E-Cigarette Sales Are Smoking

e-cigDespite proposed FDA rules and looming tax hikes, e-cigarettes remain a breath of fresh air for c-store sales.

By David Bennett, Senior Editor

While the debate on electronic cigarettes is heating up among state and federal officials, convenience stores are pressing forward with broader product offerings, driving e-cigarette sales ever higher.

Just ask Mike Gancedo, category manager for Parker’s Convenience Stores, based in Savannah, Ga., who oversees all tobacco product business for the company’s 35 locations. After attending the National Association of Convenience Stores’ (NACS) Show last October, Gancedo said he realized what path the industry was taking.

“When we were at the NACS Show and we saw all the innovation in electronic cigarettes, we knew that we had to focus on this new and exciting category,” Gancedo said.

“We knew that if we could establish ourselves as the destination for these types of products, once Reynolds American Inc. and Phillip Morris came out with them, it would only benefit us because we knew they were going to do a lot for the education portion and to help migration from combustible products to electronic cigarette products, so it’s very important in our industry and in our stores.”

From the variances in the quantity sold, to sales and gross profits over the past five months since returning from NACS, Gancedo said e-cigarette sales have been telling.

“We are up 787% in quantity sold, we are up 981% in sales and we are up 1,537% in gross profits,” Gancedo said. “We are projecting over a million dollars in e-cig sales through December 2014.

Such numbers are why regulators and tax officials have now pointed a spotlight on the expanding, and until now, unchecked industry.

The battery-powered devices that turn nicotine-laced water into vapor are a fast-growing alternative to smoking, with sales expected to approach $3 billion in 2014. As the sales of combustible tobacco decline, e-cigarette sales continue to pick up steam. In fact, some analysts believe the electronic cigarette market will be worth $10
billion by 2017.

Since 2013, Cumberland Farms has been able to offset lagging sales of combustible cigarettes with its First Class brand, a private label that has generated steady sales. However, e-cig sales have helped the company’s profit margins significantly over the last two years.

As proof, Cumberland Farms saw e-cigarette sales jump more than 25% in the first quarter of this fiscal year, compared to the fourth quarter of last year, according Anne Flint, senior tobacco category manager for the Framingham, Mass.-based chain, which operates c-stores across 11 states.

“It’s performing very well and increasing daily,” said Flint, who also serves as secretary of National Association of Tobacco Outlets (NATO). The tobacco expert has weighed in on the e-cigarette debate many times since Cumberland Farms first began offering e-cigarette products more than two years ago. She certainly understands regulators’ most recent attempt to rein in a business that has gone unchecked in terms of quality control.

FDA Rules
Among the issues is the lack of disclosure of all the ingredients used, as well as the lack of health and safety claims by product manufacturers.

The U.S. Food and Drug Administration (FDA) this past April approved historic deeming rules that would ban the sale of e-cigs, cigars and pipe tobacco to Americans under 18 and require product warning labels. The FDA proposal is awaiting a 75-day comment period before the regulations become final.The deadline for the comment period concludes July 9.

Some provisions, such as requiring evidence of health benefits, will go into effect at that point. The agency then will allow two years for all other provisions to go into effect. The FDA regulations also apply to hookahs and dissolvable tobacco products. Currently, the FDA regulates cigarettes, roll-your-own tobacco and smokeless products such as snuff.

Flint said the proposed FDA rules bring “validation to the category.”

“It will be able to regulate the many players in the category at this point,” Flint said.

The FDA involvement is a natural progression, as is the customers of Cumberland Farms becoming more knowledgeable of e-cig products and seeking out alternative tobacco options, whether it’s for economic reasons or health issues, Flint said.

Cumberland Farms doesn’t promote e-cigarettes as a smoking cessation solution in any of its 570 stores, Flint pointed out.

CLSA Americas tobacco analyst Michael Lavery predicted that retailers shouldn’t be overly concerned about more FDA mandates on e-cigs anytime soon. “FDA certainly left the door open to additional restrictions, but it’s not clear what they might be and when they would come,” Lavery said. But, it would still be a fairly careful and slow process, so there are several years, I think, before you see anything not already announced.”

No Escaping Vaping
Disposable e-cigarettes are offered by most of the major electronic cigarette companies. They provide a simple and convenient way to enjoy vaping, but are only designed to last a single charge cycle.

Flint said as e-cigs grow, so will product innovation, not just with disposable e-cigs, but vaping products, and some larger c-stores are expanding their offerings to include some vaping brands.

Most public places have no rules on whether vaping is allowed. There have been no long-term studies done on the health effects of long-term use. Still, there are an increasing number of retailers like the Ecig Emporium in Elyria, Ohio, which specialize in selling and demonstrating vaping products.

The Elyria location has a “juice bar” where customers can test out different flavors, ranging from chocolate to banana nut bread to piña colada. Beginners learn that the amount of nicotine consumed depends on the mixture of the particular liquid-nicotine cartridge installed in the device. Some are low, and others are more potent.
The average startup kit is about $30, which is more affordable for the consumers since a bottle of liquid, or e-juice, can typically last a user up to a month.

Mark Eggers, owner of the Ecig Emporium, said most customers are smokers who are trying to quit. He said many often cite health concerns as the main motivator. Eggers—one of a growing number of e-cig retailers—doesn’t promote any of his product lines as smoking cessation remedies at either of his two locations in northeast Ohio. But, he does echo Flint’s concern over the growing volleys of tax legislation directed at e-cig retailers. If Ohio passes such legislation, it will stifle his plan to add a third store to his portfolio, until he sees how the market shakes out.

“The biggest peril is the local powers that be, the governor on down. When you factor in what the state is going to do, I would not see an e-cig store as a good, viable and long-term investment right now. As a matter of fact, I’m not expanding.”

No slowing down
Flint, who has served as the tobacco category manager for Cumberland Farms for the last 15 years, said in her experience the only product category that resembles the explosive popularity of e-cigs is energy drinks when they took off with consumers. Now, the category is a $8 billion generator.

Flint marvels at the skyrocketing popularity of e-cigs, which seems to be growing steadily. Brands like NJOY Kings, V2 Cigs, Logic and Blu e-Cigs, owned by tobacco giant Lorillard Technologies, are vying for larger shares of the market. Still, Flint finds herself inundated with new brands, and companies trying to get a foothold in the growing e-cig trade.

“I still get calls 2-3 times per week from e-cig companies,” Flint said.

Of course, Flint has limited shelf space, so she only entertains those brands she is confident are going to add to category sales at Cumberland Farms stores. “Everyone that calls (claims to be) the best one,” she said with a laugh.

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