Vapor Category Continues to Grow in C-stores

NEW YORK — A new Wells Fargo Securities LLC survey shows that sales of vapor products are beginning to take over sales of combustible cigarettes in convenience stores.

According to the 2014 third-quarter Tobacco Talk survey, vapor category growth in c-stores remains robust, posting a 21-percent increase in the quarter. This increase is "flattish" compared to the second quarter of this year.

This is most likely driven by the heavily promoted national rollouts of R.J. Reynolds Vapor Co.'s VUSE brand and Nu Mark's MarkTen brand, which is driving unit sales momentum but not necessarily accelerating dollar sales, said Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities.

The survey included tobacco retailer and wholesaler contacts representing 20,000-plus convenience stores in the United States.

As vapor category growth remains robust, electronic cigarette growth continues to decelerate, the survey also found. Respondents estimate a 7-percent growth rate for e-cigarettes in the third quarter, representing a 12-percent drop from the second quarter and a 25-percent drop from the third quarter of 2013.

Looking at specific brands, Lorillard Inc.'s blu continues to cede share to VUSE and MarkTen. This shift is expected to continue given heightened activity behind the VUSE and MarkTen brands. LOGIC's momentum continues to accelerate, Herzog reported.

"Despite continued e-cigarette deceleration, we are encouraged by the continued overall growth in vapor, given our contacts believe 4.2 percent of combustible cigarette volume is being displaced into the vapor category, up from 3.4 percent in the first quarter," she noted. "Importantly, our contacts estimate that repeat vapor purchases have accelerated to 57 percent in the third quarter, up from 41 percent in the second quarter."

She added that Wells Fargo Securities believes Big Tobacco will play a pivotal role in shaping the non-combustible nicotine industry.

When asked about the new players on the national scene, respondents cited robust trial for VUSE and MarkTen. However, this is not surprising as the trial is largely being driven by "free" product coupons and other promotional activity, Herzog pointed out.

"Our contacts noted better, more localized (store-level) consumer awareness/engagement on VUSE and several noted VUSE is taking share. Though MarkTen has garnered mixed initial response despite its higher margin for retailers, VUSE has performed better than expectations," she said. "Together, these brands are expected to comprise 36 percent of c-stores' vapor revenue mix in six months, up from 29 percent today."

Survey respondents offered mixed feedback on vapor/tanks/mods (VTMs) — specifically new launches from NJOY and FIN.

According to Herzog, retailers seem a bit disenchanted with NJOY given its challenging e-cigarette performance. However, retailers were complimentary of NJOY's new packaging and one noted that NJOY has a "good concept and taste" with its new e-liquid lineup, despite other feedback suggesting that "people think it is too expensive."