Herzog: Big Three Will Win the Vapor War

NEW YORK -- Wells Fargo Securities LLC has expanded its prediction that electronic cigarette consumption will outpace combustible cigarette consumption over the next decade to now include all vapor products.

In addition, Bonnie Herzog, managing director of tobacco, beverage and consumer research at Wells Fargo Securities, stated that the Big Three tobacco companies are well-positioned to win the vapor war, as they will hold approximately 80-percent share of the combustible cigarette and vapor revenue pool combined within 10 years.

The Altria Group Inc., Reynolds American Inc. and Lorillard Inc. will command roughly 75 percent of the combined operating profit pool in that timeframe, Herzog added.

"We believe the Big Three will retain their leading share of the combined revenue and profit pools with expanded margins through a combination of organic growth and acquisitions," she explained in a research note released Monday.

However, Herzog noted that Altria's combined volume share in 2023 will be 32 percent, down from 47 percent currently.

"Further, we have been impressed with Mistic and NJOY's early recognition of the potential of the vapors-tanks-mods (VTMs) market, and we believe the Big Three will be forced to follow or may already be planning VTMs of their own," she said. For example, Lorillard has five major technological innovations rolling out this year around its blu eCigs brand.

She also said Altria has the most to lose and Lorillard -- or a combined Lorillard-RAI -- has the most to gain if rumors of a merger between the two someday become a reality.

According to Herzog, VTMs may shrink the revenue pool more than e-cigarettes, but the combined profit pool growth rate of combustible cigarettes and vapor products is robust -- fueled by the razor/razor blade model, attractive liquid margins and higher combustible cigarette margins approaching smokeless margins.