R.J. Reynolds Vapor, a division of British American Tobacco's (NYSEMKT: BTI) Reynolds American subsidiary, recently issued a total recall of its Vibe electronic cigarettes, one of the models of its leading vapor brand Vuse.
While there were no injuries reported from the 10 instances of an overheating battery, which the company warned could cause risk of a fire, Reynolds chose to recall all 2.6 million units it's sold over the years to investigate the problem. Not only should users not use their device, but they also shouldn't try to charge it, either.
The FDA, which has regulatory oversight of e-cigs, said Vuse Solo and Vuse Ciro e-cigs were not affected by the recall because they use different battery components.
The problem for Reynolds, and thus British American Tobacco, is that this comes at an inopportune moment amid other industry concerns. Electronic cigarettes generally are receiving heightened scrutiny from regulatory agencies, and more competing products are coming onto the market. With Philip Morris International (NYSE:PM) just reporting earnings that indicate its next-generation e-cig may not be the protection from the secular decline in traditional cigarettes they thought it was, a product recall that calls into question the safety of the devices doesn't help.
In the tank
The Vuse Vibe is what is known as a closed vapor tank system with a rechargeable battery. The main difference between a closed system and an open e-cigarette is a closed one comes pre-filled with an e-liquid and screws directly onto the e-cig battery; an open system is typically a three-part device including a mouthpiece, a refillable cartridge, and the battery.
Although the Vibe, Solo, and Ciro are all closed systems and use rechargeable lithium batteries, the Vibe's components came from a different third-party contractor. While it is investigating the root cause of the problem, Reynolds says it believes the problem is confined to only a small fraction of Vibe products that were sold and involve a battery manufactured two years ago.
Vuse fading in popularity
When the Vuse was introduced to the market several years ago, it quickly leaped to the forefront of the industry, surpassing Imperial Brands former leader blu eCig as the top-selling brand. However, in the last year or so, Juul Labs' e-cig device has seemingly come from out of nowhere, and JUUL commands nearly 55% share of the e-cig market, a huge gain over the 40% share it had just three months ago. At the same time, Vuse has slipped from a 21% share to 19%.
Philip Morris International is hoping to upend the e-cig market by getting approval to sell its next-gen heat-not-burn iQOS device, possibly with a reduced-risk designation, and British American is also planning on submitting an application to the FDA to market its own HNB product, the iFuse glo.
But the global tobacco giant reported earnings that showed iQOS shipments slowing significantly last quarter compared to the previous quarter, particularly in Japan, where it has been shipping more e-cigs than traditional cigarettes. Philip Morris placed the blame on having captured all the easy converts, and now it has the hard chore of convincing older smokers to make the switch.
That suggests there may very well be severe limits on just how big the electronic cigarette market can grow. While it might be limited to this new technology, a massive product recall because of overheating batteries could make it even more difficult to convince smokers that a battery-operated e-cig is a better alternative than traditional cigarettes.