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E-cigarettes ‘Coming of Age’

Initially an Internet phenomenon, electronic cigarettes have their roots in China and first made their way to the west in the mid-1990s. Although still a niche retail product, exponential growth and innovative marketing have US industry experts and retailers alike bullish about the category’s potential.

“It’s a fairly new category, and that’s what I find so exciting,” said Bonnie Herzog, senior market analyst at Wells Fargo. “I’m making some pretty big predictions. I think it’s possible that consumption of e-cigarettes could surpass that of traditional cigarettes within the next decade.”

Herzog likens e-cigs to energy drinks in terms of growth and profit potential.

“Remember when energy drinks first hit the market?” she continued. “People were saying, ‘Is it a fad, or is it a trend? What’s going on?’ I do think there are some similarities here.”

Like energy drinks a decade ago, e-cigarettes are in their retail infancy. According to Wells Fargo, e-cigarettes currently generate roughly $300 million at retail. But like energy drinks, retail volume is expected to grow exponentially—developing into a $1 billion category and offering gross margins comparable to traditional cigarettes, within a decade.

Some industry insiders, including Tom Kiklas, co-founder and spokesman for the Tobacco Vapor Electronic Cigarette Association (TVECA), expect the $1 billion barrier to be cracked in less than half that time. According to Kiklas, there are currently 1.5 million e-cigarette users. And while that number pales next to the 46 million Americans who consume traditional tobacco products, there is one key difference: e-cigs are growing, while tobacco-based cigarettes are in decline.

“E-cigarettes are a very small category right now,” agreed Herzog. “But because the product’s attributes are so similar to traditional cigarettes, this makes them very attractive to existing smokers. The operative assumption is that the risk is reduced because you’re inhaling vapor. The notion that they offer the same sensation with less harm is an attractive proposition to a large group of consumers.”

Greater US regulation likely

E-cigarette manufacturers are not allowed to make health claims. If they did so, they would be subject to much tighter FDA regulations. But word of mouth is perhaps the most powerful marketing tool ever devised, and many experts predict that individual states will soon be acting to restrict e-cigs—at least as it pertains to young-adult or even teenage consumption.

“There’s no question in my mind that you will see states putting restrictions on them—and rightly so, because they could be considered a gateway [to tobacco usage],” Herzog said. “The consumer right now is the traditional smoker.”

Tom Kiklas of TVECA says

“We have no problem with the taxing of the product, but you have to tax it at the level of harm that it does, and it’s a less harmful product than a traditional tobacco cigarette. So if you’re going to tax it, tax it at that level, and that level would be not very high.”

Now Getting Serious Attention from ‘Big Tobacco’
Once a few brands gained some profile in the marketplace, the larger companies were quick to get involved. Lorillard was the first in when the tobacco giant acquired all assets of an e-cig company in the spring. Wells Fargo predicts other major tobacco companies will likely follow Lorillard’s lead.

Smoking Harm Reduction

On the flip side of being a gateway into the tobacco category, there are consumers who use e-cigarettes as a smoking harm reduction tool.

“I absolutely think that people are using it that way,” noted Herzog. “But maybe they don’t quit. Maybe they enjoy it. I know many smokers who enjoy consuming tobacco, but they  don’t like the risk. I think it’s going to evolve; I think you’re going to see it regulated and taxed. But the consumer right now is the traditional smoker.”