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Wells Fargo 4Q2014 U.S. Ecig Retailer Survey

"Tobacco Talk" - Bonnie Herzog - Q4 U.S. Vapor Retailer Survey


Link to PDF: Wells Fargo 4Q2014 Vapor Retailer Survey



Here's the latest from Bonnie Herzog.

PVs*, e-liquid and vape shops keep taking market share away from cigalikes sold in convenience stores.

It also appears that Big Tobacco companies are urging their convenience store contacts to support regs/bans on PVs, e-liquids and vape shops.

- Bill

* 'open systems'


"Tobacco Talk" -- Q4 U.S. Vapor Retailer Survey

Wells Fargo - Bonnie Herzog

[see PDF link above]

Wake Up Call! Action Needed To Keep Vapor Category Momentum Alive


Vapor Category Remains Promising Long Term But We're Increasingly Concerned That Action is Needed For Momentum to Continue

We recently conducted a survey of our tobacco retailer and wholesaler contacts representing about 20,000 U.S. c-stores. We observed a few "calls to action" from our retailer contacts pertaining to the vapor industry:

(1) the FDA must take leadership and act soon to improve consumers' perception of the relative risks of vapor and uncertainty surrounding the category;
(2) the industry must align, particularly to push for modified risk claims so that public perception doesn't deteriorate further; and
(3) vape shops need to be regulated more closely as they are "playing by their own set of rules" potentially harming the industry's reputation. We believe it's imperative these factors are addressed promptly; if not, we're concerned that vapor category growth could continue to moderate.

Bottom line, we remain bullish long term and still believe consumption of vapor and other non-combustibles (such as heat-not-burn) could surpass consumption of combustible cigs in the next decade (by 2023).

We continue to believe that technological innovation is crucial and that Big Tobacco will be pivotal in shaping the non-combustible nicotine industry.

Vapor Category Growth Remains Strong at 17% but Continues to Moderate in C-Stores
Despite continued growth, the vapor category has not yet resulted in a deceleration of combustible cig volume. This has been very perplexing to us but we believe could be due to:

(1) high prevalence of dual use; and
(2) vapers consuming more (vapers tend to vape more since current vaping technology is a less efficient way to deliver nicotine and it's easier to vape more places currently).

Other key takeaways from our survey include:

(1) Vapor category growth in c-stores remains robust (+17% in 4Q14) but decelerating relative to 3Q14's 21% growth, likely driven by continued heavy promotions on both Vuse and MarkTen which is driving unit momentum but not necessarily accelerating $ sales;
(2) Vapor continues to displace about 4% of combustible cig volume;
(3) Repeat vapor purchases have accelerated to 60% in 4Q14, up from 57% in 3Q14;
(4) E-cig sub category growth continues to decelerate--our contacts estimate about 5% growth in 4Q14--down from 7% last quarter and 19% in 4Q13;
(5) blu continues to cede share to Vuse, LOGIC and MarkTen which is expected to continue given heightened activity (particularly on Vuse & MarkTen); and
(6) Our retailer contacts are increasingly disenchanted with NJOY, noting issues with product returns and the company generally overpromising and under delivering.

Retailers Have Low Expectations on "Advanced" Devices Coming from NJOY, LOGIC, Mistic and Blu
Retailers seem somewhat underwhelmed by the larger devices that are meant to "bridge the gap" between "traditional" e-cigs and VTMs--such as those from NJOY, LOGIC (Pro), blu (+) and Mistic.

Our contacts feel that about 75% of the sales of these products will cannibalize existing sales rather than generate incremental sales. A few retailers noted the higher price points could discourage consumers. One retailer noted, "at a time where retail prices are falling on traditional e-cigs, the price point on advanced systems will discourage sales." However, others noted that the technology improvements will benefit the category and are necessary.

Bottom line - we remain cautiously optimistic by new e-cig/vapor technological innovation.

Please call or email me with any questions.


Bonnie Herzog
Managing Director
Beverage, Tobacco & Convenience Store Research
Wells Fargo Securities, LLC