By John Kell
U.S. cigarette volumes, weakened recently as higher energy
prices and an increase to payroll taxes dented consumers' wallets,
are also being cannibalized by the soaring popularity of
e-cigarettes.
Lorillard Inc. (LO) and Reynolds American Inc. (RAI) told
analysts during their first-quarter presentations that rising
consumer interest in e-cigarettes were a factor that contributed to
the industry's 6.2% drop in traditional cigarette volumes in the
first quarter.
E-cigarettes, which began to appear in the U.S. market in 2006,
turn heated nicotine-laced liquid into a vapor mist, and come in
several flavors. Virtually all e-cigarette volume comes from
existing smokers, according to Lorillard, which estimates the
segment hurt the traditional cigarette industry by one percentage
point in the first quarter.
Lorillard, the No. 3 U.S. cigarette producer by revenue, has
been the most bullish about the segment's potential. It spent $135
million roughly a year ago to buy blu eCigs, and has since expanded
distribution and beefed up marketing.
Those initiatives are showing early dividends. Lorillard's
first-quarter earnings growth benefited from $21 million in gross
profit derived from the new e-cigarettes segment. Sales for the
business totaled $57 million, sequentially increasing from $39
million.
"There is no doubt in my mind that eCigs have tapped into a real
consumer need [and] that this could become a very big category,"
Lorillard Chairman and Chief Executive Murray Kessler said.
Lorillard estimates it commands over 40% of the retail market
share for e-cigarettes, a category that could be worth nearly $1
billion at retail this year. It sells a handful of flavor
cartridges, including classic tobacco, menthol, vanilla and pina
colada.
Lorillard has estimated revenue from e-cigarettes in the U.S. is
higher than for snuff and dissolvable products, other smokeless
options consumers have gravitated toward as demand for traditional
cigarettes ebbs. The company has contended e-cigarettes are more
popular as it is more familiar to how smokers have consumed tobacco
in the past.
To gain a better position in the market, Lorillard this year is
launching a new rechargeable kit that will retail at nearly half
the price of the current offering.
Wells Fargo analyst Bonnie Herzog recently estimated Lorillard
has invested $40 million to advertise blu eCigs, helping increase
visibility.
Retailers have taken notice. Retail distribution of blu eCigs
has expanded to more than 80,000 retail outlets from 50,000 stores
just three months earlier.
"I'm expecting consumption of e-cigarettes to surpass
consumption of regular cigarettes in the next decade," Ms. Herzog
said.
Reynolds American on Tuesday said it also will spend more to
invest in its Vuse e-cigarettes, with plans to expand the brand
this year. Reynolds hasn't broken out Vuse's sales, though like blu
eCigs, the contribution to overall sales is tiny.
Reynolds declined to provide a timeline as to when it would
launch new Vuse products, though it contends the brand "addresses
consumer needs better than anything in the category."
Market leader Altria Group Inc. (MO), which reports
first-quarter results on Thursday, has yet to address the
e-cigarette market. Altria's recent results have been bolstered by
market share gains for Marlboro and stronger demand for smokeless
products like Copenhagen and Skoal.
Earlier this year, Altria said while the e-cigarettes market was
generating high awareness among smokers, it was still a relatively
new phenomenon. The company is also monitoring the Food and Drug
Administration's role in potentially regulating the category.
Write to John Kell at john.kell@dowjones.com
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