We already know that big tobacco is betting on the success of E-Cigs. They see this emerging market as their next "big" growth opportunity. While facing stagnant sales for traditional cigarette products over the past decade. Companies like: Lorillard, Inc. (NYSE:LO), Philip Morris International, Inc. (NYSE:PM), Reynolds American Inc. (NYSE:RAI), Vector Group Ltd, (NYSE:VGR), British American Tobacco plc (NYSEMKT:BTI) and Altria Group Inc. (NYSE:MO) have already made their move and jumped into this new lucrative market. Thus far the E-Cig market has predominately been unregulated. However, recently there has been a push from state legislators to impose new regulations. Many fear that these regulations could negatively impact the E-Cig market. However, like big tobacco we need to look at the bigger picture. Lets take a look at why tobacco companies are excited about E-Cigs and why the potential regulations will not hold this market back.
For the most part E-Cigs have been virtually free of any regulations. That is one of the main reasons why E-Cigs have been so successful. However, the constant threat of federal regulations has cast a cloud over this new market. While the FDA has not made any official regulations yet, it is highly anticipated they will within the next two years.
Lack of FDA regulations has left each state free to regulate E-Cigs as they see fit. States have just recently begun to enact legislation that tackles the topic of E-Cigs. For a detailed list of each state's regulations check here. If you take a look you will notice that many states have already passed legislation regulating E-Cigs. Big tobacco has noticed that even under these state imposed regulations the E-Cig industry has continued to be successful.
I'm sure by now you have either tried an E-Cig or have seen someone smoking one. E-Cigs are becoming more mainstream by the day. Walk down a street and you will see signs and billboards for these products. Turn on the television and you will see ads. We are now under a full frontal assault from E-Cig marketing. That's why it is not surprising that E-Cigs have seen a dramatic increase in sales since arriving from China just over five years ago. Annual sales of E-cigs in the U.S. have grown to almost $1.5 billion annually, according to industry estimates. Although, this only represents a small portion of the $100 billion U.S. tobacco market. Big tobacco knows they have just scratched the surface of the E-Cig market. Some analysts are already estimating that by 2047 E-Cig sales will surpass traditional cigarette sales. No wonder every major tobacco company is now looking at ways to best exploit this new emerging market.
Big Tobacco Dives In
Big tobacco companies have already noticed the E-Cig trend and have begun to enter the market. The first to make the move was Lorillard. After it acquired Blu back in 2012, the company quickly expanded its distribution from 12,000 retail stores to 127,000. By doing so Blu has been successful in attaining a 49% share of the U.S. E-Cig market. However, Lorillard is not content with just expanding into the U.S. market. They have now set their sights overseas on the U.K. E-Cig market. Just recently they signed an agreement to acquire SKYCIG, a leading brand of E-Cigs in the U.K. By doing so Lorillard has positioned itself to take advantage of the E-Cig market both domestically and overseas. While other companies are just starting to dive into the E-Cig market. In August, Altria launched the MarkTen brand of E-Cigs. While RJ Reynolds has developed a brand called Vuse. With big tobacco now being the major players in the E-Cig market they will likely benefit the most when regulations are eventual imposed.
When will the FDA make these new regulations? What will they impose? These are the questions that have been worrying investors looking to cash in on the E-Cig revolution. Like big tobacco we should not let these thoughts worry us. As we already know "big tobacco" has been facing a decline in cigarette consumption for the last decade. E-Cigs offer big tobacco a new avenue of revenue. This will give big tobacco exactly what it needed. Big tobacco by entering the electronic cigarette market ensured that E-Cigs would be profitable. Big tobacco will make sure that whatever regulations are imposed still allow them to make money selling E-Cigs. That is why E-Cigs will continue to be big tobaccos next growth opportunity. Like I mentioned in my latest article on Altria, I am bullish about big tobacco's future.
Disclosure: I am long MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.