement at retail.

Tommy Stine, senior vice-president of Corinth, Miss.-based Long Distribution, predicts a “shakeout” that will leave only a few major suppliers, “just like what happened to snus.”

The swarm of e-cig products leaves retailers with some tough choices to make: which products to sell, who to partner with and how to ensure quality products reach their consumers. As one manufacturer says, the typical c-store will likely select three to five brands at the most. That means a lot of minor leaguers never reaching the pros, being benched or eventually squeezed out of the e-cig business.

High Hopes

As profits from the traditional cigarette category continue to dwindle, consumer demand for electronic cigarettes is on the rise, says Roy Anise, executive vice-president of e-cig manufacturer NJOY, Scottsdale, Ariz. “At the beginning of 2012, we all wondered: Are these a fad?” he says.“Now the question is whether e-cigs are a game changer and, if so, is it possible these could replace traditional cigarettes in the next five to seven years?

“Our strategy, everything that we do, is based on two words: obsolete cigarettes.”

Lorillard Tobacco Co. would surely shudder at the thought of obliterating cigarettes. Considering that cigarettes easily remain the top-selling category in convenience chains, the likelihood of such an upheaval over the next decade is highly doubtful.

Still, major cigarette players are taking note of e-cigs’ impressive rise. The first major tobacco player to jump on thee-cig bandwagon, Lorillard’s blue Cigsbrand has quickly captured an impressive portion of the total e-cig market, the second-largest share after NJOY, according to Nielsen data for the four weeks ending Jan. 19, 2013.

(Note: The Nielsen data is not fully representative of the entire e-cig market because the data does not include all U.S. retailers. All-inclusive data is not yet available at this early stage of the e-cig category.)

While e-cigs offer great potential, they currently represent a fraction of annual c-store and tobacco-shop sales, says industry consultant Lou Maiellano, based in Sevierville, Tenn. “Cigarettes will not go away in the next 10 years,” he says.“That’s just hype; the numbers simply don’t support it.”

Hype it may be, but e-cig importers and manufacturers stress the advantages for adult smokers who want to light up more often than current laws allow, and without the odor and secondhand smoke—two of the most socially unacceptable consequences of traditional cigarettes. “Imagine being able to enjoy a product that looks and feels like a cigarette in places where smoking is banned without disturbing those around you,” NJOY’s Anise says.

Kevin Frija, CEO of Vapor Corp., Fort Lauderdale, Fla., says, “The e-cig is FDA’s dream product.”

“I have no idea why they don’t embrace the e-cig as a viable option for smokers with all the benefits it offers,” he continues. “It’s a safe bet that in the next 10 years, e-cigs will represent at least half of all c-store tobacco sales.” He believes there is room for both e-cigs and cigarettes in the c-store tobacco arena.

Of course, tobacco critics might say otherwise, pointing to sporadic citations of accelerated heart palpitations potentially from unlimited use of e-cigs. It is hoped in many circles that the Food and Drug Administration (FDA), which continues to study e-cigs, will this year establish guidelines that allow e-cigs to be marketed as a modified-risk product with modest regulation.

Other than the regulatory unknowns, the e-cig category is primed for c-store success.

NJOY’s Anise says the industry is entering 2013 in a different, but more promising, position than last year.“Rather than a category dominated by rechargeable e-cigs purchased on the Internet, disposables are already seeing tremendous growth in c-stores,” he says.

Although e-cigs are sold in smoke shops, pharmacies and even Walmart, c-stores should do well with disposable e-cigs and refill cartridges, Hollander says.

“Disposables are the ideal product for c-stores. Most people are more likely to try a disposable product before investing in an entire kit, and if they decide to opt for a kit, they will probably buy it online,” he says.

Maiellano, however, feels strongly that retailers should consider a full-service offering that includes disposables, express kits and starter kits, as well as cartridges, which yield a highly profitable 50% to 60% margin. “Retailers are catching on to the importance of a well-rounded e-cig section and are giving the category space,” he says.

Smoke ’Em, a tobacco shop chain with nine stores in central Arizona, has sold e-cigarettes for four years. According to Bob Roberts, president of Smoke ’Em, the chain carries Metro, Crown 7, Smoker Friendly and, the newest addition to the line-up, blu e-Cigs.

“Our e-cig sales have doubled every year since we started selling them,” Roberts says. “It will be unfortunate if regulation bans them or restricts sales severely; they don’t contain any combustibles. Of course, our sales associates are restricted from making health claims about the products to consumers, but they can mention this important fact, and that’s a great selling tool.”

The ‘A’ Team

While a few brands are beginning to distinguish themselves in the retail market through broader distribution deals and marketing dollars, it’s premature to attempt to predict who will emerge as the true industry leaders at this point, says Maiellano, a respected industry veteran who has tracked the tobacco sector for decades.

“Ask any e-cig importer out there, and they will tell you they are the best in the industry,” he says. “At this early stage in the category’s development, it’s just too soon to tell who the primary players will be in the next few years.”

He points to Camel as an example of how a leading brand can be overtaken by the competition: “The first cigarette ever introduced in 1913 is Camel, which is now dwarfed by Newport and Marlboro. The big players now may not be the biggest as the market matures.”

Nielsen tracks e-cig sales in the convenience market by brand, but the majority of retailers are not included. Nonetheless, the data still has value, and for the four weeks ending Jan. 19, 2013, the top players in the e-cig category were listed in this order: NJOY, blu (brand name blu eCigs),21st Century, Logic, Mistic, Nicotec and Finiti (brand name FIN).

One industry expert, who requested anonymity, says the data should be read with caution because it only represents a small period of time, and data tracking also coincides with the month that NJOY filled the pipeline with its new Kings product. “Placing a new item for the first time in all of your customers’ stores will result in a significant, but temporary, boost in the numbers,” he says. “It’s too soon to tell which companies will be left standing, but if I had to predict, I would identify blu, V2, NJOY and FIN as the leaders who prevail.”

As for the sales numbers, he says any data on the category is going to be skewed at this point: “Until the industry has a program that involves participation by most of the retailers, you aren’t going to have accurate data reflecting unit share and dollar volume.”

Expect the playing field to change dramatically if other big tobacco companies join the team. Whereas Lorillard Tobacco acquired an existing company to take over blu ECigs, Reynolds American continues to put the finishing touches on its electronic cigarette, Vuse, which is on the market in limited distribution. Reynolds spokesman Richard Smith, who did not share when full-scale distribution will begin, says, “The technology is being designed and developed in-house with our own proprietary offerings, which is a time-intensive and detailed process. The appropriate time will come when we can share more information.”

Lorillard’s solid sales force is rapidly increasing blu’s availability at retail, escalating competitive pressures on others also fighting for a c-store presence, says David Bishop, managing partner of Barrington, Ill.-based consultancy Balvor. “At the end of the day, quality will differentiate the winners from the losers and drive repeat purchases,” he says. While Reynolds American continues to develop and test Vuse, others wonder when Altria will enter the game. Brian May, senior manager of communications for Altria, says the company is highly aware of electronic cigarettes and is monitoring the space, but he makes no reference to any future plans to enter the category.

Standing Out

Not every e-cig supplier has the resources or deep pockets to undertake national television and print advertising to reach consumers, but the entire category will gain from those who do. NJOY and Lorillard have both launched a TV and print campaign for the consumer market—something smokers haven’t seen since the FDA banned cigarette advertising in 2010.

Some feel that the success of the e-cig category depends, to a great extent, on educating consumers and retailers about the product. To that end, a leading online-cig company, V2, fired up an in-store sampling program that can serve as role model for other companies. The program, among the first of its kind in thee-cig category, was launched at Pilot Food Mart locations in the Knoxville, Tenn., market, according to Mark McLeod, V2’s director of new business development.

“We listened to retailers express concern about a lack of education among consumers and themselves regarding-cigarettes,” McLeod says. “The sampling program gives consumers a snapshot of the product onsite with someone there who can educate them on how to use the product and what the benefits are.” The company is in talks with other c-store chains to launch the sampling program but won’t disclose any names at this time.

Roberts of Smoke ’Em is surprised to hear that a sampling program is underway in some c-stores.

“It’s not that we aren’t allowed to do it, but there doesn’t seem to bean economical way to execute such a program,” he says. “As far as I know, there are not exchangeable tips or anything like that we could use replace so consumers could try an e-cig, and it wouldn’t be economically feasible to allow each consumer to try a fresh disposable.”

McLeod says the c-store industry is setting the tone for the future success of e-cigarettes. “Once we get more penetration in the market and more consistency, we will see increased retailer involvement and more accurate data,” he says. “In the next 12 to 18 months, the industry will be reduced to about five e-cig companies standing tall.”

Anise believes NJOY’s investment, coupled with its preparations for FDA oversight, gives the company a promising future.

“We have our own design team, engineers and flavors, and we design our own product and manufacture to our specifications,” he says. The product’s liquid, the nicotine and the flavorings are manufactured in an FDA-grade facility in the United States, and the product is assembled in China. “Many of the new e-cig suppliers coming to market are purchasing product made 100% in China, and they don’t even know what the ingredients are.”


E-Cigs Await Their Fate

There is no product like it, and it’s hard to understand why the Food and Drug Administration (FDA) would not be in support of it, says Kevin Frija, CEO of e-cigarette company Vapor Corp. In fact, Frija thinks the U.S. government should not ban but rather endorse e-cigs for adult smokers. “FDA has been given the impossible task to regulate tobacco,” Frija told CSP magazine. “E-cigs allow them to regulate smoking in a way that provides an alternative while reducing usage of tobacco. … I’m optimistic FDA will conclude that e-cigs are actually a benefit to those who want to smoke.”

In January, the FDA declared it would publish a proposed rule to regulate “other tobacco products” (cigarettes, roll-your-own tobacco and smokeless tobacco are already regulated) no later than April 2013. While the other tobacco products the FDA intends to regulate and the extent of the regulations will not be known until the proposed rule is made public, many anticipate e-cigarettes will be among the targets.

In the meantime, e-cigarettes offer a glimmer of hope for the highly criticized tobacco industry because the products are not held to the same advertising and marketing restrictions as traditional cigarettes. If and until the FDA takes action limiting such promotional activity, companies with the necessary resources are reaching out to consumers via TV commercials and print ads.

Despite the unknowns, many e-cig supporters maintain high hopes. Kathy Sparrow, senior vice president of sales for Lorillard Tobacco Co., believes the FDA will likely come out in favor of the electronic cigarette. “We are hopeful the agency will recognize the potential role e-cigarettes can play in an overall tobacco harm-reduction strategy, and therefore design regulations that encourage responsible growth,” she says. “Because e-cigarettes offer such potential, it makes sense that FDA will take steps to ensure the responsible manufacture of the product and look to expand testing to better realize the potential.”

The topic of FDA testing ignites Frija, who says the FDA’s biggest issue is with the “e-juice” that carries the nicotine and varies from product to product. “Many of the juices are not put through any testing and the fact that many suppliers buy the cheapest juice possible puts the whole industry under the microscope,” he says. “FDA seems to take a position on an issue, then runs tests to support its position, rather than the other way around. The testing done a few years ago had no control group.”

For example, Frija points out that comparable products such as the FDA-approved nicotine patch would serve as a worthy control product for e-cig testing. The patch releases nicotine right into the bloodstream, but the e-cig does not. If the patch has the FDA nod, he wonders, why wouldn’t the e-cig, because the nicotine delivery process is less harmful to consumers?

According to Sparrow, the greatest challenge overcoming government hurdles is ensuring a balance of science-based and responsibly reported studies. “It is disappointing to see the ‘anti’ side take such a knee-jerk reaction to the issue,” she says.“Some public health officials take such a strong stance against e-cigarettes, without acknowledging the necessity of further testing and without taking an objective look at the true potential that speaks directly to their prime directive more than any product alternative we have seen thus far. There is already a growing body of evidence that these products can be part of the solution, but more research is clearly needed.”

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