Vape ‘em if you got ‘em

Electronic cigarette manufacturers are innovating, not waiting, as the rulemaking process continues.  When the U.S. Food and Drug Administration announced its proposed rules concerning electronic cigarettes, the industry shrugged. The April announcement, in which the FDA proposed to extend its authority to other tobacco products and e-cigarettes, was long anticipated. However the not-yet-final rules did not exactly inspire outrage, and there have been few complaints about stifling innovation or burdensome rules. Instead, industry representatives pointed out that they supported regulation and indicated they will continue to offer new products. For the e-cigarette and vaping industry it has been business as usual. That means continued growth. The FDA proposal, which has the unwieldy title, “Deeming Tobacco Products To Be Subject to the Federal Food, Drug and Cosmetic Act, as Amended by the Family Smoking Prevention and Tobacco Control Act; Regulations on the Sale and Distribution of Tobacco Products and Required Warning Statements for Tobacco Products,” is in the midst of its comment period, which was originally supposed to end July 9 but was extended to August 8. The new rules would take effect in June 2015, but the FDA says that it will not take enforcement actions during the first 24 months after the effective date, to give companies time to adjust. Industry observers say that while e-cig sales have slowed a little, the growth outlook remains robust. In its Tobacco Talk report, Wells Fargo Securities predicts 15% annual growth, and 18% more shelf space for e-cigarettes. “We see 2014 being a pivotal year for the e-vapor category,” says Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities, based in New York. “We believe consumption of e-vapor will eclipse consumption of combustible cigs over the next decade as technology improves, resulting in accelerated conversion.” That is a lofty goal, as the e-vapor category is a $2.5 billion market and the cigarette market is worth $80 billion. Still, Herzog, in the firm’s Tobacco Talk report, notes that the e-cigarette industry faces three key issues this year. First, will the national brands, Altria’s MarkTen and Reynolds American’s Vuse, reaccelerate category growth? Herzog and other analysts think they will. Second, how will the FDA regulations impact the growth trajectory of the e-vapor category, or, more specifically, will they stifle innovation? Third, will e-cigarettes continue to lose share to vapors/tanks/mods? “The jury’s still out,” Herzog writes. “Time will tell.” The FDA regulates cigarettes, cigarette tobacco, roll-your-own tobacco and smokeless tobacco. With its proposed Deeming Regulations, the FDA seeks to extend its authority to cigars, pipes and non-tobacco products such as electronic cigarettes. Manufacturers of what the agency calls “newly deemed tobacco products” would have several requirements. They would have to register with the FDA and report the product and ingredient listings, wait until after FDA review to market new tobacco products and not distribute free samples. Also, e-cigarettes and vapor manufacturers could not make claims of reduced risk until the FDA confirms that scientific evidence supports the claim. There were also some rules relating to underage consumers, such as prohibiting sales to people under 18 years old, and the products will not be allowed to be sold in vending machines unless the machine is located somewhere where underage youth are never allowed. The agency did seem to skip one potentially controversial item. “The FDA never talked about banning flavors,” says Carlos Bengoa, president of CB Distributors and 21st Century Smoke, based in Beloit, Wis. “Some were surprised, some not.” Some consumers, manufacturers and industry advocates might have been surprised about other topics in the rules. Their comments, viewable on www.Regulations.gov, have ranged from personal anecdotes to complaints about the Paperwork Reduction Act to requests not to extend the 75-day comment period. Industry representatives have released their own statements. The Smoke Free Alternatives Trade Association (SFATA) posted a press release on its website, noting that the Washington, D.C.-based organization welcomes the FDA’s announcement of its Deeming Regulations. SFATA supports the restrictions on sales to minors, the ingredients listing and the absence of rules about flavored liquids. The group disagreed with the FDA’s intent to regulate non-tobacco products as tobacco products. “While there is a need for appropriate and proportionate regulation of vaporizers and e-cigarettes, these products represent a new and unique category,” the group wrote. “They are technology products, not tobacco products.” That difference is what will make the category continue to succeed, says Craig Weiss, CEO and president of Scottsdale, Ariz.-based NJOY. “The cigarette is using old technology. They light theirs on fire. We use heating elements, advanced biochemistry and IC chips. It’s pretty sophisticated technology. Who do you think is going to win that?” As for the FDA proposal, Weiss says the agency’s approach was balanced, reasonable and most importantly, science-based. The agency, after all, relies on science to make its decisions, he says, unlike city councils and state legislatures. Others in the industry made similar statements about the Deeming Regulations. “I think it’s important to note Altria and its tobacco companies supported FDA regulations over cigars and cigarettes and e-vapor,” says Brian May, spokesperson for the Altria Group, based in Richmond, Va. “We are reviewing the proposed regulations through the public comment process.” While it reviews the many pages of government writing, Altria’s Nu Mark subsidiary is expanding distribution of its MarkTen brand. May does not provide details, only that the company’s goal is to achieve leadership in the e-vapor space. The company also acquired Miami-based Green Smoke this year. In July blu eCigs, based in Charlotte, N.C., launched Cherry Crush Disposables. In the fourth quarter the company will release a new kit, with improvements in battery life, flavor and nicotine delivery. NJOY, which previously had sold only disposable e-cigarettes, recently entered the vaping category with devices and liquids. New products include NJOY Recharge, NJOY Vape Pen and NJOY E-liquids. “We believe we will be the first national player in vaping,” says Weiss. A misty future Vaping is indeed the future, says Bengoa, from CB Distributors. “People are buying vaporizers instead of buying e-cigarettes,” he says. “Smokers say the smoking experience is better with vaping. They complain that e-cigarettes were not exactly duplicating the smoking experience.” Bengoa adds that people are buying vaporizers instead of buying e-cigarettes now. “The other thing that made vaporizers so popular is they do not look like cigarettes,” he says, adding that the cigarette-like appearance was once a selling point, but now users do not want to be chastised when they use the product in a restaurant or other non-smoking area. CB Distributors launched Vapin Plus Vaporizers in December 2013. The liquid vaporizer pen is available with a 650 mAh (milliamp hours) battery and an 1100 mAh battery. As for the FDA rules, Bengoa also does not object. “One thing we know for sure is we will have to submit the product to the FDA. We don’t have a problem with that.” Observers say personal vaporizers have been the talk of the industry. “For certain consumers, the personal vaporizer has attractive advantages over e-cigarettes,” says John J. Wiesehan, Jr., CEO of Charlotte, N.C.-based Ballantyne Brands, maker of the Mistic brand. “Personal vaporizers come in a variety of sizes and forms and they allow vapers more control of how and what they vape. The batteries are larger and last longer, delivering more vapor compared to regular e-cigs. Vapers also have the ability to enjoy a variety of e-liquid blends with personal vaporizers.” Earlier this year Mistic rolled out the HAUS Personal Vaporizer. “We saw an opportunity to attract a younger adult demographic that currently smokes but wants more choice and more control of how and what they vape,” says Wiesehan. The company provides retailers with in-store signage and instructional videos about the HAUS personal vaporizer and other products. It is estimated that the $2.5 billion U.S. vapor market consists of $1.4 billion in e-cigarettes and $1.1 billion in vapors/tanks/mods—and growing. According to IRI, a Chicago-based market research firm, for the 52 weeks ended June 15, sales of electronic smoking devices in supermarkets, drugstores, mass market retailers, military commissaries and selected dollar and club stores totaled more than $167 million. For calendar year 2013, sales totaled more than $180 million, an increase of 87% compared to 2012. The average price for an e-cigarette unit is $11.98, slightly down from $12.36 for 2013. Observers say retailers can really succeed selling e-cigs. “There is no doubt that e-cigarettes are being given a larger shelf presence in retail locations across the country,” says Jason Healy, president of blu eCigs, the Charlotte, N.C.-based subsidiary of Lorillard. “Though some may be concerned with having to sacrifice other products, our products predominately attract the same demographic of smokers, so retailers won’t need to sacrifice existing revenue from other product lines to make room for e-cigarettes.” For its part blu eCigs is rolling out new POS display cases to help maximize in-store visibility. Manufacturers know sales are gaining momentum, and they are noticing the shift in where consumers are buying these products. “Retailers should pay attention to providing innovative products that consumers are looking for,” says Ross A. Haynes, senior vice president of sales and marketing for Tantus Tobacco, based in Russell Springs, Ky. “Many retailers are letting these sales go to vape shops and tobacco stores.” Tantus introduced its line of 24/7 vapor products this year and expanded its cigar offerings. Cigars are also mentioned in the FDA’s Deeming Regulations, but Haynes does not expect a negative effect. “We do not anticipate FDA rules to hinder the sales of our products,” he says. “Rather we believe that some of the smaller brands that have never dealt with FDA regulations and are not built to comply will suffer.” The FDA is proposing health-warning statements on cigar packaging and in cigar advertisements. There are five variations of the proposed warning and they would be applied to small and large cigars. The agency might exempt premium, or $10-plus, cigars from the warning. It is too soon to say how the regulations will affect cigar sales and marketing, say observers. “It is still unclear until we see the final regulations,” says Jessica Fratarcangelo, marketing director for Cheyenne International, based in Grover, N.C. “However, from our preliminary assessment, it isn’t something that we haven’t already dealt with on the cigarette side. Given that the FDA has been unable to efficiently manage their current regulatory workload, we anticipate much of the same with new products in the fold.” The company’s newest product is the Cheyenne Cigarillo, which retails at three for $0.89. Although e-cigarettes and vapors have been getting much attention lately, other products such as moist smokeless tobacco are still strong, says Fratarcangelo. “Products in the MST category should not be overlooked as smokeless tobacco volume increased by about five percent from last year,” she says, adding that sales of discount items have been strong too, as people switch to products such as Cheyenne’s Decade Cigarettes for its lower price. The tobacco alternative category is still growing as well. “In my opinion the tobacco alternative category is very much in its initial stage of growth,” says Dave Savoca, president of Smokey Mountain, based in Sandy Hook, Conn. “With the ever increasing taxation and restrictions on tobacco products, tobacco alternatives will continue to grow for the foreseeable future.” Savoca adds that the catalyst for growth in the tobacco alternative category is that there is always a segment of adult smokeless tobacco consumers who are seeking to quit or reduce their consumption. Smokey Mountain Snuff and Pouches are a tobacco-free and nicotine-free alternative to moist smokeless tobacco. The challenge, though, is education. “Obviously e-cigarettes and vaping is growing and evolving rapidly,” he says. “Unfortunately, there is a lot of misinformation relating to the e-cigarette category, which leads to local legislations and bans. This is unfortunate, as I am a believer in the category and the purpose it serves.”