Fighting Fear with Science
As proposed bans and restrictions circulate, e-cig companies work toward longevity.
Driven in part by blu’s 40.2% dollar share of the market, e-cig sales in the c-store channel grew 182.4% for the period ending Aug. 3, according to Bonnie Herzog, managing director for beverage, tobacco & consumer research for Wells Fargo Securities LLC, New York.
Herzog says e-cig category dollar sales growth decelerated slightly this period, yet still grew at robust levels to $39.1 million in the c-store channel. “Retail e-cig sales are on track to reach $1 billion this year—or $1.7 billion including online sales,” Herzog says in a recent note. “We continue to believe e-cig consumption could surpass traditional cigs in the next decade and the combined operating profit pool could generate a CAGR of 7% or more over the next decade.”
Another projected big player in the category is Vuse Digital Vapor Cigarettes by Reynolds American Inc. Vuse was introduced in Colorado in July, and spokesperson Smith says the company is heartened by initial feedback from customers and retailers alike.
“It’s too soon to ascertain market share for now, but I do know that this is just the first step in a national expansion of Vuse, and we intend to become a big player in vapor,” Smith says. “Vuse is one example of RAI’s Transforming Tobacco vision, where we will achieve market leadership by transforming the tobacco industry, which includes driving innovation throughout our businesses and redefining enjoyment for adult tobacco consumers.”
Many wonder how the ITG purchase of Dragonite will affect the e-cig playing field. According to Bartkowski, if the deal closes, ITG will “inherit the role of plaintiff in a U.S. patent infringement action against 10 large U.S. e-cigarette companies, including Lorillard, NJOY, Logic and Vapor Corp.” He says that since the VapAria venture with Dragonite ended in 2010, the Chinese company has stepped up efforts to protect its intellectual property/patents both here and in other countries.
“Time will tell what ITG’s intentions are and the impact it will have on the U.S. e-cigarette market,” he says. “It’s a big move, and it will certainly change the game.”
As background, in early 2011, Ruyan and parent company Dragonite International sued 11 U.S. e-cig companies because Dragonite holds the original e-cig patent. Last year they were granted a new patent and sued (in some cases, for a second time) the top 10 e-cig companies, including Lorillard (owner of blu) and NJOY. According to Bartkowski, the court proceedings have been stayed pending a re-examination of the new patent by the U.S. Patent and Trademark Office.
Not Rocket Science
To paraphrase the iconic Sam Cooke song, e-cig merchants “don’t know much about engineering and chemistry,” according to Bartkowski.
“Those selling e-cigarettes need to become educated on how it works, how it can be more efficient, and how the vapor is absorbed by the user, for example,” he says. “This lack of knowledge is a critical gap that limits the type of innovation vital to sustaining long-term growth and perhaps acceptance by regulators. It’s difficult to improve something you don’t already understand.
“There’s been focus on flavor, fixing design flaws like leaking cartridges, poor battery connections, and attempts to fix the manufacturing defects like poor quality and/or poor batteries,” he continues, “but beyond that, not much has been done in terms of innovating the product.”
And he should know a thing or two, considering he was instrumental in bringing electronic cigarettes into the U.S. market when his company entered a joint venture with Chinese manufacturer Ruyan Holdings (now Dragonite) in 2007. By 2010, his company, VapAria, dissolved the joint venture with Dragonite to explore alternative technologies for delivering the vapors to users—not just new flavors, new packages and longer battery life, but an entirely new way to vape.