Richard Craver/Winston-Salem Journal
The swelling popularity of electronic cigarettes may add to the regulatory and revenue tension between tobacco manufacturers and states.
Electronic cigarettes, or e-cigs, are battery-powered devices that heat a liquid nicotine solution in a disposable cartridge and create a vapor that is inhaled.
Refill cartridges can be purchased in different sizes and flavors; five-packs typically cost between $9 and $18. By comparison, a carton of cigarettes can cost between $25 and $50 for most name brands.
Bonnie Herzog, a Wells Fargo Securities analyst, believes the e-cig craze has shifted from “fad” to “here to stay.”
So much so that Herzog said recently in a note to investors that e-cig sales could grow fast enough to affect the payments states receive from the landmark Master Settlement Agreement.
Tobacco companies, including R.J. Reynolds Tobacco Co., agreed in 1998 to settle lawsuits filed by 46 state attorneys general over smoking-related health-care costs by paying those states about $206 billion over more than 20 years.
Most states have redirected much, if not all, of their MSA money to general expenditures, much to the chagrin of public-health advocacy groups.
Meanwhile, sales of e-cigs are about $300 million a year and the products have about 2.5 million users, according to Tobacco Vapor Electronic Cigarette Association.
There are projections of $1 billion in annual sales within a few years, Herzog said, in part because there is no federal excise tax on e-cigs. Only Minnesota has a state excise tax.
“If the prospects for e-cig category growth are as robust as we believe, this should have a meaningful positive impact on the industry’s profitability long term,” Herzog said.
“Given that the industry’s MSA payments are volume based, as e-cigs take share from traditional cigarettes, the decline in these payments to the states should accelerate. In other words, the dollar amount of these MSA payments should drop faster.”
As a result, Herzog said, those manufacturers that embrace e-cigs, either through internal production or acquisition, will gain – at least in the short term – better sales margins.
Anyone who has visited the check-out counter at a convenience store or tobacco outlet has seen what Herzog is describing – multiple e-cig brands on display.
“Repeat purchases are picking up, driven by greater knowledge and awareness, as well as what appears to be an attractive value proposition for consumers,” Herzog said.
“It appears both rechargeable and disposable e-cigs are succeeding and reinforcing growth in the other–driving overall category growth.
Bill Godshall, executive director of SmokeFree Pennsylvania and a smokeless tobacco advocate, said he believes Herzog is correct in her assessment, pointing out that e-cigs are less expensive and sales are booming, even with current regulatory obstacles.
“The sky’s the limit for e-cigarette growth potential,” Godshall said. “E-cig sales might overtake cigarette sales within a decade.”
Reynolds is dipping its toes into the e-cigs market with Vuse, which is being sold at Tarheel Tobacco stores at 6311 Stadium Drive in Clemmons, 3193 Peters Creek Parkway in Winston-Salem and in Danville, Va., as part of an overall test market initiative.
In April, Lorillard Inc. bought blu Cigs, based in Charlotte, for $135 million. It has launched an estimated $40 million marketing campaign for the devices.
Godshall said he is concerned the Food and Drug Administration may try to ban e-cigs in what he considers as a “misguided attempt to apply the quit-or-die approach to all tobacco products.”
John Spangler, a professor of family and community medicine at Wake Forest School of Medicine, supports developing and marketing products that lessen exposure to tobacco.
He said many of his patients are trying e-cigs as a cessation product with some success.
“I cannot fully recommend it because I cannot vouch for the purity or potency of the nicotine in the liquid,” Spangler said. “I tell my patients the potential risks and benefits of the e-cigarette and let them make the decision.”
Original Source: Journal Now