What’s Ahead for E-Cigs?

From regulations to shifting consumer demand, e-cigarettes remain susceptible to various factors.

By Anne Baye Ericksen, Contributing Editor

On the surface, e-cigarettes are performing well in terms of OTP (other tobacco products) category sales.

Information Resources Inc. (IRI), a Chicago-based market research firm, reported total sales of all electronic tobacco devices—e-cigarettes and vapors/tanks/mods—in U.S. convenience stores totaled more than $71.8 million for the four weeks ending March 19. That represents a 27.06% increase for the same time period during the previous year. Unit sales jumped more than 21% for the four weeks.

For the 12 weeks ending March 19, the pace slowed slightly with a 24.44% increase in dollar sales and 18.80% boost in unit sales. And a 52-week comparison for U.S. c-store sales of electronic tobacco products reveals an even more tepid progression. IRI indicated sales grew by less than 17% and unit sales also registered approximately 17% growth.

Comparably, dollars sales for e-cigarettes in all retail channels increased by one-third, and volume climbed 23.6%, according to research data by The Nielsen Co. and reported by Wells Fargo Securities for the four weeks ending April 22.

However, dollar and unit sales alone don’t paint a complete picture. Research often calculates activity on a national basis, but local influences are proving a big difference for c-stores. For example, the e-cigarette segment has never been a major profit generator for the 11 retail stores owned and operated by Scrivener Oil Co.

“Sales are slower in 2017 versus previous year-to-date. In fact, we have cut the majority of the products in our stores. In addition, our distributor has cut several brands,” said Sean Bumgarner, vice president for the Ozark, Mo.-based chain.
“I think the e-cig consumer has been trained to shop at vapor stores due to the tremendous variety offered,” Bumgarner added. “We have many vapor stores in [our] markets and they do a great job at educating and sampling.”

The reasons for customer preference vary. Two are product variety and accessibility.

“I see quite a bit of variability from one store to the next in terms of e-cigarette volume and contribution to overall inside sales,” said Jim Calvin, president of the New York Association of Convenience Stores. “Local market conditions, extent of vape shop competition, and retailer commitment to the category seem to be factors.”

New taxes on e-cigarette sales are another market factor. Last year numerous tax increases sprung up in pockets across the country. Perhaps one of the most detrimental tax hikes to date is Pennsylvania’s 40% wholesale tax. Not only were retailers, including c-stores, faced with that hefty levy, they also were subjected to the same 40% wholesale cost tax on vapor products that applies not only to purchases made after Oct. 1, 2016—the day the tax took effect—but also covers all inventory on store shelves. According to the Pennsylvania Vaping Association, 120 businesses closed their doors as a result.

The good news is that state lawmakers are considering amending the law due to the inordinate financial burden it placed on businesses. As of early May, the Senate Finance Committee advanced a bill that would lower the wholesale tax to five cents per milliliter.

Still, other states continue to contemplate tax increases and other regulations, including New York.

“In January, Governor [Andrew] Cuomo proposed a new state excise tax on vaping products at 10-cents per milliliter, but it was not enacted,” said Calvin. “Some counties have enacted public place vaping bans, and there is pressure at the state level to do so. The New York City Council is considering broad new restrictions on e-cigarettes and e-cigarette retailers.”

The trend to raise retail prices continues and could account for some of the dollar sales increases. Wells Fargo Securities stated pricing climbed by 8.1% for each the four-week and 12-week periods ending April 22. Additionally, discounting programs may be what is pushing up unit sales.

“While we are not clear how much this skews our ability to gauge organic brand-level performance, we believe the discrepancy could be rather significant given the magnitude of couponing we understand is occurring presently in the category,” stated Bonnie Herzog, senior analyst for Wells Fargo Securities. “For example, we have heard in the past of significant ‘coupon drops’ driving sales of MarkTen XL and similar tactics employed by Logic and VUSE.”

Regardless of various influences, it seems the e-cigarette industry has settled into a predictable hierarchy, at least in terms of how revenue share is divvied up between brands. Since October 2014, VUSE, by Reynolds American Inc., has dominated in nearly all retail channels. For the latest period, it claimed 40% of total retail sales in convenience stores up to April 22, per Nielsen and Wells Fargo Securities. In fact, it’s held firm at 35% or more of the revenue mix since October 2015.

Meanwhile, most other brands have either lost share or maintained a lower plateau. MarkTen XL has shown the most sustained growth, which helped Philip Morris, a division of Altria Group Inc., capture between 13-16% during the past 12 months.
Before VUSE, blu commanded top market position; however, over the past two-and-a-half years, it regularly has posted smaller growth margins. Logic has hovered at approximately 12% since May 2016, while NJOY noted less than 5% of the e-cigarette revenue mix since it declared bankruptcy last September.

Of course, a discussion of the current and future performance of e-cigarettes would not be complete without examining the effect from by the U.S. Food and Drug Administration’s (FDA) decision to classify electronic tobacco products the same as combustible cigarettes, making them subject to the same level of regulation.

The agency allotted manufacturers one year to submit applications for a substantial equivalence (SE) exemption, until February 2018 to turn in SE applications, and until August 2018 to provide Premarket Tobacco Applications (PMTAs). The FDA then has another year to review submissions and make a final determination. An FDA spokesperson confirmed it’s received 364 PMTAs across all tobacco product categories, including cigars, between August and December last year.

“What the FDA [isn’t saying] is whether or not it has refused to file any those of those applications,” said Gregory Conley, president of the American Vaping Association. “I will bet not many of the PMTAs will be read until after August 2018.”

Also, differing studies debating the health concerns of e-cigarettes have created confusion among consumers. On May 8, the first E-Cig Summit USA-Science Regulation & Public Health forum was held to discuss evidence regarding harm reduction and policy possibilities. It was attended by approximately 250 representatives from the scientific, public health, legal/government, tobacco industry, consumer advocacy and user communities.

“This was the first time in our memory that such a diverse range of U.S. tobacco/public health interests were represented in one room,” said Herzog. “On balance, we found the presenters to be fairly uniform in view on e-cigs/vapor being ‘dramatically less harmful’ than smoking even through the evidence may not yet support e-cigs as an effective smoking cessation choice or fully-satisfying alternative to conventional cigarettes.”

Of course, the conversation doesn’t end there.

“Where the experts appeared to disagree was on regulation and how far it should go to limit consumer choice in terms of flavor, nicotine strength, and styles,” Herzog added.

Until these factors reach some sort of resolution and provide consistent messaging to consumers, the e-cigarette category remains vulnerable to market fluctuations.


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