Can E-Cigarettes Survive The War Against Vaping?
The Food and Drug Administration regulations referred to in this story as pending, came out May 5. As expected, the rules require e-cigarette makers to put all products that came on the market after February 15, 2007, through an extremely costly, retroactive pre-market application process, that will likely put thousands of vaping entrepreneurs out of business. Companies have a two-year period to comply. The regulations also ban the sale of e-cigarettes to Americans under 18.
In the winter of 2008 Jan Verleur was living on the outskirts of Prague, working on a novel about three failed Internet entrepreneurs who invest their dwindling capital in an ecstasy-smuggling ring. It wasn't exactly autobiographical, but Verleur, now 36, was writing from experience with failed ventures. His most recent had been an ambitious pornography business that lost $22 million of investors' money, including $1.6 million of his own.
One day, as he was picking up a pack of smokes at a Vietnamese convenience store, he noticed a box of e-cigarettes. He tried one, and it leaked liquid into his mouth. "The technology wasn't ready for market," he says, "but the idea struck me as amazing." Soon after, Dan Recio, his buddy and colleague in the porn business, persuaded him to return to the U.S. and take another crack at making money by satisfying a different human craving.
Subscribe Now: Forbes Entrepreneurs & Small Business Newsletters
All the trials and triumphs of building a business – delivered to your inbox.
The nascent e-cig market was wide open. Startup costs were low, and
regulation was nonexistent. The potential payoff looked huge: Vaping
seemed poised to grow into an enormous global market for a healthier
product. Invented in 2003 by a Chinese pharmacist whose father had died
of lung cancer, e-cigarettes use lithium-ion batteries to heat
nicotine-laced liquid, turning it into a vapor that has only traces of
some of the 60-plus carcinogens in cigarette smoke. At first Verleur and
Recio's Miami-based company, VMR, looked to be riding a big, beautiful
wave.All the trials and triumphs of building a business – delivered to your inbox.
But the industry has shifted dramatically in the six years since Verleur and thousands of other entrepreneurs jumped in. Demand for e-cigs has turned out to be smaller than at first expected. It grew from virtually nothing a decade ago to an estimated $3.7 billion in the U.S. last year, according to ECigIntelligence, a British outfit that supplies information to the industry. But Nielsen NLSN +0.69% reports that sales in convenience stores and big retailers like Wal-Mart have started to contract, shrinking 6.2% in the 52 weeks that ended Mar. 26. Nielsen doesn't capture sales online or in America's 10,000 vape shops, but last year those channels were flat for VMR, which logged 2015 revenue of $50 million. All told, e-cig sales still pale in comparison with the $92 billion U.S. cigarette market.
Many smokers try e-cigs once and abandon them, disappointed that vapor doesn't taste or feel the same as real smoke in their mouths and throats and gives a slower nicotine hit. "There is a lot of trial and a lot of rejection," says tobacco analyst Vivien Azer, of Cowen and Company, in New York. "I'm not convinced the e-cigarette market will grow at all."
Meanwhile the forces arrayed against the many little players trying to grab a piece of that smaller-than-expected pie are daunting. Vaping entrepreneurs are up against a three-headed monster--Big Tobacco, the Food & Drug Administration and an army of antismoking zealots--which is able and more than willing to wipe them out.
Tobacco giants like Reynolds and Altria have leveraged their fat balance sheets, huge sales forces and established distribution channels to enter the e-cig market and now own the top four brands in the U.S. Vaping cognoscenti say those are inferior devices that don't really threaten Big Tobacco's core product, traditional cigarettes (the tobacco companies insist they are committed to their cigarette alternatives).
Recommended by Forbes
The FDA has been egged on by antismoking groups like the American Lung Association and the Campaign for Tobacco-Free Kids, which have taken a hard line against vaping. Ignoring or minimizing the fact that millions of smokers have used e-cigs to quit or cut down, the antismoking lobby instead obsesses over the minimal health risks of vaping. They prefer that would-be quitters stick with patches and gum, which work as little as 7% of the time. Some 70% of American smokers say they want to quit, and 480,000 people died last year of smoking-related illness.
One tobacco industry consultant, who did not want to be quoted on the record for fear of irritating his powerful clients, recently remarked that the warnings against e-cigs by one prominent antismoking public health professor are "the best p.r. campaign for cigarettes going."
In an e-mailed statement, FDA spokesman Michael Felberbaum says, "The FDA's responsibility is to protect Americans from tobacco-related disease and death," insisting that the agency's objective is to learn as much as it can about e-cigs before approving them rather than put anyone out of business. Yet the proposed rules require that companies present comprehensive research findings on the impact of every product on the entire population and gauge the likelihood that ex-smokers will start vaping, a near-impossible task for small players like VMR.
Joel Nitzkin, former cochair of the Tobacco Control Task Force of the American Association of Public Health Physicians, who is now a fellow at a free-market think tank called R Street Institute, says of the FDA, "They think they're on a mission from God. The horrific part is that they're going to maintain cigarettes as the lead nicotine-delivery product in American society." What's more, he says, "they are refusing either to tell the public or allow manufacturers and vendors to tell the public about the difference in risks between e-cigarettes and tobacco cigarettes." Indeed, even if a vaping company can jump through the FDA's proposed regulatory hoops, it won't be allowed to claim its products pose less harm than traditional cigarettes.
No one suggests that e-cigs are completely safe. They deliver nicotine, which can interfere with brain development in young people, harm a developing fetus and pose risks to people with cardiovascular disease. E-cig vapor contains a dozen or so of the carcinogens found in cigarette smoke, though at very low levels. As an August 2015 report from Public Health England, an arm of the U.K.'s health service, reported last year, e-cigs are 95% safer than cigarettes. This April the Royal College of Physicians cited that figure and urged smokers to switch to vaping.
But the British evidence hasn't swayed antismoking advocates like the American Lung Association's assistant vice president of national advocacy, Erika Sward, who says she's worried that e-cig makers are marketing to kids with flavors like cotton candy, that the majority of vapers continue to smoke and that former smokers will start vaping. "Cigarettes are the nuclear option," she says. "That doesn't make conventional warfare any less deadly."
Media reports have fed the idea that e-cigs pose all sorts of dangers. In January 2015 the New England Journal of Medicine published a study that showed toxic levels of formaldehyde could be produced by a high-powered vaporizer. The report also noted that no one would ever heat e-liquid to that temperature. Likewise, when a Harvard study showed the presence of the chemical diacetyl in 75% of e-liquids, there were headlines about e-cigs causing irreversible scarring of the lungs, despite the fact that diacetyl is present in extremely low doses. The toxic chemical is hundreds of times more plentiful in traditional cigarettes.
Since Verleur started VMR, the American e-cig market has stratified into two broad segments: "cigalikes," which mimic traditional cigarettes, and "mods," which are more powerful and satisfying.
The differences are striking. Cigalikes, which include VUSE (Reynolds), MarkTen (Altria), blu (Imperial Tobacco) and Logic (JTI), are the Budweisers and Millers of the vapor market, sold in convenience stores and chain retailers. They are packaged to look like cigarettes, with a long, tubular battery making up the body, a cartridge of fluid where the filter would go and, on the tip, an LED that glows when in use. A VUSE startup kit costs $10 for a vaporizer, a battery charger and a cartridge of liquid that roughly equals a pack of cigarettes. Replacement cartridges are $6 for a pack of two.
Mods are more like craft brews. There are thousands of them, and they're typically modified to accommodate more powerful batteries, for a greater volume of vapor and a more satisfying experience. Mods are open systems, meaning that the vaper buys bottles of nicotine liquid and fills the tank herself. Most are made by mom-and-pop entrepreneurs and small companies like VMR. They sell mainly in vape shops, which stock e-liquids that cost as little as $1.20 for the equivalent of a pack of cigarettes.
Big Tobacco brands have light-years to travel before their e-cigs make anywhere near the money combustibles do. Extrapolating from Nielsen-tracked retail sales numbers, the four top brands combined were responsible for just $300 million in U.S. revenue last year, barely a rounding error in an industry where, in the same period, Reynolds alone brought in nearly $11 billion. Also e-cigs yield little if any profit. VUSE, the No. 1 brand, which Reynolds introduced in 2014, was still in the red at the end of last year. Among the reasons for the poor performance, says tobacco analyst Vivien Azer: e-cigs' relatively high manufacturing cost and heavy discounting to attract customers. By contrast, gross margins on Reynolds' traditional tobacco products were 44% last year, according to Azer. (Reynolds declines to comment except to say that it is continuing to invest in VUSE.)
At VMR, Verleur has pushed to attract both the masses and the connoisseurs, offering cigalikes, mods and multiple e-liquids in convenience stores, online and in vape shops. Unlike the Big Tobacco brands, which focus on the domestic market, a quarter of his business is overseas, where he sells in 30 countries. In December he sold a 51% stake to a Chinese company, Huabao, in exchange for entrée to a largely untapped market, where some 315 million smokers spend more than $200 billion a year on cigarettes. Controlled by billionaire Chu Lam Yiu, Huabao had $558 million in revenue last year and, at least in theory, deep enough pockets to pay for regulatory compliance back in the U.S. The company supplies tobacco flavoring to the state cigarette monopoly and already sells e-cigs to the Chinese market. Huabao paid $23 million and left Verleur in control as chairman and CEO. (The deal includes a golden parachute that he says will pay him more than $23 million should he be ousted.) The three-headed monster has hounded him into business exile .
These days Verleur shuttles back and forth between China and Florida. He lives half the year in a hotel in Shenzhen, where VMR has 60 full-time employees and contracts with 3,000 workers in two factories. The rest of the time he's in Miami, where he says he's "homeless" after splitting up with the mother of his third child. ("I'm a hard person to have a relationship with.") He sometimes sleeps in a room next to his office, making conference calls to China at 3 a.m., or stays in a company apartment nearby. He keeps a packed suitcase in the trunk of his Jeep, which is covered in shiny bronze bulletproof Kevlar. "I bought it because it looked cool," he says.
Before he hit on e-cigs, Verleur displayed a knack for sales and hit-or-miss entrepreneurship. As a freshman at Penn State, he says, he made as much as $30,000 a month selling $1,000 Cutco knife sets before dropping out. Next he got a job in Orlando with a company that sold Web-design services. Then he followed a Cuban girlfriend to Miami, where he started and shut down a series of businesses, including one that sold sales-intelligence software and another that supplied Indian tech workers to American companies. "There were times when I'd have a million-dollar year," he says, "and other times I'd lose a couple hundred grand."
Or more. In 2003 he tried to build an online venture he hoped would become "the HBO of porn." It produced its own Internet programming, including a reality show called The Brothel, at studios in Miami and Prague. He planned to sell sex toys and lingerie on the shows and to pipe live porn into hotel rooms. "If I had endless capital," he shouts over a plate of bacon-wrapped dates at a trendy Miami restaurant, music thumping, "I think we'd be the largest adult entertainment company in the world today."
When he got around to e-cigs, in 2010, he figured he'd be most successful online, where there were only a handful of poorly designed sites selling them. He and Recio invested $7,500 each, as did a third partner. Within a year VMR had moved into a ten-story glass-and-steel office building in Miami, and revenue hit $19 million. Two years later, revenue ballooned to $75 million and the head count was at 180, split among Miami, Shenzhen, a distribution center in Prague and small offices in Hamburg, London, Moscow and Hong Kong. Then came two years of declining sales and growing concerns about regulation.
Electronic cigarettes (or e-cigarettes) are battery powered devices which heat liquid (also called e-liquid) into an aerosol which is inhaled into a person’s lungs[1]. The aerosol is often called ‘vapour’.
E-cigarettes are also called electronic nicotine delivery systems (ENDS), alternative nicotine delivery systems (ANDS), or e-cigs.
Unlike tobacco cigarettes, where the smoke from burning tobacco is inhaled, the e-cigarette user inhales an aerosol which may contain nicotine, propylene glycol and other chemicals into their lungs[1]. Inhaling the aerosol is usually called ‘vaping’.
When e-cigarette is being used, the user inhales and exhales the vapour which may give the appearance of smoke.
E-liquids are often flavoured, with over 7,000 flavours available such as tobacco, confectionery, fruit and chocolate[2]. They may or may not contain nicotine and may or may not be labelled as containing nicotine[3].
E-cigarettes may be shaped and coloured to make them look like cigarettes or other tobacco products like cigars, cigarillos, pipes, hookahs or shishas. E-cigarettes are also sometimes made to look like everyday items such as pens or USB memory sticks[3].
E-cigarettes can either be disposable or re-useable. Most devices include a battery, an airflow sensor (to activate the power from the battery), an aerosol generator (to turn the e-liquid into an aerosol) and e-liquid.
Are e-cigarettes legal in NSW?
On 25 June 2015, the NSW Parliament passed the Public Health (Tobacco) Amendment (E-cigarettes) Act 2015 to amend the Public Health (Tobacco) Act 2008. The Act was assented on 30 June 2015. The changes to the Act define e-cigarettes and e-cigarette accessories to be separate from tobacco products. The Act makes many of the provisions that apply to tobacco products also apply to e-cigarette and e-cigarette accessories.The changes commenced in two stages.
From 1 September 2015 it is an offence:
- to sell e-cigarettes and e-cigarette accessories to minors under the age of 18
- for adults to buy e-cigarettes and e-cigarette accessories on behalf of minors
- to operate or use a vending machine that dispenses e-cigarettes and/or e-cigarette accessories on behalf of a minor.
From 1 December 2015:
- it is an offence to use e-cigarettes in cars with children under the age of 16 present
- new provisions apply to the display and advertising of e-cigarettes and accessories.
- a penalty of $11,000 for an individual or $55,000 for a corporation; and
- for repeat offenders, a penalty of $55,000 for an individual and $110,000 for a corporation.
Use of e-cigarettes with kids in the car is against the law
If you see an e-cigarette or e-liquid that is labelled as containing nicotine, you can report this to NSW Health by email ecigs@doh.health.nsw.gov.au.
To find out more about the law and e-cigarettes, read
Are electronic cigarettes legal in NSW? It includes information about NSW tobacco legislation, NSW poisons legislation and national therapeutics legislation.Are e-cigarettes and liquids safe?
To find out more about whether e-cigarettes and their liquids are safe, read Are electronic cigarettes and liquids safe?Can e-cigarettes help me to quit smoking?
To find out more about whether e-cigarettes can help you to quit smoking, read Can electronic cigarettes help me to quit smoking?The NSW Government encourages all smokers to quit smoking. You can get help from the Quitline 13 7848; a free telephone based counselling service, the iCanQuit website and your General Practitioner or pharmacist.
Public health warning
Some e-cigarettes and e-liquids which are labelled as containing no nicotine have been found upon analysis in Australia to actually contain significant quantities of nicotine. Scientific testing undertaken by the NSW Ministry of Health showed that many of the liquids used in e-cigarettes contained high levels of nicotine that, if swallowed are potentially lethal. A public health warning was released in October 2013 to raise consumer awareness of the potential risks of these products.References
- World Health Organization, Electronic nicotine delivery systems: Report by WHO. 2014.
- Zhu, S.-H., et al., Four hundred and sixty brands of e-cigarettes and counting: implications for product regulation. Tob Control, 2014. 23 Suppl 3: p. 3-9.
- Brown, C.J. and J.M. Cheng, Electronic cigarettes: product characterisation and design considerations. Tob Control, 2014. 23 Suppl 2: p. 4-10.
No comments:
Post a Comment