No longer blowing smoke? e-cigarettes could soon surpass traditional brands

WINSTON SALEM, N.C. When change has come for the tobacco industry during its long history, it usually has arrived at a leisurely pace.

Not this time. The crop and products made from it face something that has gutted or transformed many other industries in recent years a disruptive technology.

Electronic cigarettes are winning over smokers so quickly that some analysts predict the battery powered newcomer could come out on top of traditional cigarettes within a decade. That s unsettling for the farmers and manufacturers who still make North Carolina the national leader in tobacco production and Virginia the leader in cigarette manufacturing.

E cigarettes heat a liquid, usually containing the highly addictive stimulant nicotine, into a vapor that users inhale. Nicotine for the liquid is extracted from tobacco, but experts think it may take less tobacco to make the «juice» than required for an equivalent amount of traditional cigarettes.

That economic threat can also be an opportunity.

Some think that e cigarettes may even offer a way to slow the gradual slide in tobacco sales for domestic use, a slide that began decades before the advent of e cigarettes.

«It has been interesting to watch e cigarettes move from almost a novelty to a trend,» said North Carolina Agriculture Commissioner Steve Troxler.

«The bad news is, if it results in the decline of demand for traditional tobacco, then we are going to have a new set of problems, but the good news is, yes, we are poised to take advantage of it.»

This may be the key year in North Carolina s effort to muscle into that leadership role. One reason is that Big Tobacco is becoming Big Vapor, too Major tobacco companies are moving to get ahead of the potential shift in the market by selling e cigarettes themselves, either by buying companies already in the business or starting their own. And two of the nation s three largest tobacco companies are here.

With their deep pockets, intimate knowledge of the market, powerful research and development capacity and massive sales and distribution networks, they are in a position to quickly seize the majority of the market for e cigarettes, said Bonnie Herzog, an analyst with Wells Fargo Securities who follows the e cigarette and tobacco industries.

She and other experts believe that the big companies will market devices that simply work better, which will win over more smokers.

Greensboro, N.C. based Lorillard, the nation s third largest tobacco company, has been perhaps the most aggressive, snapping up an established e cigarette company called Blu in 2012 for $135 million. Lorillard now has nearly half the national market share for e cigarettes.

And the nation s second largest tobacco company, Reynolds American Inc., based in Winston Salem, N.C., has launched its own e cigarette subsidiary, R.J. Reynolds Vapor Co. It has developed an e cigarette that, unlike nearly all its rivals, is made in the United States.

Reynolds is planning to launch its Vuse brand nationwide this summer. Its test marketing results suggest the effect will be huge. In July, it started sales in Colorado and quickly gained more than half the market in that state. And RJR Vapor Co. President Stephanie Cordisco said in an interview that a second phase of test marketing that began in Utah in late January is showing similar results.

The largest tobacco company, Richmond, Va. based Altria Group, has test marketed its own e cigarette, MarkTen, in two states and plans to go national in the second quarter of the year. Altria is the parent company of Philip Morris.

The stakes are huge.

Last year, Herzog forecast that by 2023, Reynolds could earn $5.2 billion in revenue from e cigarettes and $3.1 billion from traditional ones.

And it, Lorillard and Altria would all see about half their revenue from traditional cigarettes vanish by 2023.

If analysts such as Herzog are right, the tobacco companies have to get involved to protect not just their profits, but perhaps their future, said Blake Brown, a professor of agriculture and resource economics at North Carolina State University and an extension economist who specializes in tobacco issues.

«They can t afford not to do this,» he said.

«If you re a tobacco company, you don t want to be the next Eastman Kodak. They didn t understand that they were in the image business. They thought they were in the film business.»

Cigarettes to be stripped of branding

Cigarettes are set to be stripped of branding and instead sold in plain boxes after an independent review made a «compelling case» for action.

Jane Ellison, the public health minister, told MPs that she would proceed with plans for plain packaging amid heckles from Conservative backbenchers, who shouted «shame» after about turns by the Government on the issue.

She said Sir Cyril Chantler&#39 s report, published on Thursday, had convinced her that the move could reduce the number of young people taking up smoking.

She said «Across the UK, over 200,000 children aged between 11 15 start smoking every year. In other words, around 600 children start smoking in the UK every day.

«Many of these children will grow up with a nicotine addiction that they will find extremely difficult to break.»

The minister called it a «tragedy» and pointed to Sir Cyril&#39 s conclusion that even a 2% drop in the rate would mean 4,000 fewer children taking up smoking each year.

Australia has already removed branding from cigarette packaging

The minister said there would be one more short consultation, but added that she wanted to «move forward as swiftly as possible».

It comes after two U turns by the Government. Andrew Lansley said he was already convinced of the benefits of standardised packs in 2012 when as health secretary he launched a consultation.

A year later, his successor Jeremy Hunt said it was too early to introduce the change arguing that it would be better to wait for evidence to emerge from Australia, where the change has already happened.

But the Prime Minister appeared to change his mind again after coming under pressure from critics who said it was his chief strategist Lynton Crosby&#39 s links with big tobacco that was driving the decision.

Lynton Crosby, the Prime Minister’s strategist, has tobacco firm links

That triggered this latest review. Sir Cyril said branded cigarettes were «badge products, frequently on display». They acted as a «silent salesman».

«Tobacco packages appear to be especially important as a means of communicating brand imagery in countries like Australia and the UK which have comprehensive bans on advertising and promotion,» he said.

He said children could not be quarantined from being exposed to the persuasive effects of the packaging even if that wasn&#39 t the intent.

«In the light of these and other considerations set out in my report I believe that branded packaging contributes to increased tobacco consumption.»

Critics on the Conservative backbenches include Philip Davies who has argued that such a change amounts to the Government acting as a «nanny state».

Sir Gerald Howarth said his concerns centred on the cost to Exchequer as a result of plain packages being easier to fake leading to a surge in counterfeit packs in Australia.

And Jacob Rees Mogg pointed out the report&#39 s admission that it is too early to draw definitive conclusions from what happened in Australia.

However, Sir Cyril added that did not stop him from drawing the conclusion that plain packaging would trigger a health benefit in Britain.

Deborah Arnott, Chief Executive of health charity ASH, said «The tobacco industry s arguments against the policy are spurious. This policy is the vital next step in reducing smoking rates, and cutting the toll and death and disease that smoking causes.»

Baroness Tyler, President of the National Children s Bureau, agreed «Hundreds of thousands of children start smoking every year, resulting in preventable conditions including respiratory infections, asthma, heart disease and cancer.»

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