Grocery Headquarters sat down with some of the electronic cigarette industry’s biggest players to hear their thoughts on the changing landscape of the category. Since electronic cigarettes first introduction to the American marketplace some seven years ago, growth has been dramatic. However, that could come to a halt once the U.S. Food and Drug Administration (FDA) hands down its regulations for the burgeoning industry, which they are expected to do this spring.
There is a possibility that the FDA will try and apply the same regulations it imposes on traditional tobacco products to the manufacturing and sale of e-cigarettes. “If e-cigarettes are treated exactly like tobacco products, the vast majority of consumers are going to stick with what they know and that’s tobacco,” says Adam Kustin, vice president of marketing for VMR Products, a founding member of the Smoke Free Alternatives Trade Association (SFATA).
E-cigarette cartridges come in classic tobacco and menthol flavors, along with varying levels of nicotine. A variety of unique flavors have come into popularity, ranging from vanilla and berry to coconut candy colada. Industry observers say that the availability of flavors is what spurs smokers of traditional cigarettes to make the switch to e-cigarettes. “We’re looking at a product that has the potential to be far better for consumers in both the short and long terms and that progress is driven by the availability of flavors,” says Cynthia Cabrera, executive director for SFATA.
Industry members expect these flavored cartridges, as well as online sales, advertising and in-store consumer access to be heavily scrutinized by the FDA—if not banned all together. The regulations have the ability to complicate a flooded market in which upstart manufacturers, Big Tobacco and brick-and-mortar retailers were just starting to gain ground. “In the U.S. there are about half a million retailers selling tobacco products and e-cigarettes have penetrated a third of those,” says Kustin.
Several members of the industry have joined forces to strengthen their efforts against the growing competition and challenges. In 2012, Lorillard bought blu eCigs for $135 million in cash and has expanded the brand’s distribution to more than 125,000 stores. The National Tobacco Co. (NTC) has entered into a long-term distribution agreement with VMR Products, the Miami-based maker of V2 Cigs. NTC will distribute the V2 e-cigarette brand through wholesale and into retail across the U.S.
“The category’s long-term growth rate is likely to be shaped by several variables, including product innovation,” says Brian May, spokesperson for the Richmond, Va.-based Altria Group. “While awareness and trial are high, only a small number of adult smokers use these products daily. Many adult smokers and vapers are still looking for a product that meets their requirements and desires. Regulation and taxation will also impact the category’s trajectory.”
Ahead of the pending regulation from the FDA, Grocery Headquarters sat down with representatives from various e-cigarette companies to take the pulse of the industry and hear their thoughts on its future.
Adam Kustin, vice president of marketing for VMR Products, the Miami-based manufacturer of V2 Cigs and Vapor Couture
Brian May, spokesperson for the Altria Group, the Richmond, Va.-basedparent company to Nu Mark, the maker of MarkTen e-cigarettes
Jason Healy, president of blu eCigs, the Charlotte, N.C.-based independent subsidiary of Lorillard
Carlos Bengoa, president and founder of CB Distributors, based in Beloit, Wis.
Paul Wiesberger, senior vice president of Puff E Cig, based in Imlay City, Mich.
John Wiesehan, Jr., CEO of Ballantyne Brands, the Charlotte, N.C.-based maker of Mistic e-cigarettes
Grocery Headquarters: What do you think of the FDA’s proposed regulations?
Adam Kustin, VMR Products: We disagree with any proposal that subjects electronic cigarettes to the same across-the-board restrictions as tobacco products. At our core, we are a technology category that regularly innovates products to provide better experiences to consumers. Over-regulating electronic cigarettes by misclassifying them would stifle innovation and hinder our ability to bring new and better products to market.
We hope for reasonable, science-based regulations from the FDA that will help uphold product standards and prevent youth access while giving us the room to market our products effectively.
Brian May, Altria Group: Nu Mark supports allowing the FDA the opportunity to develop and implement a uniform national tobacco policy that includes e-cigarettes. As the FDA considers future regulation of e-cigarettes, it should implement regulations that are appropriate for the category and science- and evidence-based.
Jason Healy, blu eCigs: We support reasonable science-based regulation that is proportional with the harm reduction potential for e-cigarettes, such as rules setting minimum product quality and safety standards for the industry. That said, we believe these responsible marketing parameters can be achieved without stifling what could be one of the greatest harm reduction products ever made available to smokers.
Carlos Bengoa, CB Distributors: At this time, everything regarding FDA regulations is purely speculation. There are assumptions that the FDA will do away with flavored cartridges. There’s also the possibility the FDA will ban sales of e-cigs via the Internet.
Paul Wiesberger, Puff E Cig: We are a company built on sales out of brick-and-mortar retailers. The likely ban on website ordering will only help us. I think you will see many of the regulations applicable to traditional cigarettes come through and apply to e-cigs, including a ban on flavored e-cigs, zero TV ads, no self-service machines or stores and no free samples. Obviously, this does not help with growth but we feel that the consumer will not forgo the e-cig experience but rather turn to FDA-approved e-cig products.
John Wiesehan, Jr., Ballantyne Brands: We speculate regulations to follow those of traditional tobacco. As a company, we support regulation as long as it is sensible and does not stifle innovation. We have worked hard to self-regulate in preparation for deeming regulations. Some steps we have taken as a company are making sure our products are not available to children. We don’t market our brand as a “lifestyle” product or glamorize smoking or vaping. We also produce all of our liquid for our cartridges in the U.S. for closer quality control.
What stigmas do retailers need to be wary of when marketing e-cigarettes?
Ron Tully, National Tobacco Co.: Retailers need to have confidence that the brands they place on their shelves offer consumers a consistent experience every time they make a purchase. That means a retailer should ensure that any brand they sell has a taste profile that is acceptable to consumers, delivers that taste and vapor volume the consumer wants each and every time, and is built around good manufacturing and quality control processes. Further, any brand sold at retail needs to be backed by a company that is willing to address any product performance concerns directly with that consumer and is supported by strong and visible point-of-sale materials and online brand promotions that drive consumers to that brand and to retail.
Shargio Patel, Inter-Continental Trading U.S.A.: All retailers should make sure that their e-cigarette manufacturer stands behind their product and is fully licensed, bonded and insured. Also, that the manufacturer is able to assist and direct the retailer for their own licensing.
Wiesberger: Many customers are concerned with the origin of the actual liquid. The perception is that China-made liquids are not safe. Many of those liquids are absolutely safe, but perception becomes a business reality. That is the reason we took control of the situation and aligned ourselves with a U.S.-made liquid.
Ross Haynes, Tantus Tobacco: There is some concern about what the FDA will allow to be sold. Retailers should concern themselves with purchasing products from companies already familiar with FDA oversight, those that have proven themselves to be reliable and that are in the e-cigs business for the long haul. As far as stigma goes, e-cigs are becoming more “mainstream.” Retailers should be conscientious about displaying and marketing these products to adults, not children.
Ed Denk, Swisher International: E-cigarettes are an alternative for the adult tobacco consumer and are intended for use only by consumers of legal age to purchase and use tobacco products. Marketing them in that manner is the most appropriate way of establishing yourself as a respectable and legitimate retailer in your community.
Currently, there is no federal legislation regulating the sale of e-cigarettes to customers under 18 years of age. What are your concerns about e-cigarettes being viewed and utilized as a gateway to smoking?
Healy: The truth is electronic cigarettes are more analogous to an exit strategy as opposed to a gateway to smoking. Our blu eCigs products are designed for the adult smoker and offer an alternative to traditional cigarettes. If the FDA recognizes this tremendous difference than the impact on smokers would be incredibly positive.
Kustin: VMR is a founding member of the Smoke Free Alternatives Trade Association and through it we’ve advocated for common-sense parameters—like youth bans and age-verification laws—that have already been widely embraced by others in our industry and supported by the retail community.
As far as a “gateway” effect, there is absolutely no evidence of it. We feel that the public conversation and the government regulation of the industry should be based on good science.
Haynes: No responsible retailer should sell this product to minors regardless of the law. I think that providing adult smokers a product that contains no tar or nitrosamines is a bigger factor than the unproven idea that e-cigs are a gateway to traditional cigarettes. There are many who believe that the use of e-cigs could drastically reduce the amount of people smoking combustible cigarettes. I believe that if there are safer ways to consume nicotine then they should be explored, not denied.
Do you think flavored cartridges increase appeal to younger audiences?
Haynes: I do not agree that because tobacco products have flavors such as grape, vanilla, etc. that we as tobacco or nicotine companies are marketing to children. Take a stroll through the vodka aisle, cola aisle or even the toothpaste aisle and check out the variety of flavors. Adults expect more variety in just about any consumable category you look at today.
Kustin: Flavors reflect adult tastes in a wide variety of products, including alcohol, beer and cider—in other words, products purchased every day by adults across the U.S. We neither need nor want underage consumers. There are 44 million adult tobacco smokers in the US. This is a huge market. When you consider that less than 7% of adult smokers have ever tried an electronic cigarette, it is clear that we do not need to engage or sell to underage consumers in order to build a successful, long-term business.
May: Nu Mark supports efforts to keep tobacco products out of the hands of people under the legal age. To aid in this effort, the company supports minimum age and non-self-service laws for e-cigarettes. Nu Mark requires retailers who accept its promotional programs to sell MarkTen e-cigarettes only to consumers who are of legal age to purchase the product, and to merchandise the product in a non-self-service manner. The packaging includes the language “underage sale prohibited.”
One of the big draws of e-cigarettes is that they can be purchased online and delivered right to the consumer’s home. What can brick-and-mortar retailers do to attract these consumers to their stores?
Tully: Online has its limitations with brand availability and delayed delivery. What brick-and-mortar can offer is a wider brand choice in a convenient location, at a point at which the consumer is often buying other products at the same time. Brick-and-mortar therefore has some real advantages over online.
When NTC partnered with V2, both companies recognized that e-cigarettes will live in both the online and brick-and-mortar space for a period of time, but given the FDA regulatory backdrop, it would make sense to transition the V2 brand, and its loyal consumer base into retail.
Kustin: Vapor Couture and V2 Cigs products are showcased in a range of multi-product display units, and the company is always expanding its arsenal of eye-catching signage and customized POS materials. Retailers receive sales incentives and training designed to help maximize in-store sales velocity. We also support our brands with national and regional advertising campaigns for further scale. This all drives in-store traffic.
We look at our online customer base as a boon for retailers. We are actively driving our one million consumers into retail stores by combining proprietary e-commerce data with targeted digital advertising campaigns across web, mobile and email. Also, these same online customers will organically seek out in-store purchase opportunities, given the inherent immediacy of sales within brick-and-mortar environments.
Wiesehan: We focus our time and efforts on brick-and-mortar retail channels. We utilize in-store displays and point-of-purchase material to capture the attention of adult smokers in our store locations so they can make the decision at the retailer for an immediate purchase instead of having to wait for online delivery.
Patel: Considering that cigarette prices and taxes have seen a dramatic increase, the electronic cigarette is what consumers are taking an interest to. From pipe tobacco to deluxe cigarette cases, our products all have one thing in common: they help retailers satisfy their customers. We stand behind our products to maintain the kind of cost effective buying experience our valued customers have come to expect and deserve.
Healy: A big factor that can help drive sales for brick-and-mortar retailers is the products’ visibility and placement. blu eCigs is very receptive to all retailers who have expressed interest in carrying electronic cigarettes and works with our distributors to establish the highest level of in-store visibility for the brand.
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