Big Tobacco is expecting a hazy near-term future for the e-cigarette industry.
A deadly public health crisis, a push for tighter regulatory control and calls for major e-cigarette makers to pull their products from shelves have contributed to slowing sales growth for the industry and expectations that the market could contract, experts said.
Market leader Juul Labs Inc. announced Oct. 17 that it would stop selling most of its flavored products in the U.S. in response to heightened regulatory pressure. Altria Group Inc., which paid $12.8 billion for a 35% stake in Juul in December 2018, dropped its e-cigarette line the same month.
Yet other major tobacco producers like Imperial Brands PLC and British American Tobacco PLC-owned Reynolds American Inc. have yet to follow suit and Big Tobacco as a whole retains a healthy appetite for e-cigarettes, which many of those producers view as a possible future beyond traditional cigarettes.
Company officials say new U.S. regulations would help rid the sector of bad actors trafficking in the suspect products and questionable marketing tactics drawing the attention of public officials. The e-cigarette crackdown is also leaving the opportunity open for smoke-free alternatives like tobacco heating devices.
"Once there is a clearer regulatory framework in the States that's going to be a great benefit to us because it will mean the responsible players can flourish and the irresponsible ones will fall by the wayside," Simon Evans, an Imperial Brands spokesman, said in an interview.
Still, negative feedback could stymie the U.S. e-cigarette market longer term, some analysts say.
"Consumers themselves may back off from the category, possibly even going back to smoking," Philip Gorham, a director at Morningstar, said in an email.
Sales growth slows
A recent sales slowdown for e-cigarettes in the U.S. raised expectations of a broader market contraction.
Year-over-year sales growth for e-cigarettes slowed to 78.7% for the year ending Oct. 5, down from the 139.6% year-over-year growth in the year ending Oct. 6, 2018, according to Wells Fargo reports citing Nielsen data. The figures do not reflect sales made online or at vape shops.
Regulators are proposing a variety of measures to curb the industry, including a White House proposal to clear the market of most flavored e-cigarettes. State legislators are proposing their own limits on the industry as retailers continue to pull out of the vaping category.
The measures have come in response to a mysterious illness linked to vaping that has so far killed 33 people, according to the U.S. Centers for Disease Control and Prevention. That followed months of scrutiny on the e-cigarette industry that began in 2018 when the U.S. Food and Drug Administration sounded the alarm on a rise in youth vaping and subsequent reports of seizures linked to vaping.
Analysts say the controversies and confusion led to a slowing of e-cigarette sales and further pain could be ahead.
Research firm ECigIntelligence expects the U.S. e-cigarette market value to shrink by 13% from $6.6 billion in 2019 to $5.7 billion in 2020 because of the outbreak of lung disease related to vaping. The U.S. e-cigarette market in 2018 had a $5 billion market value, Barnaby Page, editorial director of ECigIntelligence, said in an email.
"Although the predicted drop in 2019-20 is pretty dramatic, it still leaves the 2020 forecast ahead of the 2018 figure," Page said.
Countries outside the U.S. are also putting pressure on the industry. India banned the sale of e-cigarettes, and China eventually plans to impose controls on e-cigarette devices, tobacco liquid and additives, and packaging, the Associated Press reported, citing the China News Service.
Controversy encircling e-cigarettes has coincided with a general drop in market sentiment toward Big Tobacco. Among the largest publicly traded tobacco companies, only Philip Morris International Inc. posted a positive share gain since the FDA began its crackdown on vaping in September 2018 through Oct. 22.
Smoking out bad actors
Big cigarette manufacturers think the road to establishing new rules for e-cigarettes in the U.S. will lead to fewer problems with youth use and quality standards.
"The issues I think that are top of mind for people right now regardless of where they are, regardless of what country, those can be addressed by having an appropriate regulatory structure in place," Corey Henry, a Philip Morris spokesman, said in an interview.
Companies have to file a premarket tobacco product application, or PMTA, with the Food and Drug Administration before new tobacco products can be legally marketed in the U.S. E-cigarette makers have until May 12, 2020, to file their PMTAs. Those that do can keep their products on the market. The FDA estimates that a premarket tobacco application review costs about $117,000 to about $466,000, though the figure can vary greatly.
"Submissions to the FDA via the PMTA process will divide the responsible companies from rogue manufacturers currently exploiting the market for a quick return," Michele Maron, a Japan Tobacco International USA Inc. spokeswoman, said in an email. "As such, we believe the vapor market will look vastly different in May 2020."
Smaller companies also want to root out irresponsible players, but fears about the impact of different regulations persist. The Vapor Technology Association, a trade group, opposes a U.S. flavor ban, which the organization estimates would cause 14,000 small businesses to close and more than 166,000 job losses.
Committed to vaping
With U.S. regulations hanging in the balance, Phillip Morris, Japan Tobacco and Imperial Brands are maintaining commitments to e-cigarettes.
"Our approach to going smoke-free remains the same," Henry, the Philip Morris spokesman, said.
Philip Morris launched in April a public relations campaign highlighting its investments in smokeless products like its e-cigarette and heat-not-burn products under the IQOS banner. Philip Morris does not sell an e-cigarette device in the U.S. for now, and executives expect the vaping controversy to benefit sales of its heat-not-burn products in the U.S.
Japan Tobacco submitted its premarket tobacco product application to the FDA in August and its strategy for marketing and selling vapor products is unchanged, said Maron, the Japan Tobacco spokeswoman. Japan Tobacco markets vaping products under the brands Logic and Ploom.
Vaping's volatility in the U.S. led Imperial Brands to slash by half its expectations for fiscal 2019 revenue growth and caution its forecast for its next-generation products business, which includes Blu e-cigarettes. Still, Imperial Brands will keep e-cigarettes as part of its portfolio of what the company calls next-generation products. This portfolio includes the heat-not-burn device Pulze that recently launched in Fukuoka, Japan.
A British American Tobacco PLC spokesman said in an email the company's guidance has not changed and referred further questions to the company's investor relations page.
British American Tobacco on Oct. 11 announced, through subsidiary Reynolds, the submission of its application to the FDA to market Vuse e-cigarettes. The Vuse application includes 150,000 pages of documentation and took years to put together, British American said in its announcement.
Juul and Altria did not respond to requests for comment.