Electronic cigarettes have been touted as the next big thing in the world of tobacco for a few years now. However, Altria (NYSE:MO) and Reynolds American (NYSE:RAI) have only just gotten around to commencing national roll-outs of their e-cig products. Lorillard (NYSE:LO) on the other hand has moved quickly, establishing first-mover advantage and capturing as much as 50% of the domestic e-cig market during the past two years.
Nevertheless, as with many new technologies the initial buzz that surrounded e-cigs has begun to die. Unfortunately, sales are coming under pressure as a result.
Falling out of favor
E-cig sales at US convenience stores fell for the first time ever as users apparently switched to larger, more customizable devices.
According to market data specialist Nielsen, the dollar value of e-cig sales fell 10.4% during the month to May 10. The suspected causes are users' preferences and the significant amount of negative information surrounding e-cigs, with both the FDA and the CDC speaking out against the use of the products.
Market leader under pressure?
Lorillard's management has said that the slowdown in e-cig sales is directly related to the rapid rise of vaporizer sales in vape shops. Vaporizers can be filled with a variety of e-liquids and their sales are growing twice as fast as the wider e-cig category. Lorillard's e-cig sales fell 10.5% during the first quarter.
Unfortunately, as mentioned above, this slowdown comes at a time when both Altria and Reynolds are trying to roll out their products nationally.
Further, vaporizers, the main e-cig competitor, tend to be cheaper than e-cigs and with much more flexibility, another reason why users could be trading away from the relatively inflexible e-cigs.
Whatever the underlying factor, it is clear that marketing and competitive activities have grown to a fever pitch recently, and all you need to do is look at Lorillard's results to see how much of an effect this is having.
Results reveal trends
For the first three months of this year, compared to the same period a year ago, Lorillard's revenue from the sales of e-cigs fell 11%, which in itself is not a huge issue. However, the company's selling, general, and admin costs jumped 93% on a reported GAAP basis.
Lorillard's management nearly doubled marketing spending during the first quarter of this year only to report a fall in sales and decline in market share. All in all, the company's e-cig segment reported a loss of -$11 million for the first quarter, down from a profit of $7 million reported for the same period last year.
So it would appear as if e-cigs' popularity is already dying out with their replacement by vaporizers. This could be a short-term trend but Lorillard's management is well aware that e-cig sales have been falling for some time now.
It will be interesting to see how this sector fares throughout the rest of the year. For the time being at least, things look to be struggling.