# Big Tobacco's E-cigarette Push Gets A Reality Check



## Alex (31/8/14)

*Big Tobacco's E-Cigarette Push Gets a Reality Check*

source: http://online.wsj.com/articles/big-tobaccos-e-cig-push-gets-a-reality-check-1409078319
By Mike Esterl
Aug. 26, 201

Big Tobacco is finally making its big push into electronic cigarettes. Altria Group Inc. MO +0.40% and Reynolds American Inc. RAI +0.81% together have captured about a quarter of convenience-store sales just weeks into national rollouts of the battery-powered devices.

In a surprising development, though, e-cigarette sales are falling at these traditional retail outlets, reversing three years of rapid-fire growth. That raises questions whether Altria and Reynolds, which already dominate the U.S. tobacco market with a combined 75% market share, are fishing in the right pond with the proper bait. It is unclear at this point if it also calls into question the future of the new "vaping" craze.

About seven in 10 regular cigarettes are sold in convenience stores. That's where Altria, maker of top-selling Marlboro, is distributing its MarkTen e-cigarette, and Reynolds, maker of Camel, is launching its electronic Vuse. That is also where No. 3 tobacco player Lorillard Inc. LO +0.64% is already positioned with the top-selling e-cigarette, Blu. They're all hoping to capture the small but growing number of smokers who are switching to the gadgets, which heat nicotine-laced liquid into vapor and are believed less toxic than cigarettes.

But e-cigarette sales are increasingly shifting to thousands of recently opened "vape shops" where consumers can buy refillable "vaporizers" that can pack more than five times the liquid and battery power of the smaller, sealed "cigalike" versions that Altria and Reynolds are just now rolling out. They also allow consumers to buy hundreds of flavored liquids in bulk and to mix and match hardware from dozens of manufacturers offering their products at lower prices.

Not only are do-it-yourself vaporizers cheaper, but the flavors make it more fun. That threatens the razorblade model pursued by Altria, Reynolds and Lorillard, whose e-cigarettes require consumers to buy replacement cartridges from the same manufacturer. Lorillard has already seen its e-cigarette sales shrink by 23% to $88 million in the first six months of this year.

That is adding to the uncertainty surrounding e-cigarettes, which also face rising regulatory scrutiny. The World Health Organization, a United Nations agency, recommended Tuesday that governments restrict e-cigarette advertising, indoor use and flavors like fruit and candy that appeal to youth. The U.S. Food and Drug Administration proposed curbs in April, including banning sales to those younger than 18 and health-warning labels.

Altria and Reynolds's e-cigarette dollar shares at convenience stores reached 14% and 11%, respectively, for the four weeks ended Aug. 2 after beginning their national rollouts in June, according to Wells Fargo, citing Nielsen store-scanner data. But overall e-cigarette sales at convenience stores shrank 7.5% in the same period, to $41.4 million.

E-cigarette sales also dropped 3.8% to $172 million in the 12 weeks ended Aug. 10 at convenience stores and other traditional retailers like supermarkets and drugstores, according to IRI. Year-to-date sales in such channels are up 12% after soaring roughly 150% in each of the previous two years and about 475% in 2011, the market-research firm estimates.

E-cigarette sales are increasingly shifting from convenience stores to recently opened 'vape shops.' Associated Press There are no reliable sales estimates for vape shops, which typically don't carry cigalikes. But the Smoke-Free Alternatives Trade Association, an industry group, estimates the number of vape shops has more than tripled to 35,000 in the past year.

That includes upstarts like Avail Vapor LLC, which makes more than 70 e-liquid flavors and opened its first vape shop a year ago in Richmond, Va., where Altria has its headquarters. Avail now has 13 stores spread across Virginia, Maryland and North Carolina, with plans to open three or four dozen more stores this year, said co-founder Cole Smith. It doesn't plan to carry Altria, Reynolds or Lorillard products.

The explosion of such specialty shops and Internet sales continues to fuel e-cigarette growth, according to industry observers. Wells Fargo tobacco analyst Bonnie Herzog estimates the overall e-cigarette market has swollen to $2.5 billion, up from about $1.7 billion last year, with vaporizers growing twice as fast as cigalikes.
Altria and Reynolds play down the threat of vaporizers, and both note they are still in the early days of their rollouts of MarkTen and Vuse, which have reached about 60,000 and 20,000 stores, respectively.

Lorillard's Blu, by contrast, is already sold in more than 150,000 stores. Altria and Reynolds plan in the coming months to increasingly spread e-cigarettes across their vast distribution networks, which span more than 300,000 stores.

In magazine advertisements appearing in GQ, Vanity Fair and elsewhere, Altria also trumpets MarkTen's "FourDraw" technology, saying the four holes in the mouthpiece produce a fuller vapor draw than other e-cigarettes on the market that feature a single opening. "We like our chances very much," said Joe Murillo, president of Nu Mark LLC, Altria's smokeless unit.

Reynolds Chief Executive Susan Cameron has called its Vuse a "game-changer." The company is airing television ads in four states touting the gadget's built-in microprocessor, which it says ensures a "perfect puff."

The two tobacco heavyweights also have much deeper pockets than their e-cigarette rivals. Michael Lavery, a tobacco analyst at CLSA, has estimated Altria and Reynolds are each spending more than $150 million this year in rolling out MarkTen and Vuse.

Altria and Reynolds could find an ally in the FDA, which has proposed requiring e-cigarette manufacturers to submit their products to the agency for approval. Such reviews could cost companies hundreds of thousands or millions of dollars, potentially driving smaller ones out of business.

"More regulation broadly speaking works to Big Tobacco's benefit. Right now there are no barriers to entry," said Ms. Herzog, the Wells Fargo analyst, who predicts e-cigarette sales could surpass traditional cigarette sales in the next decade.

But some industry watchers have become more skeptical about the growth prospects of e-cigarettes. Although half of the country's more than 40 million smokers have now tried an e-cigarette at least once, according to estimates, the overwhelming majority still continue to light up. That suggests most haven't found the current versions of e-cigarettes satisfying enough to switch over.

"The jury is still out," in terms of how big the e-cigarette industry can become, said Mr. Lavery, the CLSA analyst. A lot depends on how much technology improves in the coming years, he added.

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## Silver (31/8/14)

Very interesting
Thanks for sharing @Alex 

Will indeed be a pity if regulations make the e-cigs market only for the big boys
Will lead to less choice for us and less innovation

Reactions: Agree 1 | Thanks 1


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## rogue zombie (31/8/14)

"Jury out on how big the ecig market can become"

At the rate ecigs develop, becoming ever more competent, I think more and more smokers will stick to ecigs because they actually satisfy.

I had a laugh the other day looking at the first couple of pages of the "what's in your hand thread." Seeing all the current Reo and high end Mod users discussing their earlier ecigs. And this was like a year ago only. 

The tech improves so rapidly, it's just going to blow the ecig market up. 




Sent via a NASA satellite which gathers my thoughts and relays them to the world

Reactions: Like 1 | Agree 2


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