Imperial Propelled to Top of E-cigarettes Tree With Surprise Acquisition of blu in Reynolds/Lorillard Divesture

It’s not often that the tobacco industry is caught on the hop, especially with a deal that’s been on the radar for the better part of half a year, but it was gasps all around on the 15th July when it was announced that the expected Reynolds American (RAI)/Lorillard (LO) merger would result in Imperial Tobacco (IMP) acquiring not only the cigarettes brands Winston, KOOL, Salem, Maverick, but also LO’s leading e-cigarettes brand blu, which the industry assumed was part of LO’s attraction for RAI in the first place. The acquisitions propel IMP from bit-player on the US cigarettes market to number three player and, more unexpectedly, from litigious outsider in the e-cigarettes market to number one player. And not number one player in any old market, but in the world’s largest e-cigarettes market, worth US$1.7 billion in 2014. What does this mean for IMP and for the vapour industry? Who are now the main tobacco players in this US$6billion global market and what are their vapour brands?

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Imperial – From Litigant to Acquirer

It’s difficult to square recent events with all of a few months ago, when IMP (via its subsidiary Fontem Ventures) was in the news for its (again surprise) decision to sue a number of manufacturers for intellectual property infringements over their e-cigarettes brands – including LO via its blu brand, the very same brand that IMP has now acquired – seemingly lustily: when pressed, Susan Cameron, RAI’s Chief executive said of the divesture: “[it] was a business decision. It was important to Imperial.”

Whether the divesture of blu was an IMP condition for the deal (quite likely given the general underperformance of the attendant cigarettes brands acquired), or a BAT condition (some commentators have suggested that BAT’s role in the deal, as it owns 42% of Reynolds and is injecting US$4.7 billion to retain this position in the combined company, made divesture of the blu brand inevitable as blu would otherwise have competed in the UK with BAT’s recently launched Vype brand – though there is nothing to stop it competing as an IMP-owned entity) or an anti-trust condition (unlikely, given the comparatively small scale of the current e-cigarettes industry), the fact remains that the brand has been suffering in its home market of late.

Trend Towards Tank Systems a Threat to Cig-a-Likes

Whilst e-cigarettes sales have been cannonading in the US over the past few years, at two and three digit growth rates, these have since slowed in momentum and blu has been suffering market share declines owing partly to growing competition from US no2 e-cigarette brand Logic as well as an increasingly popular form of e-cigarette product in the US, the so-called open tank system, which Euromonitor International estimates now accounts for around 40% of total US vapour sales (by value) and growing at a faster rate than the overall category. In some nearly-as-mature e-cigarettes markets in Europe such as France, Spain and Italy, tank systems make up over 90% of total sales, so it is clear there is plenty of steam ahead for this subcategory in the US – to the detriment of sales of traditional cig-a-like brands.

prokit.png

Unlike traditional cig-a-like e-cigarettes such as blu which are sold with cartridges of their own brand of e-liquid, open tank systems allow users to customise their vape by being able to refill it with any nicotine liquid, often cheaper (read: lower margin) than proprietary brands, and now widely available (moving from independent stores to c-stores) in different nicotine strengths and flavours. To react to this trend towards the tank, Lorillard recently launched the blu Pro Kit, a tank/e-liquid combo for the UK market (see left), where tank has been growing apace.

Whether this innovation is translated to the US market will be something for IMP to decide, though it’s clear that product innovation will need to pick up pace as consumer preferences change and as its mainstream competitors launch tank extensions in their home market. Number three US player NJOY, for example, is introducing a rechargeable version of its eponymous disposable brand, as well as a “high-vapour” product or vapour-tank-mod (VTM) – mooted for a summer launch in the US.

Flavours Proliferate whilst Courting Controversy

Tank systems are also partly responsible for the growing availability and range of flavours, with a recent New York Times article quoting estimates of 7,000 different types of e-liquid flavours available on the US market alone, with names such as Banana Split and Nutty Squirrel, in addition to 250 new flavours launched each month.

NJOY, for example, which famously and publicly shunned candy and fruit flavours in their e-liquids for fear of courting controversy (for appealing to juveniles) whilst they were establishing their brand, recently announced plans to expand into just such flavours after research showed that flavours were central to e-cigarettes. “Flavour is essential to vapers’ satisfaction,” the New York Times quoted NJOYs chief executive Craig Weiss as saying. The company has gone to pains to fund research suggesting that such flavours are not appealing to youths, though this has only served to fan the flames of controversy further, particularly in the context of the candy flavour ban for combustible cigarettes in the US.

A Race to Develop International Presence for blu

Not only will IMP need to anticipate and react to trends such as shifts in hardware and flavours, whilst keeping one eye on the regulators, it will also need to work fast to develop blu’s international standing (currently there are no real international e-cigarette brands and first entrants are still largely in leading positions in local markets), a process started by Lorillard and potentially boosted by IMP’s distribution clout in the UK and Europe. That said, IMP’s own e-cigarette brand Puritane is a pharmacy-only brand in the UK, a strategy that will not work for a more established brand such as blu.

The idea that tobacco companies have more than one e-cigarette brand is relatively new, and this deal further consolidates the market and boosts the trend of tobacco players having a portfolio of vapour brands, either through acquisition or in-house/third party development. All international tobacco players now have multiple vapour brands, with the exception of BAT (if one excludes RAI), in multiple product subcategories (e.g. Heat not Burn as well as tank, though currently only Imperial with blu have a tank product on the market), a trend which this deal is expected to accelerate as some of the smaller players seek collaboration with larger players in expanding their offerings.

Combustible Cigarettes Still King

Following the near miss of blu, RAI will concentrate on its Vuse e-cigarette brand and engage in potential technological e-cig collaboration with BAT, whilst enjoying cost savings in its bread and butter category of combustible cigarettes as well as the new pricing strength the RAI/LO combined status affords against US market leader and price-setter Altria. For in the excitement of e-cigarettes and depression of combustible cigarettes, it’s easy to forget that the traditional white stick is still the money spinner, worth US$700 billion globally in 2013 (compared to $US3.5 billion globally for e-cigs in the same year), and the reason why RAI was ready to forsake a leading non-combustible blue stick for a second-placed combustible green one.It’s not often that the tobacco industry is caught on the hop, especially with a deal that’s been on the radar for the better part of half a year, but it was gasps all around on the 15th July when it was announced that the expected Reynolds American (RAI)/Lorillard (LO) merger would result in Imperial Tobacco (IMP) acquiring not only the cigarettes brands Winston, KOOL, Salem, Maverick, but also LO’s leading e-cigarettes brand blu, which the industry assumed was part of LO’s attraction for RAI in the first place. The acquisitions propel IMP from bit-player on the US cigarettes market to number three player and, more unexpectedly, from litigious outsider in the e-cigarettes market to number one player. And not number one player in any old market, but in the world’s largest e-cigarettes market, worth US$1.7 billion in 2014. What does this mean for IMP and for the vapour industry? Who are now the main tobacco players in this US$6billion global market and what are their vapour brands?

 

Imperial – from litigant to acquirer

It’s difficult to square recent events with all of a few months ago, when IMP (via its subsidiary Fontem Ventures) was in the news for its (again surprise) decision to sue a number of manufacturers for intellectual property infringements over their e-cigarettes brands – including LO via its blu brand, the very same brand that IMP has now acquired – seemingly lustily: when pressed, Susan Cameron, RAI’s Chief executive said of the divesture: “[it] was a business decision. It was important to Imperial.”

Whether the divesture of blu was an IMP condition for the deal (quite likely given the general underperformance of the attendant cigarettes brands acquired), or a BAT condition (some commentators have suggested that BAT’s role in the deal, as it owns 42% of Reynolds and is injecting US$4.7 billion to retain this position in the combined company, made divesture of the blu brand inevitable as blu would otherwise have competed in the UK with BAT’s recently launched Vype brand – though there is nothing to stop it competing as an IMP-owned entity) or an anti-trust condition (unlikely, given the comparatively small scale of the current e-cigarettes industry), the fact remains that the brand has been suffering in its home market of late.

Trend towards tank systems a threat to cig-a-likes

Whilst e-cigarettes sales have been cannonading in the US over the past few years, at two and three digit growth rates, these have since slowed in momentum and blu has been suffering market share declines owing partly to growing competition from US no2 e-cigarette brand Logic as well as an increasingly popular form of e-cigarette product in the US, the so-called open tank system, which Euromonitor International estimates now accounts for around 40% of total US vapour sales (by value) and growing at a faster rate than the overall category. In some nearly-as-mature e-cigarettes markets in Europe such as France, Spain and Italy, tank systems make up over 90% of total sales, so it is clear there is plenty of steam ahead for this subcategory in the US – to the detriment of sales of traditional cig-a-like brands.

prokit.png

Unlike traditional cig-a-like e-cigarettes such as blu which are sold with cartridges of their own brand of e-liquid, open tank systems allow users to customise their vape by being able to refill it with any nicotine liquid, often cheaper (read: lower margin) than proprietary brands, and now widely available (moving from independent stores to c-stores) in different nicotine strengths and flavours. To react to this trend towards the tank, Lorillard recently launched the blu Pro Kit, a tank/e-liquid combo for the UK market (see left), where tank has been growing apace.

Whether this innovation is translated to the US market will be something for IMP to decide, though it’s clear that product innovation will need to pick up pace as consumer preferences change and as its mainstream competitors launch tank extensions in their home market. Number three US player NJOY, for example, is introducing a rechargeable version of its eponymous disposable brand, as well as a “high-vapour” product or vapour-tank-mod (VTM) – mooted for a summer launch in the US.

Flavours proliferate whilst courting controversy

Tank systems are also partly responsible for the growing availability and range of flavours, with a recent New York Times article quoting estimates of 7,000 different types of e-liquid flavours available on the US market alone, with names such as Banana Split and Nutty Squirrel, in addition to 250 new flavours launched each month.

NJOY, for example, which famously and publicly shunned candy and fruit flavours in their e-liquids for fear of courting controversy (for appealing to juveniles) whilst they were establishing their brand, recently announced plans to expand into just such flavours after research showed that flavours were central to e-cigarettes. “Flavour is essential to vapers’ satisfaction,” the New York Times quoted NJOYs chief executive Craig Weiss as saying. The company has gone to pains to fund research suggesting that such flavours are not appealing to youths, though this has only served to fan the flames of controversy further, particularly in the context of the candy flavour ban for combustible cigarettes in the US.

A race to develop international presence for blu

Not only will IMP need to anticipate and react to trends such as shifts in hardware and flavours, whilst keeping one eye on the regulators, it will also need to work fast to develop blu’s international standing (currently there are no real international e-cigarette brands and first entrants are still largely in leading positions in local markets), a process started by Lorillard and potentially boosted by IMP’s distribution clout in the UK and Europe. That said, IMP’s own e-cigarette brand Puritane is a pharmacy-only brand in the UK, a strategy that will not work for a more established brand such as blu.

The idea that tobacco companies have more than one e-cigarette brand is relatively new, and this deal further consolidates the market and boosts the trend of tobacco players having a portfolio of vapour brands, either through acquisition or in-house/third party development. All international tobacco players now have multiple vapour brands, with the exception of BAT (if one excludes RAI), in multiple product subcategories (e.g. Heat not Burn as well as tank, though currently only Imperial with blu have a tank product on the market), a trend which this deal is expected to accelerate as some of the smaller players seek collaboration with larger players in expanding their offerings.

Combustible cigarettes still king

Following the near miss of blu, RAI will concentrate on its Vuse e-cigarette brand and engage in potential technological e-cig collaboration with BAT, whilst enjoying cost savings in its bread and butter category of combustible cigarettes as well as the new pricing strength the RAI/LO combined status affords against US market leader and price-setter Altria. For in the excitement of e-cigarettes and depression of combustible cigarettes, it’s easy to forget that the traditional white stick is still the money spinner, worth US$700 billion globally in 2013 (compared to $US3.5 billion globally for e-cigs in the same year), and the reason why RAI was ready to forsake a leading non-combustible blue stick for a second-placed combustible green one.