The Future of Tobacco and Vapor

Will deeming regs be the death of the $1.4 billion vapor channel—and if so, what will that mean for the retail landscape? Tobacco Business talked to industry experts to find out.

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Future of Vape and Tobacco

Are reports of the death of the vapor store channel greatly exaggerated? Some say that virtually all of the country’s 8,000-plus vapor stores will fade away as the FDA’s deeming regulations phase in. In fact, the FDA itself has reportedly predicted the demise of 90 percent of the channel over the next few years—which may actually be for the best, notes Norm Bour, founder of the vapor consulting company VapeMentors.

“I don’t necessarily think that’s all bad, because the reality is that most vapor shops are poorly run, with bad customer service and bad management,” he says. “Also, it’s not a commodity yet; it’s still a pretty unique product. So this is not like a gas station where you need one on every corner.”

Bour’s prediction? “Five years down the road, you’ll walk into a store the size of a Walgreens and that’s where you’ll go for your vice of choice—alcohol, tobacco, CBD, cannabis. Everything will be highly taxed, but the store will be run professionally.”

Evolution, Not Extinction
The big money, however, is somewhere in the middle—betting on a winnowing out of the “opportunists” who got into the game looking for a quick hit, coupled with the need for those staying the course to adapt their businesses to the new reality.

“Realistically, the vapor store channel, which is very fragmented, will continue to consolidate given the regulation and the overhang,” agrees Bonnie Herzog, managing director and tobacco analyst at Wells Fargo. “Having said that, I think the stronger shops will continue to thrive.”

In fact, the retail field is already narrowing as vape shop owners who profited handily by making their own e-liquids come up against a harsh regulatory reality. “Supplying your own liquid was where the big money was being made at retail,” notes John Wiesehan, CEO of Ballantyne Brands, who says the universe of vape shops has already dropped from about 12,000 two years ago to the 8,000 figure commonly cited today. In the wake of deeming regulations that are curtailing imports from China, those store owners are now struggling to source e-liquids.

A Hybrid Solution
Ultimately, the consolidation Herzog and others see ahead spells opportunity for other retail channels that sell vapor products, primarily c-stores and tobacco outlets, as vapor store customers seek alternatives to the suppliers. “If you talk to distributors, they’re already seeing it,” says John Wiesehan. “Retail has transitioned to a hybrid model where selling tobacco, smoke and vape is more prevalent than vape-only stores.”

The upshot? Vape shops that want to survive will move into other categories of merchandise, such as traditional cigarettes or cannabis accessories, such as pipes and CBD. “Some of them are starting to look at other things,” says Bour. “The gateway to [cannabis] is CBD. A fair number of vape shops are carrying CBD, which will make for an easy transition to cannabis if and when the time does come.”

Meanwhile, tobacco outlets and c-stores can capitalize on the vapor store closures by expanding their selection of vapor products. “That’s one of the reasons we started working with Cosmic Fog,” notes John Wiesehan, who noted that the partnership couples Mistic’s strength in the mass-market retail channel with Cosmic Fog’s brand recognition among vapers. “The idea behind our partnership with Cosmic Fog is to give the vape shop consumer a recognizable brand that they’re used to seeing on a mass retailer’s shelves.”

As opposed to broadened assortments, another possibility is that specialty stores will emerge. These may be super vapor shops that emphasize service levels that c-stores and tobacco shops can’t emulate. “Consumer education is important in the vapor category and it’s something the vapor channel has done very well,” says David Bishop, managing partner of Balvor LLC. “At a time when mixing stations may be going away, offering that level of service may be the way those stores can survive.”

Branded shops, akin to a Nike or Apple store, are another possibility, noted Herzog, who pointed out that Philip Morris used iQOS flagship stores to introduce its heat-not-burn product to European consumers. “There is a possibility that there will be freestanding iQOS stores in the U.S.,” she notes. “They look like mini Apple Stores and they’re fascinating in the engagement and education of consumers.”

Of course, the fear is that rather than compromise on what they really want—the products they’ve come to enjoy—those consumers will turn to illicit sources and a black market will emerge. Instructions on mixing your own liquid and rigging up your own device are all over the Internet, so it’s not a huge leap to imagine vapers finding ways to access or reproduce their preferred product or a facsimile of it.  The prospect of regulations fostering a black market or DIY activity that will, if anything, make vaping more risky is one of the many reasons many see the deeming regulations as overly onerous and dangerous to consumers.
But while there may initially be a period of illicit activity, most in the industry say that the legal marketplace will prevail over time.

As Justin Wiesehan notes, “Ultimately, price and convenience will win in this industry just like it does in every other industry. If people can go to a c-store or any other store and get their a product that satisfies them for a reasonable price, they will do that.” TB

– Story by Jennifer Gelfand

This story first appeared in the March/April 2017 issue of Tobacco Business magazine. Members of the tobacco industry are eligible for a complimentary subscription to our magazine. Click here for details.