Do e-Cigarettes Threaten the Future of Big Tobacco Companies?

Can e-cigarettes change the face of the big tobacco companies?

Mar 12, 2014 at 1:52PM

E-cigs have become much more than a tobacco-smoking substitute. Vaping (the term for inhaling vapor from an e-cigarette device) has inspired a myriad of flavor variations. Taste sensations such as Crème Brûlée and Grandma's Apple Pie can now be neatly delivered in an e-cigarette. In fact, entire cottage industries have developed around serving up palate pleasers with mouth-watering names such as Peach Schnapps and Vivid Vanilla.

The e-cigarette trend may have started as a way for smokers to get a more benign nicotine fix, but it is developing into a completely different experience all its own, spawning its own loyal culture.

Currently estimated at $1.2 billion a year, could vaping threaten the way the $89 billion tobacco industry does business? Big tobacco companies seem to think so. Altria (NYSE:MO), Lorillard (NYSE:LO), Reynolds American (NYSE:RAI), and Philip Morris International (NYSE:PM) have all jumped onto the e-cigarette bandwagon with acquisitions and new product development. To be sure, vaping has caught their attention.

Social initiatives to limit smoking have made some impact on tobacco sales, but it is entirely possible that the e-cig trend may ultimately undermine traditional smoking much more significantly.

Here are two reasons this may turn out to be the case.



1. E-cigarettes offer an elevated experience

Where e-cigs may have once represented a way for would-be tobacco users to surreptitiously get a fix indoors or wean themselves from a nicotine addiction, many vapers report they like e-cigs better. For them, vaping offers an enjoyable experience without an offensive smell and a heavy social stigma.

What's more, flavor vaping is entirely nicotine-optional. Users can choose to indulge in vaporized flavors and aromas without the addictive chemical. Flavor vaping takes the physical sensations typically associated with smoking, removes most of the bad stuff, and rewards the user with a tasty experience.

These users may not just be lapsed smokers; they may have converted to e-cigarettes for good.

2. Vaping has taken a strong hold on youth

Much to the consternation of parents and communities, e-cigs have become a distinct feature in the culture of high school – and even middle school – children.

Estimates vary, but the CDC reports that as many as 10% of high school students tried e-cigarettes last year. What's more, researchers fear the numbers may be even higher if flavor vaping is included. Kids who choose non-nicotine vaping – available in flavors like bubble gum and cotton candy – tend to dismiss the term "e-cigarette" in favor of "e-hookah" or "e-pen." These users may have been missed in the last head count, as even the CDC concedes it may not have asked the right question.

While many have raised alarms that young e-cigarette users have an increased likelihood to go on to develop a tobacco smoking habit, it is just too early in the life of this product to see these types of trends.

A more likely scenario – and perhaps the one feared most by big tobacco – is that e-cigarettes may actually be cannibalizing the next generation of smokers. According to the 2012 Surgeon General's Report, 9 out of 10 adult tobacco smokers began by age 18 and nearly all by age 25. Following this, young people who miss the early tobacco habit may never become traditional smokers. This means the bottom could potentially fall out of the way tobacco companies have traditionally ensured a steady stream of customers.

No wonder the big tobacco companies want a piece of the e-cigarette industry.

How sure is the future?

Safety, continued adoption by consumers, and the future of regulation will all affect the success of the vaping revolution.

Currently, the American Cancer Society has declined to take a stand on whether electronic cigarettes should be banned in the U.S. Nevertheless, they acknowledge that the FDA has found some potential carcinogenic agents in e-cigs and that it is just too early to understand the long-term effects of use.

Municipalities and parent groups are calling for restrictions on vaping, and the FDA would like to regulate e-cigarettes as drug-delivery devices. These initiatives are young, and their outcome will surely affect the future success of e-cigarettes in the United States. As of yet, much of the data cited is anecdotal, and opposition to use has not been highly effective to date.

In the end, what may have been a defensive move on the part of the tobacco companies to become e-cigarette players may be what keeps vaping viable in the U.S. Social opposition to e-cigs may be mounting, but they now have one of the most formidable lobbying machines in the U.S. by their side when it comes time to deal with regulators. That is mighty strong support, indeed.

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Beth Nichols has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. 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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