Are E-Cigarettes The Future of Tobacco?

David Bennett
June 8, 2015
CSDecisions
As big tobacco enters the e-tobacco category, retailers take notice.
The U.S. cigarette market retains a resilient presence—enabled by strong consumer loyalty—but regulatory initiatives continue to chip away at the industry’s dominance.
As a result, customers are increasingly exploring smoking alternatives and looking to other tobacco products (OTP) from smokeless tobacco to cigars to e-cigs, and c-stores are catering to their needs.
According to Wells Fargo Securities, open system vaporizers now contribute more than $1.5 billion to the overall electronic vaporizer market in the U.S., with electronic cigarettes accounting for $1 billion. At an estimated $2.5 billion, the overall vapor category—open systems plus electronic cigarettes—experienced 23% annual growth in 2014, with open system devices generating increased revenue for the category.
Currently, vapors/tanks/mods (VTMs) have locked onto the lead market position. Not only are vapor items expected to surpass the $2 billion mark this year, but vapor sales could exceed e-cigarette sales by $500 million. Research by Wells Fargo Securities indicated vape sales now outpace other non-combustible smoking devices three to one.
In the last five years, there have been rollouts of three generations of products—from the cigalikes to mechanical MOD (which don’t contain any circuity or electronic components) and now, open-vaping systems.
Powered by Millennials and older smokers looking for safer smoking alternatives, e-cigarette and vapor technology is moving quickly to keep up with a shifting market. Of course, all of that activity was bound to draw bigger players and now the landscape of e-cigarettes is transforming again.
In July 2014, Reynolds American Inc., parent of R.J. Reynolds, announced it would buy Lorillard Inc. the third largest tobacco company in the U.S. for $27.4 billion. With the recent approval by the Federal Trade Commission, the companies will merge Reynold’s flagship brands, Camel, Pall Mall and American Spirit cigarettes, with Lorillard’s portfolio of Newport menthol-flavored cigarettes.
The deal has also introduced more opportunity for R.J. Reynolds to beef up its own e-cigarette offering—Vuse Digital Vapor Cigarettes—now available in more than 100,000 retail outlets and one of the top performers in the convenience store channel.
Afterward, R.J. Reynolds spun off Lorillard’s popular blu eCig brand, selling it to Imperial Tobacco Group Plc. At the time, blu was the best-selling electronic cigarette brand in the country, accounting for 47% of the market.
Moving quickly, R.J. Reynold’s launch of REVO, which uses heat-not-burn technology, was introduced in Wisconsin. Not an e-cigarette by definition, REVO is a cigarette with a carbon tip that, when lighted, heats the tobacco rather than burning it, so that the cigarette releases a tobacco-flavored vapor and not traditional cigarette smoke.
Not to be outdone in the e-cigarette arena, Altria Inc., which owns Philip Morris—maker of Marlboro—in early 2014 launched MarkTen, which was around the time the tobacco maker acquired e-cigarette manufacturer Green Smoke.
With Vuse pushing into more stores, MarkTen furthering its national rollout, and blu eCig building upon its existing base, e-cigarette brands are experiencing great leaps in visibility, which means convenience stores stand to gain too.
Stay tuned for CSD’s June tobacco issue for more on how c-stores are driving vapor and e-cig sales, as well as other tobacco categories.