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Will New City Bans Halt the Growth of the E-Cigarette Market in America?

By Leo Sun - Mar 8, 2014 at 11:00AM

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Los Angeles has now joined New York, Boston, Chicago, and several other cities in banning e-cigarettes from public places. Will this stunt the growth of the e-cigarette market, which Lorillard, Reynolds American, and Altria are dependent on?

The Los Angeles City Council recently voted to ban the use of e-cigarettes in restaurants, nightclubs, bars, and public spaces across the city. Once the measure is signed into law, L.A. will join other major U.S. cities -- including New York, Boston, Chicago -- which have banned the battery-powered devices that turn nicotine cartridges into inhalable vapor.

This is a troubling development for major players in the tobacco industry, which includes major domestic players such as Altria ( MO 1.64% ), Lorillard ( LO.DL ), and Reynolds American ( RAI ), which have been relying on the growing e-cigarettes market to offset declining sales of traditional cigarettes in the United States. The fledgling e-cigarette market is forecast to grow to $2.3 trillion and account for 41% of all cigarette sales by 2050, according to Bloomberg estimates.

Lorillard's blu eCigs. (Source: Company website.)

Let's take a closer look at this growing market, and the main arguments set forth by proponents and opponents of e-cigarettes.

The current state of the e-cigarette market
Lorillard initially entered the e-cigarette market by acquiring blu eCigs for $135 million in April 2012, instantly capturing nearly half of the U.S. e-cigarette market. The following year, Lorillard acquired British e-cigarette maker Skycig for approximately £30 million ($50 million), further consolidating its position as the market leader in e-cigarettes.

In fourth quarter 2013, Lorillard's e-cigarettes revenue surged 38.5% to $54 million. For the full year, e-cigarettes accounted for 3.3% of Lorillard's top line, up from 0.9% the previous year. Lorillard's steady growth in e-cigarettes hasn't gone unnoticed. Reynolds American followed Lorillard's example by launching Vuse e-cigarettes last June, which claimed a 2% market share in the U.S.

Altria is the largest tobacco company in the United States, thanks to its market-dominating Marlboro brand, but its e-cigarette brand, MarkTen, has yet to claim a significant share of the domestic market. Although Reynolds' Vuse and Altria's MarkTen don't appear to be national contenders, both brands have grown rapidly in certain states. Vuse has secured a 55.6% market share in Colorado, and MarkTen has claimed 48% of the market in Arizona. This surprising growth indicates that Lorillard could experience some stiff competition throughout 2014 as Reynolds and Altria step up their game nationwide.

What e-cigarette proponents say
The bull case for the e-cigarette industry is simple -- the products don't contain tobacco, and they are more physically similar to cigarettes than other smoking cessation products.

Inhaled tobacco smoke, and not the nicotine itself, is the root cause of lung cancer. Nicotine is the addictive chemical released from the tobacco leaves when they are burned, but the average cigarette usually also contains thousands of additional chemicals which can cause cancer. When nicotine is extracted and used in smoking cessation products, such as nicotine gum, lozenges, and patches, the risk of cancer is nullified. However, nicotine can cause other health problems, including an elevated heart rate and cardiovascular problems.

Since e-cigarettes simply vaporize a nicotine cartridge, proponents believe that it is no different from nicotine gum, lozenges, or patches. The physical sensation of holding an e-cigarette and inhaling the vapor also offers a similar experience to smoking a tobacco cigarette, which can help longtime smokers quit. Moreover, the released vapor is considered much safer than secondhand tobacco smoke.

What e-cigarette opponents say
The bear case is a more complicated mix of public attitudes toward smoking and regulatory uncertainties.

The bans across the U.S. have demonstrated that many city governments still classify e-cigarettes with tobacco cigarettes in public settings. Although e-cigarettes might be less harmful than regular cigarettes, the behavior (known as "vaping") still looks similar to public onlookers. Moreover, secondhand e-cigarette vapors, while safer than tobacco smoke, can still be unwelcome in restaurants. Independent studies also claim that the vapor can irritate the lungs, especially in regular smokers.

(Source: Vaporlook.com)

An official statement issued by the WHO last June stated the safety and efficacy of e-cigarettes as a smoking cessation device "has not been scientifically demonstrated." The WHO also advises consumers to not use e-cigarettes until they are "deemed safe and effective and of acceptable quality by a competent national regulatory body."

The WHO points out that since e-cigarettes are not regulated, their nicotine content can vary widely, from 6 mg to 100 mg of nicotine. A nicotine dose between 0.5 mg to 1.0 mg per kg of the weight of the person can be lethal. The FDA has taken a similar stance, stating that e-cigarettes "have not been fully studied" and that it intends to extend regulation to these products.

The Foolish takeaway
The great e-cigarette debate has just started, and regulators could soon decide what restrictions these products will face. If regulators favor e-cigarettes, they could represent a strong new pillar of growth for the big three tobacco companies. However, if regulators determine that e-cigarettes aren't as safe as proponents believe and cities continue banning their public use, they could have trouble evolving into a real replacement for traditional cigarettes.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$43.92 (1.64%) $0.71
Reynolds American Inc. Stock Quote
Reynolds American Inc.
RAI
Lorillard, LLC Stock Quote
Lorillard, LLC
LO.DL

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