Puffing profits: the growth of e-cigarettes
Does the rise of the e-cigarette signal a brave new dawn for the highly regulated and much frowned-upon tobacco industry?
Since smoking rates began to decline in the developed world around 40 years ago, the big tobacco companies have searched further afield for growth. This has meant expanding in emerging markets around the world, where smoking rates are higher and people tend to trade up to more expensive brands as their incomes rise.
Now, however, a new avenue is opening up for the big companies – e-cigarettes. These electronic devices vaporise a liquid that contains nicotine, giving the user the hit they crave minus the toxins released by burning dried leaves.
So is this a brave new dawn for the highly regulated and much frowned-upon tobacco industry? Judging by the level of activity among the big players, they evidently believe it’s a genuine opportunity for someone. That may be because e-cigarettes are indeed set to replace conventional coffin nails in the developed world over the coming decade, as at least one US investment analyst has predicted. But the multiple takeovers of e-cigarette makers by tobacco companies may simply represent a concerted attempt by “Big Tobacco” to prevent one or more upstarts with a new technology from muscling into their market – look at what camera phones did to Kodak, or the music industry after Apple decided to get involved.
Sales of e-cigarettes are growing fast. In the UK, they more than quadrupled during 2013, reaching £193m compared with £44m in 2012, according to Mintel. But they remain miniscule compared with the overall value of the UK cigarette market at around £12bn a year. So if these new devices are going to give a new leg-up to tobacco companies’ growth in mature markets, a whole lot of things are going to need to go right.
First, they may be growing fast now but they could still turn out to be a minority taste – only time will tell.
Second, regulators may decide they threaten public health and therefore need tough regulation that could slow take-up.
Third, they could attract much greater restrictions on marketing than are currently in place.
Fourth, tobacco is heavily taxed and governments may decide to replace declining revenues from conventional tobacco with a heavy tax on e-cigarettes.
Any of these could slow down their advance. But if e-cigarettes do start to take over and the regulators don’t strangle them, there is no one better placed to exploit that opportunity than the big tobacco companies with their huge market budgets and distribution networks.