The vapor category is still solid with tobacco retailers—but with some new twists. As competition heats up in the premium cigarette segment with heightened promotional activity, the e-cigarette/vapor world is, by contrast, thinner on hype—but still with a positive overarching sentiment, according to Wells Fargo Securities’ latest Tobacco Talk retailer survey.
Representing roughly 25,000 U.S. retail locations, tobacco retailers and wholesaler contacts voiced their opinions on a number of industry topics in the second of quarter 2017. Here are the key insights related to vapor products and e-cigarettes:
Sales and sentiment in the vapor category is improving.
This is thanks to the fact that innovation is being driven by the top-tier players and also that the uncertainty surrounding the U.S. Food and Drug Administration’s (FDA) deeming regulations is subsiding, according to Wells Fargo research.
After strong growth in 2015, last year showed declines and flat activity in the vapor category. But it was up 6.9 percent in 2017’s first quarter and 4.1 percent in the second quarter, the research showed.
One retailer commented that his stores were witnessing “strong sales” and, as a side note, added that he hopes the “government stays away from enforcing regulations.”
“I think the category has flattened out but [is] still increasingly slowly,” reported another surveyed retailer.
“It’s better but with [fewer] SKUs,” stated another.
The category is favoring major manufacturers; a narrower playing field is expected to improve quality and category management.
On the negative side, one retailer told Wells Fargo that they were “looking to get out of the e-liquid category,” and another indicated that they had “made changes late last year to liquidate all products that are not from a major tobacco company.” Others said “no new brands,” and “not expanding to independent companies, only Big Tobacco.”
On the positive side, one retailer who has streamlined their business says, “The category still shows significant growth. We continue to keep inventory tight and make sure items turn.” He adds that he is “getting rid of slow sellers quickly.”
This is expected to contribute to improved growth and management in the category for the remainder of the year and moving forward.
Product quality is reportedly rising, with Vuse and MarkTen increasingly being named as the main contenders.
“The overall business is OK,” stated one retailer. “Vuse is performing well, and the others are a hit-and-miss.”
The way Wells Fargo analyzes it, retailers remain bullish on Vuse and MarkTen XL, while Logic is on the upswing given new product introductions. Juul is reportedly doing well where it’s available. Blu is “not keeping up,” and Fin is having continuing struggles, according to the securities company.
The revenue mix of e-cigs vs. VTMs/personal vaporizers shifts moderately toward rechargeables and away from VTMs.
Wells Fargo puts this number at around 33 percent, up from 27 percent in the first quarter of 2017 and up from 22 percent in the fourth quarter of 2016. Meanwhile, sales of VTMs (or personal systems) have shrunk considerably, from 15 percent of sales in the fourth quarter of 2016 to 1 percent in the second quarter of 2017.
Retailers remain concerned most about vapor manufacturer return policies.
Despite that the vapor players are shrinking and streamlining their businesses, the industry is still at the beginning stage of ensuring retailers don’t get burned. Thus, retailers told Wells Fargo they are most concerned about vapor manufacturers not taking back returns. More than 68 percent of those surveyed said they were “very concerned” or “concerned” about this vapor business issue—the top concern of the survey.
The next biggest concern is the increased taxation imposed on the category—more than 57 percent named this in the “very concerned” or “concerned” columns.
In the “somewhat concerned” pile, more than 31 percent of survey respondents named the impact of the FDA’s deeming regulations, so it is perhaps not as immediately pressing a business issue as previously thought. Tied to this in the “not concerned” category, more than 40 percent are not worried about e-cigarette manufacturers going out of business due to the deeming regulations. Nearly 40 percent are also not worried about traffic being lost to vape shops.
Interestingly, some retailers view the deeming regulations as a benefit to business, believing it will propel consolidation and strict retail guidelines that may result in a higher percentage of customers coming back to the category.
Retailers are most excited about the prospect of the reduced-risk industry.
Altria’s iQOS product was mentioned by name by several respondents as an exciting introduction. One mentioned it as a positive for the industry but also expressed concern for non-Big-Tobacco innovation.
“I like to hear that RAI and Altria are working on new innovations,” he said. “My concern is that you hear little from the smaller, alternative players much anymore. We need them to keep the big dogs honest.”
Wells Fargo reported that retailers are “broadly optimistic about RRPs (reduced-risk products) to the tune of about 70 percent in favor, with a third planning to allocate additional shelf space to Altria for iQOS when it’s commercially available, which the company believes will be as early as late this year or early next year. TB
– Story by Renée M. Covino
This story first appeared in the September/October 2017 issue of Tobacco Business magazine. Members of the tobacco industry are eligible for a complimentary subscription to our magazine. Click here for details.