Judging by the stock market reaction to the Food and Drug Administration (FDA) cracking down on electronic cigarettes, you'd think this was a good thing for tobacco companies. Shares of Altria (MO -1.92%), British American Tobacco (BTI -2.20%), and Philip Morris International (PM -0.11%) all jumped on what analysts described as a "clear positive" signal from the agency.
Yet as Inigo Montoya says in a famous scene from The Princess Bride: "You keep using that word. I do not think it means what you think it means."
The crackdown is not a good indicator from the regulatory agency, certainly not if the major cigarette companies are looking for e-cigs to lead them to their next stage of growth.
A sweeping assault on teenage e-cigarette use
The FDA has been warning for some time that it's concerned about teenage use of electronic cigarettes. Earlier this year, the agency admonished leading e-cigarette manufacturer Juul Labs over teenagers using its device. An enforcement wave saw 40 retailers, including national chains like 7-Eleven and Cumberland Farms, receive warnings for allowing underage individuals to buy these products.
Juul, which commands 55% of the e-cig market, was asked to turn over documents about the design, marketing, and ingredients found in its product, as the FDA sought to understand why teenagers liked its device so much.
In the latest broadside against the industry, it wasn't just Juul that was pointedly attacked. Altria, British American, Imperial Brands, and Japan Tobacco were also told the FDA "won't tolerate a whole generation of young people becoming addicted to nicotine as a trade-off for enabling adults to have unfettered access to these same products."
The FDA noted the brands of these five companies -- British American's Vuse, Imperial's Blu, JUUL, Altria's MarkTen XL, and Logic from Japan Tobacco -- comprise 97% of the U.S. e-cig market. The FDA wants the companies to submit, within 60 days, detailed plans on how they're going to prevent teens from using their products.
The agency also issued 1,300 warning letters and civil monetary penalties to retailers that have allowed teens to purchase electronic cigarettes, which the FDA declared was "the largest coordinated enforcement effort in the FDA's history."
A stacked deck?
Earlier this year, Juul Labs committed to spending $30 million over three years to finance research, education programs, and community outreach efforts to stop teens from using its products, while also supporting initiatives to raise the tobacco-buying age to 21. While it's only been a few months, it's obviously going to be a hard goal to achieve.
The problem for the manufacturers is that the solution is really out of their hands. When the devices are on a retailer's premises, the manufacturer has no control over who buys the product. Go to any manufacturer's website and they'll clearly tell you they don't want you buying their products if you're under the legal age. It's up to the retailer to ensure compliance, but if it doesn't, the manufacturer might still be held liable.
Which is why it's not good news for manufacturers that the FDA is threatening them. The agency has warned that if manufacturers don't do more to prevent underage use, the FDA will fall on these companies with its full weight, perhaps even pulling their products from store shelves.
An ill wind that blows no one good
The FDA's pronouncement was apparently seen by some as a chance for rivals to gain on industry leader Juul, but such thinking clearly ignores the danger that potentially, no one's product will be allowed on the market. Certainly a company that owns half the market has the most to lose from such actions, but all the tobacco companies risk losing, since the electronic cigarette market is their sole hope at the moment for future growth.
Traditional cigarette sales continue their decades-long decline, and only price increases have kept tobacco companies' sales growing. E-cigs promise a real opportunity to reverse that trend, one that will be crushed if the FDA carries out its broad-based threats.