The tobacco transformation

Manufacturers weigh in on what has changed, the changes to come and what retailers need to do in order to find success within the tobacco category. Consumers are more concerned with health and longevity than ever before. The tobacco market has taken a hit as a result. However, technological advances in the form of electronic cigarettes and tobacco-free smokeless products have provided the category its first surge in decades and industry observers are encouraged. Observers say about 6% of all adults, not just smokers, have sampled electronic cigarettes, a figure that has nearly doubled since 2010. Proponents of the technology say e-cigarettes help address nicotine cravings without other harmful aspects of cigarettes. Electronic cigarettes are one of the newest and youngest categories to hit grocery store shelves and manufacturers are looking for increased shelf space from retailers to allow for continued category. Grocery Headquarters sat down with some of the e-cigarette industry’s biggest players to get their opinions and insights into this burgeoning phenomenon. The round table included: •Jason Healy, founder of blu eCigs, based  in Charlotte, N.C. •Ed Denk, director of marketing for Swisher International, based in Jacksonville, Fla. •Todd Millard, chief operating officer of Ballantyne Brands, based in Charlotte, N.C. •Dave Savoca, president of Smokey Mountain Chew, based in Sandy Hook,  Conn. •Andries Verleur, co-founder and CEO of V2 CIGS, based in Miami. •Dan Hillenbrandt, vice president of Fuma International, based in Medina, Ohio. •Carlos Bengoa, president of CB Distributors, based in Beloit, Wis. Grocery Headquarters: How is the category performing? Jason Healy, blu eCigs: The e-cigarette industry is strong and is only going to get stronger. According to a recent Wells Fargo Securities “Tobacco Talk” quarterly survey of retailers, nearly 90% of the respondents indicated that e-cigarette sales accelerated in the first quarter of this year versus the fourth quarter of 2012, with annual growth topping 30%. The survey also expects the revenue to grow to over $1 billion within a few years. Ed Denk, Swisher International: The awareness is increasing with 21% of adult cigarette consumers having tried e-cigarettes according to the most recent Centers for Disease Control report. Todd Millard, Ballantyne Brands: We continue to see tremendous growth. Almost every analyst and report says the same thing: more and more people believe that part of the decline in regular tobacco can certainly be attributed to electronic cigarettes. We think the category is right on track to be at least a billion dollars at retail this year. What are some of the top developments fueling the category? Andries Verleur, V2 CIGS: The extent to which the public has embraced e-cigs is the biggest development. This is a game-changing moment of global proportions. We are talking about transforming a human habit that has been entrenched for centuries. There are about 1.3 billion smokers worldwide who buy about 10 million cigarettes a minute. Think about the implications of altering that behavior from a health, humanistic, financial and business perspective. Dave Savoca, Smokey Mountain Chew: Obviously taxation and restrictions on usage have impacted the category. A more recent development is the fact that an increasing number of companies are testing employees for tobacco usage prior to providing healthcare. This has created opportunities for tobacco-free and nicotine-free alternatives. However, probably the biggest category development is the electronic cigarette. Although still in the initial stages, e-cigarettes should see increases in sales, which will probably impact domestic traditional cigarette sales in the future. Who is the typical consumer in this category? Verleur: In terms of demographics, it is very diverse. One thing almost all e-cig consumers share is that they are or were former smokers. Some consumers successfully use e-cigs to stop smoking, often after all other methods have failed. However, the majority of e-cig consumers want to mimic the physical and psychological aspects of smoking in a way that minimizes the impact on their health and finances. E-cigs deliver on both of those fronts. Dan Hillenbrandt, Fuma: Right now it seems people have turned to electronic cigarettes after trying other tobacco products and are looking for alternatives that will allow them to smoke in restricted places. It is the perfect product for consumers that still desire the experience of smoking yet are looking for a cleaner lifestyle and have chosen our products as a result. What consumer preferences are you seeing? Carlos Bengoa, CB Distributors: Some consumers are very concerned with cost-effective savings while other consumers prefer to use a product that resembles a traditional cigarette as closely as possible. Healy: Smokers are looking for alternatives that fit their busy lifestyles, that offer flexible charging options, slim designs that are convenient for them to take on-the-go and provide significant cost savings over the long run. Hillenbrandt: Taste, value and quality seem to lead the consumer. What makes your product unique? Millard: We focus primarily on the rechargeable business and the cartridge refills because we believe that is where the best value is for our customers. We also put a strong focus on our slogan of “Best Taste. Best Value.” Best taste is a hard thing to quantify and all we can go by is the number of cartridge purchases that come back from our brand. You cannot really fake what that means: people have tried it, they like it and they are coming back and buying more cartridges. Some of our competitors have decided to adopt a disposable only strategy, which is fine too. Rechargeable is our primary business. Denk: Our new Soft Tip disposable tube is made in the U.S. and has several patents pending which prevent the end cap from falling off or leaking. According to retailers and adult e-cigarette consumers, the leaking soft tip has been a challenge for the other competitive products that have this feature. Our goal is to be 100% made in the U.S. in the near future. Healy: For blu, it was a conscious choice to offer a product that clearly was not mistaken for a traditional cigarette when in use. This is evident with our black casing to our blue LED. It is intended to invoke curiosity rather than to suggest that it is a traditional cigarette. Our goal is to empower smokers to regain some freedom. If they are using an e-cigarette that lights up and looks like a traditional cigarette, then they may be subject to potential negative reactions as if they were smoking one. Some of the biggest manufacturers of traditional cigarettes have announced plans to release their own electronic cigarettes. How are you preparing for this new competition? Verleur: V2 Cigs may have a smaller marketing budget than a “Big Tobacco” company, but we will confidently put the integrity of our electronics, the quality of our flavors and the responsiveness of our organization up against any e-cig company in the world. Millard: At this point in the game, it is still all about building brand preference and we think in the next 12 to 18 months the category will shake out and you will see four to six retail preferred brands emerge from what I would consider to be the clutter of the rest of the category. That decision will be made by the consumer. The Food and Drug Administration is currently evaluating how to best regulate electronic cigarettes. What are you doing to prepare for these regulations? Healy: I can share that blu has worked closely and will continue to work with the FDA in sharing our research and best practices regarding the manufacturing and development of blu eCigs electronic cigarettes. With this in mind, we welcome regulation of the product and our industry. From the start, blu has been very dedicated to high levels of quality control in the manufacturing of our products.  As a result, we do not anticipate that new parameters will hinder our progress. Verleur: We welcome greater regulation. Our company has been fighting for product safety standards and is staunchly in favor of restrictions on electronic cigarette sales to minors. We believe that the latest science and a very vocal consumer base will influence regulators to protect the public interest without imposing onerous burdens that will restrict consumer choice. With many retail channels competing for limited consumer dollars, how can grocers best compete in this category? Savoca: Aside from a wide assortment of fresh and in-stock brands at competitive prices, the most important consumer aspects are visibility and ease-of-purchase. Hillenbrandt: Having the product visible at checkout allows adults to purchase it along with the other products they are there for. It saves them from making an additional stop somewhere else. Healy: Market education is key. This is a product that offers great cost-savings for smokers who are looking for an alternative. Grocers should do their research to ensure they are dealing with a responsible vendor dedicated to quality. Verleur: E-cigs are substantially more profitable for retailers. In some instances, retailers can make up to three times margin selling V2 Cigs products. The first thing retailers can do is select an e-cig that consumers will enjoy and come back to buy. Selecting a brand that is backed by solid consumer marketing and incentive programs is also important. This is a category that is here to stay, but right now there are literally hundreds of e-cig companies making a lot of the same promises. Most of these companies will not exist in a few years. The less trial and error retailers go through before settling on the two or three brands they will carry, the better for their bottom line. How do you assist retailers in selling more of your products? Denk: We are proactive in ensuring retailers are competitive with their pricing and have the appropriate merchandising. We have an extensive marketing program to gain consumer awareness and drive traffic to their stores with our store locator feature on our website. Being able to work with our retailers on a local level has been a proven success for both the retailer and Swisher and we will continue to do that with e-Swisher. Savoca: Tobacco-free brands typically do not sell to the same level as their tobacco counterparts, but the dollars are incremental. That said, we do not try to sell a chain more of our SKU’s simply to gain shelf-space. To generate pull-through, Smokey Mountain has a fully integrated national marketing and advertising campaign. What qualities make a good retailer stand out in this category? Bengoa: It is all about where and how the retailer displays the product. We provide retailers with point-of-sale materials and reinforce sales through our television and radio advertising campaigns. Denk: Good retailers are easy to identify by the organization of their categories and the knowledge they bring to their customers. Having an organized offering where the customer can easily identify the products they have to choose from, the different prices and attributes of each product, and store personnel who can answer questions about the products all contribute to a good retailer. Many times you might see an organized category but no communication to the customer about the differences in their choices or pricing can easily change the customers’ minds about making that purchase. We see this as a big reason why one retailer will excel above another even though both have the same product offerings. Millard: If retailers are going to make a commitment to the category, have enough SKUs available and display some POP, even if its just a generic “Electronic Cigarettes Available Here” sign so consumers know its available in-store. I would assure retailers that putting two to four of the best selling e-cig brands in the appropriate amount of SKUs is going to outperform the least selling SKUs in the other tobacco categories. Hillenbrandt: The qualities they must have are education in the category along with the foresight to see the growth and the future of electronic cigarettes for proper planograms to be successful. What new products and innovations can retailers expect going forward? Savoca: As an innovator, we will continue to monitor the internal and external factors that are creating changes and opportunities in the marketplace. Retailers can expect us to create products that best serve the adult tobacco consumer who is seeking alternatives. Verleur: Electronic cigarettes are more than just a consumable; they are inherently a technology product. Like with other small electronics categories, innovation and a rapid upgrade cycle are critical to ensure ongoing consumer interest. At the core of our strategy is a desire to make the electronic cigarette experience closer to the real thing. As the space develops so will the quality of the user experience. Denk: Our goal is to continue to innovate our entire portfolio in a responsible and legal fashion. For e-swisher, we will continue to gain distribution and trial of our new Soft Tip disposables. We also have some very exciting improvements coming to our entire e-swisher product line, which will revolutionize the category.