CSP Magazine

Tobacco: Evolving or Obsolete?

E-cigarettes’ future role in the vapor market is hazy

The e-cigarette boom is over. Or at least Business Insider thinks so. “Over the last six months, we have seen both dollar and volume sales growth decelerate in the e-cigarette category,” reads a story from May, citing Nielsen data and a Citi report on the segment, which estimates electronic cigarettes have only a 26% adoption rate.

These facts are difficult to ignore, even for admitted e-cig “bulls” such as Wells Fargo senior analyst Bonnie Herzog.

“There are clear decelerating trends in cig-alike e-cigs that are occurring,” she acknowledges. “The question is: By what magnitude?”

Contrary to the picture Nielsen’s data paints, many retailers argue that sales of e-cigarettes are healthy. Some, such as Anne Flint, senior category manager for Framingham, Mass.-based Cumberland Farms, say their sales are even growing.

“Promotional activity has continued to drive sales and profitability,” says Flint. “We see tremendous interest by adult smokers.”

Others, such as Royal Buying Group, have shifted focus from the e-cig segment to the glitzier offshoot of vaping.

“It seems that the cig-alike products are starting to finally level off,” says James Conrad, category manager for the Lisle, Ill.-based company.

RBC Capital Markets analyst Nik Modi believes e-cig sales are not only leveling off, but that these dropping numbers also are representative of overall consumer dissatisfaction with the products’ quality.

“When you look at blogs and forums, consumers with cig-alikes are fed up with the batteries,” he says, pointing to faulty batteries that don’t provide a satisfying draw and often burn out early. “Do you really think the average smoker wants to deal with this?”

It makes one wonder: Was Business Insider correct in asserting cig-alikes are going the way of the dodo?

Between the Numbers

E-cig extinction theorists seemingly have the data on their side. The sales deceleration has continued since May (albeit to varying degrees), with Nielsen reporting c-store dollar sales were down 12.4% year over year in June, 7.5% in July and 5.3% in August.

The problem, according to Herzog, is that Nielsen is not able to track the full breadth of e-vapor, given the variety in products and places they are sold. “Nielsen maybe is not capturing the whole picture,” she says.

And if that’s true, are those decelerating numbers truly reflective of what’s going on in the market?

Cumberland Farms isn’t the only retailer seemingly bucking the Nielsen trend. Tedeschi Food Shops’ vapor sales were up 46% from last year, according to Steve Monaco, the Rockland, Mass.-based chain’s director of category management.

One potential reason for the discrepancy between what Nielsen is reporting and what retailers are actually seeing is the fact that more consumers are moving away from disposable cig-alikes, switching to rechargeables, which are more cost-effective.

That means it’s possible that dollar sales could be down despite the fact that people are using e-cigarettes more frequently, buying replacement cartridges instead of individual disposable units. (Nielsen and other major data companies track only the segment as a whole, not disposables vs. rechargeables and refills.)

“People might enter the category with disposables, but then they quickly migrate toward the rechargeables,” Herzog agrees. “Disposables have been useful in that they’re bringing consumers into the category, but they’re not necessarily the repeat purchases.”

That’s evident in the fact that NJOY recently launched rechargeable versions of its Kings line. The Scottsdale, Ariz.-based company went from a No. 2 share in the c-store channel to No. 5 over the course of the last year, something many people credit to the fact that it offered only disposable units.

Miguel Martin, president of Logic Technologies, Pompano Beach, Fla., says retailers could actually benefit from the shift toward rechargeables.

“Stores that aren’t carrying rechargeables, for example, can now offer a fuller line of products because companies like ours and others are launching fuller lines,” he says. “I think there’s a lot of opportunity across the board.”

CONTINUED: A 'Big' Shakeup

A ‘Big’ Shakeup

Besides the shift away from disposables, Flint suspects the recent deceleration can be explained in part by No. 1 e-cig player blu’s “coming off the highs from their initial launch.”

Blu, which has enjoyed top-dog status since being acquired by Lorillard Tobacco Co. in April 2012, has stumbled a bit in recent months. Nielsen reports the brand’s dollar sales dropped by 30.5%, with unit sales down by 26.9%, in the four weeks ending Aug. 2, 2014. They dropped by 22.3% and 14.7%, respectively, when looking at the previous 12 weeks.

This share loss, in part, had to do with the national expansion of not one but two Big Tobacco e-cig offerings: Altria’s MarkTen and Reynold American Inc.’s Vuse.

That’s bad news for blu but a potential game changer for e-cig sales. The influx of dollars and attention Altria and Reynolds are bringing to the e-cig segment is something most retailers and manufacturers view as a net positive for a category struggling to regain its footing.

“E-cigs have flattened out some, but I do believe with the major tobacco companies getting in this business, it will see a spur in sales again,” says Richard Shortt, retail sales operations manager for Durham, N.C.-based Erwin Oil Co.

Herzog predicts Altria and Reynolds will drive consumer trial and awareness not only of their own products but also the cig-alike segment as a whole.

“I think those companies will be good for the category,” agrees Martin, whose company is No. 2 in dollar sales and No. 1 in units. (See sidebar.) “We’re OK with the concept that we may lose a little bit of share in the short term, as long as the overall volume and trial goes up.

“Whether it’s through couponing or discount work, a lot of people who aren’t currently in the category will have the opportunity to try MarkTen and Vuse,” he continues. “The question will be, after they’ve tried [them]: How do those products hold up?”

Herzog acknowledges that the discounting and couponing strategy commonplace with large companies could skew the numbers a bit in the upcoming months, meaning it could be a while before Martin’s question is answered.

For example, Vuse was able to easily  take the top position in its initial Colorado test run—but replicating that success in 50 states will challenging, even for a company with Reynolds’ scope.

“Given Altria and Reynolds’ infrastructure, sales force and marketing capabilities, yes, I think they’ll be successful,” says Herzog. “To what extent is the question mark in my mind.”

Cannibal or Complement?

The mere fact that Big Tobacco is dedicating its mighty heft not toward vaporizers or e-liquids but to e-cigarettes suggests the cig-alike is not going away any time soon.

And yet other successful electronic-cigarette and tobacco companies are investing in the vapor segment, a segment Herzog’s survey work suggests is growing at twice the rate of e-cigs.

“Vaping is the fastest-growing subsegment within the space and is showing signs of being very satisfying to adult smokers,” says Vito Maurici, senior vice president for NJOY, which recently launched NJOY Vape alongside its rechargeable Kings e-cig extension.

Consumers are so satisfied with vape, Maurici says, that a whopping 60% of vapers would go out of their way to recommend it.

With that kind of enthusiasm, it’s easy to understand why some have suggested these open systems are the next link on the evolutionary chain of vaping, destined to perhaps make cig-alikes obsolete.

Martin, however, believes such claims are premature—especially because many traditional brick-and-mortar retailers are still hesitant to get into the space.

“I think it’s easy, especially with the lack of data on vape shops and the Internet, to get excited about open systems,” he says. “We’ve seen differing results from retailers on open systems. There are still a lot of questions.”

Flint is one such retailer, choosing to stick with Cumberland’s e-cigarette business and stay out of vapor for the time being. (See sidebar.)

“The business case is not clear for these products,” she says. “While the initial sales may be strong, there is evidence that it deeply cannibalizes the more profitable rechargeable business and potentially leads to people buying the device in a store, then buying the liquids online or at a competitive vape shop.”

Manufacturers who pursue both vape and e-cigarettes argue that the two subsegments complement each other, casting a wider net of consumer appeal.

“The two segments serve different needs and generally target two different demographics,” Maurici says. “Vaping is highly popular and growing among millennials, while cig-alikes [users’] average age is closer to 40.”

Companies such as Ballantyne Brands LLC, Charlotte, N.C., and CB Distributors, Beloit, Wis., say that their cig-alike sales have not suffered since launching their respective Haus and Vapin Plus vaporizer lines earlier this year.

Despite the fact that other companies are profiting in both realms, Martin is confident that long-term success will come from players who can provide a cig-alike-sized product with vaporizer quality.

“Some of the reasons why open systems are growing so much right now is that the current cig-alike products have not yet delivered,” he says. “Once that happens, I think you’ll see a big change.”

CONTINUED: Can Cig-Alikes Evolve?

Can Cig-Alikes Evolve?

Martin’s point hits on perhaps the most logical explanation for electronic cigarettes’ current sales woes: the performance gap, due largely to the smaller size—and thus smaller batteries—compared to those of open systems.

“One of the most important things for a smoker is the actual experience of smoke,” says RBC’s Modi. “It’s very hard to make money by commercializing a tiny battery that has a very high power. And you need high power to heat the liquid—it’s science.”

Martin is far from alone in addressing the performance problem: Lorillard CEO Murray Kessler discussed this very issue at the NATO Show. However, like Martin, Kessler believes that, ultimately, consumers would prefer a cig-alike-sized product to heavier, bulkier tank options.

“Technologies over time get smaller,” he said, referencing cellphone technology. “I think that’s the direction. Consumers want the common experience of products that feel like cigarettes.”

“There has not been new technology to interest new adult smokers or adult smokers who may have had a bad experience with first-generation products,” agrees Flint. “We believe that with technology improvements, the category is poised to have a step up in terms of overall sales.”

Herzog believes these functional cig-alike improvements are not a matter of if but when. “Cig-alike e-cigs will continue to evolve and improve,” she says. “The performance gap between them and the personal vaporizers will be bridged.”

Assuming e-cig makers will bridge that gap, retailers are confident that there’s space for both cig-alikes and open systems in the c-store channel.

“I firmly believe there is room for both,” says Tedeschi’s Monaco. “There are consumers that like the ease of using cig-alike products, and then there are those that want to take it up a notch and get into vaping.”

“There are still major manufacturers getting into e-cigs, and technology will make the e-cig experiences better as time passes,” says Shortt of Erwin Oil.

And though Herzog doesn’t believe cig-alikes are anywhere close to extinction, she admits using the term “electronic cigarettes” to describe the entire market of cig-alikes, disposables, rechargeables, refills, tanks, mods, e-liquids and beyond is no longer relevant to today’s market, switching to the more inclusive term of “e-vapor”—and even that may change with the way this category is evolving.

“I might be calling it something different in the next six months,” she says.

No one knows what the future holds for e-vapor. But for the time being, it will almost certainly include cig-alikes.

CONTINUED: Retailer Perspective

Logical Success

In July, Nielsen numbers showed that Logic Technologies Inc. had managed to grow its unit and dollar sales, despite the overall deceleration of the category being reported by Nielsen. In fact, the Pompano Beach, Fla.-based company took down longtime leader blu in terms of c-store volume.

How did the company do it?

Anne Flint, senior category manager for Framingham, Mass.-based Cumberland Farms, says Logic has made three crucial moves in growing its business. It offers a premium product (in part because of a larger lithium battery), boasts the highest profit margins for retailers (40%, according to Logic’s president, Miguel Martin) and works with retailers to create customized programs to differentiate itself and maximize promotions.

“Logic has continued to grow and is now the No. 1 electronic cigarette company chainwide,” Flint says, pointing out that the company not only created a stand-alone e-cig center for the backbar, but also developed a customized starter kit promotion for Cumberland.

Martin looks to another popular c-store category when asked if Logic can hope to continue its success in the face of Altria and Reynolds entering the space.

“There’s a long history of independent, proactive energy drink companies growing very quickly and being very competitive against major companies such as Pepsi and Coke,” he says. “That is one of the reasons why companies like Logic can be successful against companies like Reynolds, Altria and Lorillard.”

Retail Perspective: No Thanks, Vape

Although it may seem like a new retailer dives headfirst into the savvy vaping market with every passing minute, there are those who are more than content to watch from the sidelines.

The Northeast’s largest c-store retailer, Cumberland Farms, is one of them.

“While it is easy to get excited about open systems, we believe that when you dig a bit deeper, there are some concerns for a retailer such as Cumberland Farms,” says Anne Flint, senior category manager for the Framingham, Mass.-based chain. “These products carry a higher responsibility for a retailer and, operating mostly in the Northeast, these considerations are magnified.“

Flint says she is not yet convinced that a c-store retailer can truly be successful with vape, due to the clerk training and dedicated space the segment needs to thrive.

“We believe one of the keys to being a successful retailer is knowing what you are and what you are not,” she says. ‘We are not a vape shop and feel that our current lineup best complements the other key initiatives we have within our locations.”

That e-cig lineup includes a mix of disposable, rechargeable and refill cartridges from Logic, blu, NJOY and V2.

“We continue to be pleased with our electronic cigarettes,” says Flint. “Beyond the sales, we find the margins to be accretive to that of traditional cigarettes and believe that they are bringing in new adult consumers that may have been shopping at other locations.”

And for the time being, at least, Cumberland will stick with this plan.

“Vape shops may be stealing business, but we have made a conscious decision to not enter that business,” Flint says.

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