LAS VEGAS — Electronic cigarettes burst onto the scene several years ago, followed recently by more advanced products to form a new segment of the tobacco category: vapor. The past few months have seen growth in the vapor segment moderate, but convenience store retailers should not count it out.
This was the overall message during the 2015 NATO Show's "Marking Vapor & E-Cigarettes' Territory" educational session Wednesday morning in Las Vegas.
According to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC, the vapor segment continues to grow albeit moderately. Still, she remains bullish and sees vapor consumption surpassing combustible cigarette consumption in the next decade.
In addition, she predicted vapor profitability could grow by approximately 6.6 percent over the next decade, and margins could approach those of combustible cigarettes by 2018 — what she deemed the tipping year.
Specifically looking at the convenience channel, the vapor segment is growing 8 percent annually with vapor/tanks/mods growing three times faster than e-cigarettes. But at this point, e-cigarettes still dominant the segment space in c-stores 65 percent to 35 percent, Herzog said.
There are some curious trends that could affect the segment. For instance, combustible cigarette volume only declined 3.2 percent in full-year 2014 and posted a 0.5-percent increase in the first quarter of this year, she pointed out. These numbers raise a question: Why are adult tobacco consumers still smoking cigarettes if vapor is growing?
Also notably, the public perception of the vapor segment is diminishing. According to Herzog, the percent of people who believe vapor products and e-cigarettes are just as harmful as combustible cigarettes doubled in 2014 to 15 percent.
The Need for Category Management
There are a number of vapor companies that have entered the space — and exited just as quickly.
Part of the problem is the shear number of brands on the market, Joe Murillo, president and general manager of Nu Mark LLC, told NATO Show attendees. He believes the companies that survive in this fast-changing industry will be the ones that focus on the consumer, innovation and quality.
Steve Sandman, president and chief operating officer of Republic Tobacco, said his company keeps the vapor opportunity in balance with everything else it does in the marketplace, and that is important to retailers. "It somewhat amazes me that retailers and wholesalers are embracing companies they never heard of before," he said. "That could be part of the headwinds."
Similar to other product categories, there are a lot of companies entering the playing field, but the numbers are not sustainable, added Larry Wexler, president and CEO of National Tobacco Co.
This brings up a key point: category management, added Murillo, who stressed that applying traditional category management principles is "essential."
"The products are not right yet, but they are just throwing more and more out there," he said.
Traditional category management is a starting point, Sandman acknowledged, but pricing is also all over the map and consumers are still feeling their way through the segment. He suggested retailers take a break — which he thinks they are doing now — and really look at the products on the market.
Opportunities do exist and there will be an inflection point, Wexler noted. He pointed out that consumers want the product, the technology will change, and the industry will have to take control of the narrative.
There are approximately 42 million adult smokers in the United States and the Centers for Disease Control and Prevention (CDC) has found that 70 percent of them are looking for alternatives, cited Vito Maurici, senior vice president of sales and distribution at NJOY.
Because the segment is in the beginning stages of development with rapid growth, retailers need to use thoughtful category management skills but be open to new things, Maurici advised.
The real concern, he pointed out, is youth access to vapor and electronic cigarettes. New CDC data indicates e-cigarette use among youths has tripled.
"I would argue that everyone in this room needs to focus on that issue," he said. "That issue can bring this industry to its knees."
"There are still six or so states" that do not have minimum age requirements for the purchase of vapor products and e-cigarettes, according to Nu Mark's Murillo.
Speaking of regulation, while the main focus is on what the Food and Drug Administration (FDA) will do and when, the industry should be keeping a closer collective eye on state and local regulations.
"The FDA is just the first part of it. The states are the scary part of this," Maurici said. Case in point is Westminster, Mass., a tiny town that wanted to ban all tobacco sales this past fall. The measure ultimately failed.
The reality at the state and local level is that the situation is not going to get better, said Republic Tobacco's Sandman. For example, if Wisconsin implements a proposed 71-percent levy on vapor products similar to the tax on other tobacco products, consumers will find them less attractive.
"You are not going to see this get better on a state level or a local level regardless of what the FDA does," Sandman said. "It's a huge headwind."
The panelists all agreed, though, that the industry and the consumers need fair and reasonable regulations. Maurici believes consumers' concerns will ease once regulations are in place.
They also agreed the segment will continue to evolve as it moves forward, and the consumer will be a main driver of its future.
"I fall into the camp that this will be a very large segment," said Wexler of National Tobacco. "It is a part of a 100-year evolution."
Though Sandman admitted, "I don't really know what the future of [this segment] holds," he echoed that "it will evolve; the question is at what pace."
To help combat the headwinds, Herzog outlined several calls to the action that Wells Fargo Securities' retail contacts noted in a recent Tobacco Talk survey, First, the FDA needs to implement regulations so the segment has some guidance and leadership. Second, the industry itself must align to push the concept of modified harm. And third, vape shops need to be regulated more closely.
"The industry is at a crossroads given increasing levels of uncertainty, but I still remain bullish," she said.