Times are difficult for the vape sector.
Since people started experiencing severe respiratory illnesses in the USA after using illegal, mostly THC cartridges, we’ve seen an avalanche of negative headlines. As a result, vape businesses are reporting a fall in sales, which particularly seems to be affecting starter kits and business catering to new and casual vapers.
The impact in the US has been huge. Vape shops are shutting down across the country, and one US vape manufacturer told me that he’d seen shops sales fall as much as 50%, distributor sales fall 70% and manufacturing sales fall 80% as shops sell through inventory.
However, a recent report from ECig Intelligence predicted that the vape market, outside the US, will still grow, albeit more slowly than previously predicted.To get a snapshot of where we are now, and where we might go in the future, we’ve been speaking to vape businesses and analysts.
Impact on current UK vape sales: The split of the hitIt’s obviously very early to get exact figures, but one currency provider who works with 30 larger vape business estimated he had seen the value of stock orders down 15% to 30%, depending on the company. That matches very closely with what I’ve heard from other businesses, both large and small.
What is clear is that some segments - and even individual businesses within those segments - have been hurt worse than others.
The worst hit, at least so far, appears to be new vape stores, with some newer stores experiencing those larger 30% drops in sales. More established stores seem to be experiencing drops in the region of 15%. And even then, the story I’m hearing varies from shop to shop.
For example, Ryan from Right Vape (open two and a half years and counting) reports that after an initial drop of around 20% in sales after the story first hit, sales have returned to roughly their usual daily average. In contrast, another established vape shop, which wanted to remain anonymous, told me that in the last week their sales had been 38% down compared to pre-September figures.
Meanwhile, Liam Humberstone, Technical Director at UK Vapour Brands and Totally Wicked, has seen a mixed impact at new stores, with some experiencing a big impact while others have seen steady sales - but, as Liam pointed out, a new store in the early stages of its life should be experiencing steady growth, not steady sales.
A worrying trend for both Public Health and businesses is a severe drop in new customers. The IBVTA have said that its members have been reporting a drop in starter kit sales of between 30% and 60%, while Ryan reports that he’s seen a drop in people in quit smoking referrals from Stop Smoking Services of at least 50%.
Liam agrees that new customers have been affected the most, pointing out that his company has seen a drop in vape kit sales which is double that of the drop in e-liquid sales.
Tim Phillips, Managing Director at ECig Intelligence, believes that the highest drop off is being seen in those less committed to vaping, which includes dual users as well as new users, and that newer stores and the convenience sector are most likely to be affected.
However, UK Vapour Brands, which supplies hundreds of convenience stores, has so far seen little impact on the convenience sector, although Liam did point out that the sector was not exactly buoyant before the stories broke.
Potentially that might be due to the type of product sold. Liam believes the majority of their products are picked by existing vapers as a quick purchase, while Shane MacGuill, Senior Tobacco Analyst for Euromonitor, believes that the worst hit category is closed pod systems, such as Blue and JUUL, that are enjoyed by casual consumers.One area which seems to have got off lightly - so far - is web. We’ve seen a drop of just 6% in web sales, while Totally Wicked and others have reported a lower drop than in shop sales. But Liam argues that web sales often lag Brick and Mortar, and that a drop in new users points to a slowing down in the future.
Temporary or permanentSo the big question - is this a temporary dip in sales or a permanent one?
ECig Intelligence had previously been forecasting a 17% growth in the UK market. Post the USA cannabis-vape apocalypse they have trimmed forecasts, but still see a 10% increase in sales.
The agency use a model to estimate how vaping will grow, and have made adjustments to the model on the assumption that there will be a drop off in less committed vapers. Both the model and Tim’s own inclination is that the market will continue to grow in the UK but at a slower rate. There’ll be an impact, Tim feels, but not as bad as the US - and it won’t be the end of the vaping category.
I’ve been expecting an ongoing dribble of negative stories going forward. One reason for that is a new one hundred and sixty million dollar anti-vaping campaign which has been launched by Bloomberg, a US billionaire who is also investing in a pharmaceutical ‘vapourizer’.
However, Tim feels this is largely aimed at regulators in the US rather than the public. He also points out that the media pendulum seems to be swinging back, and starting once again to point out the benefits of vaping. Ultimately, Tim believes, there will be some sort of bounce back, but that doesn’t mean vaping will return to previous levels of growth.
Tim’s not the only person who sees continued growth. Euromonitor had been forecasting 30% growth in the US and 17% growth for 2019 in Western Europe. Shane now sees a halving of growth in Western Europe in the region of 9-10%, and from 20% to 5% globally, with the brunt of the impact coming from the US.
Long term, Shane is optimistic.
The overall safety profile is extremely good in comparison to other formats. Ultimately, rationale wins out. We’ll see a hit this year, but ultimately we’ll still see global growth.Shane points out that there is still a huge untapped market of smokers, with the biggest barrier, according to surveys, being a lack of education about the product - a barrier exacerbated by the current news stories.While there may be some recovery in sales, there has been enormous damage to the industry from these stories. After all, many people will have seen dramatic headlines without reading the full story. And as one journalist pointed out to me, the anti-vaccine movement shows that when an idea is put in people’s heads, the repercussions can continue for many years, even when there is a mountain of evidence demonstrating that idea is wrong.
Industry confidencePerhaps not surprisingly, industry confidence in the US was at an all time low even prior to the outbreak of negative vaping stories. It’s fallen again.
Confidence in the UK has obviously been knocked by recent events, and vape businesses are worried, but Tim feels confidence is higher than in the US.That reflects what I’ve found talking to businesses large and small. Companies are worried, and they’re also angry about a campaign they feel is funded by groups that benefit from the continued sale of cigarettes, but they’re not panicking.
InvestmentSeveral vape companies have seen large investments in the last year or so, and vape shops have continued to open - although some have a short life span. Will this continue now?
The high street was already saturated with vape stores prior to the news stories. As Liam points out, new stores are far more dependent on new people switching from smoking to vaping. That could mean fewer vape stores opening, and more failures amongst less established stores.
Ryan has a slightly different view. While he’s sees a slowing down in the opening of larger chains, he argues that vaping has always been lead by independents run by enthusiasts, and these enthusiasts are unlikely to be put off by recent news.
There’s also likely to be a downturn in larger sized investments. We’ve already seen a merger between Altria and PMI fail because of Juul’s falling valuation, and Liam feels stories are likely to severely impact outsider’s impression of the industry.
It would be a brave investor that backed new ventures in vaping just now, and I think the inappropriate slant of news stories probably has a bigger effect than the plain fact of store revenues being down.Shane agrees, feeling that the stories will have a chilling effect in the short term. The concern is not just over the financial impact, but the reputational risk to the investor. In the longer term, however, Shane feels we’ll see companies moving back into the sector, albeit at a more moderate rate and more circumspectly than previously.
Tim’s more confident. While he pointed out that there was already a lack of significant investment going into the vape sector, he feels that investors who are interested are unlikely to be put off, with the limiting factor likely to be sales rather than sentiment.It might not just be investors who are put off. With sales currently down, business value will be reduced and companies may not feel it is the right time to bring on equity investment.
And the winners are...
Tobacco analysts of combustible tobacco [cigarettes] are more positive since these stories have broken, and that’s because they think the threat of vaping has been reduced.That came from Tim, who also told me a personal story about a friend who encouraged his 18 year old son to put down his vape and go back to smoking cigarettes.
Many tobacco companies sell vaping products. But they also sell combustible cigarettes, and PMI sells heat not burn products - two products groups which have less competition from pesky independents and higher margins.
That’s probably why tobacco companies valuations have increased in recent weeks. Buy ratings have been issued on tobacco sticks, both PMI and Altria’s share price have increased steadily since late September and Wells Fargo analyst Bonnie Herzog feels that negative stories around vaping could help arrest slipping cigarette sales.
Tim also points out that tobacco companies have been fairly silent about the deaths in the US and the debate over flavours, and sees that as a further sign that tobacco companies are likely to benefit from the current vape crisis.
But not everyone agrees.
Shane thinks that in terms of vape sales, tobacco companies have been hardest hit, partly because they lack the ability to educate their customers. Most tobacco products are sold in convenience stores which sell many other products, and those stores lack the expertise needed to reassure their customers. Perhaps that’s contributed to the 14 billion dollar fall in the value of JUUL, a company that Altria has a huge stake in.Shane believes the fall in vapes sales is a concern to tobacco companies. After all, there was a reason why tobacco companies diversified their policy, and tobacco companies see vape products as both potentially more regulator-friendly and also as a platform for new products in the future.
What can retailers do?It’s important to make sure you are clued up on all the myths and misperceptions that dog vaping. When customers want to know about the stories circulating, your staff need to be able to explain the facts with confidence. That’s why our last blog post, which was based on material we give to our own shop teams, focussed on the truth behind the myths. If you’re a member of the IBVTA, it’s also worth using a letter the organisation has produced for concerned customers which explains the issues.
I’d also strongly recommend encouraging your customers to sign up to the New Nicotine Alliance newsletter. Consumer power is, well, powerful, and if it hadn’t been for thousands of vapers writing to their MEPs a few years ago and sharing their story, vaping would now be illegal. The NNA are best placed to coordinate the action of concerned vapers.
Other than that, it’s a case of buckle your belts, batten down the hatches and prepare for a chilly winter ahead.