Monday, October 7, 2013

Analyst projection: E-cigs will overtake traditional tobacco revenue at Reynolds in 2021

Winston-Salem Journal
Richard Carver

Reynolds American Inc. may have just eight more years as a predominant traditional cigarette manufacturer if a leading tobacco analyst’s revenue projections about electronic cigarettes prove accurate.

E-cigarettes are battery-powered devices that heat a liquid nicotine solution in a disposable cartridge and create a vapor that is inhaled.

Bonnie Herzog, with Wells Fargo Securities, has estimated Reynolds will have $4 billion in revenue from e-cigs in 2021 compared with $3.9 billion from conventional cigarettes.

That’s compared with barely any e-cig revenue and $6.4 billion in conventional cigarette revenue for 2013. R.J. Reynolds Vapor Co. is conducting a statewide test market in Colorado for its Vuse digital vapor product.

By 2023, Herzog projects Reynolds having $5.2 billion in electronic-cigarette revenue and $3.1 billion in traditional cigarette revenue. The expectation among analysts and some industry officials is that conventional adult smokers will switch solely to e-cigs or choose both and smokeless tobacco products as tobacco options.

Herzog forecasts similar trends for Altria and Lorillard, with all three manufacturers having about a 50 percent decrease in conventional cigarette revenue by 2023.

"We expect the Big 3 to ultimately have a meaningful presence and likely accelerate growth of the category,” Herzog said.

Herzog has estimated $2 billion in overall e-cig revenue this year and up to $10 million by 2017.

Lorillard Inc. currently owns the top e-cig market share of 37.2 percent with its blu eCigs brand that it bought for $135 million in April 2012, while NJoy was at 32 percent. Altria Group Inc. launched its MarkTen brand in Indiana during in August.

Herzog projects Altria, Lorillard and Reynolds will each have about 25 percent e-cig market share in 2013.

That’s a significantly more competitive marketplace than currently exists with conventional cigarettes, where Altria holds a 47.3 percent market share, while Reynolds has 23.5 percent and Lorillard 14.5 percent.

Herzog based her projections on three key factors:
The manufacturers’ “war chests” of cash to invest;

Their existing supply chain relationships with

retailers and distributors; and

Their expertise at building successful brands and their vast marketing databases of adult tobacco consumers.

Dr. Carl Phillips
CASAA Scientific Director

"Undoubtedly, technology is a crucial part of driving e-cig consumption,” Herzog said. “But building compelling brands is equally, if not more important, in our view.”

Carl Phillips, scientific director for Consumer Advocates for Smoke-free Alternatives Association, said that while he is confident there will be “impressive growth” for e-cigs, he said it is too soon to say how much.

"There will probably be a year or two of explosive growth, but that might start next year, the year after, or five years from now,” Phillips said. “After that explosion, the total number of smokers who switch might be 80 percent but it might only be 40 percent.”

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