Big Tobacco looks to the future of e-cigarettes

In a standard quarterly update to the markets earlier this month, Imperial Tobacco said its plans to launch an electronic cigarette product next year remained on course.

It was, as the company later said, just “one sentence at the end of four pages of an announcement”, but nevertheless helped spark a 2.6 per cent bounce in its share price and, more pertinently, further suspicions that the future of “Big Tobacco” lies at least to some degree in this relatively new product line.

While that may represent a long-term transition for a centuries old industry, the notion was bolstered last month by a report from investment bank Canaccord Genuity who cut its recommendations at Imperial and British American Tobacco (BAT) for just that reason.

“We think electronic cigarettes will prove to be the most significant development in the history of the organised tobacco industry,” it said assuredly, with consumers worldwide expected to “migrate from tobacco smoking to e-cigarettes at an accelerating rate through 2020”.

A bit like Kodak falling foul of the digital revolution or HMV of online downloads, many may see the omens of downfall here, although diversification appears to be the more likely tack.

Lucrative marketplace
And in countries such as Ireland, where e-cigarettes are all but free of regulation, the industry is sizing up a lucrative marketplace at the mercy of whoever can exploit it to its fullest potential.

The products are a no-brainer; simple nicotine-dispensing, cigarette-shaped devices that release a vapour cloud similar to smoke, designed to wean people off the real thing.

Canaccord analysts Eddy Hargreaves and Alicia Forry say that the demise of tobacco may begin to take hold more quickly than people expect.

From a numbers perspective, they estimate the e-cigarette market will grow from $2 billion in 2012 to $3 billion in 2013, whereas the tobacco industry today is worth approximately $700 billion.

The main players, however, in the race for a foothold in the electronic landscape, face the same paradox as with the introduction of nicotine replacement products like gum: an attractive product for those wishing to give up smoking but one whose purpose, by its own definition, is to do away with itself.

“Winners and losers will emerge, but are hard to predict at this relatively early stage in e-cigarettes’ development, and there will be margin pressure in the short term across the board as companies race for share,” say the analysts.

“This new uncertainty, and the faster, long-term decline of tobacco which we predict, should cause investors to reassess their holdings in the sector.

“Our modelling suggests that tobacco companies will need to win a greater share of e-cigarettes than they have in tobacco to preserve short-term margins.”

Let the race begin. Last week, Imperial Tobacco found that its efforts to diversify – despite lagging behind BAT – have been welcomed by investors. And the move is certainly played down by the company itself.

Nevertheless, the owner of such household names as Drum, Golden Virginia and Gauloises, thought it prudent to form Fontem Ventures within the last year to examine the market and develop a product.

Knowledge building
Its spokesman Simon Evans preferred to put the stock bounce down to a healthy overall quarterly report in which the e-cigarette aspect was mentioned only briefly.

"That was us just saying it's on the radar. We are not really saying anything new here. We have said over the last few months that e-cigarettes are something that we are looking at and we are building our knowledge," he told The Irish Times.

“It is not about diversifying away from tobacco. Tobacco is a great business and our brands and products give us great confidence for the future.”

Philip Morris International, the seller of Marlboro, has been slow to embrace the new order but nevertheless plans on launching the first of its "next generation" products between 2016 and 2017.

Bloomberg recently quoted chief financial officer Jacek Olczak who demonstrated a qualified reticence on the subject.

“It’s not a product which is very close to the conventional cigarette and I think the consumers are looking for something which is at least similar,” he said.

“But it’s a new category so everyone is working on how to improve it. Years from now the situation may be different but today I don’t think that the product is performing well on the taste side... I don’t think the consumer really has the confidence that what they’re buying is something which they’d like to use.”

And yet, whatever the industry says, there is at least anecdotal evidence of a growth in popularity even if that has not yet been measured in Ireland where one in four adults smoke.

"I am not in the commercial marketing area at all but it is inconceivable to me that it wouldn't take off. If it's taken off in the US then why wouldn't it take off here?" said Stephen Rowen at Addiction Councillors of Ireland.

“We are not hearing it here in Ireland [yet]. It’s a multi-billion dollar business in the US; two per cent of all people who take nicotine take it in this form.”

So what about regulation? The picture in Ireland lies somewhere between non-existent and slightly confused but certainly there are no strict rules in place, opening up further questions as to whether people who don’t smoke may one day be tempted to use the products, however unlikely that seems for now, and as to how potentially addictive the devices themselves may be.

For now, they are available in some shops and online – in 2011 the Pharmaceutical Society of Ireland decided that in the absence of proper regulation, they should not be sold in their outlets.

The Irish Cancer Society too has refused to endorse them due to this lack of guidance.

That may be about to change. At the moment, because they are not registered medical products or devices, or tobacco products, they are not regulated at all.

According to the Department of Health, they fall under the European Communities (General Product Safety) Regulations 2004; the body with responsibility for such is the National Consumer Agency.

Conversely, the NCA says various EU directives apply: "At the moment, electronic cigarettes can fall under the Tobacco Products Directive, the Medical Products Directive or the Medical Devices Directive – which are the responsibility of the Department of Health and/or the Irish Medicines Board.

Monitoring the market
"The National Consumer Agency does not have a role in terms of monitoring the electronic cigarette market."

Meanwhile, back at the EU Commission, negotiations are underway to create some formal, encompassing framework.

Last December it published its EU Tobacco Products Directive proposal, now under consideration, which will ultimately contain more clarity on how various products are regulated.

In the meantime, the industry is likely to look increasingly toward less harmful pastures, despite how much it insists that all is well with global tobacco.