Two big pieces of e-cig news emerged Aug. 22.
First was the announcement that ITG was acquiring the assets of Chinese company Dragonite International, holder of the original e-cig patent, including a portfolio of 140 registered, worldwide patents for the utility and design of e-cigarettes. The announcement brought the world’s fourth largest tobacco company by market share into the e-cigarette arena. Next, The Wall Street Journal reported that new Food and Drug Administration (FDA) regulations slated for an October release may include a ban on online sales of e-cigarettes. (The agency refuted this claim the next day.)
Steady news flashes are becoming the norm in today’s world of electronic cigarettes and, unfortunately, many relate to the new trend of proposed bans popping up at local, state and national levels across the country.
The e-cig story is starting to read like a sequel to “Smoke Out Cigs” as critics point their pistols at those who “vape” and the companies that make and sell the devices. The activity, understandably, has put the industry on the defense and made it somewhat vulnerable because electronic cigarettes are not only a new concept for this country, but also one that is not well understood by many who sell and distribute them.
Some industry veterans predict that the best way to fight back is to have a more solid grasp of the science behind e-cig technology. And if those in favor of e-cig longevity are paying attention, that’s also what regulators are seeking. Mitch Zeller, the new director of FDA’s Center for Tobacco Products, has vocalized the need for scientific evidence along with public health considerations to guide deeming regulations for electronic cigarettes.
Bill Bartkowski, president of Minneapolis-based VapAria, says regulators seem most concerned with how vaping is absorbed by the body and the effect it has on users. These many unknowns about the electronic-cigarette process are a primary reason they take more conservative positions on e-cigs.
“Great concern remains about how much nicotine a user inhales, as well as the source of some of the other chemicals that show up in the vapor,” Bartkowski says. “If we can produce a product capable of measuring and monitoring the amount of nicotine on a per-puff basis, controlling the size of the molecule and literally showing where it is being absorbed by the user, that will benefit the regulatory process and answer their questions.”
Richard Smith, spokesperson for Reynolds American Inc., agrees, to an extent. “I wouldn’t begin to speculate on what may or may not happen with bans of vapor products in various locations,” he says, “but I can say that we believe the degree of regulation of tobacco products should be based on the comparative risks of tobacco and nicotine products and their respective product categories—and that information should be based on sound science.”
Introduced to the United States only about six years ago, the e-cig category got an initial boost from a slew of online sellers eager to jump on the e-cig bandwagon—regardless of lack of experience or knowledge about the product or technology. But as the electronic devices come under increased scrutiny, Bartkowski predicts that those who truly understand the essence of e-cigs will rise to the top as key players.
Where We Are
The category has been progressing well with big tobacco companies coming on board, along with new flavor and packaging innovations.
Driven in part by blu’s 40.2% dollar share of the market, e-cig sales in the c-store channel grew 182.4% for the period ending Aug. 3, according to Bonnie Herzog, managing director for beverage, tobacco & consumer research for Wells Fargo Securities LLC, New York.
Herzog says e-cig category dollar sales growth decelerated slightly this period, yet still grew at robust levels to $39.1 million in the c-store channel. “Retail e-cig sales are on track to reach $1 billion this year—or $1.7 billion including online sales,” Herzog says in a recent note. “We continue to believe e-cig consumption could surpass traditional cigs in the next decade and the combined operating profit pool could generate a CAGR of 7% or more over the next decade.”
Another projected big player in the category is Vuse Digital Vapor Cigarettes by Reynolds American Inc. Vuse was introduced in Colorado in July, and spokesperson Smith says the company is heartened by initial feedback from customers and retailers alike.
“It’s too soon to ascertain market share for now, but I do know that this is just the first step in a national expansion of Vuse, and we intend to become a big player in vapor,” Smith says. “Vuse is one example of RAI’s Transforming Tobacco vision, where we will achieve market leadership by transforming the tobacco industry, which includes driving innovation throughout our businesses and redefining enjoyment for adult tobacco consumers.”
Many wonder how the ITG purchase of Dragonite will affect the e-cig playing field. According to Bartkowski, if the deal closes, ITG will “inherit the role of plaintiff in a U.S. patent infringement action against 10 large U.S. e-cigarette companies, including Lorillard, NJOY, Logic and Vapor Corp.” He says that since the VapAria venture with Dragonite ended in 2010, the Chinese company has stepped up efforts to protect its intellectual property/patents both here and in other countries.
“Time will tell what ITG’s intentions are and the impact it will have on the U.S. e-cigarette market,” he says. “It’s a big move, and it will certainly change the game.”
As background, in early 2011, Ruyan and parent company Dragonite International sued 11 U.S. e-cig companies because Dragonite holds the original e-cig patent. Last year they were granted a new patent and sued (in some cases, for a second time) the top 10 e-cig companies, including Lorillard (owner of blu) and NJOY. According to Bartkowski, the court proceedings have been stayed pending a re-examination of the new patent by the U.S. Patent and Trademark Office.
Not Rocket Science
To paraphrase the iconic Sam Cooke song, e-cig merchants “don’t know much about engineering and chemistry,” according to Bartkowski.
“Those selling e-cigarettes need to become educated on how it works, how it can be more efficient, and how the vapor is absorbed by the user, for example,” he says. “This lack of knowledge is a critical gap that limits the type of innovation vital to sustaining long-term growth and perhaps acceptance by regulators. It’s difficult to improve something you don’t already understand.
“There’s been focus on flavor, fixing design flaws like leaking cartridges, poor battery connections, and attempts to fix the manufacturing defects like poor quality and/or poor batteries,” he continues, “but beyond that, not much has been done in terms of innovating the product.”
And he should know a thing or two, considering he was instrumental in bringing electronic cigarettes into the U.S. market when his company entered a joint venture with Chinese manufacturer Ruyan Holdings (now Dragonite) in 2007. By 2010, his company, VapAria, dissolved the joint venture with Dragonite to explore alternative technologies for delivering the vapors to users—not just new flavors, new packages and longer battery life, but an entirely new way to vape.
“E-cigarettes are kind of fun, although some would dispute that,” says Bartkowksi. “But to really understand the product, you have to understand a certain amount of electrical engineering. How is the power supplied and managed? What is the most effective way to power these products? Some knowledge of chemistry is required.”
Battery issues are a common problem with electronic cigarettes, he says. Too much power equals too much heat in the vaporization process, causing changes in molecular structure of the formula, affecting both flavor and nicotine uptake, and leading to consumer dissatisfaction.
“We believe the vast majority of imported e-cigs are way overpowered,” Bartkowski says. “Manufacturers are erring on the side of too much power, heating to a high temperature that isn’t necessary, partly because they want these things to work effectively the first time and this is their way of ensuring that. However, it is overkill, and inefficient.”
Vaping Innovation
Industry leader NJOY stands behind its innovation efforts. According to Roy Anise, executive vice president of NJOY, the company has paved the path for creative merchandising strategies.
“The way we merchandise our product has never been done before, with a spinner rotating display designed to glamorize the King package and deliver it to the retailer with a footprint roughly the same as a box of 5-hour Energy,” Anise says. Now in 70,000 stores, NJOY expects the display to eventually reach 150,000 locations.
“We have a system for innovation throughout all areas of our business, including R&D, industrial engineering, consumer insights and especially in our manufacturing system, which is incredibly agile,” Anise says. “We are able to get product from concept to shelf in about six to nine months, which is basically unheard of.” NJOY’s newest product is a five-pack version of NJOY Kings that sells for $29.95 ($5.99 per King) and brings the cost down to less than a pack of cigarettes on a per unit basis, according to Anise.
Still on a mission to “obsolete cigarettes,” NJOY has several new products under development, in addition to its signature King brand, which is now being launched in the UK.
According to RAI’s Smith, c-store merchandising for Vuse e-cigs reflects the product’s “unique, advanced technology—modern, sleek and authoritative yet approachable.”
While Vuse products are sold only behind the counter, requiring clerk assistance and ID to purchase, Smith says the company is especially proud of Vuse Education Centers, which feature non-live products front and center so adult tobacco consumers can learn more about the product. Vuse is the only electronic cigarette to have been designed and assembled in the United States.
While it’s too soon to comment on Vuse’s expansion into other markets, Smith says “hundreds of jobs have been and will continue to be created in many states across the country as a direct result of Vuse manufacturing.”
Since splitting from Dragonite in 2010, VapAria has sought ways to more efficiently manage the power, control the heat and achieve better absorption of the vapor of an e-cig. In fact, it wants to create a new vaping technology altogether. Bartkowski says the company has a couple of designs that are more efficient from a power standpoint, more effective in terms of giving a consumer a feeling or sensation more closely aligned to what happens when they smoke a cigarette.
“All of that involves putting the various technologies in a form that is not only acceptable to consumers, but that also can be produced in the United States and perform cost-effectively in the channel,” he says.
Bartkowski’s team has been in a variety of meetings and negotiations with many tobacco and e-cig companies about bringing this particular product to market. Due to nondisclosure agreements, he couldn’t go into details, but he hopes to make an announcement in six to nine months of “somebody bringing our particular technology to market.” Bartkowski’s team believes the product needs to become more sophisticated than it is now—or has ever been—to earn the support of regulators.
“We are trying to develop a technology that differs significantly from anything in the United States, an alternative to what’s being used today, and better suited to face the kind of scrutiny and examination questions regulators are going to have,” he says. “And do it in a way that the patent infringement issue goes away.”
Will the new technology be available before they start banning e-cigs? As Bartkowski puts it, “We can be more confident about our own timing vs. various efforts to ban e-cigs. There are going to be more attempts to ban and restrict, but our new technology addresses a lot of the concerns many people have that lead them to ban or restrict.”
Left Standing
While more than 200 e-cig makers are fighting for turf, many expect the craze to go the way of the dot-com boom of the late 1990s and early 2000s, with only a half-dozen or so of the strongest, best-capitalized and most innovative eventually ruling the market. “The category,” Anise predicts, “will follow the path of traditional consumer packaged goods and have two or three large players and two or three niche players, and a lot of relatively small players.”
Buoyed by strong capital and an experienced team of tobacconists, NJOY fully expects to stand among the major players. “We do all of our own innovation and very quickly, from the flip-top pack we created to the unique product itself,” Anise says, alluding to the NJOY Kings design, which closely replicates an actual cigarette. It’s the same size with the same paper feel, soft tip and a flavor formulation designed by the top flavor tobacconist in the world, he says. And that’s important to NJOY as the company maintains its mission to stamp out cigarettes.
As for regulatory actions, there’s no crystal ball to predict the future. However, Bartkowski sees a groundswell of support among users who will fight to keep e-cigs legal.
“If we can give [regulators] answers to their unknowns, this could happen,” he says, “but we must do the research and know our product.”
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