The Food & Drug Administration is imposing new rules to restrict the sale of electronic cigarette flavors at convenience stores and gas stations. The regulatory agency is cracking down on the popular smoking alternative devices because of skyrocketing teen use.
Under the new regulations, only tobacco, mint, and menthol flavors will be permitted at convenience stores, gas stations, and other locations where the general public can buy them. Fruit and dessert flavors will be relegated to adults-only stores, like vape shops.
A narrow target
As the industry continues to evolve, these new rules could play a major role in how competition unfolds. JUUL Labs has the most to lose. Its oversize thumb drive-like devices have captured 75% of the market, and because the new limits will affect only cartridge-style devices like the JUUL, this company will be hit hardest.
There are basically two different styles of electronic cigarettes, open and closed systems. Open systems are e-cigs, meaning you can refill the e-liquid used to deliver the flavor and nicotine; in closed systems, each prefilled cartridge is discarded after use and replaced with a new pod.
JUUL isn't the only company with cartridge style e-cigs -- most manufacturers offer both types -- but its industry preeminence makes it almost synonymous with the style. Because of JUUL's dominance, tobacco giants could benefit from the change in where e-cigs are sold.
However, the devices don't account for much in terms of revenue. Philip Morris International (NYSE:PM) generates the most, with about 13% of its revenues coming from reduced-risk products, while British American Tobacco (NYSE:BTI) realizes just 3.5% of total revenues from next-generation products, and Altria (NYSE:MO)'s innovative product portfolio contributes a negligible amount to its totals.
Altria announced that it will stop selling flavored e-cigs (other than tobacco, mint, and menthol flavors) in response to the FDA threatening to remove devices from store shelves if manufacturers do not come up with a plan to impede teen use.
Better than a ban
The problem with the FDA threats and device makers' responses is that adults also appreciate a variety of e-cig flavors because they make the transition from traditional to electronic cigarettes easier. Further, because the flavors help to mask the taste of the e-liquids, which users have said is a problem with making the switch, eliminating them could discourage more smokers from using them.
Still, the FDA banned the sale of flavored cigarettes, and it hasn't done that with e-cigs, at least not yet. A general consensus is growing, however, that although e-cig use is not safe, particularly for people who have never smoked, it is a better alternative for someone smoking traditional cigarettes. Making it more difficult to transition to e-cigs only results in more smoking.
A cynic might suggest that might be Altria's ulterior motive, since tobacco is still where it makes its money. However, the reason is more likely a willingness to be obsequious to the FDA ahead of its decision on the marketing application for its IQOS heated tobacco device.
It is expecting a decision by the end of the year, and the explosion of concern surrounding teen e-cig use is not helpful. Since the IQOS will be exclusively marketed in the U.S. under Altria's Marlboro brand, the tobacco company may not mind all that much if its MarkTen and Green Smoke brands end up falling by the wayside.
As successful as the IQOS is in Japan, currently the largest and most important market for the devices, the U.S. has the potential to be the biggest market for the IQOS overall.
The e-cig industry could have faced a much worse fate than having its flavors segregated to adults-only stores, though some analysts say there is no proof adult stores do a better job with age verification than do convenience stores. With the flavors still available for purchase instead of being banned completely, adults seeking to switch to e-cigs can continue doing so while potentially inhibiting a teen's ability to purchase them.
As a result, JUUL could be the biggest loser while Big Tobacco can come out ahead.