Two Conflicting E-Cig Predictions

Segment's future at center of CSP's latest "Tobacco Update"

Melissa Vonder Haar, Freelance Writer

Nik Modi (left), Joe Teller

NEW YORK -- For CSP's final "Tobacco Update" CyberConference of 2013, UBS senior analyst Nik Modi and Swedish Match category director Joe Teller were both asked to make a "bold prediction" for 2013. Despite the fact that they could have made predictions on any issue facing the tobacco industry, both Modi and Teller's predictions focused on electronic cigarettes--although the two took different views on the nascent category.

While Teller expressed caution over the true potential of e-cigs, Modi's prediction was quite optimistic.

"The big prediction for me is the tax rate and the way that the government approaches this category is one modified risk," said Modi, a New York City-based analyst. "I just think it's the best thing for public health."

While he was quick to admit he was not a public health expert, he said that he believes lawmakers will recognize that e-cigs clearly do not contain the same harmful chemicals found in cigarettes--and that the rate at which e-cigs are eventually taxed will reflect a modified risk product.

"You could start seeing a much lower tax basis for these products going forward," Modi said. "Which means the profitability will be much higher for all the players involved."

Which means e-cig companies could actually benefit from regulation, provided they are preparing for possible future regulations today.

"I think the big players that do things right are going to be in a good position because when all the [U.S. Food & Drug Administration] regulations come out, the standard is going to be very high," said Modi. "It's very important to understand who out there is already self-governing themselves, who out there has done the work on how to predict where they FDA may come out with some of these regulations and who is compliant already."

Such awareness is crucial for retailers to consider when selecting which e-cig brands to carry, as not every company will survive in a post-regulatory environment.

"The ones that aren't compliant could potentially see a much higher cost to do business, which could compromise their operations, their margins and their ability to actually supply retailers, Modi said.

Although Teller recognizes their potential, his bolder prediction focused on "some issues with e-cigs that maybe takes a little bit of luster off the category."

Portion control was a big concern of Teller's. With traditional cigarettes, a half-a-pack-a-day smoker can clearly recognize how much he or she has smoked, both by counting cigarettes and the weight and feel of the pack. As of yet, there is no such way to monitor e-cig consumption.

"It's hard to have portion control with these things," Teller said. "If you have an e-cig that's equal to about a pack, I don't know how you know when you've smoked enough. It should last you two days if you smoke half a pack a day, but you could sit there and smoke the whole thing without realizing it."

And while most smokers appreciate the fact that e-cigs so closely mirror the tobacco cigarette experience, complete with the visible vapor "smoke," Teller said that he believes such similarities could actually be a detriment to where and when people are allowed to use the product.

"One of the downsides to e-cigs--and almost all tobacco products have it--is the telltale signs of usage," he said. "The smoke, the smell, spitting in a cup in terms of smokeless tobacco: they all have that telltale sign. And if there's a telltale sign, there are people who will want to ban the use of it."

Teller cited North Dakota as the latest of many state and local governments to include e-cig use in their definition of smoking, meaning people are not allowed to consume e-cigs in areas where smoking has been banned.

"I don't know if that takes the shine off e-cigs--probably not," Teller said, ultimately expressing a cautiously optimistic view of the category. "I think it's going to be a nice compliment to the other tobacco categories. The new adult consumer likes to use multiple tobacco products. So I think there's a big place for e-cigs, snus and other products that haven't even come out yet. "