The market for reduced harm nicotine products is huge. Consumers are well aware of the health benefits of quitting or reducing smoking, however many are never able to so, due largely to nicotine addiction. In the UK, there are estimated to be 1.3 million e-cigarettes consumers, up from 700,000 last year. We estimate that the industry already generates £100m a year in UK sales, and interest in them continues to grow, as demonstrated by the number of Google searches.
Source: Brewin Dolphin, Google, Chamber photography
Lorillard has one of the largest e-cigarette brands in the US, the largest e-cigarette market globally, and e-cigarettes accounted for just over 1% of sales in 2012, however management expect it to account for up to nearly 5% of net sales this year. In the UK, British American Tobacco recently launched its first e-cigarette brand and you can now buy its disposable e-cigarette “Vype” online. British American Tobacco’s CEO believes that alternative products could account for as much as 40% of tobacco company’s revenues in 20 years time.
E-cigarettes a healthier option
We believe regulation will increase over time, much like we have seen in the tobacco sector. If over-regulation were implemented, the potential benefit to consumer’s health will be stifled. Under-regulation and the industry open itself up to undesirable entrants which in time leads to over regulation. If regulators allow the industry to educate the public about the potential benefits compared to smoking, this could provide a substantial boost to the industry; but this is a pretty big if.
In June the UK Government announced it would regulate e-cigarettes and that they would be sold subject to medical licences from 2016 onwards. The Government delayed implementation as it believes e-cigarettes create far less harm than smoking and to allow manufacturers time to apply for licences. We would expect authorised products to be as widely available as cigarettes are currently. In the US, we expect the FDA will issue similar legislation to cigarettes, banning flavours, internet sales and use indoors (six states have already banned e-cigarettes in enclosed public spaces, including California).
Eventual winner and losers
In the UK, British America Tobacco has first mover advantage of the majors, however the market is current very fragmented with a number of smaller entrepreneurial player dominating supplying the supermarkets. In the US both Lorillard and Reynolds American have widely available products.