New Competitors Enter, Threatening Lorillard's Dominance in the E-cig Sector

Lorillard (NYSE: LO  ) dominates the US' juvenile electronic cigarette, or e-cig, market with its brand of Blu e-cigs. Indeed, during the fourth quarter of last year, Blu's share of the domestic e-cig market reached 50%. However, unfortunately Lorillard has acquired this market dominance at the expense of profitability, as the tobacco company has spent millions on advertising the brand to increase awareness.

Nevertheless, during the past year or so, Lorillard has had a relatively easy time dominating the e-cig market as it remains by far the largest company operating within the national market. The rest of the e-cig market remains highly fragmented, with 250 different brands trying to chase a relatively small domestic market of $1 to $2 billion, which makes it easy for Lorillard, with its multi-billion dollar marketing and development budget, to push smaller peers out of the way. However,Reynolds American (NYSE: RAI  ) and Altria (NYSE: MO  )  will soon roll out their e-cig offerings nationally, and this could stop Lorillard in its tracks.

Quietly building support
While Lorillard has been chasing market share during the past year, both Reynolds American and Altria have been testing their products in single states, identifying consumers' needs and wants before committing themselves to national roll-outs. In particular, Reynolds has developed the VUSE digital vapor cigarette which it has rolled out in Colorado, and VUSE has quickly become consumers' e-cig product of choice. According to Reynolds' management on the fourth-quarter earnings conference call:

It's important to know that in Colorado VUSE has driven substantial growth not only in its own share of market but also in the e-cigarette category as a whole. Since VUSE's introduction into the state in July the e-cigarette category in Colorado has tripled in size driven by strong adult smoker interest in VUSE. In the last month, the brand has been rolled out to the neighboring state of Utah. And I am pleased to report that this expansion is also going very well. Adult smokers appreciate VUSE as distinctive and superior features .

This initial success should be extremely worrying for Lorillard.  VUSE appears to have been very successful, and if it can replicate the success seen in Colorado when Reynolds rolls it out nationally later this year, Lorillard's first-mover advantage could be under threat.

What's more, industry giant Altria will also begin the national roll-out of its e-cig product during the second quarter of this year and just like the product from Reynolds, its initial sales within trial states have been impressive.

Keeping quiet
Altria's e-cig offering comes in the form of the MarkTen brand, which the company rolled out in the middle of last year. Up until recently, Altria has kept quiet about its initial sales, which implies less-than-impressive results. However, Altria's management broke its silence on the fourth-quarter conference call to reveal that the product's initial sales have exceeded expectations.

Additionally, within just seven weeks MarkTen achieved brand leadership by taking a market share of 48% within the trial market. Altria intends to leverage lessons learned from its initial roll-out when it commences national distribution during the second quarter of this year. Altria's existing dominance in the traditional cigarette market will also allow the company to gain distribution and customer awareness faster than its peers.

What's more, Altria recently acquired Green Smoke, an e-vapor business, to boost its e-cig offering. Green Smoke has been manufacturing and marketing high-quality, premium products since 2009, so it knows the market well. The acquisition will bolster Altria's already-strong e-cig development and sales team, and will also expand Altria's product portfolio to address adult smokers' and vapers' different product preferences.

Foolish takeaway
So far Lorillard has dominated the nation's e-cig market as it has lacked any serious competition. However, with both Reynolds American and Altria commencing national roll-outs of their e-cig offerings during the next few months, things could soon get much harder for the country's smallest tobacco company.

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  • Report this Comment On March 18, 2014, at 1:52 PM, Interventizio wrote:

    All Lorillard's marketing expenses will help Altria save some money in the same department: consumers will choose Altria's products. Lo's efforts to have tobacco consumers approach this new way of smoking will translate into Altria becoming the biggest player, assuming Altria makes consumers aware that the producer of Marlboro cigarettes is behind the new ecig products. You can't beat Altria's premium brands with a stick.

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