The Beginning of a New E-volution

NATIONAL REPORT -- Electronic cigarettes continue their smoking-hot growth, fueled by a combination of greater consumer interest for acceptable smoking alternatives and increased availability at retail. What started off circa 2009 in convenience retail as just e-cigarettes has evolved to encompass a much broader range of options. Products such as e-cigars, e-hoohaks and vaporizers are becoming increasingly available alongside e-cigarettes in a subcategory referred to as Electronic Nicotine Devices (END).

While this rapid evolution by no means represents the actual end of the segment, it almost certainly does mark the end of the introductory period. From the manufacturer side, competition is increasing, advertising budgets are growing and brands are working even harder to create meaningful points of differentiation with consumers and retailers. From a retailer perspective per store, week-per-week sales rates are accelerating, knowledge around the business is improving and the manufacturer base is consolidating.

END is now the No. 3 subcategory under the other tobacco products (OTP) category, according to Balvor LLC estimates, contributing approximately 8 percent of dollar sales for retailers that sell END products in their stores. These estimates are based in part on sales rates provided by 89 retailers that represent a combined total of nearly 17,000 U.S. store locations.

END’s industrywide contribution to OTP is understandably lower  — between 5 percent and 6 percent — as these products are still gaining a foothold within retail store locations. Even so, consumers can now purchase these items at approximately 83 percent of convenience stores, which is expected to grow at least another 7 percentage points as many single-store operators plan to enter the business this year.

This level of availability is remarkable considering that only 24 percent of convenience retailers carried END products in some stores as recently as February 2011, according to earlier Balvor/Convenience Store News research.

What has driven this impressive increase in distribution?

The number of retailers selling END ignited after the Food and Drug Administration (FDA) affirmed in April 2011 that it would comply with the court’s earlier decision to regulate the devices as tobacco products if no therapeutic claims were made. The second accelerant came around April 2012 with the entry of the first major tobacco manufacturer via an acquisition of a leading e-cigarette manufacturer.

So, why is that important? There’s still a lot of uncertainty in the marketplace as everyone is waiting to learn how the FDA proposes to regulate this industry. If history teaches us anything, it’s that retail strategies will swiftly adapt after the industry gains clarity and confidence on how the regulation will impact the END subcategory. And with the other major tobacco manufacturers rolling out nationally, assortment will expand more quickly as most convenience retailers will add the products from these established manufacturers.

In terms of distribution, 71 percent of the retailers selling END in their stores have done so for 12 months or longer. For those retailers in at least their second year of sales, dollar sales growth weighted based on stores is up 111 percent vs. the prior year.

This year-over-year growth underscores the segment’s growth potential; however, it’s not driven simply by introducing more products into the store. Assortment, placement and signage are all playing a vital role in the growth of END products.

Look in the April issue of Convenience Store News for more on this new e-volution.