Keys to 'Big Electronic' Success

Herzog predicts room for private players, even as Big Tobacco enters the e-cig game

Melissa Vonder Haar, Freelance Writer

CHICAGO -- As managing director of beverage, tobacco and convenience store research for New York's Wells Fargo Securities LLC, Bonnie Herzog has not been shy about her enthusiasm for the electronic cigarette segment--going so far as to call herself a "bull" for the category. And, as she shared with the retailers and suppliers attending CSP's Tobacco Category Review Meeting in Chicago, Herzog is far from alone in her enthusiasm.

"E-cigs remain the biggest excitement for 2013 according to our survey respondents," she said.

This excitement is only growing now that Big Tobacco is getting into the game: Lorillard Inc. was the first, acquiring blu eCigs last April; R.J. Reynolds Tobacco Co. recently announced plans to take its Vuse digital cigarette national; and Altria Group Inc. is about to start test markets of its brand new MarkTen offering.

Yet, with more than 200 private e-cigarette companies already on the market, the question remains: who will be the dominant player in this profitable space, especially if--or when--the FDA issues regulations?

"With the Big Three entering, there is a good chance that they will win, along with several of the private companies that are in the market today," said Herzog. "I do think with regulations, the barriers to entry do increase. It increases the cost to entry--it's something to think about."

Clearly, companies like Lorillard, Reynolds and Altria have plenty of experience dealing with both regulatory issues and the highly competitive tobacco market. The fact that these Big Three have the ample funds needed to support e-cigarette endeavors, as well as relationships already established with retailers, may also help guarantee their success in the space.

Herzog, however, doesn't believe this automatically means the e-cigarette segment will mirror that of traditional cigarettes, where Altria's Marlboro brand has long been the market leader.

"The market share will be different than what it is with traditional cigarettes today," she said. "It's potentially a great opportunity for Lorillard. I think Lorillard's purchase of blu was very smart--they paid $135 million just over a year ago and it's already contributing to their bottom line."

Meanwhile, she was surprised to see Altria enter the market so quickly with MarkTen. Although Herzog admitted she has not yet tried the product, she observed that it seemed like Altria "rushed to get it out." It's possible that the move may have had more to do with strategy than the product itself.

"I'm not convinced [MarkTen] is going to be their final product, but I think it gives them a voice in this category to have conversations with the regulators," Herzog said. "They do have a product--they couldn't go to the table without that. I don't think [MarkTen] is their endgame--I still wouldn't be surprised if [Altria] bought a private company."

The big appeal of a private e-cigarette company comes down to a very important factor for consumer products like e-cigs: brand. And though Lorillard, Reynolds and Altria may have more money and established relationships, many e-cigarette players have years on Big Tobacco when it comes to brand development.

"I certainly give some of the private companies a lot of credit for building some strong brands already," said Herzog. "I think it's ultimately very important to have a strong brand: that will be the key to success. This category is a consumer product--don't underestimate that."  

She continued, "There's still certainly plenty of room for some of the other players we all know of. It will be interesting to see how that all shakes out."