In my December 7 2011 article, "E-Cigarettes: An Emergent Threat To Big Tobacco?" I had already shown why the e-cigarette, having many advantages over the traditional "analog" cigarette, posed a serious threat to the oligopolistic tobacco industry.
At the time we even had the good fortune of having several comments from the industry, including from Jason Healy, President of Blu Cigs as well as ECCA UK (the UK e-cig consumer association). This helped us both know that private discussions were happening, and that e-cigs were estimated to take 6% of the regular tobacco's market in the U.S. during 2013, from 4% estimated for 2011 (by number of smokers, not revenues).
Given that kind of penetration and the already stated interest, it was just a matter of time for one of the large tobacco companies to make its move. This happened in April 25. Lorillard (NYSE:LO) stepped up to the plate and acquired Blu Cigs for $135 million. Lorillard is one of just five companies that dominate the cigarette market. The others are Phillip Morris (NYSE:PM) and Reynolds American (NYSE:RAI), British American Tobacco (NYSEMKT:BTI) and Altria Group (NYSE:MO).
At this point, the financial impact of this acquisition is minor, with Blu Cigs estimated to have had $30 million in revenues during 2011, to Lorillard's near $6.5 billion. However, e-cigarette sales have been doubling every year so they constitute an interesting growth segment. Plus Blu Cigs generated there revenues from 14000 locations, but it's likely that it will soon have access to Lorillard's 400000 points of sale, which should help growth tremendously.
Also helping growth will be the association with established brands. So this first move by Lorillard is sure to be watched closely by its competitors. The e-cigarette advantages, which I described in my former article, are massive from a consumer point of view - so from that point of view growth has few impediments.
Demand for e-cigarettes, however, might be harder is to monetize than tobacco companies are used to, at least at the same margin levels. But here too Blu Cigs had some advantage, in that it seemed to move away from rechargeable e-liquid cartridges. The enthusiast way of using e-cigarettes -- which might include them mixing their own e-liquids and filling the cartridges -- is not very compatible both with the establishment of a low competition environment (anyone can supply e-liquids) and concomitantly, with a high-margin product. By selling self-contained already-charged cartridges, the product is both made more convenient for the mass market, and potentially higher margin in what regards the recurring business.
At this point the e-cig market is still very fragmented, but I wouldn't be surprised to see the remaining large tobacco companies making a move of their own. If the other companies do not act, then Lorillard will have time to establish a much stronger presence in the e-cig market, building the blu brand and eventually other brands as well.
Just on this first-mover advantage, I would consider Lorillard safer versus this threat than the other tobacco companies. Indeed, Lorillard might even come to convert the threat into a competitive advantage. Although right now other smokeless tobacco products are much larger markets than e-cigs (for instance, Altria generated $1.63 billion in revenue during 2011, from smokeless tobacco) I believe in due time e-cigs will largely surpass those other smokeless alternatives.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.