The Big Picture on Vapor Products

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The Big Picture on Vapor Products

08/19/2015

Amid intense public debate over health benefits and risks, and looming government regulation, more smokers are using electronic cigarettes and other vaporizing devices than ever before.

U.S. convenience store sales of “electronic smoking devices” topped $711.3 million for the 52-week period ended June 14, 2015, an increase of 16.6 percent over the previous year’s sales during the same period, according to Information Resources Inc., a Chicago-based market research firm.

Moreover, the global vapor tobacco industry nearly doubled in size to just over $6 billion from 2013 to 2014, strategic market research provider Euromonitor International reported. With $2.8 billion in 2014 sales, the United States accounted for about half of all global vapor sales, including e-cigarettes and e-liquids, followed by Italy, the United Kingdom, Holland and France.

“Barring a very destructive set of regulations worldwide, Euromonitor believes that the vapor products market could reach about $50 billion by 2030,” said Shane MacGuill, senior tobacco research analyst for Euromonitor. “However, over the short- to medium-term, barring a product revolution, vapor products will remain a fraction of the total tobacco market and cigarettes as a category will continue to dominate.”

Bonnie Herzog, a senior analyst for Wells Fargo Securities LLC, went a step further. While she remains “cautious near-term given slowing category growth and regulatory uncertainty,” she is “bullish long-term, continuing to believe consumption of vapor and other non-combustibles [heat-not-burn] could surpass consumption of combustible cigs in the next decade [by 2025].”

According to Herzog, c-store retailers are excited about regulation and innovation in the category, but concerned about SKU proliferation and over-saturation of vapor products.

“Many retailers conveyed their ‘excitement’ for ultimate regulation of the category, as regulatory clarity should help stabilize the overall vapor market, set product standards and clarify the ‘long-term stance’ on flavors,” Herzog observed in Wells Fargo’s most recent "Tobacco Talk" U.S. Vapor Retailer Survey. “Importantly, regulation should help to improve public perception of the vapor category, which has been deteriorating according to almost 30 percent of our contacts — up from approximately 26 percent in Q4.”

Proposed Regulations Await Approval

In April 2014, the Food and Drug Administration (FDA) released its proposed “deeming rule,” which would extend the agency’s regulatory authority over a variety of tobacco products, including electronic cigarettes, cigars, pipe tobacco and hookah tobacco.

Among other requirements, the regulations — not yet approved — would require that makers of newly deemed tobacco products:

  • Register with the FDA and report product and ingredient listings;
  • Only market new tobacco products after FDA review;
  • Only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and marketing the product will benefit public health as a whole; and
  • Not distribute free samples.

Additionally, there would be minimum age and identification restrictions to prevent sales to underage youth; requirements to include health warnings; and a prohibition on vending machine sales, unless in a facility that never admits youth, for newly deemed tobacco products, according to the FDA.

While the regulations, if implemented, will impact convenience stores, the industry is ready, according to Lyle Beckwith, senior vice president of government relations for NACS, the Association for Convenience & Fuel Retailing.

“C-store operators have been operating under the new guidelines since most states already regulate cigars and other tobacco products as well as e-cigarettes, so formalizing these regulations at the federal level is something NACS’ members and others are prepared for,” Beckwith said. “C-store operators have been selling age-restricted products for years — alcohol, lottery tickets, tobacco — so adding cigars, e-vapor products and those others deemed by FDA may be an easier transition for the c-store channel than other channels.”

Advice for Operators

Whatever the outcome of the proposed regulations, one thing is clear:  “Retailers want to sell age-restricted products responsibly, period,” Beckwith stressed.

To that end, NACS recommended carding for the sale of e-cigarettes over a year ago. In addition, training offered by We Card Program Inc. (www.wecard.org) covers all the states’ requirements to prevent and deny sales to minors of e-cigarettes, cigars and other tobacco and age-restricted products, Beckwith added. The We Card program is a national nonprofit organization serving the nation's retailers of tobacco and other age-restricted products.

Beckwith encourages c-store owners to learn all they can about government regulations and to “fully understand what your responsibilities are in following the regulations” by visiting the FDA’s website (www.fda.gov) and We Card’s site.

“An important thing to know is that FDA and state agencies will be checking compliance for your store,” said Beckwith, who referred to the checks as “stings.”

Consequently, going through training, displaying signage, having appropriate point-of-sale tools, and carding customers are important steps to take in order to ensure compliance, he added. 

With questions remaining about what the future holds, c-store operators questioning whether they should expand their e-cigarette inventory, remain neutral or decrease exposure should consider Beckwith’s advice.

“We believe c-store operators should do what’s right for their business,” he concluded “If expanding the category brings in additional revenue and such products are sold according to government guidelines/laws/regulations — a legal product sold properly — then offering a wide range of choices makes sense.”