Regulation “could make stores more important than online”

Written by || 16 August, 2014 || Business news analysis |

bricks and mortar - Marc FalardeauThe future of the e-cigarette industry lies in bricks-and-mortar retail sales rather than online, according to Miguel Martin, president of e-cig maker Logic.

And reports suggesting a slowdown in sales through mainstream channels such as convenience stores do not necessarily present the full picture, he contends.

Data from Management Science Associates (MSA), which tracks shipments from wholesalers to retailers to provide a broader picture, shows that all e-cigarette core categories are up compared to the same period last year, said Martin.

This is a trend that should continue, he added, speaking in a Wells Fargo Tobacco Talk conference call. He forecast that regulatory pressure, particularly around lax age restriction measures online, would mean that bricks-and-mortar stores are likely to be the default future distribution method for e-cigarettes.

“I believe this will be the long-term play of where e-cigs will be sold, whether through FDA [Food and Drug Administration] regulation or through that of the [state] attorney general’s office.”

Moreover, the attraction between retail outlets such as convenience stores and e-cigarette manufacturers is mutual, Martin added. E-cigarettes are proving to be a lucrative product for retailers, both in themselves and as an incentive to buy other products in the store.

E-cigarettes have a high margin in both percentage and dollar terms, providing valuable return on limited shelf space, Martin said. A comparison can be drawn with energy drinks, where small companies such as Monster and Five Hour have been able to compete with bigger firms such as PepsiCo and Coca-Cola by offering retailers strong margins.

Said Martin: “The question is ‘How much does this slot make for me?’”

Buy, buy, buy

There is also evidence that e-cigarette purchasers come to the checkout with fuller baskets of other goods than tobacco purchasers.  MSA data shows that U.S. consumers who visit a convenience store for e-cigarettes tend to spend around $18.13. Of that, $14.08 that comes from e-cigarettes and $4.05 from other products. This compares with combustible cigarettes consumers spending a total of $12.73 in each visit: $10.58 on cigarettes and $2.15 from other products.

There is also still significant room to develop e-cig sales through bricks-and-mortar retail, not only in the high-growth areas of mass merchandisers and wholesale clubs but also in convenience stores.

For example, it is estimated that only around 140,000 retail locations sell e-cigarettes but approximately 325,000 sell conventional tobacco products, according to Bonnie Herzog, managing director of beverage, tobacco and consumer research at Wells Fargo Securities.

As well as expansion in the number of locations selling e-cigarettes, Logic also expects to see retailers start to stock larger numbers of e-cigarette products. There are opportunities for stores not carrying a full range to add items such as rechargeable cartridges, Martin said.

“Anywhere that can responsibly sell cigarettes to adults, there should be e-cigarettes as a category in those stores. These are the gaps you’re going to see be filled in,” he suggested.

The final frontier

However, this is likely to result in greater competition for limited shelf space. A parallel can again be drawn with energy drinks, said Herzog. Convenience stores currently allocate approximately 20% of shelf space in the beverage category to these products, but this is expected to rise to a third over the coming years – resulting in a decline in the space allocated to other drinks such as carbonated beverages.

For e-cigarettes, space could be freed up by the continued decline in conventional cigarette business, and the products may find themselves on shelves previously occupied by tobacco. Dual use of conventional cigarettes and e-cigarettes will also lend itself to this, Martin added.

“A complete category is now needed, with consumers moving between

,” he said. “The concept of having three or four counter racks for e-cigarettes just doesn’t make sense any more for the savvy or more astute retailer.”

Logic itself is driven by a long-term strategy of focusing on bricks-and-mortar stores instead of online sales. According to the latest Nielsen data for convenience stores, Logic has now become the number one U.S. e-cigarette brand sold through that channel in terms of unit share, at 24.3%.  In terms of dollars, it is second behind Lorillard’s Blu, at 22.9%.

What This Means: These are interesting ideas from a company that has gambled heavily on conventional retail instead of online. After all, many other regulated products – tobacco and alcohol, for example – maintain a far larger presence offline than on, and the need for age verification is one reason for that.

However, that does not mean e-cigarettes will necessarily follow. As a new technology that did not exist before the Internet, they are tied into a more technological space. Differentials in tax rates may encourage online shopping, and some alcohol retailers have overcome the problem of age verification.

Equally, as well as strengths in the online model, there are also weaknesses in bricks-and-mortar as a channel for e-cigarettes.

Stores where e-cigs are only a small part of the stock may well find it difficult to cater to the great diversity of tastes among vapers; and the shift in the U.S. market toward tank systems, which can need much more consideration and explanation before purchase than cigalikes, is not favourable to non-specialist retailers.

For now, the channels are most likely to continue co-existing, but increasingly sell different types of products in different ways.

– Freddie Dawson ECigIntelligence staff

Photo: Marc Falardeau