Electronic cigarettes, or e-cigs, have been one of the most disruptive technologies to hit the tobacco sector in recent years. The market for them has grown rapidly, and many smokers are now switching to the e-cig over traditional, more harmful cigarettes.

Unsurprisingly, this rise to fame within the smoking community has sent tobacco players such as Altria Group (NYSE:MO)Reynolds American (NYSE:RAI) , and Lorillard (NYSE:LO) into a sort of e-cig arms race.

Over the last few years, it seemed as if Lorillard, with its early national rollout of Blu e-cigs, had gained the first mover advantage. The company has taken nearly 50% of the domestic market. However, it now appears that the company's market share is under threat and losses are rising.

Aggressive marketing 
At present, e-cigs are for the most part unregulated, allowing companies to aggressively market them and claim that they are relatively safe. This approach can't be used with conventional cigarettes, and it's a strategy for growth that Lorillard has been using heavily. 

Lorillard dominates the U.S. juvenile e-cig market with its Blu e-cig brand. During the fourth quarter of last year, Blu's share of the domestic e-cig market reached 48.8%. However, 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. 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 billion to $2 billion. This made it easy for Lorillard, with its multi-billion dollar marketing and development budget, to push smaller peers out of the way.

Competitors have now started to up their game. This is eating away at Lorillard's market share. As promotional activity intensifies, profits have turned into losses.

Rising spending, losing market share
Despite ramping up promotion activity during the first quarter of this year, Lorillard's share of the domestic e-cig market only fell. This is shown in the table below :


Market Share

% Change

March 23, 2013



June 22, 2013



September 21, 2013



December 21, 2013



March 15, 2014



Source: Lorillard first quarter earnings release.

Although Lorillard's market share only fell by a seemingly insignificant 2% during the first quarter, the company's e-cig divisional operating losses jumped to $11 million and sales fell as the company struggled to convert customers to its brand:

Three Months Ended March 31



Net sales



Operating income (loss)



Amortization of SKYCIG brand



Adjusted (Non-GAAP) operating income (loss)



Source: Lorillard first quarter earnings release. Figures in $US millions.

Unfortunately, it seems as if things are only going to get worse for Lorillard. The company's larger peers, Altria and Reynolds American, are beginning their national e-cig rollouts later this year.

Big player enter the market
Altria's e-cig offering comes in the form of the MarkTen brand that is being produced by Altria's Nu Mark subsidiary. According to Altria's management, Nu Mark continues to make excellent progress against its long term goal of achieving e-cig sector leadership. The company is on track to begin its rolling national launch of MarkTen in June. Earlier this month, Nu Mark also completed its acquisition of Green Smoke to add significant e-vapor experience to the company, broadening its product offerings and strengthening its supply chain capabilities .

At present, Nu Mark continues to use its two MarkTen e-cigs test markets to refine the brand's value equation. For example, Nu Mark has experimented with different tools for creating awareness in trials in Arizona, and MarkTen became the leading e-cig brand in the state during the first quarter.

Meanwhile, Reynolds' e-cig offering comes in the form of VUSE digital vapor cigarettes, which are currently market leaders within the company's test market in Colorado. The brand's recent expansion in neighboring Utah is also progressing smoothly.

According to Reynolds:

VUSE is a highly differentiated product that symbolizes the very best of our companies' rich history of innovation," he said. "VUSE is already the market leader in Colorado and importantly, the brand is driving significant category growth in the state. In Utah, early indications are that consumers there also appreciate the brand's distinctive features...We will continue to invest in VUSE in 2014 as we expand the brand into national distribution.

Foolish summary
It would appear that both Altria and Reynolds are already receiving great feedback for their customers in test markets. This could be a sign that Lorillard's current leading position within the e-cig market is about to come under attack.

With this being the case, it could be time for investors to reconsider their exposure to the e-cig sector. It might be worth backing a more powerful competitor like Altria over Lorillard as competition within the sector increases.


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Rupert Hargreaves owns shares of Altria Group. 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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