Will E-Cigarettes Be The Next Big Thing For Altria?

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E-cigarettes have more than arrived in the lives of people, as evidenced by a recent report published by the Center for Disease Control and Prevention (CDC). According to them, an 18% drop in the incidence of tobacco smoking has been more than offset by a rise in e-cigarette use, especially among teenagers where the rate almost tripled to 13.4% in 2014, from about 4.5% the previous year. [1] While these figures may seem alarming, it opens doors for tobacco makers to an industry that holds immense potential, especially at a time when the market for smokable tobacco is shrinking. Data from major outlets in the U.S. indicates that the value of sales of electronic cigarettes has been roughly doubling on a year on year basis, from $20 million in 2008 to around $1 billion in 2013. Further, according to research by Wells Fargo, the market is estimated at $2 billion when one accounts for sales through online avenues and “vape” stores. [2] In this situation, it is worth better understanding the e-cigarette phenomenon and what it holds for tobacco giant, Altria (NYSE:MO).

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Why Are E-Cigarettes Gaining Popularity?

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An electronic cigarette, or an e-cigarette, is a battery-powered device that produces an effect similar to that of smoking a tobacco cigarette. While e-cigarettes are free of tobacco, users exhale vapors that contain organic compounds, heavy metals, and nicotine. While some users site quitting traditional cigarettes as the reason for use, others resort to it for recreational reasons.

E-cigarettes have become widespread more recently due to a number of factors. For one, traditional cigarette smoking has been increasingly banned in many work and public places. However, there is no such ban presently on the use of e-cigarettes. Second, while smoking e-cigarettes is not the most healthy option due to chances of nicotine addiction, it is still considered to be safer than tobacco smoke, which contains over 7,000 chemicals. Third, the sale of e-cigarettes are not governed by any licences or permits. In this situation, it becomes both easy and profitable for property owners to transform vacant stores and storefronts into “vape” stores. Fourth, with an almost 200-400% markup on products and accessories, the business happens to be extremely profitable for entrepreneurs as well. Finally, unlike traditional tobacco cigarettes, e-cigarettes come in a variety of flavors and emit more amounts of smoke, which makes it attractive for recreational use. [3]

What Are The Health Concerns Surrounding E-Cigarette Use?

Since e-cigarettes have come into use more recently, little is known of their long-term physiological impact. On the one hand, they are considered less harmful since they do the job for a smoker without putting him through an array of carcinogenic agents prevalent in conventional tobacco products. On the other hand, the notion that e-cigarettes are safe could be creating a whole new generation of adult smokers, who become increasingly vulnerable to nicotine addiction.

A recent study published in the BMC Public Health Journal, uses data from North West England to establish that one in five participants had used e-cigarettes, with prevalence being highest among smokers. Furthermore, one in twenty of those using the “vape” had never used conventional cigarettes before. The study also reveals a strong correlation between e-cigarette use and alcohol use, with teenagers that consumed alcohol on a weekly basis to be more likely to have accessed e-cigarettes. [4] Yet another study published in the American Journal of Public Health found that smokers who used e-cigarettes were 50% less likely to decrease cigarette use and 60% less likely to quit smoking compared to those who never used them. [5]  Those who favor intervention, point to these factors as its justification.

Will Increasing E-Cigarette Use Prove to Be Lucrative For Altria?

Now, what does all this mean for Altria? With cigarette volumes dwindling in response to anti-smoking campaigns and regulations, Altria worked hard to position itself in the fast growing e-cigarette market.  In February 2014, its subsidiary, Nu Mark, signed a $110 million deal to acquire the e-cigarette business of Green Smoke Inc.  In December 2014, the Altria Nu Mark e-cigarette subsidiary completed the national roll-out of the MarkTen, which was supposed to be a notch above the 200 types of e-cigarettes already available in the market. While the move into a growing e-cigarette market seems both commendable and promising, a few factors seem to threaten the company’s prospects going forward.

For one, as per the recent Q1 results, MarkTen faced problems maintaining its present market share since the product posed difficulty in ensuring repurchases. [6] Secondly, the e-cigarette market, which until now was devoid of any regulation, may come under the same level of scrutiny that the tobacco industry deals with. The CDC recently announced the introduction of a new anti-smoking campaign that will also target e-cigarette manufacturers by predominantly denouncing “vapes” as a route to kicking the butt. Furthermore, studies regarding the penetration of e-cigarettes among the youth, and the consequences of this, has renewed interest of regulators, who now see the product as one that they may deem to gain regulatory control. In this respect, the acting head of the Food and Drug Administration (FDA) said that the agency will bring in regulations around e-cigarette use, as early as June of this year. As of now, the FDA requires “vape” makers to register with the agency, report ingredients, submit new products for review, and provide evidence regarding any health risks and benefits of the products. Under the new rule, the FDA is expected to prohibit sale of e-cigarettes to children under 18 years of age. The bigger blow for the industry, which could come in the future, could be restrictions on advertising the product, which could entirely put away e-cigarette ads from the public eye.

In spite of these obstacles, electronic cigarettes presently make up a meager part of the tobacco industry and holds immense potential left to be tapped. In the words of cardiac surgeon, Dr. Gopal Bhatnagar, “You have an available worldwide market of $780 billion from smokers that are buying things they’re addicted to, that is known to cause harm to them. And you have an alternative product that from my perspective is safer.” [7]

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Notes:
  1. E-cigarette use triples among middle and high school students in just one year []
  2. New estimates double size of US e-cigarette market; increasing importance of refillable and modified devices []
  3. Smoking Industry Sees Profits Vaporising With Electronic Cigarettes []
  4. Associations between e-cigarette access and smoking and drinking behaviours in teenagers []
  5. E-Cigarettes No Help In Kicking The Butt []
  6. The Altria Group Q1 2015 Earnings Preview: Impacts Of The Economy and Innovation Will Drive Results []
  7. New e-cigarette industry says regulations off the mark []