As people increasingly become aware of the health risks and costs involved in smoking cigarettes, some smokers are switching over to e-cigarettes. The health risks of cigarette smoking have been well-publicized by governments for decades, with the U.S Surgeon General having issued a report on the risks back in 1964. Nowadays, all cigarette packages must carry warnings about the risks that smoking poses. (For more, read: The Real Cost of Smoking.)
Could a growth in popularity of this e-cigarette alternative, fueled by continued awareness of smoking's health risks, have an impact on the major tobacco manufacturers? It appears as if they might be able to dodge this bullet, at least in the foreseeable future, for various reasons.
A Variety of E-Cigarettes to Choose From
E-cigarettes come in more than one form. Also known as vapor products, these products work by heating up liquid nicotine in a battery-operated device that often physically resembles a cigarette. When you use these products, they release vapors that give you the feel of smoking without actually burning tobacco. Some manufacturers of these products claim e-cigarettes do not pose the risk of lung cancer that smokers of cigarettes face, though the American Cancer Society states that "long-term health effects are still unclear."
E-cigarette producers have also moved beyond their basic approach to offer smokers relief in other ways. There are now second- and third-generation e-cigarette products that allow users to mix and match the nicotine content with other flavors to suit their tastes. Thousands of so-called vape shops have sprung up, and there are also online retailers for such vape products.
Even though global sales of e-cigarettes were only in the $4 billion to $5 billion range in 2014, which represents less than 1% of traditional cigarette sales, faced with this threat, cigarette manufacturers aren't just sitting back. (For more, read: As E-Cig Sales Growth Slows, Big Tobacco Gains.)
Buying Up E-Cigarette Makers
One strategy is for the major cigarette companies to get into the e-cigarette market themselves, so that they can get a piece of the pie. A convenient way to do this is to simply buy up e-cigarette producers. This way, cigarette manufacturers are responsive to changing market needs, and their sales won't be hit in the long run, should the e-cigarette trend gain traction and more and more smokers abandon traditional cigarettes.
The list includes Lorillard’s (which is now owned by Reynolds American, Inc. (RAI)) acquisition of Blu, Philip Morris International’s (PM) purchase of Nicocigs and British American Tobacco’s (BTI) acquisition of CN Creative. And Imperial Tobacco has purchased the e-cigarette unit of Dragonite International, a venture founded by Hon Lik, who is credited with the invention of e-cigarettes.
Pushing for Stricter E-Cigarette Regulation
The U.S. Food and Drug Administration (FDA) is now looking into how best to regulate e-cigarettes, with traditional cigarette manufacturers pushing for more stringent regulations. This way, they expect to deter smaller e-cigarette producers who may not have the resources to go through a stringent approval process in order to get their products to market. This will also make it easier for the big cigarette companies to buy smaller e-cigarette competitors who are daunted by the prospect of a rigorous government screening process.
Top cigarette makers have also pushed for a variety of health-related warnings on e-cigarette packages. This might have the effect of scaring off some potential consumers, even though cigarettes are deemed to pose a higher level of health risk than e-cigarettes.
Big Tobacco is also pushing for the regulation of vape shops that allow consumers to mix and match nicotine with other flavors. At least one cigarette manufacturer, Reynolds, has asked the FDA to either ban vape shops that enable such mixing, saying that this situation could create quality control risks, or else to regulate them as manufacturers.
Altria has also asked that e-cigarette purchases in the U.S. should not be self-service and should be done in an assisted environment. This would give the big cigarette companies an advantage since, considering that convenience stores are the main outlets for cigarette purchases, these stores have an incentive to promote the cigarette companies' wares. So if this sort of regulation passes, e-cigarettes would have to compete for the consumer’s attention in a limited display space in which retailers would be likely to favor cigarettes.
The Bottom Line
The growing consumer interest in e-cigarettes poses a threat to the large tobacco companies, but they aren't taking it lying down. They're now engaged in a variety of efforts to ward off this threat and, so far, it appears to be working. For the foreseeable future, it's unlikely that the top cigarette manufacturers will face any major fallout from e-cigarettes.