The Electronic Revolution
Are e-cigarettes the spoils of another gold rush or a harbinger of transformation for the tobacco category?
“With Reynolds and Altria joining the mix in the next nine to 12 months, consumers will begin—if they haven’t already—to accept this form of obtaining nicotine in a less harmful manner,” says Monaco. “Big Tobacco will play a huge role in the segment’s success.”
That’s especially true when it comes to the retail environment, where companies such as R.J. Reynolds have ruled supreme. “We are focusing distribution efforts within this channel because we believe c-stores provide the best opportunity to gain product awareness and trial by adult tobacco consumers,” says Richard Smith, communications lead manager for Reynolds.
Herzog predicts that the big manufacturers will likely win the e-cigarette war, because they have the advantage thanks to a treasure trove of cash to invest, further enhanced by billions of dollars from non-participating manufacturer credits and the discontinuation of the Federal Buyout Fee.
“They also enjoy large sales forces and distribution networks, and they are obviously well entrenched in the retail and c-store channel,” says Herzog. “In addition, they have a vast database of (smoker) customers and they know these customers very well.”
Though Big Tobacco knows how to market and distribute tobacco products, Logic’s Martin contends that it’s not a foregone conclusion that they’ll dominate electronic-cigarette trade—especially with tobacco retailers’ negative image in the eyes of both the public health world and many retailers bitter over strict cigarette contracts.
“There will probably be three to four national brands that demand 70% to 75% of the business and six to seven other brands, including regional brands,” he says. “Clearly there’s room in this environment for well-funded, thoughtful independent electronic-cigarette companies.”
Of course, retailers are probably more invested in how electronic cigarettes are performing than how many companies are succeeding in the next five years. Herzog predicts that e-cigarette consumption could outpace traditional cigarettes over the next decade, with margins for the former surpassing the latter by 2017. Five years from now, Herzog believes a $10 billion e-cigarette market is entirely possible, even in the face of taxes and regulations.
“I don’t like to speak in definites, but this segment absolutely has the potential to be a long-term life-saver for the category,” says Slattery. “This could be the beginning of what I view as a transformation for tobacco. I think it could be something that turns the category around for the long term.”
In truth, the segment is still in its crawling stage. “It’s a new and emerging category, and time will tell how it is going to evolve,” says Altria spokesman Brian May.
That’s evident in the growing popularity of e-liquids, which allow consumers to create their own blend of nicotine “juice” to vape. Though newer to the market than electronic cigarettes, vapor lounges are popping up across the country to cater to the high-end vapers of e-liquids.
“Some have suggested that the future of the business is in e-liquids,” Maiellano says. “I’m not saying that’s the case, but there’s still so much up in the air. Where will we be when the vapor clears?”
It’s an important reminder that e-cigarettes are not just tobacco products, but also a part of the tech world. Just look at RJ Reynolds’ new, highly digitized Vuse, which gauges every puff. And the tech world innovates at a much faster rate than tobacco.
“Electronic cigarettes are like iPhones,” Herzog says. “We’re only on version one.”
Perhaps a more appropriate description would be Apple’s iPhone predecessor, the iPod: As technology advanced, it went from a music player to a video player, then to a video-playing version that also surfs the Web, eventually evolving into the iPhone and the iPad.
The notion of making phone calls from an electronic cigarette may seem laughable. But 10 years ago, who could have predicted that we’d be charging cigarettes on a computer? The possibilities for innovation are endless.