Competition in the e cig market is heating up. Both Altria (NYSE MO ) and Reynolds American (NYSE RAI ) are set to join the electronic cigarette, or e cig, market later this year or early next year. Lorillard (NYSE LO ) already has its own brand of e cig called blu, and the company has used its first mover advantage to snap up a 49% share of the retail electronic cigarettes market.

What’s more, the domestic e cig market as a whole is expected to be worth a total of $1.7 billion this year. This is double what it was worth in 2012. Indeed, if growth like this is set to continue then there might be room for all companies to have their own share.

However, the Food and Drug Administration will decide this month if it will lump e cigs in with conventional cigarettes when it comes to regulation and taxes. Obviously, this would slow growth within the market, but there would still be plenty of room for expansion .

The rapidly growing e cig market is already showing some signs of maturing. According to this Forbes article, while there are over 300 e cig companies, the top three have 85% of the market. This is set to change as the big fish like Altria, Reynolds and UK based British American Tobacco enter the fray, which is set to happen during the next few months.

Early mover
Still, Lorillard’s early movement into the market has helped the company surge forward. As I have already mentioned, the company’s blu e cig brand has captured a large share of the domestic market and produced income of $9 million, or $0.02 per share, for the company during the first nine months of the year. However, it would appear that after this performance growth from Lorillard’s e cig division is going to slow down over the next few years.

Running into trouble
In particular, Lorillard’s venture into the e cig market is already showing some strain. For example, looking through the respective earnings reports, we can see that Lorillard’s e cig gross margin has declined from 37%, reported during the first quarter of this year, to 32 % during the second quarter, and finally 24% during the third quarter.

What’s more, Lorillard’s operating income and margin from its e cig segment have declined from $7 million and 12%, respectively, in the first quarter of this year to 0 during the third quarter. That’s right, Lorillard made no profit from its e cig sales in the third quarter.

The reason for this? Well, the company rolled out a new, cheaper e cig product and expanded its offering into an additional 127,000 stores, which damaged the gross margin. In addition, the company’s marketing spend increased as it tried to beat competitors.

Far from being a short term effect, it seems as if higher marketing spending is going to become the norm as more competitors enter the e cig market.

Here comes the cavalry
That said, Lorillard is only trying to compete with smaller peers. The impending entry of tobacco industry behemoth Altria into the e cig market could change all of that. Indeed, this comment from Wells Fargo Securities researcher Bonnie Herzog sums up Altria’s entry into the market. “Altria has the ability to leverage its war chest of cash, its sizable infrastructure, its deep understanding of the tobacco consumer, and its entrenched position at retail.”

Elsewhere, Reynolds is also claiming that its new electronic cigarette, Vuse, will be a “game changer.”

There has also been some concern among smaller e cig companies that the entrance of big tobacco could spur big tobacco to use aggressive marketing tactics. This could include telling suppliers that they cannot stock the respective brand’s cigarettes unless they carry its e cigs. .

Foolish summary
Over the next few quarters a number of new e cig products are going to come to the market. With more products hitting the market, price wars are likely to take hold. This will hit margins and force companies to spend more on promotion.

Unfortunately, in this situation a big tobacco company such as Altria is likely to come out on top as it uses its deep pockets and experience in the sector to grab customers’ attention.

Cdc – fact sheet – tobacco industry marketing – smoking & tobacco use

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Overview

Cigarette and smokeless tobacco companies spend billions of dollars each year to market their products.1,2

  • In 2011 (latest data available), cigarette companies spent $8.37 billion on advertising and promotional expenses in the United States alone, up from $8.05 billion in 2010.1
  • The five major U.S. smokeless tobacco manufacturers spent $451.7 million on smokeless tobacco advertising and promotion in 2011 (latest data available), an increase from $442.2 million spent in 2010.2

The money cigarette companies spent in 2011 on U.S. marketing amounted to approximately 1,3.4

  • About $23 million per day
  • Almost $27 for every person (adults and children) in the United States per year (according to mid 2011 population of 311,800,000)
  • More than $191 for each U.S. smoker (43.8 million smokers 2011 ) aged 18 years or older per year

The following three categories totaled approximately $7.76 billion and accounted for 92.7% of all cigarette company marketing expenditures in 2011 1

  1. Price discounts paid to retailers or wholesalers to reduce the price of cigarettes to consumers ($7 billion)
  2. Promotional allowances paid to cigarette retailers, such as payments for stocking, shelving, displaying, and merchandising particular brands ($357 million)
  3. Promotional allowances paid to cigarette wholesalers, such as payments for volume rebates, incentive payments, value added services, and promotions ($401 million)

Marketing to Specific PopulationsYouth and Young Adults

The three most heavily advertised brands Marlboro, Newport, and Camel were the preferred brands of cigarettes smoked by adolescents (ages 12 17 years) and young adults (ages 18 25 years) during 2008 2010.5

Brand Preferences of Adolescents 5

  • 46.2% preferred Marlboro
  • 21.8% preferred Newport
  • 12.4% preferred Camel
  • 16% preferred other brands
  • 3.5% preferred no usual brand

Brand Preferences of Young Adults 5

  • 46.1% preferred Marlboro
  • 21.8% preferred Newport
  • 12.4% preferred Camel
  • 15.2% preferred other brands
  • 1.6% preferred no usual brand

Targeting of Youth and Young Adults

There is sufficient evidence to conclude that there is a causal relationship between tobacco company advertising and promotion and the initiation and progression of tobacco use among youth people. There is scientific evidence that shows 5

  • Adolescents are exposed to cigarette advertising.
  • They find the ads appealing.
  • The ads make smoking appear to be appealing.
  • The ads increase adolescents’ desire to smoke.

Women

Women have been targeted by the tobacco industry, and tobacco companies have produced brands specifically for women. Marketing toward women is dominated by themes of social desirability and independence, which are conveyed by advertisements featuring slim, attractive, and athletic models.6,7

Racial/Ethnic Communities

Advertisement and promotion of certain tobacco products appear to be targeted to members of racial/minority communities.5,7,8

  • Marketing to Hispanics and American Indians/Alaska Natives has included advertising and promotion of cigarette brands with names such as Rio, Dorado, and American Spirit.7,8
  • The tobacco industry has targeted African American communities in its advertisements and promotional efforts for menthol cigarettes (e.g., campaigns that use urban culture and language to promote menthol cigarettes, tobacco sponsored hip hop bar nights with samples of specialty menthol cigarettes, targeted direct mail promotions).5,7

References

  1. Federal Trade Commission. Cigarette Report for 2011. PDF 386 KB Washington Federal Trade Commission, 2013 accessed 2013 June 20 .
  2. Federal Trade Commission. Smokeless Tobacco Report for 2011.
    PDF 180.59 KB Washington Federal Trade Commission, 2013 accessed 2013 June 20 .
  3. Census Bureau. 2011 Census Data. Washington U.S. Department of Commerce, Census Bureau, 2009 accessed 2013 June 20 .
  4. Centers for Disease Control and Prevention. Cigarette Smoking Among Adults United States, 2011. Morbidity and Mortality Weekly Report 2012 61(44) 889 94 accessed 2013 June 20 .
  5. U.S. Department of Health and Human Services. Preventing Tobacco Use Among Youth and Young Adults A Report of the Surgeon General. Atlanta U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 2012 accessed 2013 June 20 .
  6. U.S. Department of Health and Human Services. Women and Smoking A Report of the Surgeon General. Atlanta U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 2001 accessed 2013 June 20 .
  7. National Cancer Institute. The Role of the Media in Promoting and Reducing Tobacco Use. PDF 6.35 MB Bethesda (MD) U.S. Department of Health and Human Services, National Institutes of Health, National Cancer Institute, 2008 accessed 2013 June 20 .
  8. U.S. Department of Health and Human Services. Tobacco Use Among U.S. Racial/Ethnic Minority Groups African Americans, American Indians and Alaska Natives, Asian Americans and Pacific Islanders, and Hispanics A Report of the Surgeon General. Atlanta U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 1998 accessed 2013 June 20 .

For Further Information

Centers for Disease Control and Prevention
National Center for Chronic Disease Prevention and Health Promotion
Office on Smoking and Health
E mail tobaccoinfo
Phone 1 800 CDC INFO

Media Inquiries Contact CDC’s Office on Smoking and Health press line at 770 488 5493.