The Electronic Revolution
Are e-cigarettes the spoils of another gold rush or a harbinger of transformation for the tobacco category?
“It could change the value equation between electronic and combustible cigarettes and force e-cigarette manufacturers to reduce prices and margins,” says Kretek’s Geoghegan. “I don’t think they can take a big hit all at one time from federal taxes at an equivalent rate to cigarettes.”
Those are the questions that are beyond retailers’ control. Then there’s the question most operators privately ask themselves: With about 250 electronic-cigarette companies flooding the market, what happens if one of my brands goes under?
“I don’t know how long the industry can withstand however many vendors there are on the market right now,” Strickland says. “I do think you can make a case for how many of these companies will actually answer the phone once these regulations get stamped.”
According to Carlos Bengoa, president of CB Distributors Inc., Beloit, Wis., not only are there too many companies, but there are also too many companies making subpar products.
“There are too many brands in the market that don’t meet the minimum standards to be taken seriously by any large chain,” says Bengoa, whose company produces 21st Century Smoke. “Many [e-cigarette manufacturers] lack real liability insurance or at least adequate coverage, as well as quality control. They use cheap and unreliable batteries and manual [e-liquid] injection.”
FDA regulations—along with the entrance of Big Tobacco—will likely accelerate consolidation, weeding out pretenders from contenders, says Miguel Martin, president of Logic Technology, Livingston, N.J.
“The FDA will wipe out a lot of these [e-cigarette] companies that don’t have financial stability and solid production capacity and who focus on online sales and flavors,” says Martin. “[Success] starts with having a high-quality product consistently manufactured in an FDA-compliant way. That’s hard and expensive to do.”
Promise for the Future
It’s absolutely true that electronic cigarettes are in their infancy, with lots of unknowns about the future and which companies will survive. However, early scientific evidence is giving both health experts and retailers reasons to be optimistic about the segment, even in the face of regulatory and tax-based challenges.
“There is a growing body of scientific evidence that indicates electronic cigarettes may have a very meaningful potential to reduce the harms associated with traditional cigarette smoking,” Dr. Richard Carmona, the former U.S. Surgeon General who recently joined NJOY’s board of directors, told CSP in a rare email interview.
Carmona specifically cites evidence that electronic cigarette vapor could be significantly less toxic than tobacco smoke because of the lack of combustion, which “generates the carbon monoxide and most of the thousands of toxicants to which traditional cigarette smokers are exposed.”