Merchandising An Alternative Choice

1/1/2013

E-cigarettes remain in the hinterlands of smoking and smokeless products at many retailers.

A recent trip to Duane Reade's New York flagship store at 40 Wall St. illustrates the merchandising challenge retailers and manufacturers face in attempting to gain visibility of this fast-emerging category.

A somewhat puzzled clerk searches and then pulls a rechargeable kit from one end of a wall behind the checkout lane, where the box was buried amid a sea of cigarette brands, and then searches the midsection for two single disposable cigarette items, all the Finiti brand.

When asked if these were the only electronic cigarettes the store carried, the clerk replies, "Yes." No other words are exchanged or questions asked. Without asking, drug store customers would never know the store sold any e-cigarettes.

If marketers and research analysts are correct in reading market demand, e-cigarette sales are about to skyrocket, and retailers who don't fully embrace the category risk losing highly profitable market share. The category is estimated to grow from $500 million in 2013 to $1 billion within the next year or so, according to New York-based UBS Securities.

The category got a big boost last year when the big tobacco companies entered the market to offset their dwindling cigarette sales and appeal to the changing lifestyles of smokers with alternative new products like e-cigarettes.

Greensboro, N.C.-based Lorillard spent $135 million to buy Blu eCigs. The company was quick to launch an aggressive national campaign that broke last fall, backed by a $30 million marketing budget and a celebrity endorser, actor Stephen Dorff. "In 2013, Blu eCigs television ads will be seen by over 108 million adult viewers," says Ryan Coalson, Blu sales ambassador. "What this means is that from our ads, website and customer service, consumers are going into retailers and asking for the product by name."

Winston-Salem, N.C.-based rival Reynolds American Inc. quietly followed suit by test-marketing Vuse, which operates with a computer chip. As such, Vuse is labeled a digital rather than an electronic cigarette. Product origin also distinguishes Vuse: Reynolds produces its e-cigarette domestically, not sourcing from China, where many e-cigarettes are produced and where quality is often a concern, according to reports.

"We're not looking to make a little splash in the category. We're looking to make a big splash," Daniel Delen, Reynolds' president and CEO, told investors last year.

Retailers looking to get into the category, or possibly expand it, are taking few chances, given a number of concerns that range from pending Food and Drug Administration (FDA) regulations to the public's acceptance of the product as possibly a safer alternative to traditional cigarettes.

Retailers, including those in the food business, are trying to better understand where the category's fast-paced growth momentum is headed, the impact of future FDA rules, state and local ordinances, and new taxes.

For the 52-week period ending Nov. 4, e-cigarettes generated $243.2 million in sales across multiple outlets, including c-stores, reports SymphonyIRI Group, a Chicago-based market research firm. This was a 173 percent increase over the previous year. Of that amount, c-stores contributed $162.6 million; drug, $52.7 million; and food, $3.5 million.

Merchandising Dilemma

Merchandising e-cigarettes is a challenge because service is required to properly sell e-cigarettes and age-verify buyers. Some states and local government have either banned the sale of e-cigarettes to minors or have proposed bills to do so and even limit usage in public spaces.

In researching the category, St. Louis-based Wells Fargo Securities surveyed retailers on their concerns about e-cigarettes. Some voiced concern about how best to merchandise products.

"Merchandising remains the biggest hurdle," wrote one survey respondent. "On the one hand, we want to carve out a permanent home for the leading brands and really convey the fact that we are in the business; on the other hand, we recognize that we are also speaking to nonsmokers (friends and relatives of smokers), so transaction counter placement remains a must. Lorillard's approach, which is anchored by a billboard of Blu on the backbar and incents retailers with a cigarette-like monthly payment, suggests they believe that backbar placement is the most logical home for the category."

Coalson says Lorillard "played a big role in helping legitimize the category and show more conservative retailers that this new product category has real legs and selling potential. Though we still face challenges in shelf management and selling capacity, food retailers are beginning to be more responsive to getting e-cigs on their shelves."

Another survey respondent concerned about space and merchandising said, "We believe it needs to be on the front counter so the consumer can touch, feel and explore the product to understand how it works. With multiple brands, space is very limited."

Coalson says that as the market has developed, "convenience stores were more willing to place an order and give up shelf space to see the outcome, but food retailers didn't necessarily have shelf space to spare, so they were a little more wary of bringing this new category into the space."

Move to Checkout

Roy Anise, EVP of Scottsdale, Ariz.-based NJOY, another leading e-cigarette company, which introduced the King disposable late last year and backed it with a $16 million marketing campaign, says food retailers need to educate themselves about the e-cigarette category and rethink their merchandising approach.

"It's an education process," he says. "Once you ring the cigarette bell, it takes some work to unring it. You really need to think about this product in a real different way."

Anise says he believes that visibility is the key to in-store sales, and advocates putting product at the checkout lanes with other impulse items. "Checkout is the convenience store [area] for supermarkets," he adds.

Travis Mahoney, a Giant Eagle franchise store owner based in Elizabeth, Pa., agrees. "I'd like to see them at checklanes," he says. "That would really grow sales, but my concern is theft."

Mahoney believes checklane merchandising can only work if manufacturers work with retailers on a scan-and-pay-based formula. "I know Walmart does that with things like batteries," he notes. "That takes all the pressure off owners of stores and puts it on companies."

The logistics of collecting store register data with some grocery chains like Giant Eagle that have franchise operators probably aren't feasible, Mahoney admits.

Last year, he began selling disposable e-cigarettes from White Cloud, priced at $6.99. About 10 items in different flavors are housed in a clear counter unit placed on the service desk in front of the register. Sales are about 25 units per week, he notes. Tarpon Springs, Fla.-based White Cloud is scheduled to send promotional material, and Mahoney says he'll try a two-for-$10 sale.

"Profit made on e-cigarettes crushes that made on tobacco cigarettes," Mahoney says. He gets 50 percent markup on the sale of a disposable, compared with 12 percent markup on the sale of a pack of traditional cigarettes.

For the immediate future, Mahoney says he's sticking with White Cloud and doesn't plan to add more brands. He doesn't merchandise White Cloud's rechargeable kits, which are sold at mall kiosks in his area.

Jeff McMurray, HBC/GM director at Queens Price Chopper, a five-store independent in Overland Park, Kan., says he recently began selling at two locations a rechargeable starter kit, priced at $54.95, from Lee's Summit, Mo.-based Vaper's Corner. The starter kit, enclosed in a locked box along with samples of e-cig flavoring "juice," is sold at the service desk. The retailer also sells about 60 to 70 different Vaper's Corner juices, priced at $8.95.

"This time of year, with New Year's resolutions, I thought it would be good to introduce the product," McMurray says. Customers have shown interest in the kit, and he's reordering the juices every week or two.

Samantha Woodgate, manager of Hy-Vee Gas and Convenience in Olathe, Kan., another Vaper's Corner customer, began selling three different starter kits, priced from $36.95 to $54.95, last May. The kits are placed in what Woodgate describes as a "four-tier lighter rack, but twice as wide," on the checkout counter. The juices are on shelving behind the counter.

Woodgate says that in the distant past, the store tried to sell disposables, but they died on the shelf, and she sent a small case back after eight months. She adds that customers didn't like the taste, draw or feel of the disposables.

This time around, however, the kits are moving so well so that a Hy-Vee grocery store across the street is now merchandising the kits at its express checkout lanes. Woodgate notes that Vaper's Corner posts availability of its products at her store on its website, which has brought new customers into the store. She has also sold the product to regular customers who want to quit smoking cigarettes and bought the product in hopes of eventually transitioning off tobacco.

Publix Super Markets, based in Lakeland, Fla., began stocking NJOY and Cigirex e-cigarette products in time for the holidays. "The electronic cigarettes will be kept with traditional cigarettes at our customer service desks," confirms company spokeswoman Maria Brous.

"Profit made on e-cigarettes crushes that made on tobacco cigarettes."

—Travis Mahoney, Giant Eagle franchisee

"Once you ring the cigarette bell, it takes some work to unring it. You really need to think about this product in a real different way."

—Roy Anise, NJOY

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