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E-cigarettes: a US$2 billion global industry – who should be worried?

11/23/2012
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All of five or six years ago, one would have been forgiven for not having heard of electronic cigarettes (or e-cigarettes, as they are more commonly known), but it’s hard not to notice the current swirl of interest in and bombastic big-upping of this niche category’s prospects, now worth in excess of $US 2 billion globally (about the size of the global small cigars market), according to Euromonitor International estimates.

Where do e-cigarettes fit in?

E-cigarettes are non-tobacco containing, non-combustible cigarettes which work by vaporising nicotine liquid (hence the verb ‘to vape’ or ‘vaping’) which first appeared in the US, currently the world’s largest market for e-cigarettes, accounting for around a quarter of value sales. As non-tobacco containing and non-combustible products, they are commonly referred to in the industry as cigarette alternatives, though claiming any reduced harm credentials is currently banned by the WHO. So what is it if it’s not a tobacco product? As nicotine delivery devices, e-cigarettes more closely resemble pharma NRT products such as inhalators, though e-cigarettes currently do not require a pharma licence and legal classification varies across the world – some countries such as Argentina, have banned them, whilst countries such as the US have classified them as tobacco products. Rumours abound that the EU is planning to ban any e-cigarettes that are not registered pharma products, though on an international level, the product remains largely unregulated.

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Who’s making them?

But wherever it lies in the world definitional soup, it straddles the interest of various players, including tobacco and pharma, two hitherto distinct industries competing for the same consumer and now faced with a completely new competitor on their turf. Crucially, e-cigarettes were not developed by either industry, instead being made exclusively in China (only recently has this changed with some production shifting to the US) as a generic product, and branded and marketed by totally novel players, such as NJOY and E-Lites.

After an initial fad period where the product was available exclusively on-line, e-cigarettes are now gaining acceptance as repeat usage products available through a variety of popular distribution channels, including convenience stores and supermarkets (for example, Tesco, the leading supermarket in the UK stocks e-cigarettes) and the product is now no longer the preserve of specialists.

Who’s interested?

Little wonder then that Tobacco and Pharma players have begun to sit up and take notice. In the world’s biggest e-cigarette market, the US, two leading tobacco players have entered the e-cigarette market by either buying an established e-cigarette brand (as in the case of Lorillard buying Blu for US$135mn in April 2012) or by launching their own e-cigarette brands on the market (eg Swisher’s eponymous e-cigarettes and e-cigars, also in 2012).

Larger tobacco companies with more sizeable financial outlay have decided to develop their own alternative cigarette-mimicking nicotine delivery devices, such as global no.2 tobacco player, BAT, which in 2011 set up a company called Nicoventures to develop modified risk and nicotine delivery products. According to its product developer, Kind Consumer, its lead product will be a "pharmaceutically regulated substitute cigarette”.

Fad or brave new future?

Although Kind Consumer’s publicity material stresses the new product’s distinction from “other products within the NRT space”, it’s clear the product heralds direct competition for NRT players, who have enjoyed relatively unchallenged dominance of the nicotine delivery device market. Globally, the NRT retail market is worth US$2.4bn (excluding prescription sales), and enjoying stable overall growth, but how long before it is eclipsed by the already US$2bn-strong e-cigarettes market?

Such is the optimism of BAT that e-cigarette-style products are the way of the future that its Chief Financial Officer Nicandro Durante claimed in an interview with the Financial Times in September 2012 that the size of the market for tobacco alternatives could account for as much as 40% of BAT’s revenues (which were £15bn in 2011) in 20 years’ time. “It will be sizeable in
20 years’ time … it’s going to grow,” he said.

In the face of increasing restrictions on tobacco consumption in developed markets, and the loss of smoking populations in sizeable value-generating regions such as Western Europe, the time is ripe for a non-tobacco cigarette and Euromonitor International predicts that by 2050, non-tobacco cigarettes (including e-cigarettes) will be worth 4% of the value of total tobacco – including cigarettes and OTP.

Should any future legislation clamp down on e-cigarettes which are not registered pharma products, tobacco companies such as BAT with their pharma-approved devices and those companies with the financial clout to afford the approval process will be poised to pick up the slack. In any event, the future of tobacco is glowing, but not burning.

 

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