It was simply too big of a market to ignore. A few months back, I noted Goldman Sachs estimates that electronic cigarettes would become a $1 billion industry in a few years and Altria (NYSE:MO) was the only major tobacco company that did have an electronic loosey to call its own. I thought it was simply too lucrative an opportunity for the Marlboro Man to pass up and yesterday the tobacco giant confirmed it was indeed launching its MarkTen brand of e-cig in August through its NuMark subsidiary.
While the FDA wants to get its fingers into regulating them, saying their ability to help users quit smoking are unproven, I don't think that's the attraction of an e-cig from a smoker's point of view.
The government has caused smokers to be treated like pariahs and has taxed the bejesus out of tobacco such that a pack of smokes these days costs on average $5.51. In some states like New York, the price can run as high as $12 a pack, and as my Foolish colleague Selena Maranjian noted, that means some folks can spend a quarter of their annual income on cigarettes.
In comparison, an e-cig costs about $10 and a refill pack from Njoy, one of the product's first manufacturers, runs about $22, but is equivalent to a carton of cigarettes. That's a significant savings for a smoker, along with the added benefit that you don't get the 4,000 or so chemicals that are found in a regular cigarette, but, more importantly, none of the tar associated with them. It's the tar that kills you.
Designed to look and feel like a real cigarette, e-cigs produce a vapor, not smoke. Though there's a cigarette-like taste for the smoker, there's no cigarette smell.
With tobacco sales falling, all of Altria's major rivals have an e-cig product on the market already or have one coming to market soon. Lorillard (UNKNOWN:LO.DL) is now one of the leading e-cig manufacturers, having gotten into the business last year after acquiring blu eCigs for $135 million. It generated $57 million in sales in the first quarter and has more than 40% market share.
Because President Obama wants to hike cigarette taxes yet again, almost doubling the excise tax paid to $1.95 per pack, it's clear cigarette makers need to find an alternative source of income. Reynolds American (NYSE:RAI), also late to the game, will launch its Vuse brand next month.
Wells Fargo says it's possible e-cig sales could surpass those of regular cigarettes over the next decade, which makes it understandable why Altria wants in. It also explains why the FDA wants to control the market since government coffers at all levels rely heavily on the taxes they levy on tobacco. Anything that diminishes their take causes them to tremble with fear.
Whatever regulation does ultimately get imposed, one big change is that it won't be hammered out in some smoke-filled back room. Rather, it may be one that's filled with vapor.