What a difference a year makes. Just 12 months ago, retailers attending the CSP Tobacco Category Review Meeting couldn’t stop talking about electronic cigarettes. When the little-known subject of vapors and the e-liquid market came up, most dismissed it as “not for the c-store channel.”
How times have changed.
Ask vape’s big brother, electronic cigarettes. The boon of 2013 is turning into the fizzle of 2014. And that’s because of vaping’s double threat of tanks and e-liquids. Analysts such as Wells Fargo’s Bonnie Herzog are taking notice, and many tobacco companies and established e-cig players are suddenly introducing tanks and e-liquids.
As for c-stores? Well, some heavyweights, including Sheetz, Circle K and Sunoco, are swiftly making space for vaping SKUs. However, finding hard data on vaping in c-stores is limited both because of the newness of the segment and the fact that it is not yet tracked by companies such as Nielsen or IRI.
Pittsburgh-based Management Science Associates (MSA), through its distributor-to-retail shipment data, shows liquids accounted for 27% of equivalent e-vapor volume in the convenience channel during the four weeks ending June 28. In comparison, just a year ago, liquids barely eked out a fraction of a percentage point. And while liquids moved like a tidal wave, disposables went from more than a 40% share in June 2013 to just 16% in June 2014.
“Kits and refills are still performing strong, but e-liquids are showing real growth,” says MSA senior vice president Don Burke. “Yes, [c-stores] should have disposables, but this data suggests you should really be looking into liquids, too.”
It is worth noting that MSA volume reflects not what is selling but what is being shipped to retailers. Yet wholesale shipments clearly represent a growing momentum.
“It’s been a slow but steady build,” says Steve Monaco, director of category management for Rockland, Mass.-based Tedeschi Food Shops.
Given the segment’s infancy, there are plenty of hurdles confronting retailers who are studying the vaping segment, not the least of which is the abundance of options on the market (many of which are not of the highest quality).
“It will thrive once the c-stores figure out that quality makes a big difference,” says Steve Sandman, president of Glenview, Ill.-based Republic Tobacco, which recently entered the vaping business with its REAL brand and partnership with Johnson Creek e-liquids. “Once the vaping segment settles down, c-stores will figure out the right balance of selection, inventory and partners to make it a solid category.”
For now, though, challenges remain.
Or as RBC Capital Markets’ tobacco analyst Nik Modi puts it, “Getting into the category is one thing; managing effectively and actually making money from it is another.”
CONTINUED: A Branding Challenge
Lack of Branding
As Sandman hints at, an absence of brand equity and abundance of players represent real obstacles. This is especially true when it comes to e-liquids: Offering bang-up profit margins, they’re inexpensive products to make, though not necessarily inexpensive products to make well.
“It’s unclear at this point who the real e-liquid winner is; it’s very fragmented,” says Modi. “This is a tough area to brand because the barrier to entry is so low.”
That’s a challenge for retailers. James Conrad, tobacco category manager for Lisle, Ill.-based Royal Buying Group, says selecting which products to carry from countless names that lack equity is vape’s biggest obstacle. Because companies such as Altria and Reynolds are legally prohibited from producing Marlboro or Camel-branded vape products, he says, there’s little brand recognition among consumers.
“Other than Zig-Zag, no brands really have any equity,” says Conrad, whose merchandising and marketing company represents 6,000 independent c-stores. “That is what creates brand loyalty.”
Carlos Bengoa, president of Beloit, Wis.-based CB Distributors Inc. and a fellow early adopter of vaping products with the Vapin Plus line, says, “The only way to establish a brand is quality and customer service.” And both of those things take time.
Modi is confident that, as time passes, branding will be established in both liquids and tanks, whether through the entrance of established companies or the regulatory environment cracking down on smaller players. It’s something that’s already happening: Besides Republic, established players such as Ballantyne, CB Distributors, NJOY, Nicotek, National Tobacco and Kretek are offering vape.
“You’re starting to see some legitimate companies come into the category,” Modi says. “That’s good—they’ll clean it up a little bit.”
Paltry Distribution
Distribution is explicably tied to branding, according to Todd Millard, CEO of Charlotte, N.C.-based Ballantyne Brands LLC (maker of Mistic e-cigs and Haus vaporizers).
“Retail distribution is critical,” he says. “You can’t build brand loyalty only being in the Southeast.”
And that’s a problem for both retailers and analysts, given the lack of national distribution in vape—or at least the minimal amount of traditional distribution.
“In the e-vapor category, there are several ways these products are distributed,” says Burke of MSA. His group estimates 60% of products are distributed through traditional wholesalers (such as McLane), 20% are sold online (which is not tracked) and 20% through direct-to-store shipments (also untracked).
That means MSA’s data, some of the only data available on the vaping segment, at best captures a little more than half of the total vaping market.
Aside from making it nearly impossible for retailers to grasp what’s selling, a lack of distribution means it’s often difficult for retailers to be able to actually get vaping products to their stores through traditional means.
So instead of relying on a wholesaler, one respected tobacco veteran—Richard Shortt, retail sales operations manager for Durham, N.C.-based Erwin Oil Co.—shopped vendors at a local trade show when deciding to get into vape. (He ultimately went with Just Juice because of its displays and simplicity.)
Fortunately, such unconventional means will be short-lived. “There are so many existing tobacco companies now entering the market,” Shortt says, “that a retailer should be able to partner with someone they already have a trusting relationship with.”
This is also true of wholesalers. Being one of the very first e-liquids brought on by McLane last spring is something Millard of Ballantyne described as "a big win” for Haus.
“Distribution has been a massive competitive advantage,” he says. “Up until recently, McLane only had a few vape vendors; that allowed us to gain a lot of distribution.”
Likewise, Tedeschi’s selection of Nicotek’s Faze vaporizers and e-liquids came down to one thing, says Monaco: his wholesaler, EA Berg, Paramus, N.J.
As c-store wholesalers such as Berg and McLane further embrace the segment, Burke predicts it will become easier for retailers to do so as well.
“Currently, only 7% of all c-stores are carrying an e-liquid SKU, partially due to the lack of wholesale opportunities,” he says. As e-vapor products become regulated or taxed, more will likely be distributed through traditional wholesalers, in part because of their experience managing taxed and regulated tobacco products.
CONTINUED: The Vape Shop Competition
Another Competitor
The problem with waiting for wholesalers is that a new breed of competition—vape shops—isn’t pausing but growing at a rapid rate, and well on its way to “owning” the vape segment.
“I absolutely feel that vape shops are a threat to this segment,” says Monaco. “Potential consumers can test various delivery devices, as well as e-liquid, in vape shops prior to purchasing them.”
Though the vaping shops and lounges popping up across the country may not seem to attract the traditional c-store consumer, many retailers fear that these stylish hot spots offer benefits the convenience channel is struggling to meet: space, time and education.
“Vape-shop employees have one purpose: to sell vaping products,” says Royal Buying Group’s Conrad. “There is absolutely no way c-stores are going to be able to compete on an educational level.”
So are vape shops destined to become tobacco shops of the future? Even manufacturers such as Ballantyne, who’ve made it a priority to “convert the vape-shop customer to national retail,” acknowledge vape shops and some of their loyalists pose a perhaps insurmountable challenge.
“There’s a certain segment of consumers that I’d call the hobbyists: the guys that love going to a vape shop and want to buy a $149 unit with all the bells and whistles,” says Millard. “We’re probably not going to convert all those people.”
Those consumers, however, do not represent the majority of the population, which prefers more traditional channels when given the option. Just look at e-cigarettes, which were first sold in mall kiosks.
“
We’ve tried some unique off-the-wall retail channels in our history,” Millard says. “One of the lessons we’ve learned is that people want to buy e-vapor where they buy their regular cigarettes.”
And the price differential between vape shops and c-stores is a huge factor. Products such as Haus or Vapin retail for $20 to $25; vape shops sell nearly identical models for upwards of $40, Millard says. That’s something price-sensitive consumers are noticing.
Even if c-stores may never capture enthusiasts looking to throw down upwards of $100 for a tank unit, it’s important to remember that they don’t have to return to the same vape shop to purchase their refill liquids. That makes them unlike electronic cigarettes; a blu e-cig can be refilled only with a blu cartridge, for example. So customers don’t have to remain loyal to one brand.
Because of this, some retailers are optimistic that vape shops could actually help their business.
“I believe that vape shops are a great way to introduce cig-alike or traditional cigarette smokers into the world of open-tank vaping,” says Conrad. “That being said, this could be a good thing for c-store retailers and their customers. C-stores have the ability to sell the e-liquids and, once brand equity is established, why would a consumer go out of their way to drive to a vape shop if they have the convenience of a c-store?”
Too Pricey For ‘Bubba’
The same way there are certain vaping “hobbyists” who will likely never shop at a c-store, there are likely c-store shoppers and tobacco consumers who might never embrace vaping.
“There is a very slick demographic that wants to buy this stuff, and I’m not sure it’s the core c-store consumer,” says Modi, pointing to the cost, maintenance and technological challenges of vaping. “Our research suggests that the core tobacco consumer does not give a hoot about this category. Think about ‘Bubba’: You think he wants to go into a store and pay $300 for a vaporizer?”
It goes back to last year’s CSP Tobacco Category Review Meeting and the retailers who scoffed at the idea that vape would ever sell in a c-store. It’s just too expensive, they said. Or is it? Certainly not when it comes to refills. Bengoa points out that “the savings are huge” compared to e-cigs: a typical 1ml e-cig cartridge or disposable unit costs about $10, compared to just $6 to $7 for 15ml of Vapin’s e-liquids.
Indeed, RBC’s data suggests vaping costs about 66% less per pack equivalent than electronic cigarettes, meaning the cost of vaping may not be the deterrent c-store operators have feared.
Well, mostly. “It’s cheaper once you get past buying the $300 device,” Modi says.
Some retailers, including Erwin Oil’s Shortt, have found they may have underestimated how much their consumers are willing to invest. Operating in North Carolina, Shortt has plenty of core tobacco consumers in his market and, as such, was looking for a $20 vaporizer to bring in. However, he took a chance on adding Ploom to some of his locations, thanks in part to the San Francisco-based company’s guarantee to buy back any products that didn’t sell. The move paid off.
“I was skeptical because of a $40 ring but quickly learned customers will pay for quality,” he says. “In fact, I’m wondering if I can’t offer a more expensive option!”
CONTINUED: Education and Awareness
Education and Awareness
Even if c-store consumers might be willing to drop $40 on a vaporizer, they’re significantly more likely to do so if a knowledgeable sales clerk explains the products. Unfortunately, this type of interaction is more commonplace in a tobacco shop or vape shop than in a c-store.
“One of my biggest challenges is making sure each and every store associate understands vaping,” Monaco says. “Without this education, associates will not engage customers to purchase.”
Though part time c-store clerks may never offer the full breadth of knowledge readily available at a vape shop, vaping manufacturers and wholesalers are working hard to help retailers narrow that education gap. Online tutorials, in-person training at management meetings and free samples to better acquaint employees with the products are just a few examples. Other retailers have taken it upon themselves to encourage their
associates to understand and push vape through old-fashioned competition.
“We initiated a contest whereby the store that sells the most tanks and liquids over a month wins a $50 gift card for each associate,” says Monaco.
The good news for retailers struggling with the awareness challenges with vape is that, as the segment continues to garner national attention, education becomes less of an issue.
“It seems as though the learning curve is becoming real short because consumers are educating retailers before we even get to them,” says Republic’s Sandman.
Inventory Overwhelm
It should come as no surprise to any retailer who’s worked in tobacco over the past decade that the most common challenge retailers list for vape—or any other tobacco product—is the twofold dilemma of what to carry and where to fit it.
As Monaco puts it, “retailers were just figuring out the cig-alike space requirements, and now here comes vaping.”
Besides the challenge of picking which vaping manufacturer to partner with, retailers also face the increasingly complex decision of how many flavors to offer. The options are seemingly endless within the e-liquid business: Which ones are the must-haves vs. those merely taking up space?
“After about 10 flavors, everything kinda tastes the same,” Modi says. “It creates a whole other complexity for inventory management.”
Sure enough, Burke’s MSA data shows that tobacco- and menthol-flavored e-liquids account for approximately 30% of the category, roughly the same share level as the 277 “other” e-liquid flavors (which includes everything outside of common flavors such as cherry or vanilla).
“Consumers tend to stick with flavors they know when given an abundance of choice,” Modi agrees.
It’s part of the reason why c-store-focused vendors such as Ballantyne and CB Distributors have limited their portfolios to help keep this category manageable. Haus, for example, has just 10 SKUs, meaning a retailer can pick up the entire line for less than $350 per store in most cases.
“What we don’t want to do is over-inventory any of our distributors or retailers,” Millard says of potential line extensions to Haus. “I think you confuse the consumer (with too many options), especially while the category’s in its infancy.”
Still, those who have done well with vape struggle with whether they’re missing the boat by not expanding the segment. “My biggest challenge now is deciding how much we need to be into this category,” says Shortt, who admits he’s undecided at this point.
Though many retailers in Shortt’s predicament have looked to cut cig-alike SKUs to accommodate a more robust vaping category, Millard says the better option might be looking at SKU rationalization of the entire OTP category.
“It’s not just the cig-alike space that retailers have to look at and justify,” he says. “We’ve seen that in a lot of our (Haus) expansions: The space didn’t come out of e-cigs. A lot of it came out of OTP.”
Whether a retailer’s looking to expand into a full-fledged vapor offering that rivals a vape shop’s selection or merely dip a toe in the waters of this new segment, the merchandising and ever-evolving inventory challenges are likely to remain. As Modi points out, these are technology products. And technology products evolve at a much more rapid pace than your average consumer goods.
“There will be a new product every three to four months, because that’s the way technology works,” he says. “It’s a whole different ball game in terms of inventory management.”
It’s a ball game, however, that consumers are embracing with open arms.
“Vaping has proven over the past several years that it is not a fad,” says Conrad. “C-stores have always been the traditional best outlet for tobacco consumers. I do not see that changing with vaping products.”
So despite early challenges for the segment, it may be time for retailers to play ball.
CONTINUED: The Data
E-Liquid Trends
26 weeks ending June 28, 2014
Volume Contribution by Flavor
| Flavor | Share |
| Tobacco | 17.5% |
| Menthol | 13.0% |
| Cherry | 6.4% |
| Vanilla | 5.7% |
| Blueberry | 5.6% |
| Strawberry | 5.0% |
| Grape | 4.7% |
| Watermelon | 3.7% |
| Apple | 3.4% |
| Peach | 2.6% |
| Chocolate | 2.4% |
| All other | 30.0% |
Source: Management Science Associates Retail Shipment Data;
volume is reported as individual serving.
Vapor Trends by Channel
E-Vapor Distribution Levels by Product Type
Percentage of stores selling by trade class and category
| Channel | Total e-vapor | Disposable | Kit | Liquid | Replacement cartridges | Vaporizers |
| Total | 49% | 40% | 35% | 5% | 34% | 4% |
| Convenience | 67% | 54% | 48% | 7% | 46% | 5% |
| Tobacco stores | 78% | 59% | 68% | 24% | 66% | 12% |
| Drug | 12% | 7% | 7% | 0% | 10% | 0% |
| Grocery | 41% | 26% | 27% | 5% | 25% | 6% |
| Liquor | 33% | 24% | 17% | 3% | 14% | 1% |
| Mass merchandise (including dollar) | 87% | 83% | 82% | 0% | 78% | 0% |
| Wholesale club | 85% | 81% | 79% | 0% | 80% | 0% |
Source: Management Science Associates Distributor Shipment Data through June 28, 2014;
stores receiving product in 13 weeks ending June 28, 2014.
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