The first time you saw an electronic cigarette you may have thought it was a joke or a marketing ploy, the second time you may have felt it was becoming a fad, the third time you may have barely noticed at all. The fact is that non-burning, electronic nicotine delivery systems are worthy of some attention. Don’t believe that? Consider whyLorillard (third largest tobacco company) bought Blu Ecigs for $135 million.
Blu Ecigs brought in about $30 million revenue in 2011 and Blu Ecigs is sold in more than 13,000 retail outlets, including Walgreens and Sheetz.
Blu Ecigs by virtue of being acquired by Lorillard, now has the financial resources to aggressively market its brand of Blu electronic cigattes. Here's their TV commerial, "Rise From The Ashes," starring actor turned-eCig spokesman Stephen Dorff:
The electronic cigarette market as a whole, generates between $250 million to $500 million estimated annually—a small portion of the $100 billion US tobacco market. Still, A government survey found that 2.7% of U.S. adults had tried e-cigarettes by 2010, up from 0.6% a year earlier. Those rises in exposure for a niche product are the kind of statistics that potential trends are made of.
Meet White Cloud
This growth in interest is exactly what White Cloud Electronic Cigarettes are banking on. The Florida-based company started up in 2008, after company founders Michael Murray and Danielle & Matthew Steingraber were inspired by viewing e-cigarettes at a Las Vegas trade show.
White Cloud Cirpus 3X electronic cigarettes (Click Image To Enlarge)
Searching for a new business startup endeavor following a short-lived career in private collegiate funding services, the trio dove into the niche industry, acting as distributors for an established company before traveling to China to establish their own factory and set the foundation for their own company—White Cloud.
What sets e-cigarettes apart from other non-traditional nicotine delivery systems is that it has a high conversion rate, meaning that ‘smokers’ are less likely to return to regular cigarettes—a trend not enjoyed by other non-burning nicotine outlets like patches, Matthew Steingraber said. This could be because e-cigarettes look similar to cigarettes, feel the same in the hand and can be social (think cigarette breaks or grabbing a smoke outside while at a bar with friends). Because it’s non-burning, e-cigarettes don’t carry the same health risks as regular cigarettes, Steingraber said. Though nicotine is still not healthy, there’s no smoke, no ash and no tar.
“People smoke for nicotine but they die from the tar,” said Steingraber. All three company founders enjoy their own products, he said.
How Does White Cloud Compete?
Steingraber insists that what sets his company apart from the rest is a) longer product battery life, b) higher levels of nicotine than competitors, and c) An array of attractive flavors. The company won’t release revenue figures but said it has enjoyed 77% revenue growth year over year. The company is looking to franchising as a means of growth, shooting to establish itself in the more high-end e-cigarette space.
Growth of the Market
As for the future of White Cloud, the company is open to the idea of taking on minority investment as a means of speeding up growth—a concept they hadn’t considered prior to coming to the conclusion that the e-cigarette industry will make leaps in the coming year or so, on the back of a handful of new players and investment and development of products by big tobacco companies like Lorillard.
There are dozens of electronic cigarette producers, but at the moment the big competitors in the U.S. e-cigarette market include V2 Cigs, bluCigs, NJOY, 21st Century, Xhale02 and Green Smoke. Reynolds American Inc. has released e-cigarettes under the Vuse and Zonnic brands as well. In the coming year or so the market is likely to see a lot of new players as well as a lot of acquisition of established competitors, Steingraber said.
And why shouldn’t big tobacco embrace electronic cigarettes? If they do not, the niche brought to US shores from established markets in China could further harm an American tobacco market that has seen a steady reduction in consumption over the past 20 years.
How long can we really look at e-cigarettes as a niche? The product has shown an increase in exposure and adoption, the tobacco company has acknowledged them as a threat to business and, hey, the product already has celebrity endorsers like Robert Pattinson and Uma Thurman. This is definitely a battery-operated, addiction-based market to watch.
COMMENTARY: The diversification move by Lorillard, the third-largest U.S. tobacco company by sales, into battery-powered e-cigarettes—which turn heated nicotine-laced liquid into a vapor mist—coincides with aggressive moves by its larger rivals.Altria Group (Philip Morris), V2 Cigs, NJOY (King brand), 21st Century, Ehale 02, White Cloud (Cirpus 3X brand), XEO, and Reynolds American Inc. (Vuse and Zonnic brands) have been pushing more-established smokeless tobacco products, including snuff and snus, as cigarette volumes fall.
When Lorillard acquired privately-owned Charlotte, N.C.-based Blu Ecigs, the company had about $30 million in revenue in 2011 and was sold in more than 13,000 retail outlets, including Walgreens and Sheetz. It competes with dozens of other start-up brands, including NJOY, 21st Century and Xhale02, that are sold in stores and online.
Things are heating up in the electronic cigarettes market. In December 5, 2012, Bloomberg reported that Altria Group was interested in acquiring NJOY, a strategic response to Lorillard's acquisition of Blu eCigs.
Lorillard's strategic shift comes as the Food and Drug Administration weighs a possible crackdown on menthol-flavored cigarettes, which represent about 90% of Lorillard's revenue, owner of the popular Newport brand. The FDA already has banned all other cigarette flavors. It also plans to regulate e-cigarettes, saying they may pose health risks.
Size of E-Cigarette Market
E-cigarettes are still a tiny fraction of the $100 billion U.S. tobacco market. But the niche industry has grown rapidly since arriving from China five years ago. It now accounts for between $250 million and $500 million in annual sales, according to industry estimates. Bonnie Herzog, an analyst at Wells Fargo & Co., estimates that the market for e-cigs may rise to $1 billion in the next three years from $300 million in 2012.
Herzog told Bloomberg by telephone from New York.
“It is truly a wakeup call for Big Tobacco. If manufacturers can create something that tastes, looks, feels and smokes like a traditional cigarette with substantially less risk or harm, more consumers are going to try them and retailers are going to give them more shelf space.”
Lorillard says e-cigarette sales have been doubling every year and is betting the product will grow more quickly than other smokeless alternatives because they more closely mimic traditional cigarettes. E-cigarettes look similar to traditional cigarettes and users—often called "vapers"—also inhale nicotine.
Lorillard Chairman and Chief Executive Murray Kessler in an earnings conference call with investors in July 2012 said.
"I like it because you get all of the benefits of not having combustion, but on the other hand you are maintaining the behavior that cigarette smokers enjoyed."
Lorillard's sales slipped 0.6% to $1.53 billion and net income fell 10% to $223 million in the first quarter from the same period in 2011, heightening investor concerns about the tobacco industry's growth prospects.
Reynolds American, the No. 2 tobacco player and maker of Camel cigarettes, said Tuesday its first-quarter sales fell 2.9% to $1.93 billion and net income shrank 29% to $270 million. Altria, maker of Marlboro cigarettes and the industry leader, reports results Thursday.
Lorillard, which has been grabbing cigarette market share from its larger rivals in recent years, blamed the first-quarter sales decline on inventory fluctuations. The company said its domestic retail cigarette share rose 0.4 percentage point to an all-time high of 14.5% as its menthol share grew 1.0 point to 40.0%. Mr. Kessler reiterated Wednesday that he is "optimistic" the FDA won't slap big restrictions on menthol cigarettes.
Lorillard is trying to play catch up with its two larger rivals on the smokeless front after sticking resolutely to cigarettes for decades. Reynolds reported $158 million in first-quarter revenue at its American Snuff unit, led by its Grizzly and Kodiak moist-snuff brands. It also markets spit-free tobacco pouches called snus and oval-shaped lozenges called orbs.
Altria generated $1.63 billion in revenue from smokeless tobacco last year on the back of its Copenhagen and Skoal snuff brands, which it obtained after acquiring UST Inc. in a 2009 diversification push. Mr. Kessler headed UST before becoming CEO at Lorillard in September 2010.
Altria and Reynolds declined to comment on whether they plan to enter the e-cigarette market.
How E-Cigarettes Work
This video produced by ESmokeInPeace.com explains how E-Cigarettes work:
The following infographic created by Visual.ly provides a detailed explanation of how electronic cigarettes work, their benefits, price comparison versus regular cigarettes, durability versus regular cigarettes and other facts and statistics about smoking and smokers.
Prices for e-cigarettes vary greatly but can cost half as much as traditional cigarettes, which are heavily taxed. They can use batteries or USB chargers and come in several flavors; Blu Ecig makes cherry and piña colada varieties, among others.
Anti-E-Cigarette Advocacy Groups
An advocacy group associated with the American Cancer Society is asking the FDA to re-examine the safety of electronic cigarettes and whether they can actually help people quit.
Chris Hansen, president of the American Cancer Society Cancer Action Network (ACS CAN), said in a statement.
"E-cigarettes have not been scientifically shown to be effective tobacco cessation tools, yet some distributors are marketing them either directly or indirectly for that purpose."
Hansen pointed to an ad from Arizona-based NJOY, which ran during the Oscars. He said.
"E-cigarettes are often manufactured to resemble traditional cigarettes, and are available in fruit and candy flavors that are appealing to youth. The familiar appearance and enticing flavors could actually encourage kids to try traditional cigarettes, rather than avoid them."
FDA Regulation of E-Cigarettes
In 2012 the FDA said that it plans to regulate e-cigarettes after warning in 2009 that the product may pose health risks after detecting carcinogens and toxic chemicals. Lawmakers in a growing number of states want to extend smoking bans in public areas to include e-cigarettes, tax them the same as cigarettes and ban their sale on the Internet.
But some health experts say e-cigarettes help wean nicotine addicts off more harmful traditional cigarettes, which release most of their toxins through combustion and are linked to an estimated 443,000 deaths a year in the U.S. They also say e-cigarettes eliminate the dangers of second-hand smoke.
Courtesy of an article dated October 24, 2012 appearing in Forbes and article dated April 25, 2012 appearing in The Wall Street Journal , an article date December 5, 2012 appearing in Bloomberg, an article dated March 3, 2013 appearing in PC Magazine and an infographic appearing in Visual.ly