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Tobacco

As Consumers Trade Up, E-Cigs and Vape Gain Traction

The industry awaits further moves from the FDA

CHICAGO -- Bill McCloskey is noticing a metamorphosis—a change that could bode well for electronic cigarettes and similar electronic nicotine-delivery systems (ENDS). The tobacco consumer is transforming into a more sophisticated smoker who uses multiple products at higher price points.

McCloskey, COO of Deerfield, Ill.-based Rmarts, has watched the introduction of Juul, an electronic vaporizer, go through an “encouraging trial” with his smoking customers, despite its higher price point as compared to typical c-store goods. He sees it as part of a “premium” trend.

“It shows that our tobacco user is being more selective in what they purchase,” McCloskey says. “They  want to satisfy their need for tobacco and are willing to spend extra to do it.”

An average vaping starter kit can range from $30 to $100, with the cost of electronic liquids in the $35- to $40-per-month range (for a pack-a-day smoker), according to vapinginsider.com. In comparison, an average pack-a-day smoker can spend as much as $185 per month on cigarettes.

The potential new demand for e-cigarettes and other ENDS is happening alongside developments at the federal level. In a series of decisions, a U.S. Food and Drug Administration (FDA) committee rejected the claim put forth by New York-based Philip Morris International (PMI) that its iQOS heat-not-burn device would reduce the risk for tobacco-related diseases. While the FDA still needs to decide what to do with the committee’s decision, it’s a potential blow to PMI’s marketing plans. The FDA must still rule on whether to allow PMI to sell iQOS in the United States.

Despite the setback, the tobacco industry remains hopeful, especially because the FDA’s attitude toward tobacco appears to have pivoted. It’s all due to the entry of FDA Commissioner Scott Gottlieb. Despite reservations about teenagers’ e-cigarette usage, Gottlieb has softened the agency’s hard-line stance on adult users and has cited e-cigs’ potential in helping smokers quit.

“One finding that’s particularly troubling is that kids who experiment with e-cigarettes are more likely to try smoking,” Gottlieb said during comments about an ENDS report commissioned by the FDA and released in January. “At the same time, the report finds that current smokers who completely switch to e-cigarettes may see improved short-term health outcomes.”

Gottlieb called for more research on the matter.

Vaping has shown strong, consistent c-store growth for a year and a half and remains the fastest-growing subcategory within tobacco, says Don Burke, senior vice president of Management Science Associates, Pittsburgh. He expects the same trajectory in 2018.

Particularly strong is the new vaporizer segment, which is growing by three to four times its previous-year level, Burke says.

“With the expectation that the new iQOS system from Philip Morris will receive FDA approval this year, it is likely that this will draw even more consumer attention to electronic nicotine-delivery products, raising the awareness and growth of the entire category,” Burke says, agreeing with many that the FDA will likely grant PMI’s overarching application to market the product in the United States. “We would expect a new wave of trial as consumers are once again drawn to these alternatives to combustible cigarettes.”

The category, which hit $1.3 billion in sales in 2017, has already seen a flurry of activity, including a new No. 1. San Francisco-based Juul Labs recently became No. 1 in market share for category sales, according to data from New York-based Nielsen and its all-channel data for the four weeks ending Dec. 30, 2017. With its vaporizers and e-liquid pods, the Juul brand has 46.8% share of all-channel e-cigarette sales, followed by Reynolds’ Vuse at 20.7% share.

E-cigarettes enjoyed strong sales and volume growth of 34.4% and 32.6%, respectively, over the four-week period ending Dec. 30, 2017, outpacing all other tobacco categories, according to Nielsen. Smokeless, the next highest-performing category, grew 5.4% in sales, while cigarettes declined by 0.2% in that same four-week period over the same time a year ago.

“Our growth is driven primarily by a strong consumer connection—in other words, largely organic,” says a Juul spokesperson. “When an adult smoker switches to Juul from cigarettes, they recommend our product to friends, family and acquaintances who are also adult smokers attempting to switch from combustibles.”

While Burke says the larger category of vaporizers is making headway in c-stores, growth is being driven by “closed systems,” such as the Juul product. Closed systems use self-contained modules, sometimes called “mods” or “pods,” that hold the electronic liquid or e-liquids and pop into the vaping device without users manipulating the actual fluid. That’s the difference between open systems, in which vapers actually pour the liquid into the device or use eyedroppers. And technology keeps stretching the category: At last year’s NACS Show, Logic unveiled Vapeleaf, which passes heat through a capsule of actual tobacco to give a true tobacco flavor.

People perceive closed systems as simpler; as a result, the systems have a lower trial threshold, says Dylan Spencer, executive vice president of marketing for Space Jam Juice, San Clemente, Calif. His company is about to introduce a closed-system vaporizer into the c-store channel called The Byrd.

“A lot of consumers would make the switch to vaping but see [open systems] as too difficult,” Spencer says.

Open-system users could also be customers for The Byrd because they want to use their current device at home and a less involved, closed system at work, Spencer says. The multiproduct user has also caught the eye of Fontem Ventures, Charlotte, N.C., manufacturer of blu e-cigarettes. “There are [open-system users] who are perfectly happy with their systems but find that it’s not best for all situations where they enjoy vaping,” says Ryan Coalson, director of sales operations in the United States for Fontem. “This opens the door to capture some of the lost consumers to specialized retailers and to incite smokers to give vaping another try.”

As the industry awaits further moves from the FDA, suppliers and consultants are maintaining a focus on the total category.

“[We] have long been committed to leading the transformation of the tobacco industry,” says a spokesperson for R.J. Reynolds, Winston-Salem, N.C., which manufactures Vuse under its R.J. Reynolds Vapor subsidiary. “We have been investing and innovating to create transformative, smoke-free products for more than two decades.”

“Although the category continues to evolve, we believe the challenges of the past two years [with the FDA] have helped to refine the products and offers, which are now showing a resurgence in consumer acceptability and use,” says Douglas Teitelbaum, chairman and CEO of NJOY, Scottsdale, Ariz., which offers e-cigarettes and other vaping products.

And in terms of vaping, Burke points to the “huge increases” in movement in the category that MSA is tracking, especially vaporizers: “There’s a real story there.”

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