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    The E-Volution Continues

    E-cigarettes are just the beginning of a new ?END? tobacco segment

    By David Bishop, Balvor LLC
    Convenience Retailers Offering END Products

    Electronic cigarettes continue their smoking-hot growth, fueled by a combination of greater consumer interest for acceptable smoking alternatives and increased availability at retail. What started off circa 2009 in convenience retail as just e-cigarettes has evolved to encompass a much broader range of options. Products such as e-cigars, e-hookahs and vaporizers are becoming increasingly available alongside e-cigarettes in a subcategory referred to as Electronic Nicotine Devices (END).

    While this rapid evolution by no means represents the actual end of the segment, it almost certainly does mark the end of the introductory period. From the manufacturer side, competition is increasing, advertising budgets are growing and brands are working even harder to create meaningful points of differentiation with consumers and retailers. From a retailer perspective per store, week-per-week sales rates are accelerating, knowledge around the business is improving and the manufacturer base is consolidating.

    CONTRIBUTION & DISTRIBUTION

    END is now the No. 3 subcategory under the other tobacco products (OTP) category, according to Balvor LLC estimates, contributing approximately 8 percent of dollar sales for retailers that sell END products in their stores. These estimates are based in part on sales rates provided by 89 retailers that represent a combined total of nearly 17,000 U.S. store locations.

    END?s industrywide contribution to OTP is understandably lower ? between 5 percent and 6 percent ? as these products are still gaining a foothold within retail store locations. Even so, consumers can now purchase these items at approximately 83 percent of convenience stores, which is expected to grow at least another 7 percentage points as many single-store operators plan to enter the business this year. This level of availability is remarkable considering that only 24 percent of convenience retailers carried END products in some stores as recently as February 2011, according to earlier Balvor/Convenience Store News research.

    What has driven this impressive increase in distribution?

    The number of retailers selling END ignited after the Food and Drug Administration (FDA) affirmed in April 2011 that it would comply with the court?s earlier decision to regulate the devices as tobacco products if no therapeutic claims were made. The second accelerant came around April 2012 with the entry of the first major tobacco manufacturer via an acquisition of a leading e-cigarette manufacturer.

    So, why is that important? There?s still a lot of uncertainty in the marketplace as everyone is waiting to learn how the FDA proposes to regulate this industry. If history teaches us anything, it?s that retail strategies will swiftly adapt after the industry gains clarity and confidence on how the regulation will impact the END subcategory. And with the other major tobacco manufacturers rolling out nationally, assortment will expand more quickly as most convenience retailers will add the products from these established manufacturers.

    In terms of distribution, 71 percent of the retailers selling END in their stores have done so for 12 months or longer. For those retailers in at least their second year of sales, dollar sales growth weighted based on stores is up 111 percent vs. the prior year. This year-over-year growth underscores the segment?s growth potential; however, it?s not driven simply by introducing more products into the store.

    ASSORTMENT

    With the extraordinary growth that END has experienced and the aggressive push by a large number of manufacturers to gain distribution, some may expect that stores would be already showcasing a broader array of products than they are currently.

    Convenience stores offer, on average, a moderate range of brands when compared to other brick-and-mortar retailers. In fact, at the end of 2013, consumers could select from 3.2 brands in a convenience store compared to 5.5 in tobacco outlets and two brands in all other outlets like drug and grocery. While nearly 80 percent of the convenience retailers that have sold END for more than a year indicate that the number of brands offered has increased vs. the prior year, the same relative percentage of tobacco outlets would indicate a similar trend.

    Digging beneath the averages reveals that convenience retailers are taking a more measured approach to building this business. This is a prudent approach given that many of the early manufacturers didn?t have a proven track record in this channel and consumer demand for any new product requires time and manufacturer support to build.

    New Balvor/CSNews research shows that retailers who entered this segment within the last six months offer, on average, two END brands. Using that level as the base, brand selection increases by 15 percent as retailers enter the second six months of operations, and grows by 75 percent in stores that have sold for more than one year.

    How retailers are entering the END subcategory mirrors in some ways the consumer adoption process related to these same products. Retailers new to END start by offering mainly single-unit products, focusing particularly on disposables. As sales build over time, most retailers during the second six-month period expand into rechargeables with an emphasis on the basic/express kits and the supporting refill cartridges. After a year, retailers begin to expand into newer END subsegments like e-cigars and to a much lesser degree, e-hookahs and vaporizers.

    The number of brands offered in-store is projected to expand by nearly 50 percent this year across the convenience channel, growing to 4.7 brands. 2014 will likely mark the year when some of the more established and better-performing retailers begin to offer 10 or more END brands in their stores.

    PLACEMENT

    Just as brand availability has increased in the convenience channel year over year, the number of locations where END products are displayed in the store has grown by nearly 25 percent. While 2012 saw approximately three-quarters of retailers using one display location, that percentage has dropped to just under half while the share of retailers leveraging two locations climbed from one-fifth to almost half at the end of 2013.

    This trend is driven by two distinct factors. First, as retailers add more brands to the assortment, there?s a need to search for secondary placements as the initial locations have difficultly supporting the additional product inventory. Second, retailers are attempting to create a more permanent home for END on the back counter while still using front-counter displays to build awareness for the overall segment.

    Retailers will have even more display locations in 2014 as the major manufacturers integrate their brands into the cigarette set, similar to what they did when introducing their respective snus brands.

    The primary display location is also affected in part by how long the retailer has sold END products. Newer entrants predominantly start by positioning on the back bar above the counter (83 percent), but this practice diminishes as the retailer builds the business over time. For instance, fewer of the convenience retailers that have sold END for more than a year (40 percent) elect the above-counter back bar in favor of using front-counter placement as their primary display location (49 percent), according to the new Balvor/ CSNews research.

    A very small group of convenience retailers (4 percent) display these products on the sales floor, typically by the checkout counter as a way of maximizing engagement and exposure. Even though there are no federal regulations yet limiting the use of self-serve displays with END products, restrictions are beginning to surface below the federal level. Chicago, for instance, passed a city ordinance in January requiring these types of products be merchandised behind the counter.

    SIGNAGE

    Besides the physical display of products, signage plays a vital role in building awareness and interest for END products. Established retailers understand this point well, as more employ signage in their stores today vs. a year ago (80 percent vs. 61 percent).

    Retailers newer to the END business are still learning this lesson as fewer (71 percent) currently use any signage compared to those who have at least a year of experience under their belt (84 percent).

    The most prevalent type of signage used by retailers is a static cling on the door entrance as a way of building general interest for these products. Retailers offering the products for a year or more are 40 percent more likely to also place price signs in the front window as a way to highlight pricing on select END brands. These same retailers are nearly twice as likely to leverage various danglers and other signage on the shelf fixture as a way to highlight the back-counter sections.

    END OF THE BEGINNING

    The impressive growth of this subcategory has attracted a lot of interest from various industry players, as well as public and government groups for various reasons. The rate of product innovation flowing from this subcategory is impressive and challenging for all parties to manage and understand. What is clear is that consumer interest in END is high and likely to evolve further based on how the environment around the products changes.

    So, the end of the beginning actually represents the beginning of the END segment. During this stage, growth will accelerate on a per-store basis as retailers enlarge their END footprint, bringing in a broader range of products and enhancing how they?re promoted to adult tobacco consumers.

    Even though the evolution of this subcategory remains uncertain, convenience retailers have demonstrated their ability to adapt and prevail in increasingly challenging times.

    David Bishop is managing partner at Balvor LLC, a sales and marketing firm in Barrington, III. He can be reached at [email protected].

    By David Bishop, Balvor LLC
    • About David Bishop David Bishop is managing partner of sales and marketing firm Balvor LLC and segment leader at industry consulting firm Brick Meets Click. For more information, he can be contacted at [email protected]

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