E-Cigarettes: A Path to the Future

JERSEY CITY, N.J. – Electronic cigarettes may be a relative newcomer in the tobacco category, but they present promising opportunities for both convenience store retailers and suppliers alike, according to today's webcast, "E-Cigarettes – The Future of Smoking," presented by Convenience Store News and sponsored by NJOY Electronic Cigarettes.

Presenters included Bonnie Herzog, managing director and senior beverage and tobacco analyst at Wells Fargo Securities LLC, and Vito Maurici, senior vice president of sales and distribution at NJOY. CSNews Managing Editor Brian Berk served as moderator.

Herzog kicked off the webcast with a bold prediction for the future of the tobacco industry.

"Consumption of e-cigarettes could surpass consumption of conventional cigarettes within the next decade," she said, adding that this could be good for the market. Although the decline of total cigarette volume has increased in recent years, e-cigarette and other tobacco product sales are on the rise.

While some have dismissed the emergence of e-cigarettes as a fad, responses to Wells Fargo Securities’ quarterly Tobacco Talk surveys show that industry insiders believe they are here to stay. While the e-cigarette market is "currently very fragmented, I expect consolidation over time," Herzog said.

The c-store channel is particularly important, serving as a "key channel" for the e-cigarette market. While online sales are similarly meaningful to the segment, it's likely that future regulation will shift sales to brick-and-mortar retailers – a positive for c-store retailers, considering the larger profit margins on e-cigarettes.

Other notable points about the e-cigarette market, according to Herzog, include:

• E-cigarettes are to tobacco what energy drinks are to the beverage category – profitable, growing in shelf space and gaining consumer acceptance.
   
• The annual growth rate for e-cigarettes is estimated to be 30 percent. The e-cigarette market itself is estimated to already be over $1 billion, and could reach $1.8 billion by the end of 2013.
   
• More than 50 percent of e-cigarette buyers are repeat users, not just trial users, marking "a favorable trend."
   
• Trial and consumption are driven by a perceived lower health risk, lower price points and novelty.
   
• Only Minnesota currently taxes e-cigarettes. Although Herzog believes this is likely to change as e-cigarettes become regulated, it is unlikely that taxes will ever be as onerous as for conventional cigarettes.

During his portion of the webcast, NJOY's Maurici stated that e-cigarettes are "probably the most exciting category in the c-store space in the past two years," during which time people have gone from questioning whether it has a future to accepting it as "a game changer."

While e-cigarettes admittedly differ from conventional cigarettes when it comes to certain attributes such as the feel and weight of the cigarette, the smoking sensation and the aroma, the fact that more than 42 percent of smokers -- or 19.6 million people -- are seeking alternatives makes e-cigarettes an attractive option nonetheless.

Innovation is driving the growth, according to Maurici. As suppliers try to understand the needs of today's adult smoker and how to meet them, e-cigarettes will continue to innovate in a way that traditional cigarettes have not. NJOY, in particular, has the goal of making traditional cigarettes obsolete. "It gives us focus," Maurici said.

Impending regulation from the Food and Drug Administration (FDA) will affect the market, and it is coming soon. While no date has been set yet, the FDA submitted proposed deeming regulations to the Office of Management and Budget in October. Probable regulatory requirements include ingredients lists, facility inspections, reporting requirements, required warning statements and age restrictions, according to Maurici, while bans on special flavors and Internet sales are also possible.

Convenience retailers should also take note that while e-cigarette suppliers such as NJOY don't make health claims regarding their products, there is a public perception that e-cigarettes are better for consumers than traditional cigarettes, further improving their image.

In regards to category management, Maurici advised retailers to place e-cigarettes on the front counter in a non-self-service format, where possible. This increases store employees’ ability to provide product education, something the segment still requires, and has been shown to increase sales. This also creates a visual separation from the tobacco section, something that has the potential for a long-term positive impact.