US: 7-Eleven First Big Battleground for E-cigs

Source from:  Winston-Salem (NC) Journal  08/12/2014

The first significant fight for electronic cigarette market share between the Big 3 tobacco manufacturers features a national convenience store chain as a key battleground.

MarkTen, the e-cig brand by Philip Morris USA, recently began being sold in 7-Eleven stores in North Carolina.

It joins blu eCigs of Lorillard Inc. andVuse of R.J. Reynolds Vapor Co., along with offerings from several smaller manufacturers.

Reynolds began national distribution of Vuse in June, while blu eCigs has been sold in most national convenience stores for more than two years. Reynolds claimed top market share for Vuse in its test markets of Colorado and Utah.

Vuse also is being sold at WilcoHess and Quality Mart stores in the Triad, while MarkTen also can be found in Circle K and Sheetz stores. Blu eCigs is in all of those outlets.

E-cigs are battery-powered devices that heat a liquid nicotine solution in a disposable cartridge and create a vapor that is inhaled.

What makes the head-to-head-to-head competition pivotal is that convenience stores are the largest retail channel for e-cigs at 75 percent of brick-and-mortar sales, or about $540 million in 2013, according to the National Association of Convenience Stores.

Overall e-cig sales were about $1.7 billion last year. Tobacco-only shops, kiosks and the Internet also represent sizable retail components for e-cigs.

According to the Smoke Free Alternatives Trade Association, online outlets represented about 25 percent of e-cig sales in 2013.

By comparison, 85 percent of traditional combustible cigarettes are bought at convenience stores,

Philip Morris USA spokesman Brian May said national expansion of MarkTen began in June in the western half of the country. "It will be expanding eastward through the summer and fall," May said.

The financial potential of e-cigs could be stout. Wells Fargo Securities analyst Bonnie Herzog projects up to $10 billion in sales by 2017, although vapor products are started to carve out more market share.

Vapor products can feature a liquid capsule that is inserted into a cartridge. Vapors offer consumers a wider variety of flavors, included fruits and candy.

Reynolds has touted Vuse as a "game changer" for not only the e-cig category, but also consumption of tobacco products.

What has made Reynolds officials so confident in Vuse is their claim that it provides "the perfect puff, first time, every time" because of technology that includes a digital microprocessor. That device works in conjunction with a memory chip to control key elements from vapor delivery to battery management.

Reynolds' faith in Vuse could play a pivotal role in whether federal regulators approve the company's $27.4 billion offer for Lorillard. Reynolds' main goal is taking ownership of Newport, the No. 2 selling traditional cigarette brand. It could take six to nine months for the Federal Trade Commission to make a ruling.

Reynolds has agreed to sell blu eCigs to Imperial Tobacco Group PLC, as well as four nonsupport traditional cigarette brands - three from Reynolds and one from Lorillard - in a proposed $7.1 billion deal.

A key element of British American Tobacco Ltd.'s proposed expanded alliance with Reynolds American Inc. is agreement on a joint technology sharing and commercialization strategy for next-generation products.

That would include BAT globally distributing Vuse, which saves Reynolds the cost of reestablishing an international distribution channel, and adds a critical new source of revenue.

Reynolds is converting about 70,000 square feet at its 1 million-squarefoot Tobaccoville plant into turn-key production space for Vuse. Reynolds plans to fill at least 200 new full-time jobs for Vuse production. The full rampup could take up to four years.

Herzog predicts Reynolds will have $4 billion in revenue from e-cigs in 2021, compared with $3.9 billion from conventional cigarettes. That's compared with minimal e-cig revenue and $6.4 billion in conventional cigarette revenue for 2013. Enditem