E-Cigarettes a Wake-Up Call for Big Tobacco


NEW YORK -- While some may have thought they were just a passing fad, electronic cigarettes may not only be here to stay but could surpass traditional cigarettes to become a leading tobacco product among adult consumers.

"While difficult to predict, we think it is possible that consumption of [electronic cigarettes] could outpace traditional cigarettes over the next decade, especially given the rapid pace of innovation and consumers' demand for reduced harm products," said Bonnie Herzog, managing director, beverage, tobacco and consumer research at Wells Fargo Securities LLC. "As [e-cigarettes] continue to evolve and offer an experience that is increasingly similar to smoking a traditional cigarette, we think consumer acceptance and conversion will accelerate."

In addition, she noted a parallel between e-cigarettes and the energy drink category. "We think e-cigs are to tobacco what energy drinks are to the beverage industry. Therefore, we think big tobacco needs to wake up and recognize the potential opportunity of the e-cigarette category and not make the mistakes of the large beverage companies that overlooked the potential of the energy drink category when it was in its nascent stage," Herzog explained.

This is happening already. Most notably, Lorillard Inc. -- the tobacco company behind the Newport brand -- acquired blu cigs for $135 million this spring. "Considering both [Lorillard] and [Reynolds American Inc.] have dipped their toes in the e-cig waters, the next move is [the Altria Group Inc.'s] and we expect it to be big," she added.

On the product end, Herzog point to NJOY's soon-to-be released "next generation" e-cigarette product as a product that "greatly improves upon current e-cigs in the market, offering a look, feel, flavor profile and packaging that more closely resembles a traditional smoking experience." NJOY has approximately 39 percent retail market share and distribution in nearly 30,000 retail outlets; NJOY King will hit stores in the fall.

On the retail end, Herzog explained that retailer feedback from Wells Fargo Securities' "Tobacco Talk" surveys has been positive around electronic cigarettes, primarily due to their healthy margins -- particularly given ongoing margin pressure in the traditional cigarette category for retailers -- and the lack of strict contracts that the retailers perceive as controlling and stifle their ability to run their businesses as they see fit.

There are some unknowns, however. Specifically, the Food and Drug Administration has said it will issue regulations for electronic cigarettes, but more than a year later has still failed to do so, as CSNews Online previously reported.

"As the timing and scope of such regulation is unknown, this uncertainty will likely continue to be an overhang on the e-cigarette category," Herzog said. "Another challenge for the e-cig manufacturers is generating consumer awareness and trial. As e-cigarettes continue to evolve and better address the needs and wants of adult smokers, we expect the technology to keep improving and this should help to drive interest. Although e-cigarette companies may not have the marketing budget of a big tobacco company, they are somewhat less encumbered (for now) in communicating to consumers."