Clearing the Vapor

How e-cigarette manufacturers are distinguishing themselves in a growing category.

Melissa Vonder Haar, Freelance Writer

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Electronic cigarettes seem to be everywhere. Rarely a day passes without an e-cig company applying for another patent, signing a deal with a c-store chain or railing against proposed municipal e-cig bans.

And as with many nascent categories, a hive of players is fighting to be queen bee. Take this year’s NATO Show: Of the 178 cigarette, cigar and specialty tobacco-product companies represented, more than 20 were associated with electronic cigarettes.

“The excitement is that it’s a growing business,” says Lou Maiellano, president of Sevierville, Tenn.-based TAZ Marketing and Consulting Group and a former tobacco buyer for Sunoco, who likened the buzz surrounding the e-cig category to that of energy shots a few years ago. “It’s a great opportunity, because in case you didn’t know, cigarettes are on the decline.”

Such excitement is understandable. With the FDA yet to regulate and none of the state and federal tobacco taxes applied, electronic cigarettes offer a price-friendly alternative to traditional cigarettes. And while states continue to limit the areas where smokers are allowed to light up, these electronic counterparts can be enjoyed most anywhere.

Then there’s the numbers: UBS reports that the e-cigarette industry has recorded triple-digit growth, with an estimated $250 million in online sales in 2011—a number the Tobacco Vapor Electronic Cigarette Association (TVECA) predicts will double in 2012 and could quadruple by 2014.

However, with more than 200 brands—most of which claim to have the highest quality on the market—the dilemma for retailers is selecting a product that will actually appeal to their customers. Do they choose based on eyecatching design innovations? Where and how the product is manufactured? Which manufacturer has the deepest pockets? Or, perhaps, which product you actually most prefer?

“The major accounts look at the total package,” explains Roy Anise, executive vice president for e-cigarette leader NJOY, Scottsdale, Ariz. “Retailers want the brand that’s going to be the next Marlboro in the category.” Understandably, Anise believes that brand will be his. Still, with the industry in its early stages, Maiellano says, “When I look at the leaders that are out there today, you have to question how many of them will be leaders tomorrow.”That’s not to say c-stores should shy away from the opportunity; rather, they shouldn’t necessarily lock in on one brand when others certainly may be viable. To help retailers navigate through the field of players, CSP talked to some of the early leaders, exploring how they are distinguishing themselves in the booming electronic-cigarette category.

Made in Where?

Lakewood, N.J.: It may not be the bestknown place in America, but it’s a very big deal to Smoker Friendly (SF), a Boulder, Colo.-based tobacco outlet chain and tobacco maker.

With the vast majority of e-cigs being manufactured in China, SF is touting its “Made in the USA” products. “We partnered with a company called Freedom that’s based out of New Jersey,” explains Curtis Fracas, SF’s director of national sales. “The only thing they really get from China are the batteries. Everything else is done here in the United States.”

That “Made in the USA” stamp certainly helped Smoker Friendly attract retailers as it took its electronic cigarettes national during the last quarter of 2011.

“Being able to state that the majority of everything is made in the United States—that’s a big selling point with retailers,” Farkas says. Smoker Friendly will soon have competition: While the United Kingdom’s Intellicig products are all produced on the University of Manchester’s biochemistry campus, plans are in motion to open up a more local shop.“We’re getting ready to manufacture in the United States,” and a Pennsylvania site already has been identified, says Sherry Cassaw, Intellicig’s USA managing partner. “We’ll start with the cartomizers but will eventually be able to make the entire product.”

Although a more locally made product may appeal to American retailers, Maiellano warns that closer isn’t always better—especially with e-cigarette technology being pioneered in China.

“I don’t agree to the fact that just because it’s made in China, it’s horrible,” he says. “The made in China label—you’re going to have that anywhere, with any product.”

Retailers who do go with a Chinese-made e-cigarette must also consider how the products are transported to the United States. According to EliAlelov, president and CEO of Livingston, N.J.-based Logic E-Cigs, this can make a huge difference in the quality of products retailers put on their shelves.

“The shipping method we use is by air,” Alelov says. “Unfortunately, many companies bring it by freight to save shipping costs.”

Alelov estimates that products shipped by freight boats can be upwards of four months old by time they reach shelves in the United States, having spent three weeks getting from the factory in China to the boat, another six weeks on the boat, and then a few weeks moving through distribution. This, says Alelov, means a compromised battery is being sold to customers—a potential concern for the popular disposable products, which do not have the option of being charged.“The product is already weak,” Alelov continues. “These kinds of products hurt the entire industry.”So lesson to retailers: Ask not only where the product comes from, but also how it is transported, eventually residing in your store.

Distinction by Design

A major differentiator is, not surprisingly, the design itself. Many of these come with patent applications. For example, Hallandale, Fla.-based Vapor Corp. filed a patent in June for a “Padded Cartridge For An Electronic Cigarette Apparatus.”

“We believe the soft padded electronic cartridge is the most significant innovation to e-cigarettes since their invention and introduction to the U.S. marketplace,” said company CEO Kevin Frija.“The comfort of the new soft-tip filter will offer our customers the most realistic and similar experience akin to the filters of traditional cigarettes.”

In that same month, Logic announced it had received a patent for a “puff counter” screen that will display how many puffs or virtual cigarette users have left.

“With cigarettes you can open the pack and know when you need to go to the store to buy more; you don’t have that with electronic cigarettes now,” says Logic’s Alelov. “It will redesign the landscape of the industry.”

With so many patents flying around, Maiellano is wary of such claims: “There’s this desire to authenticate ownership. Time will only tell the value.”

Still, design innovations, both simple and complex, are a qualitative, critical marketing tool to help manufacturers differentiate themselves from the competition. It’s just a matter of whether retailers and customers buy into that innovation.

The brains behind Skokie, Ill.-based Eco-Cigs believe retailers and customers will buy into a simple innovation it has pioneered: a front-charging electronic cigarette that allows users to charge up without having to remove the cartomizer.

“When we looked at the complexities associated with electronic cigarettes, it became very obvious that the dismantling of the product was going to be an encumbrance. So why not simplify it?”says Roger Grogman, Eco-Cig’s vice-president of sales and marketing. “That simplification is a big deal; simplification provides an acceleration of sales.”

“We wanted to go for ease of use, not having to lose any pieces,” continues the company’s president and CEO, Steve Glasberg. “It makes the product very convenient for the user. You don’t have to take it apart like all the other products on the marketplace. It makes it very easy.”

For its disposable products, Logic uses a larger battery and higher volume of liquid than most electronic cigarettes. As a result, Alelov says that a Logic electronic cigarette releases more product per puff than the competition.

“When we say 400 puffs, we mean 400 real smoker’s puffs,” he explains. Meanwhile, Cassaw and the manufacturers of Intellicig are betting customers will be more interested in what’s inside the products rather than how they look on the outside.

“Several retailers have an interest in our product because it uses vegetable glycerol, not propylene,” says Cassaw, citing that many people have negative side effects and allergies to propylene, a product used in most electronic cigarettes. “People are specifically looking for glycerol.“We manufacture to CGMP standards,” she continues, referring to the Current Good Manufacturing Practice standards to which medical products are held. “As a result, we have the ability to use the pharmaceutical brand nicotine that’s used in 80% of the patches and gum on the market today. We’re the only company they’ll sell that to.”

Amid the slew of impressive innovations, retailers must look at whether the products live up to their claims and, if so, whether or not that innovation will be enough to bring customers to the cash register.

Distinction by Company

Perhaps the most crucial way retailers can distinguish electronic cigarettes are not by the products, but by the companies producing the products. After all, the quality of a product is irrelevant if the company behind it can’t survive the test of time.

“There’s a whole bunch of irresponsibility in the e-cigarette category,” says Maiellano. “There’s not an understanding of the development and infrastructure that would garner success in an FDA regulatedmarket. If a company is already on life support and FDA regulations come into place, what happens?”

One company that can clearly make the claim it’s ready to play in a regulated environment is Charlotte, N.C.-based blu e cigs. In April 2012, with its purchase of blu, Lorillard became the first major tobacco company to jump into thee-cigarette game.

“It changes throughout the whole process now,” says blu’s president and cofounder, Jason Healy, of the acquisition by Lorillard. “We’re building inventory soothe time from order to delivery is much shorter. Instead of having 10 sales reps, we have up to 900 representatives checking in on retailers across the country.”

More important, when and if regulations on e-cigs are put into place, bluwill have Lorillard’s support in bringing its products up to standards, something Healy believes will happen sooner rather than later.

“At some point this summer, the FDA will come out with regulations for electronic cigarettes,” he says. “By nature, meeting those regulations will be costly and will undoubtedly weed out a lot of companies by cost alone. That’s not something blu has to worry about.”

While not partnered up with a big tobacco company, NJOY has certainly proven it’s willing to take on expenses to support its products. After the FDA started seizing electronic cigarettes coming into the United States, claiming they were an unapproved new drug, NJOY spent $2 million to legally defend its products.

“We undertook that challenge and expense,” explains NJOY’s Anise, who says his company was the only one in the industry to do so. “NJOY created the opportunity for this category to exist.”

And with its victory both in federal and federal appellate court, NJOY has made it so all electronic cigarettes can be regulated only as tobacco products, not drug or health products.

Besides pioneering the legislation that allows the category to exist, NJOY continues to pioneer category sales, with May 2012’s Nielsen numbers showing NJOY products occupying seven of the top 10 e-cig products in c-store sales. Anise credits NJOY’s successes in the courtroom and in the marketplace to a strong sales and marketing team—successes that have enabled NJOY to secure tens of millions of dollars in private equity support.

“NJOY has a lot of depth; our people have a tobacco background,” says Anise, who spent 24 years at Philip Morris. “I’ve recruited a number of Altria employees with specialized skills. We have a management team that’s head and shoulders above anyone else in the industry.”

Another company expected to stick around is Vapor Corp., the only electronic-cigarette company that’s publicly traded—a status that Adam Frija, the company’s director of business development, believes reinforces the company’s long-term strength.

“We have a responsibility to our shareholders to provide greater managerial accountability, better products, quality control and continuously improving our product line,” he says. “Private companies may have a more short-term objective in the business. Obviously, we have a longterm view of improving and enhancing shareholder value.”

Whether dealing with a publicly traded company such as Vapor Corp., a court- and time-tested company such as NJOY, or a company with corporate support such as blu, Maiellano believes it’s essential for retailers to take a long, hard look at the companies they’re choosing to partner with.

“I would be looking to develop this category with companies that are well situated and have a clear understanding of the potential of what a regulatory world could mean, and how they would support that program,” he says, pointing out that the retailers should look for manufacturers with a plan to support retail programs from both marketing and regulatory perspectives. “If you don’t think a company will be able to handle that, you have a problem.”

One company that’s going above and beyond to support retailers in the marketing environment is V2 Cigs. Distributed by Miami, Fla.-based VMR ProductsLLC, V2 offers retail partners custom displays,POS and, perhaps most important, a demo team who comes into the stores to sample its electronic cigarettes and offer coupons to interested consumers.

“Selling it in is the easy part; it’s getting the consumer to pull it off the shelf that’s the hard part,” explains V2’s director of business development, Mark McLeod. “Even though the category’s grown, it’s still new to consumers. But with our program, when you come in for Doritos, you’re going to know we’re there. You can actually sample, taste it, touch it, feel it.”

Getting the products into the hands of consumers is a wise strategy because in the end, they will be the ones who determine the true leaders of the still forming electronic cigarette category.“Time will prove out manufacturer claims,” says Maiellano. “But ultimately the consumer, if given the opportunity, will be the judge.”

Until that judgment is handed down, retailers will need to perform the same due diligence they apply to all tobacco categories, because it’s becoming more apparent that electronic cigarettes are here to stay—and may just represent the future of the tobacco industry.

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