Big Tobacco continues its race for the loyalty of U.S. vapers

tortoise and hare 300x180Reynolds American and Lorillard, the two U.S. tobacco giants expected to merge next year, both expressed great expectations for e-cigs in announcing their latest quarterly financials.

But while Reynolds is ploughing funds into the national rollout of its first e-cig, Lorillard – not long ago a clear market leader – is pinning hopes on the chance that new product enhancements can reverse the decline of its Blu brand.

At Reynolds, a highlight of the third quarter was growing national distribution for its Vuse e-cig (as well as the Zonnic nicotine gum, marketed by its Niconovum subsidiary). President and CEO Susan Cameron said that “Vuse will be available in almost 70,000 selected retail outlets” within days, “and that will be followed by another wave of expansion early next year.”

The 70,000 figure represents a doubling of Vuse’s availability, and Reynolds is putting heavy resources behind the rollout. Indeed, Wells Fargo Securities – highly-regarded for its analysis of the tobacco sector – thinks that the money generated at the manufacturer from growth in margins on combustibles was almost entirely consumed by spending on Vuse, which Reynolds expects to be profitable by mid-2015.

The company is also developing other next-generation products but its current focus is attracting vapers to Vuse, said Cameron. “This is our priority. And getting them to try…Vuse is essential because you have smokers out there who have tried a lot of different e-cigarettes. They have not found them all satisfying and so we’ve got to get them to try another one. And so our promotional activities are focused on doing just that.”

Cameron cautioned, however, that the patterns of consumer use are still complex. “There is a lot of trial going on out there across the categories. We’ve always seen people dual use snus and moist, or combustible and snus, and we see reports of people using combustibles and vapor. And then you see reports of people switching to vapor. It’s just too early to have a real handle on it.”

Overall, Reynolds recored net sales for the quarter of $2.24bn, up 4.9% year-on-year. Net income on a GAAP basis was up 2.2% to $467m. The company, expected to complete its acquisition of Lorillard in the middle of next year if it gains regulatory approval, did not separate out figure for e-cigarettes.

LO mood

At Lorillard, a longer-standing presence in the e-cig sector, the emphasis is more on stemming decline than entering a new market – albeit decline that still leaves it in a strong position.

The Reynolds Vuse brand has recently overtaken Lorillard’s Blu to take the position of top seller in U.S. convenience stores by dollar value, with 28.8% for Reynolds against 25.4% for Lorillard, according to figures from the market research service Nielsen Scantrack. Indeed, Lorillard’s C-store dollar share has gone down a full third in the course of a year.

But the picture is not a simple one of an ascending power versus a spent force. For example, Wells Fargo believes that Blu still has greater unit sales because of the larger number of shops that sell the brand – more than 100,000, a level that Vuse seems unlikely to achieve before next year. Blu also still has a 40% share in non-convenience general retailers, and the Nielsen figures do not track vape stores at all (although Big Tobacco brands are unlikely to dominate there anyway).

And the company says the decline is partly illusory – the year-ago figures were boosted by large orders for initial stocks when the product was new, at a level which stock top-ups wouldn’t be expected to maintain – as well as partly the result of “aggressive” free trial programmes from competitors such as Reynolds.

The contribution of Blu to Lorillard’s fortunes is also complicated by the likelihood that the Blu brand will be transferred to Imperial Tobacco as part of the Reynolds-Lorillard combination next year, assuming that goes ahead as planned.

Plus+ plus?

Still, Lorillard clearly needs to fight back for now. It plans to do this with a range of product innovations including Blu Plus+, a closed rechargeable tank system with longer-lasting battery; and more flavours.

It has already been encouraged, the company said, by the launch during the quarter of cherry-flavoured disposables, and seems to have high hopes for its UK operation (the previous Skycig, acquired in October 2013) which generated only $1m in net sales during the quarter but is poised for a big push into retailers.

Unlike Reynolds, Lorillard breaks out its financial figures for e-cigarettes. In the third quarter, sales were down 39.7% from $63m to $38m, while over the first nine months, they dropped 28.8% from $177m to $126m. Lorillard’s e-cig operation incurred an operating loss of $14m for the quarter, and $48m for the nine months.

Overall, Lorillard sales including combustibles were up 0.2% to $1.83bn in the quarter, and GAAP income rose 12% to $289m.

What This Means: Vuse could triumph over Blu, Blu’s new products and the dropping-off of Vuse’s free trials could put Lorillard back on top, the MarkTen from Altria (the third of the big three U.S. tobacco makers, due to report quarterly results next week) could come from behind to trounce them both, the transfer of Blu to Imperial could make the point moot, the rise of vape stores and tank/mod systems could do the same…it is far too early to pick winners and losers here.

The real takeaway is Big Tobacco’s commitment to investment in e-cigs (and/or other alternatives to combustibles). Just as symbolically telling as the yo-yo of market shares may be that when Reynolds recently announced a ban on smoking in most areas of its office buildings, it didn’t extend that to vaping.

– Barnaby Page ECigIntelligence staff

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