E-cigarettes were supposed to save lives and revitalise the smoking industry. But anti-smoking zealots, government regulators and Big Tobacco seem determined to snuff out the market—and any entrepreneurs plying it.
By Susan Adams | June 21st, 2016
In the winter of 2008, Jan Verleur was living on the outskirts of Prague, working on a novel about three failed internet entrepreneurs who invest their dwindling capital in an ecstasy-smuggling ring. It wasn’t autobiographical, but Verleur, 36, was writing from experience with failed ventures. His most recent had been an ambitious pornography business that lost $22 million of investors’ money, including $1.6 million of his own.
One day, as he was picking up a pack of smokes at a Vietnamese convenience store, he noticed a box of e-cigarettes. He tried one, and it leaked liquid into his mouth. “The technology wasn’t ready for market,” he says, “but the idea struck me as amazing.” Soon after, Dan Recio, his buddy and colleague in the porn business, persuaded him to return to the US and take another crack at making money by satisfying a different human craving.
The nascent e-cig market was wide open. Startup costs were low, and regulation was non-existent. The potential payoff looked huge: Vaping seemed poised to grow into an enormous global market for a healthier product. Invented in 2003 by a Chinese pharmacist whose father had died of lung cancer, e-cigarettes use lithium-ion batteries to heat nicotine-laced liquid, turning it into a vapour that has only traces of some of the 60-plus carcinogens in cigarette smoke. At first, Verleur and Recio’s Miami-based company, VMR, looked to be riding a big, beautiful wave.
But the industry has shifted dramatically in the six years since Verleur and thousands of other entrepreneurs jumped in. Demand for e-cigs has turned out to be smaller than at first expected. It grew from virtually nothing a decade ago to an estimated $3.7 billion in the US last year, according to ECigIntelligence, a British outfit that supplies information to the industry. But Nielsen reports that sales in convenience stores and big retailers like Wal-Mart have started to contract, shrinking 6.2 percent in the 52 weeks that ended on March 26. Nielsen doesn’t capture sales online or in America’s 10,000 vape shops, but last year, those channels were flat for VMR, which logged 2015 revenue of $50 million. All told, e-cig sales still pale in comparison with the $92 billion US cigarette market.
Many smokers try e-cigs once and abandon them, disappointed that vapour doesn’t taste or feel the same as real smoke, and gives a slower nicotine hit. “There is a lot of trial and a lot of rejection,” says tobacco analyst Vivien Azer, of Cowen and Company, in New York. “I’m not convinced the e-cigarette market will grow at all.”
Meanwhile, the forces arrayed against the many little players trying to grab a piece of that smaller-than-expected pie are daunting. Vaping entrepreneurs are up against a three-headed monster—Big Tobacco, the Food & Drug Administration (FDA) and an army of anti-smoking zealots—which is able and more than willing to wipe them out.
Tobacco giants like Reynolds and Altria have leveraged their fat balance sheets, huge sales forces and established distribution channels to enter the e-cig market and now own the top four brands in the US. Vaping cognoscenti say those are inferior devices that don’t really threaten Big Tobacco’s core product, traditional cigarettes (the tobacco companies insist they are committed to their cigarette alternatives).
More ominous for smaller players like Verleur: The FDA is expected to announce regulations soon that will treat e-cigs as tobacco products. If a draft rule released by the FDA in 2014 stands, thousands of e-cig products on the market will have to go through an onerous pre-approval process that e-cig companies say could cost them as much as $2 million per item. (The FDA puts the figure at $330,000.) VMR, which sells mostly online, offers more than 500 types of e-liquids, vaporizers and e-cig accessories, so fully complying with the new regulations will cost it anywhere from $175 million to $1 billion. Daniel Walsh, CEO of Purebacco, an e-liquid maker in Gaylord, Michigan, which sells more than 200 selections, calls the impending rules “Vapocalypse”.
The FDA has been egged on by anti-smoking groups like the American Lung Association and the Campaign for Tobacco-Free Kids, which have taken a hard line against vaping. Ignoring or minimising the fact that millions of smokers have used e-cigs to quit or cut down, the anti-smoking lobby instead obsesses over the minimal health risks of vaping. They prefer that would-be quitters stick with patches and gum, which work as little as 7 percent of the time. Some 70 percent of American smokers say they want to quit, and 480,000 people died last year of smoking-related illness.