E-Cigarettes: Weapons of Non-Combustion?

TheStreet.com

NEW YORK (MainStreet)—Spring is really in the air for e-cigarettes and a lot of folks are getting second chances. Philip Morris, Inc. (backed by Altria Group) may stay at the top of Big Tobacco after announcing plans last month to roll out its own smokeless nicotine delivery system by the end of 2013.

And thanks to Blu-Cigs, the b-list actor Stephen Dorff now has a second career as a pitchman. And, thanks to Dorff, electronic cigarettes are gaining market share as a less-expensive alternative to conventional cigarettes. His promotional video urges smokers to "take back your freedom" from being a pariah puffer who can now "smoke anywhere" with "no ash, no smell."

InLife, another e-cigarette manufacturer with offices in Irvine, California, offers a punny promise for "more meaning inLife." Vaulting past the other circus barkers, Wood Dale, Illinois-based South Beach Smoke thinks it can flat-out "change your life."

Freedom, meaning, and wholesale change aside, what's clear is that e-cigarettes have entered the mainstream with the same bang as Acai Berry Diet or Costa Rican yoga retreats.

The difference is that e-cigarettes might be around for a longer time.

Sucking On A Tail Pipe

When you pick up an electronic cigarette, you'll notice that it's heavier than a conventional cigarette. You'll also notice the ersatz LED cherry at the end, which offers the "smoker" some semblance of actual smoking. And, since there's no need to ash, you're left sucking on a stainless steel tube that might have been a museum-quality prop from the Mos Eisley Cantina in Star Wars.

Also see: Spartan Race's Private Equity Adrenaline Boost

In other words, it's a weird experience, and actual cigarettes continue to make up the lion's share of tobacco sales in the United States.

In spite of that fact, profitability has become a huge worry for Big Tobacco. Revenue from the sales of cigarettes for Philip Morris, R.J. Reynolds, and Lorillard continues to decline. Last year the Centers for Disease Control (CDC) reported a whopping 27.5% drop in sales between 2000 and 2011, which shows no signs of abatement.

Pummeled by federal and state taxes and the rising costs of production and distribution, cigarette manufacturers have obviously raised the price of a pack of smokes to make up for lost ground, as much as $5.00 or $6.00 per pack in some cities in the same 11-year period.

As a result, the production and consumer cost factors—as well as successful public health campaigns by the American Cancer Society, the American Lung Association, the Surgeon General, and others—have created a sound business case for these companies to invest millions in rechargeable and disposable sticks.

Also see: IS the Realtor Dead?

And, by last count, it's an enormous bandwagon tilting under the weight of dozens of niche manufacturers with names like Vapor King, V2, and Ever Smoke.

In the end, it will come down to Big Tobacco, which has gone on a development spree in the last 36 months. Lorillard purchased Blu for $135 million in 2011, R.J. Reynolds is currently testing Vuse, launched in 2012 (through its R.J. Reynolds Vapor division), and Philip Morris announced plans on May 22 to begin testing its own, homegrown e-cigarettes in the marketplace later this year.

Health professionals have been uneven, at best, in their assessments of vaporized nicotine. Based on the assessment of early Chinese e-cigarettes, which appeared in the marketplace in 2004, the World Health Organization came down hard on false "nicotine replacement therapy" claims in 2008. The American Journal of Preventative Medicine disagreed three years later and qualified them as a "smoking cessation tool" in a 2011 report.

Also see: Student Debt Diary: Wait, What was the ROI on my Education?

Since then, no credible health professional has come out to endorse e-cigarettes, although many of them have called for more research in order to determine the long term impact on personal health.

E-cigarettes remain essential to the corporate health of Big Tobacco, however, with industry-wide sales expected to double from about $500 million in 2012 to $1 billion in 2013, according to VapeRanks. That's still only a small percentage of the $80 billion cigarette market. But, considering the interest levels of Philip Morris, R.J. Reynolds, and Lorillard, every billion seems to count.

--Written by William Richards for MainStreet

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

View Comments (1)