C-store Retailers Embracing Latest Vapor Products

NEW YORK -- Convenience store retailers may have been a little hesitant to dip their toes in the electronic cigarette pool a few years ago, but they are showing less reluctance with new vapor products.

Wells Fargo Securities LLC's latest Tobacco Talk survey revealed that retailers are excited about vapors/tanks/mods (VTMs) -- the growing subsegment of vapor products. In addition, more than 92 percent of respondents believe VTMs are taking share from e-cigarettes.

Tobacco Talk surveyed tobacco retailer and wholesaler contacts representing 30,000-plus convenience stores in the United States.

"We continue to be encouraged by the burgeoning presence of VTMs in c-stores. We believe VTMs will drive momentum in the entire vapor category for retailers, which should help generate greater margins and gross profit dollars," said Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities.

The survey also found that nearly all respondents (95 percent) either currently carry VTMs or expect to carry them in the next six months.

"Given retailers' excitement around VTMs, these products are expected to comprise 45 percent of the vapor category in c-stores in six months, up from 26 percent today," Herzog explained. "This is consistent with our independent vapor manufacturer survey, which indicated that VTMs are growing twice as fast as the overall category."

According to Herzog, survey respondents also reported that VTMs offer attractive margins for retailers, approximately 30 percent, which is more than double the average cigarette margins. However, retailers are concerned about margin compression if, or when, the Big Three tobacco companies -- The Altria Group Inc., Reynolds American Inc. and Lorillard Inc. -- control the vapor category.

As for the Big Three's efforts in the electronic cigarette segment, Tobacco Talk found that blu and NJOY are expected lose share to VUSE and MarkTen as they roll out nationwide over the next few months. MarkTen is Altria's e-cigarette product; VUSE is RAI's digital vapor product; and blu is Lorillard's e-cigarette.

"Though we acknowledge VUSE and MarkTen could result in some share disruption for blu, we believe technological advancements on blu should not be underestimated," Herzog said. "For instance, blu's new cherry rechargeable e-cigarette should help blu bridge the performance gap between e-cigs and VTMs, ultimately driving share growth."