E-Cigarettes – A Threat Or Opportunity For The Tobacco Industry?

First developed in China in 2003, e-cigarettes have been the hottest trend in the tobacco industry ever since. E-cigarettes sales have surged over the past few years bypassing the opinions of analysts who believed they could not significantly penetrate the conventional tobacco market.

At first, the dominant force in the smokeless tobacco market was a group of small manufacturers selling their electronic nicotine delivery systems mainly through online stores. Around 300 companies in the United States alone, still sell their electronic smoking devices over the internet.

To that extent, larger tobacco manufacturers were caught napping by the e-cigarettes wave. Now they are moving. Using their massive operational scales, tobacco giants are pushing to dominate the market for e-cigarettes with their own vaporizing products.

Some analysts think the larger tobacco manufacturers are late to the party, as e-cigarettes become less fashionable and convenient than larger vaporizing products offered at a range of ‘vape shops’ around the country.

HAS THE E-CIGARETTES MARKET REALLY STALLED?

Mainstream tobacco producers in America have recently experienced sluggish growth in the e-cigarettes business, raising legitimate questions for experts who have marked out ambitious growth trajectories for the market.

Greensboro-based tobacco producer, Lorillard Inc (NYSE:LO) reported a third quarter, 40% slump year-over-year in revenues generated from vaporizers.


On the broader front, the company’s e-cigarette sales are sharply down on the second half of 2014, bumping along at a three year low in this year’s first quarter.

The company blames plummeting sales of its ‘Blu’ brand, coupled with increased competition, for its overall e-cigarettes sales slide.

In fact, Lorillard is expected to dump Blu this year, as part of a three-way agreement with the Federal Trade Commission (FTC) and the UK’s Imperial Tobacco Group PLC in order to win FTC approval for a merger with its larger rival Reynolds American, Inc. (NYSE:RAI).

Similarly, Reynolds’ e-cigarettes brand Vuse has failed to capture a significant market share. The same fate is shared by ‘Markten’ – an e-cigarettes brand from industry leader Altria Group Inc. (NYSE:MO).

The shift in consumer preferences from the smaller e-cigarettes to larger tank ‘vaping’ devices offered by hundreds of ‘vape shops’ in the country have dragged sales of e-cigarettes downward. These larger devices provide customers with improved battery timing, delivering a ‘puff’ more closely resembling a conventional cigarette.

Some research has found consumption of e-cigarettes can actually be more harmful than conventional smoking. This would appear to undermine manufacturers claims of ‘health benefits’ for their products and lend fuel to critics claims of ‘pure marketing gimmicks’.

A recent study conducted by the University of California evaluated the risks of vaping. The research, presented to the 2015 American Thoracic Society International Conference, concluded that the chemicals used to flavor the electronic smoking devices can damage cells in lung tissues similar to that caused by combustible cigarettes.

Another recent study, this time led by James Pankow – a chemistry and civil and environmental engineering professor at the State University of Oregon – claims the carcinogens contained in e-cigarettes are as much as 15 times more lethal than those found in traditional cigarettes.

Still, some optimistic analysts and experts believe e-cigarettes are here to stay. In a joint report, analysts at investment firms UBS and Wells Fargo claimed the market for electronic smoking devices should continue to grow exponentially, building on the growth of recent years.

The report projects a $10 billion hike by 2017 in the vaporizer market, up from last year’s $2.76 billion.

Research firm BIS supports this view. Its research suggests the e-cigarette market will grow to $39.6 billion through 2024, translating into 27.3% compound annual growth rate (CAGR).

The analysts claim e-cigarettes will continue to feed off a growing health consciousness in the country, as people dump conventional cigarettes for alternative vaporizing products; which many still believe are less unhealthy than conventional cigarettes. Wells Fargo says conventional cigarettes revenues for market leader Altria Group could be ripped in half as early as 2023.

TOBACCO MANUFACTURERS HOPEFUL OF A BRIGHT FUTURE IN E-CIGARETTE SPACE

Despite current headwinds, major tobacco producers are willing to take on smaller vape shops and independent online e-cigarette sellers in the hope of a market revival.

London, UK, based British American Tobacco (BAT) was the first major tobacco producer to hit the e-cigarettes market when in August 2013, the company introduced ‘Vype’. Other larger mainstream tobacco producers quickly followed.

Philip Morris International Inc (NYSE:PM) teamed up with its peer Altria Group to debut e-cigarette products and introduced other ‘reduced risk’ tobacco products. In mid-2014, as Lorillard posted a slumping quarterly top line amid poor e-cigarette sales, Phillip Morris announced its acquisition of ‘Nicocigs’ – a UK e-cigarette startup – to break into the UK’s relatively more promising vaporizers’ market.

Altria Group itself is aiming to move deeper into the market its ‘Markten’ brand. Imperial Tobacco’s e-cigarette, dubbed ‘Puritane’, also launched last year.

Despite some analysts’ claims of encouraging future growth potential in the e-cigarettes business, at BidnessEtc we believe shifting consumer trends and increased competition from vape shops as well as from mainstream tobacco producers will likely cap top and bottom line prospects in e-cigarettes.

We believe tobacco companies with extensive exposure in e-cigarettes, such as Altria Group and Reynolds, could be adversely affected by the business’s limited upside potential.

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