AWMA Forum Explores Emerging Vapor Trend

ROSEMONT, Ill. - Vaping has become a hot topic and the convenience channel is starting to take notice. But at least one industry analyst is urging c-store players to be cautious.

According to Viv Penninti, president and CEO of InfoRhythm Inc. and C-Metrics, 9.3 percent of the adult population is visiting vape shops these days. The emerging tobacco category trend, which encompasses e-liquids and vapor/tanks/mods (VTMs), is beginning to impact disposable electronic cigarettes and combustible cigarettes -- both key drivers in the convenience channel.

The increased popularity of vaping created buzz during the AWMA C-Metrics Convenience Industry Outlook Forum, held Tuesday at the DoubleTree Hotel Chicago O’Hare in Rosemont. The American Wholesale Marketers Association (AWMA) and InfoRhthym partnered on the forum.

"Vaping and vape shops could be [a] fad, but we don't know," Penninti told Outlook Forum attendees. "What we know right now is that they are pretty hot."

Vape shops, which present a looming threat for the convenience channel, have been popping up in cities across the United States, and vaping lounges are likely to double to 5,000 stores by 2015, he said.

Causing further woe for c-store operators, the total number of dollar stores and tobacco-only outlets is likely to grow by 3 percent. In addition, big-box, small-format stores will continue to grow.

The convenience store revenue impact due to emerging competitive channels will likely touch an estimated 3 percent to 5 percent over the next decade, according to Penninti.

DIFFERING OPINIONS ON VAPOR

Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities, agreed that vape shops are a growing trend to watch.

She remains bullish that vapor consumption (electronic cigarettes and vapor/tanks/mods) could surpass combustible cigarettes in 10 years. The U.S. vapor market today totals $2.5 billion, with e-cigarettes accounting for $1.4 billion and vapors/tanks/mods generating the remaining $1.1 billion, said Herzog, adding that "VTMs are not your father's e-cigarette."

She also predicted vapor products will further penetrate convenience stores over the next six months.

However, Nik Modi, managing director of RBC Capital Markets, cautioned all convenience channel partners to be a little cautious and look at the whole picture before jumping in.

"I think there is a problem in this industry with 'group think,' and it is costing people dollars and cents," he said. Pointing to what he calls the consensus vortex, Modi said the industry is getting "pelted with information," but insiders must make accurate decisions with all that information.

"You are getting too much information and getting it faster," he explained. "You feel the pressure to react and everyone is reacting the same way. The consensus vortex could lead you to make bad business decisions."

He agreed with Penninti that data is important, but said retailers and their partners need to understand the why behind the data. "It is important to look at the big picture before making capital expenditure decisions, before jumping on the bandwagon," he remarked. 

For example, electronic cigarettes are still making headlines even though the numbers show the segment's growth has been declining. He cautioned the same could happen with other vapor products.

"It takes time for a disruptive category to play out," Modi said. Fifteen years ago, e-commerce was set to revolutionize the retail industry, yet today it only makes up 7 percent of all retail.

Disruptive products have a lifecycle, he explained: strong early years, expected exponential rise, disconnect between consumer value proposition and growth, falling expectations, consumer value proposition improves, and finally the disruptive category takes hold.

Right now, e-cigarettes are in the falling expectations phase, he stated.

And just as e-cigarettes take a dip, vapor products are stepping up in popularity, Modi noted, pointing to the decrease of Google searches for electronic cigarette shops and the increase in searches for vape shops. Everyone is reacting to vape shop popularity, but it remains to be seen if that popularity will follow the same storyline as e-cigarettes.

While vape shops and vapor/tanks/mods are creating a lot of buzz right now -- and everyone is always looking for the next big thing -- there are certain factors around the segment that retailers and wholesalers need to keep in mind when deciding how to build the business.

Notably, vaping is very niche and is clustered in a select group of demographics; the technical aspects of the products and the segment are uninviting to non-techies; regulatory uncertainty looms; and there is an SKU proliferation problem among flavors, according to Modi.

"I am just trying to put this into perspective," he said. "The dialogue has been one-sided."