E-cigarette technology has exploded in the U.K., with 2.6 million adult Britons using the devices in 2015, according to the anti-smoking charity ASH.  A 24% growth over the previous year can be attributed to a rise in the number of ex-smokers using electronic cigarettes, as evidenced by the Smokefree Britain Survey conducted by YouGov, which showed a 4.5% increase in 2014, and a 6.7% growth in 2015 for electronic cigarette use among ex-smokers. A recent report published by Public Health England found that e-cigarettes were 95% less harmful than tobacco and could be a gateway for smokers trying to quit. 
Sales of E-Cigarettes Escalate In U.K. Supermarkets
E-cigarettes sales surged in the U.K. to become the fastest growing supermarket product by volume and value in 2014.  According to insights firm Nielsen, while sales of traditional nicotine replacement products, such as patches and gum, dropped 6.1% in 2014, those of e-cigarettes soared 50% year-on-year to 17.3 million units. This shift can be attributed to positive reviews about the products and their efficacy in helping smokers quit. They are also considered a game changer in the tobacco industry, supported by falling cigarette sales at a rate of 2.2% by volume.
- Can iQOS Be A Key Growth Driver For Philip Morris In The Future?
- What Led To The Poor Performance Of Philip Morris In Its Latin America And Canada Region In The Second Quarter?
- Philip Morris Q2 2016 Earnings: Currency Headwinds Leave The Company Flat
- How Will Philip Morris Perform In Q2 2016?
- Which Is A Better Dividend Bet – Altria Or Philip Morris?
- What Is The State Of The Illicit Cigarette Market In The European Union?
While there is a growing trend towards selling e-cigarettes online and through specialist e-cigarette or ‘vaping’ stores, highstreet stores, particularly convenience stores and newsagents, still form a significant part of the e-cigarette retail landscape. Convenience stores in the U.K. have undertaken significant investment in the booming electronic cigarette and vaping products market. According to Charlotte McGaughey, brand manager for the BAT-owned Vype brand, 56% of the U.K. adult smoking population has tried an e-cigarette, indicating great awareness of the category, while still leaving plenty of room for growth. She further identifies grocery, amassing 55% of the market, as the largest retail channel, with convenience stores hot on their heels by way of a continually growing market, currently estimated at 30%.  Smokers have cited a number of reasons for using e-cigarettes, such as to reduce the intake of tobacco or to stop it completely.
According to a study conducted by BMJ Open, unit profit margins from selling e-cigarettes were reported to be significantly higher than those for conventional tobacco products.  Retailers also regard e-cigarettes and other vaping products as suitable items to fill the behind-the-counter display, vacated by tobacco products. There is also a growing demand for products with newer technology and a variety of flavors. Pharmacies, including Boots, have also started selling the products for the first time.
EU’s Tobacco Products Directive May Dampen The Mood
Despite an overwhelming consensus that vaping is noticeably less harmful than smoking, new EU rules will impose numerous rules and regulations on e-cigarette companies. Among some of the restrictions are those that limit the size of refill containers of nicotine to 10ml, the size of cartridges or tanks to 2ml, and the maximum nicotine strength of e-liquid to 20mg.  Furthermore, if three member states in EU consider a product to be harmful, the ban will be extended to all EU member states. E-cigarette manufacturers have also been saddled with rules such as listing all ingredients contained in the product and the resulting emissions from the use of each product, by brand name and type.
While the EU was originally in favor of regulating e-cigarettes as medicines, it has instead opted for a mixed approach. However, regulators in the U.K. wish to go down the medicines route, meaning that any sale of e-cigarettes from 2016 has to be approved by the Medicines and Healthcare Products Regulatory Agency, like any other drug. The Government in the last week also allowed one e-cigarette brand to be prescribed on the NHS to assist people to quit smoking. This could pave the way for other brands as well. This has been a result of studies declaring e-cigarettes to be 95% safer than tobacco, while also showing no evidence of claims that it would lure young people to be recruited to smoking. 
Philip Morris International (NYSE:PM) entered the e-cigarette market in the U.K. with the purchase of Nicocigs Ltd., which has a 27% market share in the region. The company, which also has a licensing and distribution agreement with Altria (NYSE:MO), for its e-cigarette products, has with this acquisition immediate access and a significant presence in the e-vapor category. The possibility of the products to be advised by NHS as a smoking cessation tool will help the company to expand significantly in this fast growing market.
View Interactive Institutional Research (Powered by Trefis):Notes:
- Use of electronic cigarettes among adults in Great Britain, ASH fact sheet, May 2015 [↩]
- E-cigarettes around 95% less harmful than tobacco estimates landmark review [↩]
- E-cigarettes among fastest growing products in U.K. stores [↩]
- E-cigarettes: The electric avenue [↩]
- E-cigarette marketing in U.K. stores [↩]
- How e-cig U.K. regulation is set to change the way you vape [↩]
- Latest data finds no evidence that electronic cigarettes are a gateway to smoking for young people [↩]