By Barnaby Page ECigIntelligence staff
The e-cigarette world in 2016 will be overshadowed by regulation. Most notably, the European Union’s (EU’s) revised Tobacco Products Directive (TPD) will come into force in Europe in May, while the U.S. Food and Drug Administration’s (FDA’s) deeming regulations are likely to appear in the early parts of the year.
But the story will not just be about compliance. The e-cigarette industry is not a mature one like fast food, or insurance, or aviation, where new regulations mostly mean adaptions to well-established ways of doing business.
On the contrary, in e-cigs the market and the products themselves are rapidly evolving even without the influence of law-makers. So requirements like the TPD and the deeming regulations merely add a further twist to an already complex outlook.
What can we expect, then? It’s difficult to be adamant. Though the outline of those regulations in Europe and the U.S. is fairly well known, many details of their implementation remain unclear, so even if the market itself was entirely predictable it would be tough to forecast exactly how they will affect it. Given the fluidity of the market, that’s almost impossible.
But what we can do is extrapolate forward from current trends and current talk. The only certainty, of course, is that what we predict won’t come to pass precisely. Even so, the broad outlines of the picture we paint should bear some resemblance to the e-cigarette industry in 2016.
Regulation: challenges and contradictions
The TPD is widely held to have been hastily and poorly thought-out. The deeming regulations – at least in their last-seen form – satisfy almost no-one. The e-cig industry considers them overly restrictive (especially in the burdensome requirements for product approval), while opponents of e-cigs see them as far too easy-going (by allowing e-liquid flavours that are supposedly appealing to minors, for example).
So we can expect challenges, both from the industry (as has already happened with the TPD) and from dissatisfied legislators seeking to vary the new rules before they’re dry on the page (as is already happening with the deeming regulations).
And adding to the convolutions of the situation is the fact that neither the deeming regulations nor the TPD will stand alone.
In Europe, several important aspects of e-cig control – including vaping in public places and, of course, taxation – are unaddressed by the TPD and left to individual member states.
In the U.S., state and municipal governments have been moving enthusiastically to devise their own regulations in the absence of a finished deeming rule. The FDA’s regulations will trump these local ones when there are direct contradictions, but again there are many issues not covered by the federal agency – and we can be sure that authorities at lower levels will continue to regulate in these gaps.
The upshot, then, is that neither the deeming regulations nor the TPD will bring about any kind of uniformity in their respective territories. At least unless challenges are successful, there will certainly be some things that are prohibited throughout the EU (e-liquid above a certain concentration, for example) or throughout the U.S. (new e-cigs unapproved by the FDA, for instance), but there is no guarantee that anything will be permitted throughout either region.
We can also expect much regulatory activity elsewhere – ranging, perhaps, from complete or near-complete bans in some Asian countries to a clarifying of confused or absent rules in nations such as Canada and China.
Regulation: the impact on business
The scale of regulation’s effects on business has probably been overstated. In the U.S., for example, some hints have emerged that the FDA may well not require the full-scale scientific testing of each new e-cigarette that had been feared. All the same, it is still clear that one of the biggest impacts on the industry will be a vastly increased compliance burden.
Of course, that’s decidedly unamazing. You’d hardly expect the first wide-ranging regulation of a new industry not to add a lot of compliance requirements. What’s particularly notable, though, is that much of the burden will be directly proportional to a supplier’s range of SKUs: more product variation means more paperwork and more cost.
There may turn out to be cunning ways to circumvent this, at least to some extent. But it’s very likely that we will see the number of SKUs substantially reduced, both for individual suppliers and by extension for the industry overall.
This will not necessarily mean less variety. It may mean the emergence of clearer market leaders in each subsection of the e-cig sector, and it may mean that smaller companies, in particular, become more focused.
To take an abstract example, a hundred firms could all drop a certain flavour which accounts for only 1% of each one’s sales, and therefore isn’t worth jumping through regulatory hoops for; but if demand for it is unchanged, all those 1%s could add up to a healthy business for someone else specialising in obscure flavours.
Regulation may well also encourage better-quality new product development and customer research, as the cost of bringing a poor-selling product to market will no longer be trivial.
Regulation: the impact on business (yes, there’s more)
The effects of the deeming regs and TPD will not stop there. It has been widely suggested that the cost of compliance will favour bigger businesses, especially those from the tobacco industry, and there may be some truth in this – though we do think the doom-saying has been excessive.
And other regulatory factors may also push the industry toward consolidation into fewer, larger suppliers, whether or not they come from a tobacco background.
For example, we expect regulation to reassure investors and backers, making mergers and acquisitions easier to achieve. Similarly, by making what has thus far been low-hanging fruit harder to reach, it will discourage casual entrants into the market – at least at the manufacturing end, if less so in retail. New e-cig firms will have to invest sufficiently to get things right, and then execute them on a large scale to recoup that investment.
We also expect tight controls on advertising to swing marketing budgets substantially toward point-of-sale promotion. This is particularly true in Europe, where the TPD will ban most forms, but possibly also in the U.S., where the Federal Trade Commission (FTC) appears to be taking an interest in the vapour sector’s practices. Bigger firms will have an edge here because they can move sufficient volume to persuade retailers to take them seriously.
The other beneficiaries of advertising restrictions in Europe, at least, will likely be cinema and digital outdoor (screens in public places, especially adults-only venues such as pubs, clubs and bars). And good advertising agencies will do well out of them, too. Just as regulation could encourage smarter product development, it will – in Europe at least – necessitate far more creative approaches to marketing. There are silver linings to the regulatory cloud.
What about the customer?
Consumers will still have choices to make, even in a regulated market, and one of the most obvious ones they are making at the moment is to move away from closed-system cigalikes to later-generation, more open e-cigarette systems. In many retail markets this seems to be paralleled by a drift of custom from supermarkets and convenience stores toward vape stores.
This is because the latter tend to stock open systems, which are significantly more complex to display and sell than cigalikes, and require staff with in-depth knowledge to advise customers. Similarly, the migration of many bricks-and-mortar customers to online shopping favours the specialist sellers.
We expect this to continue. But our expectation comes hedged with one very large caveat: these trends will not have escaped the notice of the big suppliers.
It is very possible that one of the major brands will come up with the Holy Grail: an e-cigarette that delivers the benefits of open system performance for the consumer along with the convenience of the cigalike for both them and the retailer. And all this in a way that’s compliant with the emerging regulatory frameworks.
We also believe it is possible that, in one or more countries, a major retail player from outside the e-cig sector might launch its own vape store chain. Perhaps one from the slightly edgy, fashion-driven side of mainstream – maybe from coffee or cosmetics, for example.
So, yes, there is a clear shift toward open systems and vape stores, but it would be very dangerous to assume this shift means the future is only about small independents. The industry will likely be as variegated at the end of 2016 as it is at the beginning.
The big names may still be the same names, but it is probable they will be selling rather different product in rather different ways, thanks to the twin pressures of regulation and consumer taste.
Photo: Kate Farquharson