E-Cigarettes Important New Niche Category: Survey

Wells Fargo reports retailer confidence in e-cigs, concern that regs, taxes will slow down growth

Melissa Vonder Haar, Freelance Writer

NEW YORK -- "I believe that e-cigarettes are a viable category and will continue to grow with the major brands rising to the top … with Lorillard purchasing blu, some validity has been added to the category." This was the response of just one of the tobacco retailers and wholesalers interviewed for Wells Fargo Securities' "Tobacco Talk" survey, according to analyst Bonnie Herzog, but the sentiment was shared by many.

While previous "Tobacco Talk" surveys had also included positive attitudes towards the growing category, Lorillard's acquisition of blu ecigs has further convinced many that e-cigarettes are here to stay.

The May 17, 2012, survey results had 73.1% of the respondents believing that e-cigarettes are not simply a fad, but a lasting "trend," similar to the energy drink phenomenon.

There's good reason for such enthusiasm: one retailer described an impressive 193% increase in sales from the first week to the second week of offering NJoy e-cigarettes at its stores.

Not all retailers have seen such success, but the category is continuing to prove its worth with 2.5 million e-cigarette users, according to industry group Tobacco Vapor Electronic Cigarette Association, and an estimated $300 million in revenue currently at retail, and the possibility of increasing that number to $1 billion in the future, according to Lorillard's CEO Murray Kessler.

Other respondents were more cautious about the ability of the e-cigarette industry to continue such impressive growth, citing new product boom, the possibility of further U.S. Food & Drug Administration (FDA) regulations and the addition of state and federal excise taxes as obstacles to the category.

One respondent went so far as to describe e-cigarettes as an "extreme liability risk," noting the lack of regulation in both the United States and in China, where most of the products are manufactured.

Besides regulation and taxation, just how much space e-cigarettes will take from cigarettes and OTP has yet to be determined; 65% of survey respondents said e-cigarettes are not currently encroaching on traditional tobacco products, as most e-cig companies encourage self-service counter displays. As the category grows, however, many believe e-cigarettes will be required to move elsewhere. While some respondents predicted "other tobacco products" (OTP) as the ultimate landing spot for e-cigarettes, others see cigars as the natural victims of e-cigs moving off the counter, as cigar shelving can typically be adjusted to accommodate a variety of sizes.

Ultimately, the Wells Fargo analysts agreed with the majority of respondents that e-cigarettes are more than just a fad, but are also expecting increased regulation and taxation to slow down enthusiasm.

Or, as one respondent put it, e-cigarettes "are a real opportunity, but not quite up to the hype."