Out of Sight
The food channel rang up impressive dollar and unit gains in the electronic smoking device market last year, albeit from a minuscule fraction of the $2.5 billion total volume.
Nevertheless, high double-digit growth in the food channel shows that the electronic nicotine vapor category has penetrated mainstream retailers like Walmart, Kroger, Meijer, Food Lion, Bi-Lo, Giant Food and Safeway.
?There are 40 million current adult smokers in the U.S. Many of them see e-cigs as a significant alternative to smoking. These people shop at local grocery stores and supermarkets, so there is a big opportunity for these types of retailers to reach a highly affluent consumer,? says John Wiesehan Jr., CEO of Mistic Electronic Cigarettes, a product of Monroe, N.C.-based Ballanyne Brands that?s widely distributed at mass-market outlets.
Food channel dollar sales soared 52 percent and units 66 percent, with vapor revenue totaling $16.5 million at food retailers for the 52 weeks ended Nov. 2, 2014, according to data from Chicago-based market researcher IRI. Grocery has a long way to go to catch up to the e-vapor volume generated through convenience and drug store channels.
Given the value proposition of vapor devices, for some in grocery, the cost of merchandising e-vapor products may override the benefit of driving traffic and generating profits, some observers say. Costs not only include financial and labor, but also political ones that can curtail a retailer?s merchandising.
Last year, state attorneys general and public health advocates mounted efforts for retailers with pharmacies to stop selling tobacco products. Some chains, notably Price Chopper, based in Schenectady, N.Y., decided years ago to move tobacco products out of sight by obscuring display cases and not allowing promotional signage.
Price Chopper, however, opposed a law last year in its marketing territory that would ban the sale of tobacco at pharmacies and stores with pharmacies. The law was eventually vetoed by the local legislature.
?Although most grocers still offer tobacco products, its role and visibility has diminished over the years as it moved from the main checkout lanes to behind the service counter,? notes David Bishop, managing partner at Balvor LLC, a sales and marketing company in Barrington, Ill.
Jan Verleur, CEO and co-founder of Miami-based VMR Products, the maker of V2 e-cigarettes, acknowledges that grocery stores are unique in merchandising tobacco products. ?Often, a consumer requests a product that is not in his or her direct line of sight,? he says. ?This obviously means that branding and in-store communication have much more leverage in a grocery store than a typical convenience store.?
According to Verleur, grocery chains that ?find a way to create more consumer engagement and education with electronic cigarettes ? within the boundaries of the law ? will absolutely find themselves in a leadership position within the category.?
Sales by Channel
While e-vapor sales growth is evident, how retailers within various channels respond to the opportunity will determine their success within the evolving segment, Bishop adds.
A Balvor sales analysis, for instance, revealed that convenience retailers that sold a broader range of products such as open-system vaporizer devices, which have gained sales momentum at the expense of e-cigarettes, significantly outperformed those that didn?t.
Given the above, ?the economic value that e-cigarettes may offer a grocer is likely too small to warrant committing much space to it. My guess is that those grocers that do enter this segment will do so with only a small fraction of what is available in convenience. As a result, sales growth in grocery is likely to be lower than the overall market,? Bishop says. This correlates to the percentage of tobacco sales among various distribution channels.
Bishop observes that tobacco sales in a grocery store represent about 1 percent to 2 percent of total store sales. In comparison, tobacco sales represent nearly 40 percent of total store sales in a convenience store.
Traditionally a destination for tobacco products, the majority of mainstream e-vapor device distribution is firmly entrenched in the convenience store channel. C-stores capture about 75 percent of the e-cigarette market among brick-and-mortar stores, according to the Alexandria, Va.-based National Association of Convenience Stores.
IRI reports that electronic smoking device sales are up 31 percent and units up 36 percent, with revenue at $644 million, at c-stores for the period. Total food, drug, mass-merchandiser and c-store sales for the e-cigarette segment was $795 million, up nearly 20 percent.
Drug Store Revenues Vaporize
E-cigarette sales volume in the drug channel was more than four times that of grocery, at $73.3 million, for the yearly period. Drug store dollars and units, however, took a dive: 29 percent and 24 percent, respectively.
Part of the drop could be attributed to CVS? decision last year to pull out of the tobacco category to solidify its health care position. That decision cost the chain an annual loss of $2 billion in revenue.
The coming year could be pivotal in the burgeoning e-vapor category as the U.S. Food & Drug Administration moves to finalize proposed regulations; the tobacco industry quickly consolidates; large vapor, tank and mod devices take up the sales pace; and advances in technology and innovation change what many view as reduced-risk products.
While the industry generally supports the FDA?s effort to regulate e-vapor products, a major point of concern is the costly pre-market approval of new products, which critics say would result in higher retail prices, stifle product innovation and favor large tobacco companies over small innovators.
In a technologically driven product segment like e-vaping, innovation is critical to growth. ?They are technology products, not tobacco products. Trying to squeeze an innovative vapor product into a regulatory structure that was designed for traditional combustible tobacco products is simply not appropriate,? asserts Verleur.
Under the proposed regulations, ?products not marketed as of the February 15, 2007, cutoff (grandfather date) would be considered new tobacco products.? The e-cigarette market barely existed before 2007, so just about every e-vapor product now on the market would be subject to pre-market approval.
Nu Mark LLC, an Altria company, which rolled out its MarkTen products nationally and acquired e-vapor business Green Smoke last year, wants to see the FDA change the grandfather date. In written comments to the FDA, Miami-based Nu Mark suggested the effective date of the final rule as a logical date for the grandfather period.
Ralph Brown, VP government affairs at Grover, N.C.-based Cheyenne International, calls the FDA?s pre-market review ?a huge hurdle.?
Cheyenne isn?t yet in the e-cigarette category, but will soon preview an e-liquid, in three nicotine strengths and seven flavors, under the Bodyshot (cigar) brand at the TPC Expo, Jan. 28?29, in Las Vegas.
?The costs of the pre-market review necessary to receive the authorization are high. Companies will be challenged with the investment that is needed to prepare for the pre-market review, and then there can be uncertainty as to whether the new product will be accepted by the consumer,? Brown notes.
Adds Mistic?s Wiesehan, ?While the FDA?s proposed pre-market review may not necessarily impact product development from Big Tobacco and other larger independent e-cig brands, we do expect the rule to have a deeper impact on smaller vape shops with many SKUs and limited financial resources.?
?The economic value that e-cigarettes may offer a grocer is likely too small to warrant committing much space to it.?
?David Bishop, Balvor LLC