Is This the Next Looming Threat to E-Cigs?

Quitbit's new lighter hopes to help smokers quit, but it probably won't curb demand for Lorillard (LO), Reynolds (RAI) and Altria's (MO) e-cigarettes.

Jun 15, 2014 at 9:30AM

The people behind Zeo are at it again. This time, instead of using a headband to track sleep, they're using a lighter to track cigarettes.

Two of Zeo's former employees are among the founders of Quitbit, a crowdfunding supported company developing a smart lighter in a bid to tap into the smoking cessation market, a growing and important market already served by nicotine patches made by Pfizer (NYSE:PFE), and e-cigarettes made by Lorillard (NYSE:LO)Reynolds (NYSE:RAI), and Altria (NYSE:MO).

Those major cigarette manufacturers are benefiting from rising popularity for e-cigarettes even as traditional cigarette sales falter. Initially marketed as a way to stop smoking, e-cigarettes are also being used as a cigarette alternative, with users advocating that e-cigarette vapor is less toxic than chemical-laden packs of Pall Mall and Marlboro.

Ligher

Source: Quitbit

Can lighters displace batteries?
It's unclear how much of the smoking cessation market Quitbit's lighter could capture, and whether Quitbit's lighter could erode battery-powered e-cigarette sales among users hoping to kick the habit. The lighter is a unique idea, but its appeal may be somewhat limited. The lighter will track the number of lights, and is programmed to ignore smokers who like to fiddle with their lighter, or who tend to light cigarettes for friends. To eliminate those from the lighter's running count, the lighter won't register lights lasting less than 1.5 seconds, or lights that happen within three minutes of a counted light.

Quitbit's goal is to establish the lighter as a friendly reminder, similar to a weight scale, that can be used to help users reduce how much they smoke. Will users be willing to pay for a lighter that essentially nags them about their habit? It's a fair question; but Quitbit's lighter could find a niche audience of users who would like to limit their smoking, without quitting cold turkey.

E-Cigarettes remain a powerful product
Lorillard was the first of the big three to embrace e-cigarettes, purchasing the e-cigarette brand Blu in 2009. Blu has since become the industry leader, with market share near 50%, and annualized sales north of $200 million.

Blu

Source: Lorillard Blu

Reynolds and Altria, the nation's largest makers of cigarettes, have approached e-cigarettes more cautiously, but are more recently bolstering their own e-cigarette offerings. Altria announced it would spend $110 million in February to add e-cigarette maker Green Smoke to its existing MarkTen brand, and Reynolds launched Vuse, its own e-cigarette brand, last summer.

That has smaller e-cigarette manufacturers and consumer watchdogs nervous. Smaller e-cigarette companies are already finding it tough to compete given that big tobacco's deep pockets provide firepower for marketing and innovation. As Reynolds and Altria gain a foothold, consolidation among the smaller players is likely.

Regulator worries aren't tied to market share, but, instead, to rising popularity, and studies showing that e-cigarette vapor may not be as safe as some early proponents have suggested. There's also a growing concern that the main users of e-cigarettes aren't users trying to quit, but young consumers new to nicotine. If that's true, some anti-smoking advocates think e-cigarettes may pose more harm than good, serving as a gateway to more powerful nicotine products, including traditional cigarettes.

E-cigarettes, as a category, are also facing another threat from vaporizers that deliver a more potent dose of nicotine than traditional e-cigarettes. As vaporizers gain more attention and slow e-cigarette growth, companies like Lorillard are investing more in boosting the potency of e-cigarettes to compete.

Modevape

MODE Vape. Source: facebook.com/ModeVape

During Lorillard's first-quarter earnings conference call, the company reported that vaporizers were one reason behind its quarter-over-quarter e-cigarette sales growth slowing to about 10%. That's got Lorillard ramping R&D to make its e-cigarettes more powerful.

"Blu will be making a series of technical advances in the next 6 months that improve battery strength, vapor production, consumer value and satisfaction. We believe these types of changes will accelerate the acceptance and/or minimize the defection from traditional e-cigs, but we will be watching the vaporizer category carefully," said Lorillard CEO Murray Kessler.

Fool-worthy final thoughts
There are, of course, traditional (and well-tested) methods of quitting smoking, such as Pfizer's Chantix, a smoking cessation drug that posted sales of nearly $650 million last year. In studies, 23% of Chantix patients quit smoking at one year versus just 10% of patients receiving placebo.

E-cigarettes may offer some users an opportunity to quit, too, but more studies will need to be conducted to prove that their risk to new smokers is lower than their benefit to those looking to stop. While Quitbit has a unique device that may help users at least reduce their smoking, there's also the chance of users relegating the lighter to the back of the junk drawer, similar to stashing the weight scale in the back of the closet. After all, what we don't know can't hurt us -- or so the saying goes.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies 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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