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The e-cigarette industry looks doomed

Daniel Roberts
Senior Writer
A woman smokes an electronic cigarette in London, Britain August 19, 2015. Electronic cigarettes are around 95 percent less harmful than tobacco and should be promoted as a tool to help smokers quit, a study by an agency of Britain's Department of Health said on Wednesday. E-cigarettes, tobacco-free devices people use to inhale nicotine-laced vapor, have surged in popularity on both sides of the Atlantic but health organizations have so far been wary of advocating them as a safer alternative to tobacco and governments from California to India have tried to introduce bills to regulate their use more strictly. REUTERS/Neil Hall

"Fervor over e-cigarettes continues to wane."

So says a new report today from RBC Capital Markets on the tobacco industry. It's a bit of cold water on a segment that just a few years ago appeared to be exploding. When e-cigs gained sudden popularity, it appeared the segment could threaten traditional cigarettes; it no longer looks that way. (It also won't help sales if e-cigs keep exploding inside pockets.) Last year saw the end of five consecutive years of triple-digit sales growth.

The category of e-cigarettes and vaporizers, RBC says, "continues to struggle and retailers are struggling with too much inventory on hand (which is hurting retailer ability to take on new innovation). We believe this is largely the function of too many brands in the category and brand velocity being too low."

One chart in the RBC report makes the drop glaringly clear.

Convenience stores that sell e-cigs and vaporizers were asked if they plan to expand their offerings. One year ago, 29% said yes. By June, only 23% said yes. In September, it dropped to 11% and now 0% say yes.

E-cigarette chart from RBC.

Outlook isn't much better for the vaporizer category. Stores that sell vaporizers (known in the industry as "open systems" as opposed to e-cigs) were asked "how trends are progressing." Just under half say interest is slowing down, while just under half say the category "never really got started," and 5% say sales are "booming." Among retailers that do not sell vaporizers, 0% are interested in entering the category, down from 12% as recently as September.

The news is sunnier for traditional cigarettes, nearly one year after Reynolds American (RAI), the second-largest tobacco company behind Altria Group (MO) completed a $25 billion acquisition of Lorillard last June. Cigarette sales were down 3% to 4% in the first quarter, but that was less of a decline than expected. RBC believes it was due to rising consumer confidence and lower gas prices. Consumer confidence in e-cigarettes, on the other hand, doesn't look pretty.

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Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology.

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