Right Oversight

Retailers that invest in new tobacco segment await the effect of regulations.

Wegmans Food Markets Inc. stopped selling highly profitable cigarettes and other tobacco products in 2008, citing a commitment to health and wellness, particularly for its employees, who were encouraged to begin a smoking-cessation program launched by the retailer.

“As a company, we respect a person’s right to smoke, but we also understand the destructive role smoking plays in health,” Rochester, N.Y.-based Wegmans declared.

Wegmans’ decision was in accordance with a strong anti-smoking and health-conscious movement sweeping the country at about the time an innovative breed of devices — electronic cigarettes — emerged in U.S. markets, arising “from the ashes,” as a slogan for Blu eCig ads from Greensboro, N.C.-based Lorillard conveys.

Viewed by many as a safer and cheaper alternative to conventional cigarettes, e-cigarettes in six short years have gained a foothold in the tobacco market, positive Wall Street attention, the entry of Big Tobacco companies, and distribution into mass market retailers, including supermarkets.

Analysts valued global sales of e-cigarettes at nearly $2 billion last year. Some predict the category could eventually surpass declining cigarette consumption, which stood at 293 billion units in 2011, from a high of 640 billion units in 1981 in the United States.

“Any food retailer who sells tobacco products and wants to remain relevant to the adult tobacco consumer should be evaluating this rapidly growing segment,” says David Bishop, managing partner at Balvor LLC, based in Barrington, Ill. “Not doing so is simply resulting in a further market share erosion, as there is a clear and growing demand for these types of products. With that said, it’s important which manufacturers are the best fit and what level of assortment to offer, given the range of available product types.”

E-cigarettes vaporize nicotine through a battery-powered process that heats — not burns — nicotine and a propylene-glycol solution. The electronic products attempt to mimic the smoking experience through inhalation of nicotine-laced vapor not tobacco smoke.

There’s generally no tobacco in e-cigarettes. Recent examples suggest that could be changing as manufacturers push technology to develop devices that could be considered less harmful.

FDA’s Intent

The U.S. Food and Drug Administration (FDA) unsuccessfully attempted to regulate e-cigarettes as drug delivery devices, which in 2010 sparked a federal appeals court to rule against the agency, determining that e-cigarettes and other products made or derived from tobacco could be regulated as “tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009.

Subsequently, FDA revealed its intent to extend its tobacco product authority to other products such as unregulated e-cigarettes.

FDA’s pending regulations, which the industry has anxiously anticipated for the past several years, sit at the federal Office of Management and Budget for review. It’s not known when they will be released for public comment, or what the scope of those rules will encompass.

The industry remains cautiously positive, despite concerns.

Ray Story, CEO of the Tobacco Vapor Electronic Cigarette Association, in Alpharetta, Ga., believes FDA is waiting to see final rules in a proposed European Union Commission’s (EU) proposal for a Revised Tobacco Product Directive that would impose regulations on e-cigarettes that are similar to those for cigarettes.

Last year, the EU voted not to regulate e-cigarettes as medical devices that would subject the products to costly certification and place product sales with pharmacies.

“Hopefully, the FDA will look at some kind of harmonized regulatory structure that applies to both continents,” Story says.

Expectations and Concerns

The e-cigarette industry generally favors broad regulatory guidelines with strict age restrictions for minors.

“We believe that it’s incredibly important for the consumer to know that they have a safe, high-quality product that’s manufactured according to GMP guidelines and under an FDA-regulated environment,” said Jessica Lee, CMO of Rejuve Cigs LLC, in Brea, Calif., a newly emerging company.

Carl V. Phillips, scientific director of Springfield, Va.-based Consumer Advocates for Smoke-Free Alternatives Association, says his organization would like to see regulations that “make consumers better off, the same type of regulations that FDA imposes for safe food.”

Concerns, however, center on restricting sales channels and product innovation through the pre-market approval process used in approving new tobacco products.

Tobacco manufacturers can use “substantial equivalent” as a pathway for new products, which means they have to establish that the new products have the same characteristics as valid, previously marketed items sold before Feb. 15, 2007, explains Phillips.

The Smoke Free Alternate Trade Association (SFATA), based in Hallandale Beach, Fla., supports appropriate government regulation, but under a separate regulatory framework.

“The FDA has a unique opportunity to craft a new regulatory framework for vaporization products outside of the Tobacco Control Act. Such an approach would not only establish smoking products as a defined category with the agency, it would also give much needed specialized regulatory attention to a technology offering that could transform adult consumer nicotine consumption patterns going forward,” notes Cynthia Cabrera, the association’s executive director.

“At our core, we are a technology category that regularly innovates products to provide better experiences to consumers,” says Rafael Llopis, VP sales at Miami-based VMR, a founding member of SFATA. “Imposing disproportionate regulations on electronic cigarettes by misclassifying them would stifle innovation, as well as our ability to bring new and better products to market, driving consumers back to the traditional cigarette.”

Without government regulation, e-cigarettes have gained quick momentum, perceived as a safer, better-for-you alternative for tobacco smokers.

Chicago-based Information Resources Inc. sales figures for the 52-week period ending Nov. 3 valued e-cigarette sales at $171 million at multi-outlet mass market retailers, a 108 percent increase over the previous year. Supermarkets generated e-cigarette sales of $10.9 million, and drug stores, $103.9 million.

Various interest groups hotly debate whether e-cigarettes are safer. How the pendulum swings on the issue of harm-reduction tobacco products will go a long way in determining the success of the category.

Big Tobacco has entered the electronic market with its own brands of e-cigarettes: first Lorillard with Blu eCigs, followed by Winston-Salem, N.C.-based Reynolds American Inc. with Vuse in limited markets, and Richmond, Va.-based Altria Groups MarkTen, also in limited markets. Lorillard, which operates mostly in the United States, additionally acquired U.K. e-cigarette manufacturer SkyCig late last year.

New York-based Philip Morris International Inc. is the latest to enter the market, with an e-cigarette slated for the second half of the year.

Additionally, a San Francisco startup, Ploom, says it’s “reimaging the smoking paradigm” with its ModelTwo e-cigarette that heats small pods of tobacco. A Ploom device sells for $39.95, and a 12-pack of pods for $8.99.

“Any food retailer who wants to remain relevant to the adult tobacco consumer should be evaluating this rapidly growing segment.”
—David Bishop, Balvor LLC

“At our core, we are a technology category that regularly innovates products to provide better experiences to consumers.”
—Rafael Llopis, VMR