Analysis: Big Tobacco to dominate e-cig business


Big Tobacco (LO, RAI, MO) will dominate the e-cigarette business due to its resources and established distribution network, according to RBC Capital Markets analys Nik Modi.

A merger between Lorillard and Reynolds American would only heighten the advantage of the majors over smaller players (ECIG, MCIG, AHII), reasons the investment firm.

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Comments (47)
  • Paulo Santos
    , contributor
    Comments (34781) | Send Message
     
    That doesn't seem entirely likely, because the e-cig industry has sprung up a massive culture of customization.
    30 May 2014, 08:39 AM Reply Like
  • Mikie713
    , contributor
    Comments (624) | Send Message
     
    Agreed, Paulo. While Big Tobacco may get a significant share of this market, the e-cig market is taking on his own shape with product that are far removed from tobacco or traditional cigarettes. Who ever thinks this will be completely dominated by Big Tobacco is short sighted.
    30 May 2014, 09:07 AM Reply Like
  • Big Tobacco123
    , contributor
    Comments (9) | Send Message
     
    Think go to market strategy and market penetration. Think distribution channels. Big tobacco wins because they will have their products in front of the customer the most.
    30 May 2014, 01:14 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (4368) | Send Message
     
    Think BIG MONEY. Big tobacco will have a large slice of this pie b/c they can BUY it. It's only a matter of time.
    30 May 2014, 01:54 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (11220) | Send Message
     
    The Big Players will simply buy out the smaller players.

     

    Pure dominance.

     

    Microsoft, Oracle and Facebook are the models here.
    30 May 2014, 09:11 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (34781) | Send Message
     
    Nope, there's no network effect, quite the contrary - there's a trend towards using something different from the other guy. There's a trend towards exclusivity, made obvious by mods that are sold in numbered series and all.
    30 May 2014, 09:13 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (11220) | Send Message
     
    You are wrong.

     

    The only "network effect" necessary is cash.

     

    The big players have plenty of cash flow to simply buy out any e-cig start-up that "threatens" the larger players.

     

    You are also completely discounting the power of brands as well.
    30 May 2014, 09:24 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (34781) | Send Message
     
    Well, I am in close contact with the industry. I know just how diverse this thing is. I am invested in a private company that is rolling out stores selling this stuff in Portugal ...

     

    Big Tobacco can have a chance in entry-level products but is basically doomed regarding:
    * Refillables;
    * E-liquids.
    30 May 2014, 09:26 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (11220) | Send Message
     
    I can't believe there are still people who exist who call the big tobacco companies "doomed"!

     

    After all they've gone through and after all of their victories there are still some dead-enders who claim that they are "doomed"?

     

    Wow!

     

    There aren't a lot of industry leaders who have shown the adaptability of the big tobacco companies over the decades.

     

    smh
    30 May 2014, 09:28 AM Reply Like
  • Mikie713
    , contributor
    Comments (624) | Send Message
     
    Exactly, Paulo, Big Tobacco getting into e-liquid and refillables is as likely as them getting into milk and cheese. People who aren't already "vaping" have no idea HOW DIFFERENT e-cigs CAN BE and WILL BE from traditional leaf tobacco smokes. It's an entirely different animal. Big Tobacco will sell a watered down version of e-cigs (they are already), but for the new wave of vapers out there -- they are already seeking out new products. Is Kanger on the market yet?
    30 May 2014, 09:34 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (34781) | Send Message
     
    DVL, "doomed" regarding those two markets. In overall terms, Big Tobacco is simply going to lose a chunk of its business.
    30 May 2014, 09:40 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (11220) | Send Message
     
    No, they won't.

     

    These billion dollar corporations will not sit idly by and allow their customers to walk away.

     

    You don't understand the power of Big Tobacco and the massive cash flows they deal with.

     

    Smaller threats will be purchased or crushed...there is no third option.
    30 May 2014, 10:29 AM Reply Like
  • Big Tobacco123
    , contributor
    Comments (9) | Send Message
     
    Worked in Big Tobacco for 5 years. You are wrong. Cash is king.

     

    Scenario:

     

    Hey start up or small player in industry, great idea - we are going to buy you and absorb your market share.
    30 May 2014, 01:14 PM Reply Like
  • Big Tobacco123
    , contributor
    Comments (9) | Send Message
     
    Big Tobacco for 5 years, now it strategy consulting.
    30 May 2014, 01:14 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (4368) | Send Message
     
    <The only "network effect" necessary is cash.>

     

    Yup.
    30 May 2014, 01:55 PM Reply Like
  • borkner
    , contributor
    Comments (164) | Send Message
     
    You ain't seen nothin' yet
    B-B-B-Baby, you just ain't seen nothin' yet
    Here's something that you never gonna forget
    B-B-B-Baby, you just ain't seen nothin' yet
    30 May 2014, 09:18 AM Reply Like
  • Econ Student
    , contributor
    Comments (248) | Send Message
     
    Something comparable would be craft beer versus light beer. These smaller companies will do just fine.
    30 May 2014, 09:22 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (34781) | Send Message
     
    It's worse than that for Big Tobacco. The natural tendency is to start by using a disposable e-cig and they graduate to a custom refillable e-cig. Refillables allow for a better experience, lower running costs and the access to a massively more diverse e-liquid market.
    30 May 2014, 09:28 AM Reply Like
  • jsteinm1
    , contributor
    Comments (161) | Send Message
     
    I think this is probably the best analogy around for this market. I suspect the majors will likely split a very large piece of the pie among a few, while the small fish will split a smaller piece among many.

     

    One thing I see, at least locally in my hometown, is that we have tons of Vape Shops popping up that thrive on selling their own juice. I predict that FDA regulations will wipe these guys out when it comes and make producing juice a harder thing to do without reasonable scale.
    30 May 2014, 09:33 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (11220) | Send Message
     
    ...and who contributes the most money to the politicians who oversee the FDA?...
    30 May 2014, 09:35 AM Reply Like
  • ac7880
    , contributor
    Comments (113) | Send Message
     
    Which is why Mcig/Vcig is uniquely positioned. You can load the Mcig with anything you want so nicotine is not inherently involved. And Vcig has no nicotine, only flavors and vitamins. $10 ea for Mcig, $2 for Vcig. I think they are well positioned to avoid any FDA issues.
    30 May 2014, 01:14 PM Reply Like
  • slam stocks
    , contributor
    Comments (1452) | Send Message
     
    This is an easy call about big cigs controlling the e-cig business.

     

    Government is quickly implementing very strict health laws that could result in years and million$ to get approval. Distribution is another problem to get products into the stores. There will be a lot so small players at the beginning, but long term this industry will remain with the big cig companies.
    30 May 2014, 09:28 AM Reply Like
  • unclewoo
    , contributor
    Comments (91) | Send Message
     
    I never bet against Big Tobacco.
    30 May 2014, 09:54 AM Reply Like
  • WmHilger1
    , contributor
    Comments (1723) | Send Message
     
    Agreed! I have owned stock in RAI since 2003 when it was called R.J. Reynolds Tobacco or some such name. Despite all of the furor over tobacco and its imminent demise, they have continued to pay relatively good dividends which presently average 17.5% of my original cost, and the value of my holdings has quadrupled.

     

    They are not going away soon, if ever. Too many people around the world use their products and they WILL ensure that this remains the situation, regardless of health scare mongering, e-cigarettes, or any other occurrence that might cut into their business!
    30 May 2014, 10:56 AM Reply Like
  • jelrod3
    , contributor
    Comments (129) | Send Message
     
    E-cig sales have been declining over the past few months. LO's 10Q notes the decline. But in convenience stores, where most sales are occurring, Lo's blu e-cig still leads in dollar sales and unit volume over other brands in the category. Query whether this will remain the case with RAI rolling out its Vuse product.

     

    In addition, across the nacent industry sales have declined. In the 4 week timeframe ending May 10, 2014, dollar sales volume declined 10.4%. Net pricing declined 13.9%. In response, unit sales grew 4.1%, but were not enough to offset the losses in dollar sales.

     

    There seems to be an increasing sales volume trend in the vapors-tanks-mods category sold mostly in tobacco stores and vape shops. This could put a dent in e-cig sales.
    30 May 2014, 09:59 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (34781) | Send Message
     
    It's the customization trend I talk about - people enter through disposables but graduate towards those.
    30 May 2014, 10:02 AM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (4368) | Send Message
     
    I see your point Paulo, but respectfully disagree. Sure there are Sprint and T-Mobile (at the moment-may become one soon though), but let's not kid ourselves here. Are T and VZ going to let some micro-telecoms become bigger (esp somewhere in their own backyards) and do nothing about it??? I doubt it.

     

    The cash is there, and so is the motivation. Again, it's just a matter of time. Besides...are all these little guys going to say 'NO' to a huge payday for their co's??? No friggin' way.
    30 May 2014, 01:59 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (34781) | Send Message
     
    Telecoms are different because of the huge network and spectrum costs.
    30 May 2014, 02:01 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (4368) | Send Message
     
    Big fish eat little fish Paulo. Its the law of the land. Always has been-always will be.
    30 May 2014, 07:49 PM Reply Like
  • xbureaurat
    , contributor
    Comments (346) | Send Message
     
    PS,

     

    "It's the customization trend I talk about - people enter through disposables but graduate towards those."

     

    I understand what your saying but what happens when the lawsuits start? Wherever BT goes lawyers and lawsuits are sure to follow. Since the small players sell their own customized product they will probably need their own high priced lawyers not to mention all the expensive testing they would have to do on a proprietary product. Are they capitalized to withstand potentially years of litigation?

     

    Remember BT was already big and wealthy before the lawsuits started so they had the capital to fight.

     

    I think the smaller guys will get bought out (MO buying Greensmoke) or go out of business because of FDA regulations or possibly high legal expenses. BT may even push for FDA regulation so they can buy out the smaller players they want at a low cost. The ones they don't want would end up going out of business.

     

    The bottom line is BT is extremely scrappy and they know how to win.

     

    31 May 2014, 06:23 PM Reply Like
  • CES
    , contributor
    Comments (97) | Send Message
     
    BIG TOBACCO PAYS A NICE HEALTHY DIVIDEND!!
    30 May 2014, 11:15 AM Reply Like
  • polecat
    , contributor
    Comments (383) | Send Message
     
    Paul,
    I must comment on you theory of e-cigs, or sticks as we call them. I have had 27 years in the biz with big MO. First, MO is in the money making business, period! Second, what happens when e-cigs are taxed like cigs, because only a limited number of distributors are allowed to tax stamp. Third, how deep are these e-cig companies pockets? They will need lots of dollars for lawsuits that are sure to follow, both by individuals an by local, state and the feds, plus the laws that will be written.
    Trends are one thing, i.e. cocoon skin caps, real business is all about money making it an maintaining it!
    30 May 2014, 02:44 PM Reply Like
  • Maria Capone
    , contributor
    Comments (8) | Send Message
     
    The bigger players likely aren't moving, similar to McDonalds, Burger King, and Arby's aren't moving. That doesn't negate the significant growth and value of a say a Subway, where it's made to order.
    30 May 2014, 03:33 PM Reply Like
  • Mikie713
    , contributor
    Comments (624) | Send Message
     
    Was Chipolte bought out by $YUM because it suddenly created a new food niche in the fast food market? No, maybe $YUM might have borrowed a few ideas from the aforementioned. Think of that in the same vein as the advent of e-cigs. Big Tobacco isn't going to usurp the e-cig industry just because it can. Yes, there's a lot to borrow from the e-cig phenomena and a buy out here and there isn't out of the question. But to think that NO BUSINESS can survive without Big Tobacco is severely short-sighted.
    30 May 2014, 03:46 PM Reply Like
  • unclewoo
    , contributor
    Comments (91) | Send Message
     
    As soon as a bunch of State Attorneys Generals start suing e cig companies they will go POOF! They don't have the resources to pay hundreds of millions in settlements. Leaving Big Tobacco the only game in town.
    30 May 2014, 06:32 PM Reply Like
  • brooklake
    , contributor
    Comments (8) | Send Message
     
    Why do you think they will be sued. On what basis. While I agree Big Tobacco will in the end dominate ALL tobacco categories they is no valid reasons to sue e cig. companies.
    1 Jun 2014, 07:37 AM Reply Like
  • Trout L
    , contributor
    Comments (31) | Send Message
     
    Google: 'Bonnie Herzog ecig' for some additional analysis.

     

    IMO: Big tobacco will have liquids/vape units that consumers and retailers actually trust very soon. Talk to a retailer. Attend a trade show. The retailers out there can't stand having to deal with six thousand fly-by-night companies making who knows what from who knows where.
    31 May 2014, 07:55 AM Reply Like
  • Mikie713
    , contributor
    Comments (624) | Send Message
     
    Trout, you in essence telling us that retailers are waiting for Big Tobacco to lead the way, because they can't trust Mom and Pop. They'd rather "trust" Big Tobacco, trust is an interesting word. Especially when it comes to Big Tobacco. Lying to the American public for decades about a product that literally killed millions of Americans. But, according to you, go to any trade show and googly eyed retailers will tell you WE'RE WAITING FOR SOMEONE WE CAN ACTUALLY TRUST. Propaganda. The retailers don't want someone they can trust, THEY WANT SOMEONE TO DO THEIR HOMEWORK FOR THEM!! They want someone to hold them by the hand and helping them eliminate the wide variety of choices down to three. Just like our food, our entertainment and cell phones. I have a list of six e-liquid/vape unit suppliers that make a superior product. Start with eGo and Kanger and go from there. But this isn't about looking a superior product, this is about laziness. And our distrust of ourselves.
    31 May 2014, 08:40 AM Reply Like
  • Trout L
    , contributor
    Comments (31) | Send Message
     
    Mikie: fair enough! I guess 'trust' was a pretty ironic word to use. You have articulated what I was trying to say better than my attempt: retailers are looking for someone to help them eliminate a wide variety of choices. As the retailers are the ones ultimately building the brands, they'd also probably rather spend their time with a company that will actually be around in a few years.

     

    Ego and Kanger actually two of the brands a retailer near me swears by. He's one of those who has gone out of his way to do a great deal of research, and has actually started buying direct from China with Kanger.
    31 May 2014, 07:21 PM Reply Like
  • shaai
    , contributor
    Comments (33) | Send Message
     
    Other smaller players are VPCO and VAPR for instance. VPCO just uplisted to NASDAQ
    1 Jun 2014, 03:34 AM Reply Like
  • Econ Student
    , contributor
    Comments (248) | Send Message
     
    (OTCQB:VPOR) as well.
    1 Jun 2014, 04:14 AM Reply Like
  • unclewoo
    , contributor
    Comments (91) | Send Message
     
    Attorney General, is a stepping stone to Governor. The reasons don't have to be valid. They just have to be a publicity and money grab.
    1 Jun 2014, 08:50 AM Reply Like
  • rgreen3200
    , contributor
    Comment (1) | Send Message
     
    Season trader with good views of the mmj market.
    1 Jun 2014, 01:16 PM Reply Like
  • acjewell
    , contributor
    Comments (2) | Send Message
     
    Never forget that Altria ownes 28% in SABMiller, the 2nd largest beer producer company inthe world....a great diversification! avi Jewell
    1 Jun 2014, 01:25 PM Reply Like
  • jsijimmy
    , contributor
    Comments (556) | Send Message
     
    Are there any laws that do not allow e-cig advertisements on billboards, magazines, TV? If not, I see big tobacco pulling another "Marlboro Man" advertising scheme - the first to do it will win over many customers...we'll see who gets "in the saddle" first.
    10 Jun 2014, 10:52 PM Reply Like
  • jobehro
    , contributor
    Comments (766) | Send Message
     
    Marlboro Man and Vaping markets are different don't you think? But advertising would help. I tend to go with the big tobacco win side of this discussion.
    11 Jun 2014, 01:02 PM Reply Like
  • stick130
    , contributor
    Comment (1) | Send Message
     
    If the Big Three are so scary why was thierforsight to buy in so late? I buy from China tax free so " BRING THEM ON" LO has BLUE nothing but junk, looks like LO didn't put much research in there product. Build it and they will come won't work with us die-hard vapors.
    23 Jun 2014, 09:20 AM Reply Like
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