E-cigs – a smokin' opportunity

27 June, 2014

In a few short years, electronic cigarettes have emerged as one of the most dynamic — and controversial — markets in the country.

Latest research by ASH, Action on Smoking and Health, suggests that users, or vapers, now number 2.1 million, up from 1.3 million a year ago, and equivalent to 18% of tobacco smokers.

According to Nielsen, the UK market is worth £107 million, although that figure does not include sales online and via street vendors. Other estimates put the total in excess of £200 million.

Most striking is the pace of growth, up 130% over the past 12 months, and an astonishing tenfold increase over the year before that.

Commentators disagree wildly over where it’s all going to lead. Some say e-cigs can replace tobacco cigarettes altogether. American manufacturer Njoy, for instance, believes it can “obsolete” smoking by converting smokers as readily as it converts adjectives into verbs.

On the other hand, growth appears to have slowed over the past six months. Nielsen last summer predicted that sales would hit £340 million by 2015, but now the company’s Natasha Kendall expects sales to “plateau in the not too distant future”. “We might soon reach saturation point,” she says.

In truth, the future of e-cigs is extraordinarily hard to predict. The market has until recently been driven by raw consumer demand satisfied by a plethora of manufacturers and suppliers reaching their audience online, or through pop-up stalls and specialist shops. Only in the past year or so has distribution spread to the conventional retail sector, and the major tobacco companies have begun to exploit the opportunity.

Alongside that, ferocious debate about the safety of e-cigs and looming regulation will play a part in determining the final shape of the market, as will technical innovation in the devices themselves.

Everything is up for grabs. Whatever the outcome, retailers cannot afford to ignore the vaper, and for Jacob Fuller, chief executive of Blu UK, they have a key role to play.

Blu is American tobacco giant Lorillard’s entry into the UK e-cig market and it’s taking the opportunity very seriously indeed, deploying 70 reps to talk to retailers on the ground, and launching a £20 million TV ad campaign behind the brand.

“The market is very fragmented,” says Fuller. “Because there’s really no barrier to entry there are many different brands out there, and that’s caused a lot of confusion. Some customers have been getting a bad experience.

“There’s a need for understanding and expertise, and retailers are the gatekeepers. A big percentage of them have still not really got it, but when they do get it right there are amazing margins compared with traditional cigarettes. We know some shops are taking £400 to £500 a week. Off-licences are great places for Blu to be stocked.”

Further down the line, Fuller expects tighter regulation, which should be in place by 2016, to favour the larger manufacturers.

“High standards will be set, and we’re ahead of that game. We’ll definitely see a shake-out of brands as those with a more professional approach come in and stricter controls are introduced. In two or three years’ time I believe there will be only 10 or 12 big players left.”

John Patterson, director of sales at Njoy, has detected a “marked change in how independent retailers view the category over the past 12 months”.

“Previously, the sheer number of products available, and the new and unknown nature of the products, might have been off-putting. Now retailers are beginning to focus on stocking the brands that are selling best and providing the highest quality experience, which is crucial for securing long-term, repeat business and building trust among customers.”

Product quality remains an issue, he says. Retailers need to purchase their stocks and choose their brands carefully. Then it’s a matter of effective merchandising, making sure your range is visible, on the front counter or behind the till.

Njoy targets smokers looking for an alternative to tobacco, seeking to replicate the experience as closely as possible.

“Once e-cigarettes can match tobacco smoking, smokers will start to switch at a faster rate — ultimately obsoleting tobacco,” says Patterson.

That raises another question for retailers. Evidence suggests a trend away from cigarette-like devices towards refillable “tanks” that give vapers more control over the nicotine hit and a wider range of flavours. Nielsen predicts tanks will claim the largest share of the market, meaning retailers need to stock liquids alongside the devices themselves.

“We expect these shifts in usage and sales to continue, on an upward trend, as the product category becomes more familiar and credible in the UK,” says Patterson. “The balanced regulation of e-cigarettes is also set to strengthen public confidence in vaping.” 

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