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Is Vaping a Dying Fad?

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.

Vapor-Tanks-Mods Outlook 

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.


A Q&A With Tim Philips of ECig Intelligence about Project Vape Manifest

Recently ECigIntelligence, Roebling Research, E-Cigarette Forum and SFATA partnered to create the first independent analysis of the U.S. vapor shop industry with the launch of “Project Vape Manifest.” Our colleagues at SFATA rspoke with ECigIntelligence’s Tim Philips on the genesis of the survey.

CLICK HERE to take the SURVEY.

SFATA:  Why did you create the survey?

Tim: As consumer preferences evolve and the category continues its growth, we saw a need for accurate data on sales, trends, preferences and attitudes, as well as insight in to actual economic impact from the category on a local, state, regional and national level.

SFATA: What is the aim of the project?

Tim: This really is the first time that the industry will have independent data from vape shops, where most of the growth is now occurring, which we think will be helpful to shop owners to better compete in today’s marketplace, and regulators and other constituents to make informed decisions.

SFATA:  Why partner with SFATA? 

Tim: SFATA is the largest trade association to the e-cig industry with strong ties to the vape shop community. With SFATA, Roebling and E-Cigarette Forum, we have brought together a great mix of industry leaders to start tracking important trends in the vapor industry.  

SFATA: What are some of the benefits of participating in the study?

Tim:  Participants will receive a customized report that will include best practices and key economic trends and insights into the vape shop market. We are also extending SFATA members a 50 percent discount on the full final report, which we intend to conduct regularly to track longitudinal changes in the sector. Finally, by tracking the vape shop industry and making public the key findings of the report to U.S. regulators and media, we will contribute to a better understanding of this part of the sector to the benefit of its long-term future.

SFATA:  How can a vape shop participate? 

Tim: The survey is anonymous, takes no longer that 30-minutes, and can be found here. We encourage all  vape shops in the U.S. to participate.

CLICK HERE to take the SURVEY.

Views from the Middle (Men) on the Vape Industry

The following post comes to us from Kai Chen and Rich Park, the owners of All Day Vapes (www.alldayvapes365.com); an importer and nationwide distributor of vape hardware and liquids located in Los Angeles, CA. We have been talking lately about what is good and bad about rapid change in vape so they wrote this post to explain with the industry looks like from their vantage point in the middle.

By Kai Chen and Rich Park

The vape industry, if anything, is characterized by rapid innovation. In the last two years, the industry has moved through several innovative platforms – from cigalikes to ego batteries and clearomizers, to high powered regulated devices, and, now, temperature control. But, innovation can be a double-edged sword, and, often, the question “is innovation good” depends on who in the industry answers it.


For consumers, innovation brings a host of benefits. New products promise convenience, improved flavor, greater vapor generation, and enhanced safety features; the quality and selection of products increases while prices continue to decline. The sheer pace and number of products released to market can, at times, be overwhelming. Constant education is necessary for consumers to stay ahead of the curve, and the rapid release of products can make consumers feel as if the newest product they just purchased is already obsolete. Overall, however, innovation has pushed the consumer vape experience to previously unimaginable levels of convenience, safety and performance.

On the other hand, ask retailers and distributors how they feel about innovation, and they will tell you innovation moves too fast. The number and developmental pace of products can be highly disruptive to the supply chain, and for retailers and distributors attempting to keep up, that pace can compound mistakes made in product selection and inventory management. Retailers are often managing SKUs; with the release of each new product, coils, batteries, chargers and other accompanying accessories must also be stocked. At the same time, older products, going back several generations, need to be supported. Constant innovation also requires re-training of employees to ensure product support is up to date. Furthermore, retailers must also contend with minimum order quantities from their suppliers, purchasing more inventory than optimal. As a result, the number of SKUs and inventory levels can skyrocket and product management can quickly overwhelm an unprepared retailer. Like any other retail business, those retailers with proper inventory and supplier management skills, release valves for overstocked items, and an understanding of their customer base can mitigate many of these issues.

Distributors face the same issues as retailers, but on a much larger scale, and must also contend with market demand lag – early adopters, a vocal and visible minority, create artificial spikes in demand for new products, which are followed by months-long lags, and subsequent price drops, as mainstream adoption catches up. Fragmented regional, or even hyperlocal, markets exacerbate the problem. For example, new products tend to be picked up quickly in California, but take anywhere from one to two months to fully penetrate the national market. Because of the the rapid pace of product releases from manufacturers, distributors must make a constant stream of difficult product, inventory and pricing decisions, often without the benefit of market research or data. Proper development of multiple retail sales channels and geographic strategies, however, can allow a distributor to mitigate mistakes and succeed at the national level.

At the top of the supply chain, manufacturers are competing in a hyper-competitive and crowded space. As a result, they are often pressured to release new products in order to stay ahead of the curve. The accelerated and compressed product cycle of the industry can result in manufacturers rushing untested or incomplete products to market, essentially turning consumers into alpha and beta testers. Corners are often cut in a rush to market or to lower costs with materials and quality control often the first on the chopping block. Copying is also endemic to the manufacturing base. These conditions have created a flood of “highest quality, innovative” products that are neither quality nor innovative. Case in point, a manufacturer recently declared his company to be innovative because he packaged four coils to a pack instead of the standard five.

Marketing plays a huge role in masking these deficiencies, and to enhance the chances of success of a new product, “hyping” to-be-released products weeks or even months in advance of a release. In some cases, mere product announcements can cannibalize existing products or even entire platforms. One manufacturer was notorious for cannibalizing their own products; before a product had even arrived in the U.S., the upgraded version was announced by the manufacturer, leaving distributors and retailers with a glut of depreciated product before it even hit shelves.

The result of this an innovative industry that is disruptive to its own supply chain and difficult to manage, but highly favorable to consumers. On the whole, the vape experience has been greatly enhanced and consumers now enjoy a wide variety of products at a range of prices. Early adopters do take on some risk when paying for new and untested products; but, it is undeniable that, overall, consumers now have a wide selection of products that offer increased levels of convenience, performance and safety over products released just a year ago. But, for those involved in bringing those products to market, the rapid pace of innovation can be difficult to manage; like in the mobile phone market, another industry characterized by rapid innovation and disruption, many of the players – retailers, distributors and manufacturers - in the vape game will be left on the sidelines. 

 

Market Research for Vape Retailers

How can we help?
Roebling Research would like to know how we can help make your business better. We've talked to several vape retailers about their market research needs but we want to hear from you. Please click the link below to tell us what research you need the most. It should only take a few minutes. Thanks!

CLICK HERE to take our survey!

The Key to Success? Yup, it’s at the Mall.

Who will be the first vape billionaire? If you’ve raised your hand, then you might want to get familiar with Spanish billionaire Amancio Ortega and his fast fashion retail brand Zara. Though not a household name, Ortega recently bumped Warren Buffett down a rung when he became the second richest person in the world, after Bill Gates. According to the Bloomberg billionaire index, his estimated net worth stands at $71.5 billion.

In part, Ortega owes his fortune to his innovative production and distribution model. Zara is unique among fashion retailers because it can take products from concept to store shelves in three weeks. With capabilities like these, it can adapt rapidly to ever-evolving consumers’ needs and tastes. In 2008, the Spanish brand over took Gap, that other shopping mall stalwart, as the largest fashion retailer. Where as Gap focused on wardrobe staples with a preppy, static style, Zara focused on introducing up-to-the-minute imitations of runway fashion to provide customers with high style at low prices.

Much like Zara, vape manufacturers tend to cycle through product iterations rapidly. For instance, if a tank model sells well then version two and a mini-version won’t be far behind. The upside of this agility is two fold. First, the general quality of vape products has improved steadily through frequent iterations. Many of the initial problems that were common in open system devices just a couple years ago (leaking tanks, weak vapor, difficulty in changing wicks, etc.) have at least been addressed if not mostly eliminated. As well, both hardware and e-juice have evolved to provide more consumer satisfaction. You want a tank that provides just the right amount of airflow for the way you inhale? You want a 50-watt battery that fits in your shirt pocket? You want e-juice that tastes like it was excreted by a mythical creature? It’s all available at your local vape shop.

However, without appropriate channel coordination, this fast turnover comes at a cost. One of the biggest challenges that distributors and retailers face is contending with the constant flow of new products. In an ideal world, these channel partners would have the right products at the right time in the right amount, selling out just in time for the next wave of new products. But as it is, they often don’t know which products to invest in, have trouble buying them at wholesale, and are often left eating the cost on outdated inventory when consumers have moved on to the next new thing. All of these problems lead to economic waste so the market is not as efficient as it could be.

What can Vape learn from Zara?

One of the criticisms of the vape industry as an investment is that it is hard to build a brand to take significant market share. There are low barriers to entry, not much enforceable intellectual property, and thus, products tend to be copies of each other. However in fashion, Zara faces a similar market environment but focuses on distinguishing itself though capabilities, not product. By anticipating consumer demand, producing and distributing products rapidly, and adapting as needed, Zara has build an industry-leading brand.

Zara can better deal with distribution challenges because it is vertically integrated, with all production taking place in house. Near constant communication from the retail level to headquarters is a key component of their operations. That’s great for the future Andrew Carnegie of vape but as it is, the vape industry is highly fragmented both vertically and horizontally. What are the keys to Zara’s success and can they be replicated in the vape industry?

Responsive Supply Chain

Zara’s supply chain is optimized to get new products on store shelves as quickly as possible for two reasons. First, Zara’s core consumers know that products inspired by the latest styles from major fashion houses will be available at their favorite store. As well, constant rotation of styles keeps customers coming back more frequently to see what’s new. So continually changing product serves as a kind of marketing in itself.

While vape brands produce new products rapidly and are able to generate buzz online, anecdotal evidence from distributors and retailers suggests that the vape supply chain often doesn’t link up. Many buyers don’t know where to get the latest products or to source a steady stream of the best brands. This confusion often leads to lost sales.   

Forecasting and Intelligence Gathering

For vape retailers, knowing what to purchase is a major challenge. They can’t buy and stock every new product that hits the market because of their limited budgets. But without reliable demand forecasts, purchasing decisions are a gamble. Sure, it’s got buzz on ECF but will that prosciutto-flavored e-juice be a hit at the local vape shop?

Contrast this uncertainty with Zara’s operation. The retailer does extensive market research and forecasting to make educated guesses about what will sell in upcoming seasons and how many to produce. As well, the company has a communication system that allows retail managers to communicate directly with designer to communicate customer feedback and ordering needs. With this system, designers and production can adapt rapidly to the market place.  

Outsourcing vs. In-house

Part of Zara’s success is due to a strategy that Ortega employed early in the Zara story. While most clothing manufacturers around the world were outsourcing production to Asian contractors, he continued to use in-house and contracted production facilities in Spain and Portugal because the advantage of rapid communication between designers at the Spanish headquarters and the production facilities was more important than saving on labor costs.

It could be said that Chinese device brands like Aspire and Kangertech also have this advantage because managers, designers, and manufacturers are geographically close. However, Western brands that white label China-made products may be more susceptible to delays in new product development because of the geographic distance.

So back to our original question. We don’t know who the first vape billionaire will be but we might know what the business will look like. In this unregulated environment, having a organization that can get innovative, highly demanded products to the market quickly would be an enormous advantage.

 

The Evolution of Vape Shops

Roebling Research is currently recruiting vape shop retailers to participate in studies. Those who participate are eligible for honorariums, contests, and free market research. Go to http://roeblingresearch.com/vape-shop-panel/ for more details.

When vape shops first started appearing just a few years ago, they seemed more likely single-door passion projects opened by vapers wanting to turn a hobby into a living. But the channel is maturing quickly. Today, many of these passion projects look more like budding empires. Take Avail Vapor of Chesterfield County, Virginia for instance. This operator of retail stores has grown to 45 locations in under two years with plans to add more. In addition to manufacturing their private label juice in a 4,000 square foot pharmaceutical-grade production facility, Avail also distributes e-juice to other vape shops. 

According to estimates from Wells Fargo, the e-cigarette market is expected to grow to $3.5B this year with the Vapor-Tanks-Mods (VTM) segment expected to account for $2B. Cig-a-likes, which only a few years ago dominated the market, are supposed to account for the remaining $1.5B.

The growth of the VTM sector is due in large part to the fact that vape shops are opening in communities across the country.  Claims vary as to how many vape shops there are but we estimate that between 6,000 and 8,000 stores operate in the U.S. At an expected $1.2B in retail sales for 2015, the vape shop channel is the largest in the VTM segment. But beyond the numbers, vape shops have nurtured the growth of the market one vapor at a time. Vape shops know that consumers new to the practice require handholding when it comes to selecting the right gear and using a personal vaporizer for the first time. As well, vape shops offer a sense of community to smokers trying to quit. This personal attention is a key driver of the channel’s growth. Indeed, convenience stores and other traditional tobacco retailers have acknowledged that they have trouble competing with this high-touch service.

Despite the increasing focus from all industry stakeholders on vape shops, we have found very little data available on their activity. So from January to April of this year, Roebling Research conducted a study to gain insight into the channel. Our findings show signs of maturing businesses with many increasing in operating experience, number of locations, and developing sales through the online and brick-and-mortar channels. However we have also identified sources of risk. Most stores in our study manufacture their own juice. Small e-juice manufacturers, including vape shops, will likely have trouble dealing with regulatory requirements from the Food and Drug Administration and may have to cease production. If stores are heavily dependent on revenue from their private label e-juice, regulation may have a negative impact on the channel as a whole.

Methodology

From January to April of 2015, Roebling Research, in conjunction with Vape News Magazine and Wingle Consulting Group, conducted a survey of U.S. vape shops to gather basic business metrics.

For the purposes of our study, we wanted to capture results from “pure” vape shops meaning the vast majority of their sales come from the sale of open system devices, accessories, and e-juice. As well, we screened for business names that alluded to vaping or e-juice; indicating the focus of their business was on vaping products. Only one of our respondents sold any tobacco products. Our study was comprised of results from 44 vape businesses.

Length of Operation and Proliferation of Vape Chains

The vape shop channel is relatively new and our data on length of operation reflects that. 86% of businesses surveyed were less than two years old and almost half were less than a year old. These proportions reflect the rapid expansion of the channel in the past two years. However, we expect that local regulation will slow growth in number of vape store retailers in some areas. In particular, local governments may discourage the opening of vape shops by imposing zoning laws, licensing laws, and hefty taxes.  

Though the vast majority of businesses in our survey were single-location businesses, about half of locations (46%) accounted for in our survey were part of a multi-store chain. As the channel matures, we expect vape chains to grow in number of locations and as a proportion of the channel. Presumably, chains benefit from branding and the other advantages of larger scale (lower per unit cost, proven management, etc.). For brands, finding ways to reach these chains would be vital.

Multiple Lines of Business

Vape retail businesses have expanded in scale but they have also grown their businesses by adding lines of business. Our survey shows that shops are also manufacturing, distributing, and selling goods online. In a regulated environment, specific authorization from state and federal authorizes would be needed to perform all three functions. We expect that as regulation is introduced, vape retail businesses will disaggregate in terms of function.

E-juice Manufacturing and Distributing

In its infancy, the VTM market’s value was predicated on devices. Bigger batteries meant more power and more vapor. Over time, however, juice flavor became a major component of consumer satisfaction. As juices evolved, small U.S. brands came on the market to compete with Chinese e-liquids. Branding and unique flavoring created great perceived value, allowing brands to charge higher prices. 

Thus it is no surprise that vape stores are selling private label e-juice. 68% of businesses surveyed manufacture and sell private label e-juice. Because e-juice ingredients (propylene glycol and / or vegetable glycerin, flavoring, and nicotine) are relatively inexpensive, this can be a high margin product for the manufacturers / retailers.

Private label brand owners should be concerned about impending FDA regulation and the effect that it will have on their business. Industry experts expect that many smaller brands, including private label, will be unable to comply with per SKU cost of regulation. Thus, if vape retailers are dependent on private label juice for a large portion of their profit, their businesses may be jeopardized by regulation.

Online Sales

According to estimates from Wells Fargo, the online channel in the VTM sector is expected to grow 25% this year. Our survey shows that vape shops are taking advantage of this growth by selling their products online. For vape shops that produce private label juice, online sales is a way to market to consumers who are outside of their geographic region. As well, many vapors shop online and in brick-and-mortar shops so having the virtual store front is way to capture more spend. 

Expectations

The vast majority of retailers in our survey expected their revenues to increase this year as compared to 2014. Despite the challenges that the industry faces, these results reflect a confidence in the future of vaping from those who have driven growth in the industry to date. Vape shops are important nerve centers in the vape landscape. Studying this channel is also important because these retailers are market makers that have kept vaping alive and flourishing in the U.S. market. 

Roebling Research is currently recruiting vape shop retailers to participate in studies. Those who participate are eligible for honorariums, contests, and free market research. Go to http://roeblingresearch.com/vape-shop-panel/ for more details.

The Long Tail and What it Means for Vaping

The growth of the e-cigarette industry comes with a proliferation of new language used to describe it; vaping stands in for smoking and cig-a-likes have replaced cigarettes. But perhaps the most telling vocabulary change is the appropriation of the term “digital” to describe vaporized nicotine use and “analog” for the combusted version. One might take these descriptions to be figurative but the descriptions could be taken quite literally.

The e-cigarette industry has come of age in the digital era and it is enabled by the internet. Retailers, brands, manufacturers, and suppliers are using digital communication to connect online while minimizing geographic distance. Perhaps more importantly, consumers are finding information on products and opportunities to purchase them online. Thus understanding the role of digital communication in the vape market is essential to understanding its current and future state.

A Market of Niches

Understanding the role of digital communication in vape has practical applications for marketers and other industry participants. Namely, with this understanding we can apply the digital commerce framework known as the “Long Tail” to studying the vape industry.

In his 2006 book “The Long Tail: Why the Future of Business Is Selling Less of More”, Chris Anderson writes that online retailers are changing markets by serving previously underserved niche markets more effectively than traditional retailers can. In aggregate, the collective size of these niches can be greater than the so-called “Mainstream” market. Thus an entirely new market place has been opened; one that caters more to unique tastes.

But in order for online retail to be more effective, two conditions must exist; wider bandwidth and better discovery. First online retailers must have wider bandwidth. To understand this, let’s first take a step back and review the difference between brick-and-mortar retail and online retail. One of the most important differences between the two is that internet retailers house goods centrally and maintain a virtual, digital store front. Aggregating inventory in a central warehouse, rather than in stores, lowers per SKU cost of holding inventory while a digital storefront offers a virtually limitless number of goods. So a digital bookseller like Amazon is able to offer millions of titles while a physical retailer would only be able to offer a fraction of that. This ability to offer more goods is what Anderson refers to as “wider bandwidth”.

Secondly, with the abundance of additional variety, consumers must be able to find the products that they want. This process, which Anderson calls “discovery”, is enabled by digital technology. Today, we commonly use digital technology to find the products and services we buy. Search engines, user review websites, and social media have enabled discovery such that it is difficult to imagine a consumer life without them.

The Vape Market as a Long Tail

One of the main advantages that vaping has over smoking is that vaping enables more consumer choice. In particular, with open systems, vapers can customize flavor, nicotine content, amount of vapor, throat hit, and draw, to name only a few attributes. By using different combinations of batteries, tanks, juice, and other accessories a vapor can create thousands of different experiences and find the ones that suit him or her best. These varieties of experiences demanded by consumers are an example of the niche demands that Anderson describes. And the vape industry, being born in the age of online, has developed to meet these niche demands.

By comparison, smokers have fewer options when it comes to smoking cigarettes. Traditional cigarette retailers carry a much smaller number of SKUs and once purchased, the experience of smoking is much more limited. Only traditional flavors of tobacco and menthol are available (though there may be some variation within these categories) and cigarettes are engineered more so for consistency of experience, not variety. With less variety, it makes sense that traditional tobacco products sell well in traditional retail outlets like convenience stores where bandwidth is narrow. 

The open system segment of the market is a natural match for online retailing. Online retailers can carry all varieties of batteries, tanks, accessories, and e-juices. A cursory look at some online vape shops reveals that they have a much wider bandwidth than a c-store or other mass channel would be able to offer. As well, online vape shops often include digital media that explains how to use devices or online customer reviews that enable discovery.

Though Anderson was writing about the digital environment, vape shops provide the same advantages that online shops do as compared to c-stores and other mass tobacco retailers. A store solely devoted to vape has more room to display products thus they have more bandwidth. As well, consumers can get recommendations on products, instruction on how to use devices, and sample juices or try batteries. Low-touch environments like c-stores and other mass channels typically cannot facilitate this level of service. 

Like online retailers, vape shops are enabled by the internet because many vapors find out about new products from sources on the internet but purchase them in vape shops. These might include peer reviews on e-cigarette forums or reviews from popular Youtube vape personalities. As well, there are a number of specialized vape media outlets on the internet.

Applying the Frame Work

Once we understand how the Long Tail framework fits the vape industry, we can use it to begin examining marketing issues and industry challenges. What follows is more a list of questions than answers. 

Market Structure

The most important question that this comparison begs is, what is the future market structure of the vape industry? The digital origins of the vape industry create a propensity towards fragmentation but does this mean that there will be no blockbuster brands as there are in tobacco or other consumer goods categories? And without blockbuster brands, can the industry attract the capital required for the industry to grow?

Marketing Concerns

Online discovery is the engine behind the growth of the vape industry but will this help the industry attract mainstream smokers? As well, how can brands most effectively influence the discovery process online when they don’t “own” that conversation or process?   

Effect of Regulation

FDA regulation will certainly raise the barrier to market entry and increase the price of offering a SKU on the market. To what degree will this disrupt service of niche markets and the industry as a whole? Or will long tail demands attract products and commercial models that subvert regulation?

Blockbusters and the Long Tail 10 Years Later

Today, the long tail model is not as ground breaking as it was a decade ago. Rather it is a widely accepted concept upon which many successful businesses, like Netflix and Amazon, are based. However, despite the proliferation of niche markets, the media business still makes lots of money by producing hits. Whether it’s the latest Avengers movie or the Super Bowl telecast, consumers still want to participate in shared experiences, not just stay in their rabbit warren. By giving them the option to be part of both the mainstream and niche markets simultaneously, consumers gain higher utility.

For generations smoking was a shared social experience. And we know that vaping can appeal to niche tastes but can it also be a widely shared experience? For those who spend hours in online chat rooms or in vape shops, this may be true. But it will be a much bigger challenge for the vape market to attract baby boomer smokers who may not have a proclivity for participating in subcultures. 

Non-Tobacco Users Bolster Vaping Segment

A report for Cowen and Co. shows increasing use of vape among non-tobacco users. 

"Not surprisingly, it is younger adult consumers that are driving this trend," she noted. "Among all 18- to 24-year-olds we surveyed, 35 percent were non-tobacco users — and among vapers, a remarkable 45 percent are non-tobacco users." - See more at: http://www.csnews.com/product-categories/tobacco/report-e-cigs-attracting-nicotine-na%C3%AFve-consumers#sthash.aAKaNJiR.dpuf

China to be Important E-cig Market

This is an article I wrote for Vapor Voice based mostly on the research of Jackie Zhuang, General Manager at Huabao Global. Promising future for the sleeping giant as tobacco control messages are introduced. 

CLICK HERE 

Key Matchups in the Open System vs. Closed System Game

March Madness, i.e. tournament season in U.S. men’s college basketball, may be over but as a native cheesehead, I am still reeling over Wisconsin’s loss in the championship game to Duke [pause for booing here]. What’s even worse is that until the last few seconds, I was convinced that my Badgers had a chance. Why? Because Wisconsin was winning a key match up; national player of the year Frank Kaminsky was making freshman phenom Jahlil Okafor look phenomenally average. But alas… Duke won by five.

Withdrawal from college basketball has me looking for key match ups in other contests. Take team Open System verses team Closed System. While open system devices have been available for a few years now, second generation devices with closed, capsule-like e-juice tanks are now hitting convenience store shelves. As well, companies like NJOY and Haus who have previously only sold cig-a-likes are now selling open systems in mainstream retail channels. These changes have set the stage for another classic contest.

In the coming months the key match up that I’ll be watching is NJOY’s vape pen vs. Logic Pro in the c-store channel. Logic Pro, a closed system, is the newer kid on the block. But the advantages of a closed system are that they’re easier to refill (just replace the tank) and they won’t leak like an open system device. As well, c-stores are not ideally suited to sell open systems because conventional wisdom says that they are harder to use and require more hand holding for new customers. Thus conventional wisdom would have us predict that Logic Pro would dominate in the c-store. But if NJOY can sell devices and juices in this low-touch environment, then I believe this is an indicator that “mainstream” consumers (picture the baby boomer who wouldn’t be caught dead in a vape shop) are accepting of open systems.

If NJOY can be competitive in this match up, then they and other open systems brands may just change the game. Evidence that open systems have a place in the approximately 150,000 U.S. c-stores, and thus the mainstream, might draw economic interest from other brands and maybe even change the public perception of these devices from toxic fume makers to viable reduced-risk products.

Like any good rivalry the open system versus closed system contest features two teams with different styles and strategies. Open systems allow users to put any e-juice from any brand in the tank, giving a platform to a variety of juice makers from ultra-premium brands through to bathtub mixes that attract the ire of anyone interested in quality; the blessing and curse of freedom. One could argue, though, that this business model allows for increased consumer choice and thus, satisfaction. And keep in mind that open systems have driven growth of the entire vape market recently.

On the other hand, closed-systems users are restricted to e-juices sold by the device maker and thus they employee the razor-razor blade business model. While this might encourage repeat purchase, it might also alienate consumers who are looking for choice.

The obvious flaw in my analogy is that Kaminsky won the match up but Wisconsin lost the game. To that I say, thank goodness that the open vs. closed contest is not a zero sum game; the winner does not necessarily take all. If NJOY and Logic Pro can both capture sizable market share, then there may be room for closed and open systems in the mainstream because well… different strokes for different folks. 

Stay tuned for more updates.

Who’s Killing the Electronic Cigarette?

It’s a battery-powered, highly disruptive technology that is reinventing a daily activity upon which millions rely. But a confluence of poor regulation, entrenched corporate interest, and a semi-ambivalent consumer base might prevent it from reaching its full potential. Of course I’m talking about the electric car but you’d be forgiven if e-cigs came to mind. The parallel story lines of e-cigs and e-cars are hard to ignore. Indeed, examining the story of how the electric car went from a tree hugger’s pipe dream to a Wall Street darling shows us the challenges ahead for the vaping industry.

The 2006 documentary “Who Killed the Electric Car?” tells the story of the EV1, an electric vehicle that GM marketed in California during the mid-nineties. But by 2003, GM cancelled all leases and crushed the EV1s like old beer cans. Why? Because car companies were selling gas-guzzling SUV’s like hot cakes and gas was still under $1.50 per gallon. So no one, not consumers, oil companies, regulators, or auto manufacturers, were really interested in the car of the future when the present was so sweet. And though some consumers showed interest in the battery-powered cars, others were dissuaded by the limited 100 mile range of the strange looking vehicle.

Today of course, the conversation around electric cars is much different. Tesla, the electric car company founded by business magnate Elon Musk, is grabbing headlines for its meteoric stock price and customer ratings. As well, Nissan and GM have sold thousands of electric vehicles.

So what happened between the demise of e-car 1.0 and today?

Well for starters, the world changed dramatically. The second gulf war and catastrophic weather events forced the American public to make the connection between our addiction to oil, national security, and global warming.  As well, the recession of 2008 exposed the flaw in the business models of American car companies; namely the assumption that gas would be cheap forever.

But more importantly, battery technology was given time to develop. Because of the increased availability of power, the Model S, Tesla’s luxury sedan, distinguishes itself from the previous generation of electric cars in that it equals or betters most gas-powered cars in its class in terms of performance and luxury.

Vaping products on the market today are much like the EV1 in that they are “ultra-low emission” but they still require consumers to sacrifice short-term satisfaction for long-term benefit. As the case of the electric car shows, many consumers cannot compromise. Less satisfaction has lead to lack-luster customer retention and mixed results from studies on the effectiveness of e-cigs as a smoking sensation device. E-cig makers will need time and a focus on innovation to develop a product that is better than the analog cigarette on all fronts. A better product would also convince critics that e-cigs aren’t a bridge to analog cigarettes but a viable reduced-harm substitute.

As well, e-cig makers will need the cooperation of regulators. At the very least they will need FDA regulation that allows for technology innovation and the introduction of new products. Thus far, the FDA has not had a good track record of evaluating and approving new tobacco products in a timely manner so this is an area of concern.

Fortunately, we won’t need any protracted wars or natural disasters to convince tobacco companies, e-cig brands, and smokers that the time is right for e-cigarettes. Tobacco use in this country is in decline, most smokers want to quit, and smoking is the number one cause of preventable death. So we get it. All that’s needed now is more convincing product and the latitude to build it.

After Regulation, E-cig Brands Have Another Huge Hurdle: Men’s Complacency About their Health

 

 Let’s imagine a world where all the regulation matters over e-cigs are settled.  In fact let’s heighten the fantasy and also imagine that in this world, long-term studies have proven that vaping products pose minimal health risk and are effective smoking cessation aides. If you’re thinking “Certainly this is a perfect world where tobacco cigarettes no longer exist,” you’d probably be wrong. Even if e-cigarette use was normalized, the next great hurdle for the industry is men’s complacency about their own health.

It’s been well documented through the years that women tend to take better care of themselves. They see the doctor more often, they have better eating habits, and partly for those reasons they tend to live longer.  

“Women receive encouragement to be nurturers… A woman is so used to giving and taking care of others it’s not too much of a leap for her to take care of herself,” said Robert Sobut, MD, a clinical instructor of psychiatry at Northwestern University. “For men the act of nurturing can be an unfamiliar concept, therefore they tend to be more neglectful of themselves.” 

recent study concluded that young men of today know what healthy behavior is but social cues in their lives trigger unhealthy choices. The prevalence of obesity, binge drinking, sedentary lifestyles, and smoking among men are evidence of this. The study goes on to say that sports can be a conduit by which men take an interest in their health. Specifically, the promise of better performance or opportunity to emulate an athlete can prompt healthy behavior. 

Our recent Roebling Research report Churn in the E-Cigarette Markert (Link) confirms that adult male smokers who have tried e-cigarettes make up 63% of all triers and are less likely to continue vaping than their female counterparts. Thus they comprise most of the triers who are churning out of the market, presumably to go back to smoking. So it’s possible that we’re seeing male smokers exhibit this same complacent attitude about quitting smoking by substituting e-cigs for analogs.

This is the big marketing challenge that the industry will face. The brands that can crack this nut will likely be market leaders. A few random observations:

  • Downside: If e-cigs are subjected to the same advertising limitations that tobacco brands are, then sponsorship of sports or entertainment events would be illegal. Thus, e-cig brands could not use a forum through which men learn healthy behaviors
  • Upside: Vaping culture may provide those social cues that men need to quit tobacco.

What do you think?

Blu to spend $40 million this year on marketing

I got this from the NY Times article that ran over the weekend. WOW! $40 million? Is anyone else even close to that? I thought this article was a good summary of events in the months leading up to possible deeming regs. What did you all think?

http://www.nytimes.com/2013/10/27/business/the-e-cigarette-industry-waiting-to-exhale.html?_r=0

 

Look at this E-cig and tell me what you see...

Blogger’s note - I started writing this as a conclusion to the upcoming Roebling Research report, “Churn in the E-Cigarette Market” but realized that it would probably work better as a blog piece. The results discussed are based on a survey of 361 adult smokers who have purchased at least one e-cigarette.

When I was looking at some survey results from new e-cigarette users, I came upon a surprising result. According to the survey, the number one motivation for adult smokers to try e-cigs (33% of respondents in fact) was to quit smoking. That’s not the surprise. The surprising result was that the number two motivation was curiosity. With all the other tangible benefits that e-cigarettes can provide like saving money or getting your nicotine dose indoors or not smelling like an ask tray, that most basic inborn impulse to explore the unknown trumps them all as a motivator.

But then, I guess I shouldn’t be surprised. This curiosity is in part a result of the confusion surrounding e-cigarettes. After all, how do you make sense of a product that is designed to look and feel like a cigarette but can help eliminate the health risk factors associated with smoking? What do you make of a product that is sold in convenience stores, competes with pharmaceuticals, and has the disruptive force of an Apple gadget? How should the mainstream regard an industry that’s a mix of mom-and-pop shops, little-known brands, and big tobacco companies?

E-cigarettes are like a Rorschach ink blot test. Not only does everyone see something different, they are projecting their own issues onto them. Tobacco companies see a threat to their business and the future of it. E-cig entrepreneurs see an opportunity to get in on the ground floor of something big. Veterans of the tobacco wars see a new foe or perhaps an old foe in new clothes. Resistance from lawmakers and suspicion from health-advocacy groups is a knee-jerk reaction born from fighting these wars. Though the veterans’ reactions may or may not be warranted, they are predictable and to some degree, understandable.

Vapers see e-cigarettes in a number of ways but the biggest chunk see a device that may help them quit smoking. This group skews older, mostly over 30. If they are like average smokers, they smoke about a pack a day and want to eliminate the harmful habit from their lives. When supporters of e-cigarettes say that it is the “lesser of two evils”, this is the group they have in mind. E-cigarette use for this group is the easy sell.

The high hurdle for widespread acceptance is getting approval for use by this second chunk, the “curious” group. 26% of respondents who tried e-cigarettes fell into this group and it skews young; 69% are between the ages of 18 and 29. When detractors talk about the potential risks e-cigarettes pose to society, they are largely talking about this curious segment of adult vapers and, in addition, minors who might also be experimenting with e-cigs.

This segment has no particular goals when it comes to their e-cigarette use (e.g. quitting smoking). If e-cigarettes are their Pandora’s Box, the question is, what will they find when they open it? They might find a quality product that is as safe as a cup of coffee. Or they might find an addiction to a poorly made class of devices with unknown, untraceable, or potentially harmful components. Or worse yet, they might find a gateway back to traditional cigarettes.

The outcomes for this group will largely determine what most see when they consider this product. The most equitable situation for the industry would be for those who are determining its structure, namely e-cig brands, tobacco companies, law makers, regulators, retailers, health-advocacy groups, etc. to work to ensure quality products, to quantify and minimize risk, to prohibit purchase by minors, and to create regulation that allows for industry growth and positive health outcomes. Taking these measures would clear up some of the confusion around these devices and create a viable path to enable what could be the safest era of nicotine use in history. Industry participants have to act with urgency though, because the same study shows that this group is the highly likely to quit vaping, presumably to revert to smoking much more harmful cigarettes.