Back at the end of November, the world's most iconic tobacco company, Philip Morris (NYSE:PM) announced that it was going to produce its own electronic cigarette. This makes Philip Morris the last of the international tobacco companies to move into this market, as peers Imperial Tobacco (NASDAQOTH:ITYBF) and British American Tobacco have already launched, or are in the process of launching, their own e-cig products. Is this move by Philip Morris coming too late?
There is no doubt that the market for e-cig products is growing rapidly. While data for the worldwide e-cig market is vague at present, the United States domestic e-cig market is expected to be worth a total of $1.7 billion this year. This is double its value in 2012.
However, market currents within the US may indicate what will likely happen in the international market. These emerging trends suggest that the rapidly growing e-cig market is already showing some signs of maturing.
According to this Forbes article, while there are over 300 e-cig companies, the top three have 85% of the market. This is set to change as the big fish like Altria, Reynolds American, British American, and Imperial Tobacco all enter the fray during the next few months. It does not take a genius to figure out that with all of these competitors in the market, the competition is going to become cutthroat.
It appears that Lorillard (NYSE:LO), one of the first companies within the US to roll-out its e-cig product, is already grappling with fierce headwinds.
For example, looking through the respective earnings reports we can see that Lorillard's e-cig gross margin has declined from 37% in the first quarter of this year to 32% during the second quarter, and finally to 24% during the third quarter.
What's more, Lorillard's operating income and operating margin from its e-cig segment have declined from $7 million and 12%, respectively, in the first quarter of this year to zero during the third quarter. That's right, Lorillard made no profit from its e-cig sales in the third quarter.
These signs all show that Lorillard is pushing hard to sell its products and aggressively compete with peers. Far from a short term trend, it seems as if higher marketing spending will become the norm as more companies enter the e-cig market.
Aggressive International growth
Although a late mover, UK-based Imperial Tobacco has rapidly caught up to its peers and it now stands in one of the best positions within the tobacco industry to ride the growth of electronic cigarettes.
Imperial, the world's fourth-largest tobacco company, plans to launch two e-cig products next year from its Fontem Ventrues unit. Furthermore, Imperial recently acquired Chinese based Dragonite, whose founder Hon Lik invented the electronic cigarette. As a result, Imperial has acquired an extensive portfolio of global patents covering e-cig technologies, which gives Imperial a huge intellectual advantage over its peers.
Additionally, British American Tobacco is rolling out its Vype e-cig product within the US and Europe next year after a successful roll-out in the UK earlier this year. This aggressive expansion into the e-cig market by Imperial is going to further pressure Philip Morris' outlook. While Philip Morris is bigger than Imperial, the Dragonite acquisition will help Imperial get ahead.
So in summary, Philip Morris' foray into the e-cig market could be too late. In particular, there are already signs that the market for electronic cigarettes is maturing within the US. With around 300 companies active in the market it is easy to see how this has occurred. In addition, the market will have to absorb a number of new products from tobacco giants during the next year, which will pressure sales further. All in all, while Philip Morris' entry into the electronic cigarette market is warranted, the company may find it is letting itself in for more competition than it would like.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. 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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