AWMA Forum Homes in on Vaping
Analysts Herzog, Modi, Bishop share their views on future of tanks, e-liquids
CHICAGO --A theme quickly emerged among the three tobacco analysts presenting at the American Wholesale Marketers Association (AWMA) C-Metrics Convenience Industry Outlook Forum yesterday: the vaping and e-liquid trend has hit the industry at full force. And with good reason.
"I've used tanks versus 'cig-alikes': it's a crazy difference," said Nik Modi, managing director of tobacco for New York's RBC Capital Markets LLC, noting that personal vaporizers (also known as tanks and mods) look nothing like a traditional cigarette, have superior batteries and are as much as one-third cheaper to use than electronic cigarettes.
But for all of the certainty over the superiority of these products, there were a lot of questions. Just how big is this subsegment? Is it really the root cause of the decelerated e-cigarette sales convenience store operators are seeing? Are tanks really the future of the industry, an area Big Tobacco and the c-store channel will inevitably have to embrace?
One of the inherent problems of answering these questions is that the information simply isn't out there.
"The very difficult and frustrating part for me is that there's not a lot of numbers," said Bonnie Herzog, a senior analyst at Wells Fargo Securities LLC, New York. "This segment is just not being captured."
Neither Nielsen nor IRI currently track vaporizer or e-liquid sales. Part of the challenge is that these data providers do not capture online or independent sales (where much of the vaping market falls).
Another challenge, according to David Bishop, is that so few "traditional" retailers (such as the convenience store channel) are in the vaping business.
"The challenge for any data provider today is, if only 2% of all c-stores are carrying vaping products, how do you capture this data?" said Bishop, managing partner at Balvor LLC, Barrington, Ill. “Smaller retail operators were the first to introduce vaporizers even before their wholesalers carried the segment, forcing them to find alternative means of distribution. This meant data wasn’t available given that the wholesale distributor was not delivering the product and syndicated retail data providers were less likely to capture sales due to their store sample.”
Because of both the lack of data and the abundance of e-liquids and vaporizers on the market, it's difficult (if not impossible) to determine the segment's leaders.
"At this point, it's really undefined who the e-liquid 'winner' is," Modi said, adding that based on research he's seen, Innokin's iTaste is the closest any company has come to having a leading brand. "It's very fragmented. This is a tough area to brand because barriers to entry are so low right now. How do you really differentiate yourself in this category?"
According to Modi, this lack of brand equity might dissuade Big Tobacco from entering the segment.
"There's no pricing power," he said. "How do you get pricing power when you can't differentiate yourself?"
Although Herzog predicted that bigger companies will have to at least consider getting into the vaping and e-liquid business, she agreed that it could be problematic for companies like Altria, Reynolds and Lorillard.
"From Big Tobacco's perspective, there may be more risks," she said, pointing out that the segment does not replicate the popular "razor blade" model, as any e-juice can be used with any tank. "This segment could be a threat or potential opportunity for the Big Three."
The lack of brand equity doesn't just present challenges to major manufacturers--the amount of options also makes it significantly more difficult for convenience store operators to choose which brands to carry.
"This highlights the importance of wholesalers in an area where brand equity and product quality are still forming," said Bishop. "They do a lot of the homework" for retailers relative to qualifying product suppliers.”
Whether the vaping segment is becoming a "must-have" for the convenience store channel or an area that doesn't yet appeal to the channel's core consumer proved to be a divisive issue amongst the presenters.
"More and more c-store retailers are seeing these trends and embracing them," said Herzog, adding that Wells Fargo's retailer surveys suggest vaping is growing at twice the rate of traditional electronic cigarettes. "It's giving (retailers) growth and it's giving them margins."
Balvor's research also indicates this is a segment that benefits the convenience store channel: a recent survey showed that while the average c-store sells approximately $150 worth of e-cigarettes a week, a retail chain that brought in vaping products was boasting a hefty $400-a-week average with vaporizer representing a sizable share of the business.
"When our industry is saying that (the e-cig) business is flat, it's because we've been flat-footed related to getting into the vaping game," Bishop said. "If you're not in open systems yet, you've already lost a significant amount of the upside potential to those who already offer."
Modi, however, took a more cautious approach, pointing out that the vaping segment is appealing to health-conscious Californians or New York hipsters. Not exactly the average convenience store shopper.
"Data shows that 'Bubba' does not care about this category," he said, pointing out that traditional convenience store demographic doesn't want to plunk down $300 on a vaporizer, deal with maintenance and technical issues or worry about customizing liquids. "Consumers buying this product are still peripheral."
Which isn't to say that convenience store operators can't benefit from the vaping craze, just that it's not an automatic victory.
"Getting into the (vaping) category is one thing," said Modi. "Managing and making money off it is another."