By Steve Hong, Principal of Roebling Research
As 2015 draws to a close, one thread in the vape narrative that has taken hold in the media is that vaping may be a dying fad. The fad characterization has been suggested throughout vaping’s short history but high growth rates in recent years have been a great defense against such claims. However, a recent article in the Wall Street Journal entitled “E-cigarette Sales Rapidly Lose Steam,” by Tripp Mickle points to declining sales of cig-a-likes and doubts about VTM sales growth as indicators that the industry may be in trouble.
In light of this emerging viewpoint, I wanted to re-examine the current state of the vape industry and put some of the points raised in context. The fact that sales of cig-a-likes are in decline, is somewhat expected and could be the result of open system products’ increased popularity. In our 2014 report on open system device adoption, we observed that many smokers who were thinking of taking up vaping were aware of open system devices. In 2015, the advent of sub-ohm tanks and more powerful mods along with decreasing prices made better vaping experiences more accessible to even those new to vaping. So decline in cig-a-like sales may in part be a result of smokers who are skipping cig-a-like use in their conversion to vaping and going directly to open system use.
The more concerning assertion from the recent article is that sales in the vapor-tanks-mods (VTM) sector of the market are slowing down and / or negative. In my opinion, this is a better indicator of vape market health because the VTM sector now makes up the majority of the vape market.
As evidence of a downward trend, Mr. Mickle reports that tobacco industry analyst Euromonitor has lowered their VTM market growth expectations from 126% to 51%. He also reports that Schell Hammel a retailer in Texas who lobbies on behalf of 110 vape retailers in Texas says that all of the stores she represents are reporting declines in sales.
So declining sales in certain areas may be impacting lower but still positive market growth. But in order to get a clearer picture of results from this year and expectations for next, we conducted a brief survey of 30 vape shop retailers during the first week of December 2015.
Our response size was small but statistically significant and geographically diverse. And our results provide some insight into the current and future state of the industry. We asked respondents to tell us about their retail revenue changes from 2014 to 2015 and from 2015 to 2016. Over 75% of our respondents reported sales growth from 2014 to 2015 which leads us to believe that the sales declines in Texas, as discussed in the WSJ, may not reflect the entire market.
Note however that the outlook among retailers changes in 2016. Only about half of retailers expect sales growth in 2016 and about a third expect sales to be flat. “The first half of 2015 has seen increases month over month, but the second half of the year has seen a flattening of revenue,” wrote one retailer respondent, pointing out that mixed results from 2015 maybe be trending towards less retailer confidence for 2016.
One reason for deceleration in growth may be increased competition from other vape stores. As one of our respondents wrote, “When we opened our store in April 2014 there were only 3 stores within a 20 mile radius. Now there is [sic] about 8 within a 5 mile radius.”
This saturation is leading to a turn over of vape shops with “hobbiest” or “quick money” owners leaving the market while others pop up to take their place. “Our market has become quite saturated in the last year…. More stores are opening but that has slowed down somewhat. More stores are closing. I expect that to continue,” commented another of our respondents.
Increasing regulation at the state and local levels along with impending federal regulation are an additional source of pressure on vape retailers. In a survey we conducted earlier this year, we found that 68% of vape retailers sold private label e-liquid. Under a regulatory regime, manufacturing and selling e-liquid at a small scale could become much more difficult if not impossible. So if retailers are dependent on high-margin house e-liquid economically, regulation could affect their profitability. Local and state taxes on e-liquid could also impact profitability.
So there are hurdles for vape retailers that have lead to a flattening of growth. But to call vape a dying fad may be a bit alarmist, according to Kai Chen, an owner of Los Angeles vape distributor All Day Vapes. “With anywhere from 5-9 million vapers in the country, as well as established regulations in Europe and the UK, the government won’t be able to kill the industry.” Chen regards the current retail turnover as a “culling of the herd” and expects continued growth in the VTM market.
Amid these challenges, we expect a few positive trends may drive growth; market consolidation and development of regions not saturated by vape retailers. As some vape shops leave the market, we expect chain vape retailers to expand their businesses thought acquisition. For example, in November, Alabama chain retailer Vulcan Vapes was sold to Vapor Corp., a retailer and distributor based in Florida.
As well, there are still regions, such as metro areas in the North East that are underdeveloped markets for vape retail. New York City is home to 10,000 licensed tobacco shops but only about 100 vape shops. California-based retailer Beyond Vape is taking advantage of this trend and has opened five shops in the city this year to bring their total New York locations to eight. We will be watching for continued consolidation and signs of maturation in the vape shop channel as indicators of the vape market’s health.