Opinion: 3 Predictions for the E-Cig Industry
Open system vs. closed not necessarily an adversarial relationship
MIAMI -- The electronic-cigarette industry will bring in a whopping $3.5 billion in total retail sales by the end of the year, according to Wells Fargo Securities. It’s predicted to pass $10 billion by 2018. For a category that’s less than a decade old, that is impressive growth.
Bullishness aside, as the industry matures, we’re likely to see some fundamental changes related to consumer preference, product innovation and key areas of investment. With those changes in mind, here’s how I see the industry evolving by the end of the year.
1. Big Tobacco Will Spur the Vaporizer Market’s Growth.
Open-system vaporizers (OSVs) will continue to grow, with novices and some electronic-cigarette users moving toward these more powerful, tank-style devices. Big Tobacco, with its push into the e-cigarette market, may even be spurring this growth while trying to compete against it.
Last year, sales of vaporizers were already growing twice as fast as e-cigs, and in September they finally overtook the traditional e-cig market, according to Wells Fargo analyst Bonnie Herzog. This isn’t a surprise, since vaporizers offer benefits over e-cigs like longer battery life and the ability to tailor the user experience with multiple cartridge options, flavor choices and vapor strengths.
That said, major tobacco companies, among others, continue to stake their claim with e-cigarettes whose form most closely resembles combustibles in the belief that they may appeal to the smoker looking for a familiar configuration and experience.
Big Tobacco’s investment in the e-cig space without yet entering the OSV category is good news for the overall industry. One common trend of electronic vapor is that novice users start with easy-to-use disposables and ultimately progress to more advanced OSVs. The more Big Tobacco builds out the e-cig space without entering OSVs, the more likely independent players will thrive and tap that segment. If tobacco companies do enter the technology-driven OSV segment, they will encounter vigorous competition from the independent players who have won the loyalty of a dedicated community of vapers.
2. Rapid Innovation Will Drive Device Democratization.
What does this mean for convenience-store operators who, unlike vape shops and tobacco outlets, are operating with far less space?
With open-system, high-powered devices continuing to enter the mainstream, the demand for such products at brick-and-mortar locations will only increase. As a result, more models will be designed specifically for retail channels, where price points must be lower in order to drive in-store purchases. Most retail customers purchase vaporizers from c-store locations, where pricing must be reasonable to compel a sale.
One threat that looms over this promising segment is that of excessive regulation. Lawmakers at the local and national level are putting forward proposed rules for the production, marketing and sale of e-cigarettes, and some may target OSVs due to the products’ open-system design that can allow for user modification. The regulatory uncertainty means that some manufacturers and retail sectors may hold off on jumping into OSVs, choosing to focus on e-cigs until there is greater clarity from the Food and Drug Administration.
Either way, this doesn’t mean inferior products for brick-and-mortar. Innovation in the category continues at a rapid pace. In the past, there was a trade-off. Cheaper vaporizers typically meant limited power and inconsistent quality. But today, impressive product improvements are enabling manufacturers to create powerful, high-quality devices that are also affordable. This has happened at just the right time, with innovation and demand coming together.
As innovation continues and affordable OSVs at retail become more widely available, prices will continue to fall. It’s a common trend in technology products, from smartphones to fitness monitors; vaporizers will experience a similar democratization, with high-powered products available at all price points. And like smartphones, there will always be higher-end, higher-priced products available as a result of innovation; but in c-stores, lower prices will be key.
3. Record Investments in R&D
If, as I believe, OSVs become the driver in the electronic vapor industry, the category’s biggest players—from vaporizer-first businesses to traditional cigarette companies—will invest significant sums in research and development to meet demand.
But what about e-cigs? Are they merely a general bridge helping to transition from conventional cigarettes to vaping systems? I believe e-cigs still have a future, as they are typically the first device a vaper adopts and likely the final device for some.
Ultimately, to convert more smokers to vapers, additional R&D is required to create an e-cig that serves as a better alternative to combustible cigarettes. Manufacturers will continue investing to deliver the closest possible alternative electronically.
In the end, I foresee continued improvement in both e-cigs and vaporizers, where the long-term outlook will be determined by consumer demand, manufacturer innovation and, yes, regulatory decisions.
The electronic vapor market is still quite young. Despite the industry’s relative youth, however, it is evolving rapidly and will continue to do so for the foreseeable future.