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LAS VEGAS — Electronic cigarettes burst onto the scene several years ago, followed recently by more advanced products to form a new segment of the tobacco category: vapor. The past few months have seen growth in the vapor segment moderate, but convenience store retailers should not count it out.
This was the overall message during the 2015 NATO Show's "Marking Vapor & E-Cigarettes' Territory" educational session Wednesday morning in Las Vegas.
According to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC, the vapor segment continues to grow albeit moderately. Still, she remains bullish and sees vapor consumption surpassing combustible cigarette consumption in the next decade.
In addition, she predicted vapor profitability could grow by approximately 6.6 percent over the next decade, and margins could approach those of combustible cigarettes by 2018 — what she deemed the tipping year.
Specifically looking at the convenience channel, the vapor segment is growing 8 percent annually with vapor/tanks/mods growing three times faster than e-cigarettes. But at this point, e-cigarettes still dominant the segment space in c-stores 65 percent to 35 percent, Herzog said.
There are some curious trends that could affect the segment. For instance, combustible cigarette volume only declined 3.2 percent in full-year 2014 and posted a 0.5-percent increase in the first quarter of this year, she pointed out. These numbers raise a question: Why are adult tobacco consumers still smoking cigarettes if vapor is growing?
Also notably, the public perception of the vapor segment is diminishing. According to Herzog, the percent of people who believe vapor products and e-cigarettes are just as harmful as combustible cigarettes doubled in 2014 to 15 percent.
The Need for Category Management
There are a number of vapor companies that have entered the space — and exited just as quickly.
Part of the problem is the shear number of brands on the market, Joe Murillo, president and general manager of Nu Mark LLC, told NATO Show attendees. He believes the companies that survive in this fast-changing industry will be the ones that focus on the consumer, innovation and quality.
Steve Sandman, president and chief operating officer of Republic Tobacco, said his company keeps the vapor opportunity in balance with everything else it does in the marketplace, and that is important to retailers. "It somewhat amazes me that retailers and wholesalers are embracing companies they never heard of before," he said. "That could be part of the headwinds."
Similar to other product categories, there are a lot of companies entering the playing field, but the numbers are not sustainable, added Larry Wexler, president and CEO of National Tobacco Co.
This brings up a key point: category management, added Murillo, who stressed that applying traditional category management principles is "essential."
"The products are not right yet, but they are just throwing more and more out there," he said.
Traditional category management is a starting point, Sandman acknowledged, but pricing is also all over the map and consumers are still feeling their way through the segment. He suggested retailers take a break — which he thinks they are doing now — and really look at the products on the market.
Opportunities do exist and there will be an inflection point, Wexler noted. He pointed out that consumers want the product, the technology will change, and the industry will have to take control of the narrative.