Vape Shops Hit Big Tobacco Where It Hurts
So Big Tobacco has decided to make a big entrance into the electronic cigarettes industry. Reynolds American Inc. (RAI - 0.67%) and Altria Group Inc. (MO +0.21%) have worked together to capture around a quarter of all the E cigarette convenience store sales only a few weeks into the national rollouts of their electronic cigarettes.
However, there has been a surprising development in the industry. Electronic cigarette sales in America have been falling in traditional retail outlets. The trend has reversed the three year rapid growth in the industry. This raises the question whether Reynolds and Altria, who have a combined 75% market share in the United States tobacco market, are taking the right step by pushing hard in the market. Most importantly, it also raises some questions about the future of the electronic cigarettes industry.
It is important to understand that in America, 7 in 10 electronic cigarettes are sold in conventional convenience stores. This is exactly where Reynolds (manufacturer of Camel), and Altria (manufacturer of Marlboro) are launching their electronic cigarette called Vuse. Convenience stores are also the place where the No.3 company, Lorillard Inc. (LO - 1.22%), have already targeted with its top electronic cigarette called Blu.
All the companies are trying hard to capture the growing market of e cigarettes. The companies want to target people who are trying to make the switch to electronic cigarettes.
It is worth mentioning that electronic cigarette sales have been shifting to numerous Vape Shops where consumers can also buy refillable vaporizers. They can pack over 5 times the battery power and liquid of smaller electronic cigarettes being rolled out by Reynolds and Altria in the market. Vape Shops also allow customers to purchase many different flavoured e-liquids in bulk at lower prices.
Consumers are realising that DIY vaporizers are cheaper and offer a more versatile flavour choice, making them more fun. This has been threatening the razorblade marketing model being used by Lorillard, Reynolds and Altria. Electronic cigarettes from these companies require customers to purchase replacement cigarettes from the exact same manufacturer. In the first half of this year, Lorillard’s sales have already dropped to $88 million. This is a significant 23% drop.
Reynold and Altria’s electronic cigarette dollar shares reached 11% and 14% respectively at major convenience stores in the month of August. However, their overall sales in the convenience stores during the same period fell to $41.4 million. This was a 7.5% drop in the sales numbers. The electronic cigarette sales of these companies also dropped to $172 million from June to August. This was a 3.8% drop in the numbers. Although the drop was not significant, industry experts are still noticing a trend.
According to Associated Press, electronic cigarettes sales have been quickly shifting from traditional convenience stores to Vape Shops. Currently, there aren’t any reliable sales numbers related to Vape Shops. However, the Smoke Free Alternatives Trade Association, reports that the number of Vape Shops has almost tripled to 35,000 in just one last year.
The numbers include companies like Avail Vapor LLC. It makes over 70 E-liquid flavours. The company opened its first Vape Shop in Richmond, VA about a year ago. Altria’s headquarters are also located in Richmond, VA. Currently, Avail has 13 Vape Shops across Virginia, North Carolina and Maryland. It even has plans to set up 3-4 dozen more Vape Shops this year alone. According to the Co-Founder, Cole Smith, the company’s Vape Shops won’t carry products from Reynolds, Lorillard and Altria.
According to industry experts, the rapid growth of these specialty shops combined with Internet sales have been fuelling electronic cigarette growth. According to an analyst from Wells Fargo, Bonnie Herzog, the overall electronic cigarettes market has grown up to $2.5 billion. This is a significant increase from $1.7 billion last year. Moreover, vaporizers have been selling even quicker.
Reynolds and Altria are currently playing down the threat imposed by vaporizers. They understand that the rollouts of Vuse and MarkTen are still in their initial stages. Vuse and MarkTen have reached 20,000 and 60,000 stores respectively. On the other hand, Lorillard’s Blu is already sold in over 150,000 stores across the country. In the coming months, Reynolds and Altria plan to spread the electronic cigarettes across their distribution networks to reach more than 300,000 stores.
In recent magazine advertisements published in Vanity Fair, GQ and other publications, Altria focus on MarkTen’s FourDraw technology. The company claims that four separate holes in the mouthpiece can produce a much fuller vapour draw than many other electronic cigarettes that have a single opening. The company’s representatives believe they have a good chance at overtaking the market.
According to Chief Executive, Reynolds, Susan Cameron, Vuse will be a game changer in the electronic cigarettes industry. The company has been airing television advertisements in four states. These ads have been showing how the device’s built in microprocessor can let customers enjoy the “perfect puff”.
It’s worth mentioning that both the companies have deeper budgets than other electronic cigarettes companies in the market. According to a CLSA analyst,
Michael Lavery, Reynolds and Altria have each spent more than $150 million this year on Vuse and MarkTen. In fact, Reynolds and Altria have also found a strong ally in the Food and Drug Administration. The FDA has asked electronic cigarette companies to submit their e-cigs for approval. This could easily cost millions of dollars. Small scale companies may be hit hard with this proposal.
According to Wells Fargo analyst, Ms. Herzog, regulation by the FDA will work in favour of Big Tobacco. Currently, the industry does not have any barriers to entry. According to her, electronic cigarette sales could easily surpass tobacco cigarette sales in the next decade. However, some industry experts are sceptical about the growth of electronic cigarettes. Although more than 40 million (about 50%) smokers in the country have now tried an electronic cigarette at least once, this trend continues.
In simple terms, it means most people didn’t find the urge to make a switch to electronic cigarettes an urgent decision. People have still been sticking to traditional tobacco cigarettes in the market. According to Mr. Lavery, it’s still unclear how well the electronic cigarettes industry will perform in future. He believes a lot will depend on how much technology advances in the coming years. FDA regulations will also be vital.
Vape Shops have been around for a while in the UK but there are no figures on whether this is a growing trend. It seems the majority of UK vapers prefer the Internet for their e cigarettes. The Internet offers a huge choice in ‘build your own’ e cigarette kits, and here at Smokshop we offer advice to everyone on how to find the perfect kit.
What do you think though? Would you prefer to have a local Vape Shop to attend and discuss about your e cigs, or do you prefer shopping on the website? Please let us know, we would love to hear about it.
Author: Kevin Ewbank
Avid vaper & co-founder of SmokShop