It may come as a surprise that at an event filled with some of the most successful electronic-cigarette and vapor manufacturers, the overwhelming message was: We’re not quite there yet.
While attending the Wells Fargo E-Cig Forum last November, Joe Murillo, president of Richmond, Va.-based Altria’s vaping subsidiary, NuMark, described the industry as being in the first or second inning of a baseball game, with no single product “hitting it out of the park” right now.
“The winning product hasn’t been invented yet,” agreed fellow attendee Craig Weiss, CEO of NJOY, Scottsdale, Ariz. “If it had, all smokers would be using it."
An argument can be made that vaporizers, tanks and mods (VTMs) emerged in 2014 as a step in the right direction, providing a better experience than that of electronic cigarettes. While this may be true, UBS tobacco analyst Nik Modi believes the data suggests interest in VTMs may have peaked: Google Analytics shows the year-over-year rate of change in search interest of “vape shops” is declining for the first time, similar to what happened with searches of “electronic cigarettes” before we started seeing their deceleration.
“I wonder if we’ll be saying the same thing about vape/open systems a year from now,” Modi said during a CSP-hosted Tobacco Update webinar.
Almost on cue, two major tobacco players announced major investments not in vaporizers, but in products that heat actual tobacco (as opposed to vaporizing liquid nicotine). First came Philip Morris International’s (PMI) $680 million investment in two Italian manufacturing plants dedicated to producing next-generation heat-not-burn tobacco options, releasing the first of such products (iQos) in Italy and Japan last spring. Then there was Reynolds American Inc.’s November 2014 announcement that the Winston-Salem, N.C.-based company planned to test Revo, a rebranded version of its retired heat-not-burn Eclipse brand, at 2,000 Wisconsin locations.
It’s clearly premature to peg heat-not-burn as the next big trend in e-vapor, much less as the product that might eventually replace combustible cigarettes. Revo began testing only in February 2015, and Altria has merely entered into an exclusive agreement with PMI to potentially bring iQos to this country. But Big Tobacco committing to this segment, combined with the fact that heat-not-burn may offer an experience that duplicates actual cigarette smoking, has many in the industry excited about its potential.
“If you look at the decline that’s happening in disposables right now,” says Don Burke, senior vice president of Management Science Associates (MSA), “while consumers may enter the e-vapor category using a disposable, once they’ve tried it, they likely may continue to look for a satisfaction level closer to what they get from a combustible cigarette. By far, the heat-not-burn approach gives smokers a closer approximation to the experience with a combustible cigarette than the current disposable does.”
Heat-not-burn is hardly a new phenomenon. There have been a number of pricier dry vaporizers on the market that heat loose tobacco, and Reynolds’ Eclipse was first made widely available in the mid-1990s. While dry vaporizers continue to be something of a niche market, Eclipse never quite took off and was pulled from shelves in the mid-2000s.
So why should we expect something different from virtually the same product?
“Times have changed since making Eclipse widely available,” says Reynolds spokesperson Richard Smith. “We believe when it was introduced, Eclipse was a product ahead of its time. The expectations and interest in innovative tobacco products of today’s adult tobacco consumers are different than they were 20 years ago.”
Many, Reynolds included, believe the e-cig boom is largely to thank for this shift in consumer interests. Wells Fargo senior analyst Bonnie Herzog likens it to smartphones paving the way for touch-screen tablets.
“I think the consumer today is more willing and able to accept this kind of technology,” she says.
Vivien Azer, a tobacco analyst at The Cowen Group, New York, says consumers might not have been able to ascertain the reduced-risk potential of heat-not-burn products when Eclipse was first released (something manufacturers are not legally allowed to claim without approval from the U.S. Food and Drug Administration). Thanks to e-vapor, that is no longer the case.
“There’s almost an implicit reduced-risk aspect to [e-vapor] without the companies being able to communicate that,” she says, pointing out that the modern consumer is therefore better equipped to make that association about heat-not-burn on their own.
The evolution of a consumer market willing to embrace heat-not-burn isn’t merely about e-vapor products, but also the expansion of the entire tobacco category. “When Eclipse was first made widely available in the mid-1990s, the market for tobacco products was less diverse than it is today,” Smith says. “With the growing popularity of innovative, nontraditional tobacco products, adult tobacco consumers are demonstrating their interest in different options.”
Though cigarettes continue to dominate c-store tobacco sales, any retailer can tell you that they are no longer the only game in town. Sales of OTP continue to climb, and a variety of new products have established themselves in recent years.
“Consumers are looking for different ways to enjoy tobacco and the tobacco experience,” says David Sylvia, Altria’s director of strategy and business development, who points to increased interest in smokeless, hookah and, yes, e-vapor. “Consumers are now showing an interest in looking for alternatives to conventional cigarettes.”
CONTINUED: An Alternative for Core Cigarette Consumers?
Today’s smoker may be more willing to look at alternatives, but not everyone believes e-vapor will become the dominant option for the average cigarette consumer.
“I don’t think the pack-a-day smoker has fully bought into electronic cigarettes,” Modi explained during the December webinar, citing the cost, maintenance and overall technical know-how needed for most vaping products. Indeed, the average pack-a-day smoker Modi describes is likely a far cry from the young, tech-savvy crowd associated with dropping $200 at vaping lounges.
Could heat-not-burn present an alternative for the core cigarette consumer—aka Bubba? Altria and Reynolds—the No. 1 and No. 2 cigarette manufacturers in the United States—certainly think so.
“Some adult tobacco consumers who have tried [e-cigarettes] have shared that the experience does not meet their expectation,” says Smith of Reynolds. “Because Revo uses real cigarette tobacco, we believe it presents an option that may be of interest to these adult tobacco consumers.”
Besides using actual tobacco, Burke says heat-not-burn options may offer a more viable alternative due to the fact that they create actual smoke (albeit by heating the tobacco instead of burning it), vs. the vapor produced by electronic cigarettes and vaporizers.
“It provides a greater mouth and throat feel, more comparable to combustibles,” he says. “It’s likely more appealing for the true cigarette smoker who really enjoys that sensation.”
It’s not just a matter of the flavor and smoke, Azer says, but the way consumers engage with heat-not-burn products. With cigarettes, consumers can ascertain how many sticks are left in their pack and be assured they can light up whenever they like; the same is not always true of e-vapor.
“You absolutely run the risk that you’re caught with a depleted battery or a depleted cartomizer,” she says. “For a core cigarette consumer, we view that as unacceptable.”
Both Revo and iQos, however, use disposable sticks—essentially cigarettes that don’t actually burn—so consumers can see when they need to buy another pack. Additionally, the Revo units are lit by a live fire source, such as a match or a lighter. (Azer and Herzog pointed out that PMI’s second heat-not-burn offering, dubbed Platform 2, will operate similarly.)
“The key benefit that piques my attention is the absence of battery-life management,” Azer says.
Of course, there’s also the cost. Cigalike options may be less expensive than cigarettes in most states (thanks to a lack of taxation), but they arguably offer a less comparable experience to combustibles. Vaporizers may offer a better experience and cost savings in the long haul, but they typically require a larger upfront investment in the hardware. Both Revo and iQos are set to be priced comparably to cigarettes and offer a more satisfying experience.
“You’re going to hear a lot more about heat-not-burn,” Modi predicted. “Perhaps that is a lot closer to the smoking regiment.”
For all predictions that heat-not-burn might be the hot new vapor trend of 2015, not everyone believes the segment belongs in the e-vapor category.
“The technology is different (than e-vapor). ... The technology is related only in that it does not burn something,” Burke says.
Some, such as Reynolds, feel even stronger. “Let me be perfectly clear: Revo is a cigarette, not an electronic cigarette, and is being marketed as such,” Smith says.
But can a product that doesn’t produce ash, doesn’t actually burn and is poised as an alternative to combustibles really fall in the cigarette category?
“As we think about the heated-tobacco space and look to provide adult cigarette consumers with alternatives, this fits in that space just like e-vapor does,” says Altria’s Sylvia.
Perhaps we should think of heat-not-burn as part of the evolution of the entire tobacco category. These products might not represent the next step in vapor, but instead the expansion of the larger alternative (and feasibly reduced-risk) family, bringing new consumers into the space.
“My opinion is the heat-not-burn apparatus will attract a different segment of the e-vapor user,” Burke says. “The e-vapor user that prefers flavors will likely continue with the liquid-type products they’re using today. What the heat-not-burn does is attract a new segment of current cigarette smokers who like the deeper tobacco experience.”
Sylvia points out how new a phenomenon it is for cigarette consumers to have this kind of choice.
“I’ve heard it compared to the automobile industry: They all have four wheels and are modes of transportation, but there are people who need or prefer different models,” he says. “If you look at the cigarette category until e-vapor came in—really, we were all driving the same car in the same color. That potentially could change within our category as these new products are invented and improved.”
Same Result, Different Methods
A breakdown of how different heat-not-burn products operate
Revo
A carbon heat source at the tip of a disposable, cigarette-like unit (fılled with tobacco) is lit with an actual flame. The heat from the tip transfers hot air through the cigarette, releasing nicotine and smoke from the tobacco leaf without combusting. Like combustible cigarettes, Revos operate with only a lighter or match.
iQos
The fırst generation of Philip Morris International’s heat-not-burn options is heated through a rechargeable heating device that is placed on the end of each disposable unit. To consume an iQos, consumers will need a charged heating device, as well as the disposable units fılled with tobacco.
Open and Closed Dry Vaporizers
Other options include loose dry vaporizers. For open-system vaporizers, such as Ploom’s Pax, consumers fıll VTM-like devices with their own blend of RYO or pipe tobacco. For closed- system dry vaporizers, consumers fıll a VTM or pen-like device with the manufacturer’s proprietary tobacco cartridge or pod.
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