Category attracts traditional smokers

The electronic cigarette category is booming. Smokers continue to migrate to the devices, and improved technology and lower price points are fueling sales. Manufacturers say that customized tobacco flavors will propel sales going forward.

(For the full category review, including sales data, click here.)

Dollar sales of electronic cigarettes in the drug store channel were up 81% to $104.4 million for the 52-week period ended Dec. 1, 2013, according to IRI data. Sales increases in the convenience store channel for a comparable sales period spiked more than 90%, according to Nielsen data provided by Wells Fargo.

Wells Fargo senior analyst Bonnie Herzog said retail, including online, sales of e-cigarettes hit the $2 billion mark in 2013. She expects the category to eclipse $10 billion in retail sales by 2017. In fact, in an earlier report, Wells Fargo analysts said “consumption of e-cigarettes could surpass consumption of conventional cigarettes within the next decade.”

“There are [more than] 40 million traditional cigarette smokers in the [United States], resulting in $90 billion in cigarette sales annually,” said Kevin Frija, CEO of Vapor Corp. “The electronic cigarette business has only tapped into [1%] of that market.”

Frija said users typically enter the category through disposable e-cigarettes, which retail for around $4. Once they become users, they migrate to rechargeable e-cigarettes, which retail for between $10 and $30, and use refill cartridges, which retail for around $3. Increased battery life and performance has allowed the price/performance ratio to keep improving and attracting more users to the category.

Herzog calls it a “razor/ razorblade model, in which less margin is made on starter kits and rechargeable e-cigarettes , and more margin on refill cartridges or cartomizers (e.g., disposable cartridges with built-in atomizers).” Retailers like the repeat business generated by the cartomizers.

The trend has been bringing more margin to the tobacco category. “Our analysis indicates that e-cigarettes could be margin-enhancing to the combined category in the near term and by 2017,” Herzog said. “We predict [e-cigarette] margins could approach the mid-40% range, higher than current conventional [cigarette] margins of approximately 40%.”

The next wave of “signature blends” that can be customized to consumer tastes will be the trend to watch. Frija said that over time, e-cigarette users evolve to higher-end “vaporizers” that look “more like a Mont Blanc pen than a cigarette.” These models retail for between $30 and $50 and use liquid.

“The electronic cigarette category is evolving, and so has the smoker. More and more smokers have already tried an electronic cigarette and have moved from disposables to rechargeable [e-cigarettes]. The consumers eventually upgrade to a personalized vaping experience with the freedom to use their own e-liquid. This new trend of personal vaporizers and personalized tailor-made smoking experiences will continue to drive the category,” said Ditmar Berberich, VP marketing for International Vapor Group.

Herzog sees huge upside for the category, particularly since the “Big 3” tobacco manufacturers have entered the category. Lorillard, the No. 3 U.S. tobacco company, was the first big tobacco company to enter the market with its purchase of the blu brand. Lorillard’s heavy spend on blu’s distribution and marketing paid off — the brand has become the dominant player in the category.

Reynolds American followed with the July launch of Vuse e-cigarettes, and tobacco category-leader Altria Group recently launched its own MarkTen e-cigarette brand. Phillip Morris International management sees huge profit potential in the segment, and has the budget and expertise to exponentially expand the category.

“We believe the [e-cigarette] battleground is heating up, especially as the ‘Big 3’ tobacco manufacturers push further into the category,” Herzog said in a June 2013 report. She said the Big 3’s “treasure troves of cash, distribution power at retail and superior brand building capabilities” would accelerate category growth. But, the playing field is still open to the smaller brands that built the category, she said.

Companies continue to refine their offerings. The blu brand recently introduced a new on-the-go rechargeable kit. “The kit offers on-the-go recharging, superior battery performance and flavor options — with the added convenience of a slimmer profile for easier carrying,” said blu eCigs president Jim Raporte. “It’s off to a great start.”

Vapor Corp. recently re-launched its flagship Krave brand.

Manufacturers believe retail could grab share from online sales as the category matures. “Blu eCigs works with retailers [that want to] establish a ‘home’ for our products that achieves the highest level of visibility for the brand, as well as the retailers who are looking to consolidate the category,” Raporte said. “As this industry continues its growth, it is paramount that we educate consumers about electronic cigarettes in a responsible way.”

Vapor Corp. has developed an in-store kiosk concept modeled on duty-free shops and “authorized dealer” cell phone shops. “Consumer education is key to selling the category, but touch screens can accomplish 90% of the consumer education function,” he said.

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