By Tripp Mickle
Sales of electronic cigarettes have fallen sharply in recent
months, bringing an end to five years of triple-digit growth and
making the much-touted category look more like a potential fad than
real threat to Big Tobacco.
Growing dissatisfaction among customers, inventory backlogs, new
state laws and rising safety concerns are expected to cut the rate
of e-cigarette growth in half next year to 57% from its compound
annual growth rate of 114% over the past five years, according to
the research firm Euromonitor International. Because of the rapid
sales declines, Euromonitor research analyst Eric Penicka said he
is preparing to "pull back that forecast" even further.
The slowdown has been most noticeable among Big Tobacco's
"cigalike" devices, which look like cigarettes. Sales of those fell
21% and volume dropped 11% during the 12-week period ended Oct. 31,
marking the first quarterly decline in sales and volume, according
to Nielsen data cited by Wells Fargo.
Reynolds American Inc., the nation's second-largest tobacco
company behind Altria Group Inc., said in September that it would
post $100 million in asset write-downs and exit charges to
consolidate its e-cig manufacturing. In July, Reynolds told
investors it would miss its goal of making its Vuse e-cigarette
brand profitable in the second half of the year.
Sales of vaporizers--the bigger, refillable devices sold at
independent vape shops--along with the liquid nicotine used to fill
them, have decelerated in recent months, too. The segment is
expected to grow just 51% next year, down from an estimated 126%
this year and 455% from 2013 to 2014, according to Euromonitor.
"Consumers are disenchanted right now with these products," said
Bonnie Herzog, an analyst with Wells Fargo who estimates the
e-cigarette market totaled $2.5 billion last year. She said e-cigs
need to mimic cigarettes or users won't switch. She added, "It's
not that different from diet soda."
The current devices fail to deliver nicotine into the
bloodstream as quickly as cigarettes and lack the same so-called
"throat hit" that cigarettes offer. Many e-cigarette users have
found them so disappointing that they have returned to cigarettes,
Ms. Herzog said. The $100 billion U.S. tobacco industry estimates
that cigarette volumes are down 0.5% so far this year, far better
than the more typical recent declines of 3% to 4% annually.
Reynolds and Altria recently finished a national rollout of Vuse
and MarkTen e-cigs to more than 100,000 stores. They offered
promotions that gave consumers coupons for free starter kits or
packets of cartridges for $1.
Delores DeMaria, a 31-year old stay-at home mother from Lake
Wales, Fla., tried Reynolds's Vuse after getting a coupon. She said
she choked the first time she used it but continues to take two
puffs daily and credits it with cutting her daily cigarettes to two
from six. She keeps smoking because cigarettes are easier to inhale
than Vuse vapor, which is "so strong and so different that I'll
start coughing."
Nick Pepper, a 31-year-old waiter in Providence, R.I., had a
similar experience with the Blu e-cigarette brand owned by Imperial
Tobacco Group PLC. He had to draw "really, really hard on it to get
the vapor out." He's back to smoking a half pack of cigarettes a
day.
Consumer feedback like that is leading retailers to reduce
inventory. Some retailers like Texas grocer and tobacco-shop
operator Brookshire Brothers Ltd. have begun requiring that
suppliers guarantee that they would buy back products that don't
sell.
David Woodley, executive vice president of sales and marketing
at the convenience-store chain Sheetz Inc., said much of the
e-cigarette categories' growth was sales to retailers--not
customers. He added, "That is beginning to normalize and you are
starting to see what the business looks like."
Many vape shops say they are seeing the slowdown. The shops
aren't tracked by Nielsen, but vape shop owner Schell Hammel said
the number of smokers--who often become new customers--visiting her
store in McKinney, Texas, has dropped to about one a week from five
a week last year--and 50 in 2013. She lobbies the state government
on behalf of 110 vape shops across Texas--all of which she says are
reporting sales declines this year.
Part of the problem is confusion about the devices' safety, she
said. Most researchers have agreed that e-cigarettes are less
harmful than traditional cigarettes because they don't combust and
release carcinogens, but the long-term effects of e-cigarettes
remain unknown. A January study in the New England Journal of
Medicine found the devices can release cancer-causing
formaldehyde.
New taxes on e-cigs in cities like Washington, D.C., are damping
sales, as are new regulations, like measures passed this year in
Indiana that require manufacturers to secure permits and list
ingredients.
The industry also is awaiting final rules from the Food and Drug
Administration, which could require federal approval for nearly all
flavored liquid nicotine juices and e-cig devices.
"That's creating stagnation," said Dimitris Agrafiotis, chief
operations officer at Mountain Oak Vapors, referring to the
relative safety of his products when compared to cigarettes. "We
have a big uphill battle if we can't accurately describe our
product."
Write to Tripp Mickle at Tripp.Mickle@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
November 17, 2015 17:33 ET (22:33 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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