No longer blowing smoke? E-cigarettes could soon surpass traditional brands

The News & Observer (Raleigh, N.C.)March 27, 2014 

Stephanie Cordisco, president of R.J. Reynolds Vapor Co., explains this month in Winston-Salem, N.C., how Reynolds is going to market its new electronic cigarette, the Vuse.

CHUCK LIDDY/RALEIGH NEWS & OBSERVER/MCT

WINSTON-SALEM, N.C. — When change has come for the tobacco industry during its long history, it usually has arrived at a leisurely pace.

Not this time. The crop and products made from it face something that has gutted or transformed many other industries in recent years: a disruptive technology.

Electronic cigarettes are winning over smokers so quickly that some analysts predict the battery-powered newcomer could come out on top of traditional cigarettes within a decade. That’s unsettling for the farmers and manufacturers who still make North Carolina the national leader in tobacco production and Virginia the leader in cigarette manufacturing.

E-cigarettes heat a liquid, usually containing the highly addictive stimulant nicotine, into a vapor that users inhale. Nicotine for the liquid is extracted from tobacco, but experts think it may take less tobacco to make the “juice” than required for an equivalent amount of traditional cigarettes.

That economic threat can also be an opportunity.

Some think that e-cigarettes may even offer a way to slow the gradual slide in tobacco sales for domestic use, a slide that began decades before the advent of e-cigarettes.

“It has been interesting to watch e-cigarettes move from almost a novelty to a trend,” said North Carolina Agriculture Commissioner Steve Troxler.

“The bad news is, if it results in the decline of demand for traditional tobacco, then we are going to have a new set of problems, but the good news is, yes, we are poised to take advantage of it.”

This may be the key year in North Carolina’s effort to muscle into that leadership role. One reason is that Big Tobacco is becoming Big Vapor, too: Major tobacco companies are moving to get ahead of the potential shift in the market by selling e-cigarettes themselves, either by buying companies already in the business or starting their own. And two of the nation’s three largest tobacco companies are here.

With their deep pockets, intimate knowledge of the market, powerful research-and-development capacity and massive sales and distribution networks, they are in a position to quickly seize the majority of the market for e-cigarettes, said Bonnie Herzog, an analyst with Wells Fargo Securities who follows the e-cigarette and tobacco industries.

She and other experts believe that the big companies will market devices that simply work better, which will win over more smokers.

Greensboro, N.C.-based Lorillard, the nation’s third-largest tobacco company, has been perhaps the most aggressive, snapping up an established e-cigarette company called Blu in 2012 for $135 million. Lorillard now has nearly half the national market share for e-cigarettes.

And the nation’s second-largest tobacco company, Reynolds American Inc., based in Winston-Salem, N.C., has launched its own e-cigarette subsidiary, R.J. Reynolds Vapor Co. It has developed an e-cigarette that, unlike nearly all its rivals, is made in the United States.

Reynolds is planning to launch its Vuse brand nationwide this summer. Its test-marketing results suggest the effect will be huge. In July, it started sales in Colorado and quickly gained more than half the market in that state. And RJR Vapor Co. President Stephanie Cordisco said in an interview that a second phase of test marketing that began in Utah in late January is showing similar results.

The largest tobacco company, Richmond, Va.-based Altria Group, has test-marketed its own e-cigarette, MarkTen, in two states and plans to go national in the second quarter of the year. Altria is the parent company of Philip Morris.

The stakes are huge.

Last year, Herzog forecast that by 2023, Reynolds could earn $5.2 billion in revenue from e-cigarettes and $3.1 billion from traditional ones.

And it, Lorillard and Altria would all see about half their revenue from traditional cigarettes vanish by 2023.

If analysts such as Herzog are right, the tobacco companies have to get involved to protect not just their profits, but perhaps their future, said Blake Brown, a professor of agriculture and resource economics at North Carolina State University and an extension economist who specializes in tobacco issues.

“They can’t afford not to do this,” he said.

“If you’re a tobacco company, you don’t want to be the next Eastman Kodak. They didn’t understand that they were in the image business. They thought they were in the film business.”

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