Getting to Know Tobacco’s New Breed

NATIONAL REPORT -- It hasn’t been that long since first-generation electronic cigarettes (a.k.a. “cig-alikes” that look and feel like traditional cigarettes) popped up in the market and now, a new generation of vapor products is growing up fast and furiously — so much so that one industry analyst already referred to members of this new breed as “not your father’s e-cig.”

In fact, the e-cigarette world is more accurately referred to now as the e-vapor world, thanks to these tank/mod/open system/e-juice delivery system vapor products, which are proving to be more cost effective and customizable for consumers than their stick counterparts. The various pieces (sold individually) include tanks, cartomizers, e-liquids, wicks, heads and coils.

Just how big is this world currently?

The estimated size of the total U.S. vapor market today is $2.5 billion, according to Nielsen and Wells Fargo Securities LLC. This pie is currently divided into traditional electronic cigarettes, which represents about $1.4 billion and vapors/tanks/mods (VTMs as Wells Fargo Securities classifies them), which represents about $1.1 billion. This estimate takes into account tracked channels, non-tracked channels and online sales.

For convenience store retailers that are paying attention, the vapor realm has the potential of mirroring a very familiar beverage segment that took the category by storm and is now a staple in the channel.

“We think e-vapor is to tobacco what energy drinks are to beverages,” said Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities. “They are profitable and quickly growing in volume and shelf space at retail, and increasingly gaining consumer acceptance.”

The typical "vaper" is a former smoker who first tried e-cigarettes, but quickly moved to tank-style systems and eventually to mods, “which offer a much stronger battery and a superior vaping experience,” according to Herzog.

Bill Seide, owner of insurance agency William R. Seide Agency, who insures and closely follows the market of e-cigarettes, vaporizers, e-juice and accessories, agrees that vaping and VTMs are clearly "the 'in' side" of the market right now, despite what the major tobacco companies are pushing onto consumers. An educated consumer typically moves beyond the trial of traditional e-cigarettes and into the more pleasurable vaping system fairly quickly, he noted.

The typical vaper is also someone who has done the math, because vaping has proved substantially more affordable than combustible cigarettes and rechargeable e-cigarettes (stick-alikes). A 15-milliliter bottle of e-juice, which costs about $15, is roughly equivalent to five to seven packs of combustible cigarettes, according to Wells Fargo Securities research.

Put another way, the cost to the consumer for the liquid used in a vaping device is one twenty-fifth the cost of a cartridge, based on analysis by the Tobacco Merchants Association. What’s more, the average VTM consumer’s weekly spend is about 30 percent less than the electronic cigarette consumer’s weekly spend.

The expectation is that c-store retailers will continue to embrace e-vapor thanks to consumer trends and the fact that cigarette gross profit margins remain on a downward trend. “E-cigs are probably three times more profitable for retailers than combustible cigs,” Herzog cited.

Another plus for the industry is the fact that e-juice is proving to have some loyalty potential. Recent field work at vape shops revealed that vapers do indeed have a “go-to” juice, even though they experiment with flavors/brands and customizing. This leads Herzog to believe “there could be more potential for brand loyalty than we originally thought, despite the lack of combustible cigarette-style packaging.”

According to Nielsen estimates, blu eCigs (which is being sold to Imperial Tobacco Group in conjunction with Reynolds American Inc.'s acquisition of Lorillard Inc.) remains the category leader in the convenience channel with a 44-percent dollar share. LOGIC is No. 2 with about a 22-percent share, and NJOY is third with an approximate 14-percent share. Trailing behind in fourth and fifth places is Reynolds’ VUSE (2.7 percent) and Altria’s MarkTen (1.5 percent).

For more on the rise of the e-vapor market, check out the fourth-annual Convenience Store News Tobacco Industry Handbook, being published in August.