NEW YORK-- With everything going on with electronic cigarettes, vaporizers and e-liquids, it’s not surprising that Wells Fargo chose to center its third-quarter “Tobacco Talks” retailer survey on the e-vapor segment. Of the tobacco retailer and wholesalers surveyed (representing more than 20,0000 convenience stores nationwide), all respondents are currently carrying e-cigs, with 85% carrying vaporizers, tanks and mods (or VTMs) and nearly all predicting they would carry VTMs within six months’ time.
The enthusiasm over vaporizers and e-liquids may be due to the stronger conversion rate compared to cig-alikes: the survey suggested 27% of consumers are using both e-cigs and combustibles, with 14% converting to just e-cigs; by comparison, 23% of consumers are displaying dual use with VTMs and combustibles, with 19% converting to just VTMs.
VTMs also represent a potential for retailers to continue growing the e-vapor segment, which has largely flattened out in recent months.
“Vapor category momentum is moderating in c-stores,” said Wells Fargo analyst Bonnie Herzog, noting that contacts estimate a 7% growth rate in Q3 2014 (down from 12% in Q2 and 25% in Q3 2013). “Retailers are excited about new vape products, with the e-cig-VTM mix expected to be (approximately) 53/47 in six months, versus (approximately) 67/33 today.”
“We've seen a dramatic change in our consumers, switching from e-cigarettes to vaporizers,” said one respondent, with another retailer adding that vaping accounts for more than 60% of their e-vapor sales.
With an impressive $3.45-per-bottle profit margin, it’s not surprising that e-liquids are taking the most incremental shelf space of the retailers surveyed, up 34% year-over-year. E-cigs and VTMs are up 32%, smokeless up 3%, cigars up 2%; snus and cigarettes were losing shelf space, down a respective 1% and 5% from last year.
Although retailers are more enthusiastic about vapor and e-liquids than e-cigarettes, most acknowledged that Big Tobacco is poised to shake up the category with the ongoing national rollouts of Reynold’s Vuse and Altria’s MarkTen. The two brands already represent nearly 30% of respondents’ vapor revenue and are expected to grow to a 36% share in the next six months.
“Overall, our contacts noted robust trial for Vuse and MarkTen, though this is not surprisingly being driven by ‘free’ product coupons and other promotional activity,” said Herzog. “Our contacts noted better, more localized (store level) consumer awareness/engagement on Vuse and several noted Vuse is taking shares.”
“Unable to tell so far due to the number of ‘free’ product coupons we are getting,” wrote one retailer of Vuse. “They jumped to a 30% share the second week we carried them but the (number) of coupon redemptions is off the charts.”
“It will be interesting to see how many people stick around to pay for the product,” agreed another respondent who has seen “good initial movement” on Vuse.
“MarkTen has garnered mixed initial response despite its higher margin for retailers,” Herzog said of Altria’s e-cig offering, which like Vuse, has benefitted from a robust marketing and couponing campaign.
“MarkTen was heavily promoted when introduced in June 2014 and has since slowed down,” one retailer commented. “Though it's still a strong brand for us it's behind Vuse and blu over the past two months.”
Despite concerns over Vuse and MarkTen’s performance once the discounting and promotions stop, and despite continued overall e-cig deceleration, Herzog and respondents were encouraged by continued overall growth in vapor. Surveyed operators predicted 4.2% of combustible cigarette volume is being displaced into the e-vapor category, up from 3.4% in the first quarter of 2014. Respondents also noted that repeat vapor purchases are up to 57% this quarter, versus 41% last quarter.
“We believe consumption of vapor and other non-combustible products (such as heat-not-burn) could surpass combustible cigarettes in the next decade, Herzog said. “We believe Big Tobacco will likely be pivotal in shaping the non-combustible nicotine industry.”
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