Now that the FDA has revealed its proposed rules of engagement for the electronic cigarette market, manufacturers have a clearer idea of how they can proceed -- and with major brands planning for midyear national rollouts, this will be the time when the industry enjoys its greatest period of growth.
Tobacco giant Altria (NYSE:MO) announced during its first-quarter earnings call that it will begin launching its MarkTen brand of e-cigs nationally in June, which is the same timing Reynolds American (NYSE:RAI) declared for the rollout of its Vuse brand, anticipating 15,000 convenience stores will stock its e-cigs by the end of that month. While the explosion of options will be a boon for e-cig and vaping enthusiasts, it represents a bit of a conundrum for Lorillard (NYSE:LO), currently the industry leader but the one with the most to lose.
Having realized earlier on than any of its other tobacco rivals that this was an industry phenomenon, Lorillard purchased the blu eCig brand for $135 million in 2012 and has developed it already into a product that generated $230 million last year, with sales that rose 38% in the fourth quarter alone. Volumes continued rising in the first quarter even though revenues fell due to the introduction of lower-priced rechargeable kits, and they still command a 45% share of the market. Yet as Altria and Reynolds launch their own products nationally, Lorillard may see its slice of the pie narrowed, not to mention profits pinched.
Reynolds says that when it test-marketed its Vuse e-cig in Colorado and Utah it quickly captured market-leading share in both states. Altria similarly found that after bringing its MarkTen brand to market last August, it became the leading e-vapor product in Arizona by the first quarter. It also just completed the acquisition of leading e-vapor business Green Smoke, a divergent path for the industry that promises to eclipse e-cigarette sales.
The difference between e-cigs and e-vapors is that the former is designed to more closely resemble a tobacco cigarette, complete with a burning "ember" tip -- hence the term "cig-alikes" -- while the latter is a bigger, bolder device called a pen or wand that might be more akin to a portable hookah (as a matter of fact, e-hookahs are becoming their own niche too). Both, though, produce a vapor rather than smoke, which may make them a healthier alternative to cigarettes, as a lot of the toxic chemicals in cigarettes come from the smoke. While the new FDA regulations admit as much, they prohibit e-cig makers from touting any health benefits that may be associated with them.
The e-cig regs preclude sales to minors, which is no big leap for the tobacco companies, so there will be little impediment to their growth. While the new rules will now also include cigars, pipe tobacco, and cigarillos -- segments that have been outside the FDA's purview before -- another catalyst for the vaping trend to grow may have been created.
There's a 75-day public comment period on the FDA's proposals, placing them neatly into the time frame the tobacco companies have planned for their national product rollouts. With a clearly defined road to follow, new products on the horizon, and the potential for the overall market to expand in new directions, e-cigarettes, vapors, and other e-device variants suggest the industry is ready to explode higher.
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