Why Big Tobacco Is Watching E-Cigarettes Adoption

Statutory Warning: Cigarette smoking is injurious to health. This is not the first time we are reading this and definitely not the last time either. Cigarettes are very simple in their making, tobacco folded between a piece of paper that produces a smoke when it burns. However, it has very complex outcomes on consumption. Tobacco smoke contains alarmingly high concentrations of carcinogens (substances that are directly involved in causing cancer). Interestingly though what makes cigarettes so addictive is nicotine – an ingredient of tobacco which makes up around 0.6-3% of its dry weight. Nicotine is a substance that raises levels of nervous activity in the body, which is the main factor responsible for the addictive properties of tobacco smoking. Nicotine is not regarded as a carcinogen, it’s primarily because of tar, smoke particles and other chemicals present in the smoke of traditional cigarettes that they bear extremely high economic costs. This is exactly what becomes the selling point for electronic cigarettes.

What are Electronic Cigarettes?

An electronic cigarette is essentially an electronic inhaler which has three main components. 1. a cartridge, that contains the nicotine solution and also forms the mouthpiece; 2. an atomizer that converts the liquid into vapor when activated; and 3. a battery that powers the atomizer. They are similar to traditional cigarettes in form factor but work very differently from them.

They still contain nicotine, but they are substantially less harmful as the vapor produced has not been proven to contain any carcinogens in concentrations that could be harmful. Whilst there are ongoing researches to determine the exact impact of nicotine vapor, e-cigarettes are currently not subject the kind of regulations and restrictions imposed on traditional cigarettes. E-cigarettes are thus being seen as a potential long term replacement for cigarettes.

Prospects for E-Cigarettes

Currently a $300-400 million industry, this segment has the potential to take on a significantly large $100 billion tobacco industry in the US by storm. Due to a wide range of issues surrounding the traditional cigarettes market from marketing restrictions to increasing duties and taxes, we forecast the volumes to decline by around 35 billion cigarettes over the forecast period.

This could potentially mean a $10 billion market space to be occupied by e-cigarettes straight away. The underlying assumption is that all the dollars simply flow from traditional to electronic cigarettes, which would not necessarily be the case. However, it should also be noted that the rate of decline in the volumes of traditional cigarettes sold in the US could accelerate by higher adoption rates of e-cigarettes.

Additionally there could also be demand from other segments as in consumers from smokeless tobacco segment could also migrate towards the use of e-cigarettes. All of this put together basically implies that the segment has huge growth potential in the coming years and is something that tobacco giant like Altria (NYSE:MO) and Philip Morris International (NYSE:PM) need to monitor.

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