Vapor, but few clouds

The outlook for the electronic cigarette category is growth, increased consumer interest and a few potential regulations.

The electronic cigarette and vaping category is still strong, even as it faces certain challenges. Sales growth has slowed in some retail channels and federal regulations are still in flux, but industry observers say product innovation is helping manufacturers and retailers succeed in the space. 

“Overall growth for the entire U.S. vapor industry is positive,” says John J. Wiesehan, Jr., CEO of Mistic Electronic Cigarettes, based in Charlotte, N.C., adding that sales of vapors/tanks/mods, or VTMs, are driving the category. “We continue to see positive sales trends for our products among grocery stores as more adult smokers see e-cigs and personal vaporizers as significant alternatives to smoking.”

Although e-cigarettes are not marketed as smoking cessation tools, many adult smokers who try the products do have that goal in mind. “There are currently 42 million smokers in the U.S. and 70% of them want to stop smoking,” says Wiesehan. “Millions of smokers have already made the switch to e-cigs and personal vaporizers. It’s clear this trend will continue to drive the category forward as projected sales show e-cigs and VTMs growing considerably over the next decade.”

Mistic’s newest product is the Mistic Bridge with HAUS technology, which Wiesehan says combines the flexibility of an open tank system with the convenience of a cigarette-like configuration. The Mistic Bridge is sold as starter packs and individual refillable replacement tanks. “We believe the Mistic Bridge fulfills a deep need among cig-alike users looking for more choices and flexibility in their vaping experiences that they don’t necessarily get with existing closed cartridge systems,” he says.

Wiesehan says adult smokers are intrigued  by vapor products but do not necessarily get adequate information at the register. That creates an important market opportunity for grocers to improve consumer education at the point of purchase—by training staff about the new products and by displaying signage.

Grocery is seeing a slowdown in this category. According to IRI, a Chicago-based market research firm, U.S. Multi-Outlet sales of electronic smoking devices totaled more than $144.7 million for the 52 weeks ended January 25. That was a decrease of 20.2% compared to the same period the previous year. Unit sales were down nearly 12%, to just over 13 million.

Also according to IRI, sales of cigarettes in these stores, which include grocery, mass, drugstores, military and select dollar and warehouse chains, totaled more than $14.3 billion, down 1.8%. Unit sales totaled more than 1.4 billion, down about 2.5%. The average price of an electronic smoking product was $11.11, and for cigarettes it was $9.99.

These retailers face competition not only from online sales but also from newly opened vape stores. Bonnie Herzog, managing director of beverage, tobacco & convenience store research for Wells Fargo Securities, based in New York, says that there are 8,500 vape shops across the country, and the pace of vape shop openings increased in the last six months prior to the firm’s January 2015 Tobacco Talk report. The report also stated that the e-cigarette industry will continue to grow robustly in 2015 and is expected to reach $3.5 billion in retail sales. Net pricing on vapor products will go down, but manufacturing capacity will grow 26%.

“We continue to see vast opportunity for vapor long-term and continue to believe consumption of vapor and other non-combustibles could surpass consumption of combustible cigs in the next decade,” Herzog wrote in the report. Although the industry is facing challenges from a lack of FDA regulations, mixed public perception regarding the safety of e-cigarettes and unfavorable reviews of some new products, the firm remains bullish on the category and notes that innovation is crucial.

Manufacturers agree that the category is indeed promising. “The electronic cigarette is very dynamic and exciting right now,” says Miguel Martin, president of Livingston, N.J.-based Logic Technology Development. “This is being driven by record investment and product innovation.”

Martin says users are looking for a more robust experience, a preference that has contributed to the growth of rechargeables and larger format devices. In March the company launched Logic Pro, which is designed to perform like an open system but has many of the benefits of a rechargeable. The product has a proprietary capsule based system that uses Logic’s premium e-liquids and eliminates the concerns with loose liquids and degrading parts.

One trend that is affecting the category, Martin says, is that consumers and retailers are becoming better informed about the different attributes of the various products. He adds that manufacturers that succeed in the e-cigarette space are the ones that focus on brick-and-mortar stores. That approach not only helps limit  product sales to adults only, but it also provides retailers with higher margins than cigarettes, helping offset the declines in cigarette sales.

Grocery retailers specifically are evolving with the category, says Jessica Fratarcangelo, marketing director for Cheyenne International, based in Grover, N.C. Retailers are compressing their space for other tobacco products, and allotting space to e-cigarette and vapor items. “While some stores have discontinued their tobacco sales, there are still plentiful opportunities in the category, and not just in cigarettes,” she says. “The OTP segment is seeing growth specifically in cigars, smokeless and vapor.”

Cheyenne International’s newest product is Bodyshot Vapor, a line of seven cocktail-inspired flavors. “Adult consumers are looking for alternatives and we provide them,” says Fratarcangelo. “We also provide value to retailers and wholesalers. We believe in partnerships with the trade channel.” The company also distributes cigars, moist snuff and pipe tobacco.

Add, not switch

Companies that offer a broad selection of items can likely respond to consumers’ partial, but not total switch to other tobacco products. Studies indicate that many smokers are not substituting combustible tobacco products with electronic devices, but are adding the new products to their repertoire of nicotine delivery systems. The National Institutes of Health (NIH) and the Food and Drug Administration (FDA) are conducting the Population Assessment of Tobacco and Health (PATH) Study, a national longitudinal study of tobacco use. The study, announced in 2011, follows 46,000 participants for five years. Among the earliest findings: 28% of adults say they use a tobacco product, and 40% of that group say they use two products. Half of the group that uses two products say electronic cigarettes are among those products. 

“The addition of e-cigarettes has certainly impacted the overall tobacco category,” says Fratarcangelo. “Initial reports of a huge shift in users from traditional combustible products to e-cigarettes has seemed to slow although there is still innovation happening in the category. There has been a learning curve for both wholesale and retail as the products continue to emerge as well.”

Dual usage is one of the major consumer trends currently affecting sales, says Jason Healy, founder and president of blu eCigs, based in Charlotte, N.C. “What the industry does not always realize is that most e-cig users still trade between e-cigarettes and cigarettes, rather than other vapor products, making cigarettes our largest competitor,” he says. “So, when your consumer base is using your biggest competitor in conjunction with your product, establishing growth can get complicated.”

He adds that the category has seen good growth, and shelf presence has increased for these products in grocers across the country. Grocery retailers face certain challenges though. Supermarkets have to make sure the products are not accessible by or sold to youth. They also have to avoid implying e-cigarettes are a cessation aid.

“As with other retailers, it is the grocer’s responsibility to train their workers to be able to answer questions with regards to the regulations,” says Healy. “At blu eCigs, we strive to provide helpful resources to not only educate the distributors but also educate their customers who may be looking at these products, or our brand, for the first time.” 

The company’s newest product is the blu PLUS Rechargeable Kit, which officials say features improvements in battery life, charging speed, vapor production and flavor delivery. There are also new blu PLUS Tanks, re-designed to hold more e-juice than the original cartridges and re-engineered to use all of the e-liquid within the cartridge. The technology is designed to create a more cigarette-like draw with enhanced nicotine delivery and more consistent, enjoyable vapor production. The tanks are pre-filled in a closed system, and are available in flavors such as Classic Tobacco, Magnificent Menthol, Vivid Vanilla and Cherry Crush. The company plans to introduce more flavors in 2015.

Observers say grocery needs to keep current on consumer demands, even if there is limited space in the store. “Customers are looking for both variety and quality in the tobacco and vapor product segments,” says Brittani Cushman, director of external affairs for National Tobacco Co., based in Louisville, Ky. “With the explosion in the use of the Internet as a tool for fulfilling consumers’ desire for variety, brick-and-mortar retailers are faced with the challenge of providing consumers with popular new products and styles while also keeping an eye toward both quality and inventory levels.”

Rules are rules?

Another important challenge is regulation. The FDA has not finalized the rules that it proposed last year. The proposed rule, “Tobacco Products Deemed To Be Subject to the Food, Drug & Cosmetic Act,” or what the industry calls the “deeming regulations” or the “deeming rules,” would include electronic cigarettes under the FDA’s authority. Among the highlights of the rules: manufacturers would have to register with the FDA and report product ingredients, they could not distribute the items through vending machines, and could not give out free samples.

The FDA is not saying when it will finalize the rules, and this creates uncertainty for the segment at both at the federal and state level, says Cushman. “Although the FDA issued its proposed regulations in April 2014, there is no guarantee that the final regulations will resemble those issued for comment,” she says. “At the state level, we are seeing legislators who are growing impatient in the face of the FDA’s delayed action with regard to the vapor category. Consequently, states are proposing their own regulations.” She notes that these state rules include labeling, packaging and flavoring restrictions, requiring licenses to sell or distribute products, developing taxation regimes and adding vapor products to tobacco product statutes, such as indoor smoking bans.

“The industry faces an uphill climb in opposing these proposals or amending them to a more reasonable approach,” says Cushman. “National and local suppliers at all levels will need to band together if they hope to survive the distinct possibility of a state-by-state patchwork regulatory regime.”

Others say there is little they can do but wait. “They are still talking about it,” says Carlos Bengoa, president of CB Distributors and 21st Century Smoke, based in Beloit, Wis. “I don’t think about it because I have no control over it.”

CB Distributors’ newest products are the Vapin Plus with Adjustable Constant Voltage Battery and Vapin Plus Bottom Dual Coil vaporizers, designed to produce more vapor. There are also new glass tank atomizers. “It’s like when you drink wine out of a cup or glass,” says Bengoa. “It has a better taste out of a glass.”

The different atomizers and other features appeal to 20-35 year olds who are not looking for items that look like cigarettes, he says.  “Everybody personalizes them,” he adds. “Most people own more than one battery and one tank. They are growing with it, creating personalized items out of it.”

Flavors also appeal to adult consumers who use vaporizers, and Scottsdale, Ariz.-based NJOY recently launched a line of e-liquids. The flavors include Classic Tobacco, Menthol, Pomegranate, Double Espresso and Single Malt Scotch. The company also offers five-flavor sample packs.