E-Cigarettes: The End of Smoking?

E-cigarettes have the potential to satisfy big tobacco, anti-tobacco activists, consumers, and retailers all at the same time. Can e-cigs overtake traditional cigarettes?

Feb 22, 2014 at 8:30AM

With the U.S. smoking rate in a nosedive, the nation's three largest tobacco companies -- Altria (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO) -- face an existential threat. A committed cadre of anti-tobacco activists is determined to drop the smoking rate all the way to zero. By acting on a number of fronts that include excise tax hikes, laws that ban smoking in public places, and legal victories for anti-tobacco groups, activists have helped lower the U.S. smoking rate from 32% in the 1980s to 18.1% in 2012. However, new measures must be found and implemented in order to drop the rate to zero.

Americans have a strong sense of their right to do to themselves what they please, even when it involves activities they would be better off avoiding. Just look at the push for marijuana legalization, which is starting to sweep across the nation on a state-by-state basis. Except in certain medical contexts, Americans would be better off not smoking marijuana. However, public sentiment is starting to sway in favor of individual rights. This is all the more evidence that anti-tobacco activists need to find a solution other than the heavy hand of government to put an end to the smoking epidemic.

E-cigarettes: Less harmful, less expensive, more profitable
Electronic cigarettes, or e-cigarettes, may be the answer to everyone's problems. Altria, Reynolds American, and Lorillard are each making a push into the nascent category, while even do-gooder health advocates who are waging open war on the tobacco companies have opened up to the possibility of e-cigarettes replacing traditional cigarettes.

Jonathan Foulds, a tobacco addiction researcher at Penn State, says "e-cigarettes are at least 90% less harmful" than traditional cigarettes. He notes that most of the chemicals that smokers inhale are the result of burning tobacco. E-cigarettes neither contain tobacco nor produce smoke. Instead, users inhale vaporized nicotine; the vapor contains significantly fewer harmful chemicals than cigarette smoke.

Foulds concludes that "any cigarette replaced by [an e-cigarette] is probably a step in the right direction."

Andy Schamisso, a former cigarette smoker and the proprietor of Inko's White Tea, is a perfect example of how nicotine addicts can quit smoking cigarettes and start using less-harmful e-cigarettes. Schamisso used to smoke a pack of cigarettes every day, but he completely switched to the NJOY e-cigarette in one week. He likes NJOY because it looks like a real cigarette and because it "[gives] me an appropriate smoky, semi-harsh hit at the back of my throat" that is similar to that of a real cigarette.

Schamisso says NJOY was ideal for helping him quit smoking because it offered him a nicotine hit whenever he needed it. "A key aspect for me was the security I felt having it in my pocket, knowing if something -- stress or whatever -- was hitting me, I could reach in my pocket, pull it out, and have a drag," he says.

In addition, Schamisso spends far less money on e-cigarettes than he used to spend on traditional cigarettes. He used to spend $70 per week to smoke a pack of cigarettes each day, but he now spends about $15 per week on e-cigarettes.

Smokers are not the only ones with a strong financial incentive to switch to e-cigarettes. John Przybylo, owner of e-cigarette retailer Vapor Haus, says retail margins on e-cigarette refills typically run as high as 50%. He says it "costs about $4.50 to make and label a quality bottle of 10ml E-liquid. We sell it for $8.95." On the other hand, gross profit for a convenience store on a pack of cigarettes is typically less than 16%. As a result, retailers may give e-cigarettes significantly more shelf space in the coming years.

That would be good news for Lorillard, which owns Blu -- the leading e-cigarette brand. Reynolds American is introducing its Vuse e-cigarette to a wider market after tests in Colorado and Utah proved successful. Altria recently acquired Green Smoke, a manufacturer of premium e-cigarettes, and hopes to mount a significant challenge to Blu.

Some experts believe e-cigarettes will become a crucial part of tobacco companies' revenue in the coming years. Wells Fargo analyst Bonnie Herzog says, "We have increased conviction that consumption of e-cigs could surpass consumption of conventional cigs within the next decade."

Foolish takeaway
If e-cigarettes gain widespread popularity and lead to the decline of cigarette smoking, it could be a win for all parties involved; tobacco companies would have a new and growing industry to dominate, consumers would have an attractive alternative to cigarettes, and anti-tobacco activists may eventually rejoice as they see zero cigarette smokers. Therefore, investors in Altria, Reynolds American, and Lorillard should closely monitor each company's progress in the e-cigarette market -- it could soon become the most important product category in the tobacco industry.

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Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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