Big Tobacco looks to the future of e-cigarettes
Ireland still has lack of product regulation
In a standard quarterly update to the markets earlier this month, Imperial Tobacco said its plans to launch an electronic cigarette product next year remained on course.
It was, as the company later said, just “one sentence at the end of four pages of an announcement”, but nevertheless helped spark a 2.6 per cent bounce in its share price and, more pertinently, further suspicions that the future of “Big Tobacco” lies at least to some degree in this relatively new product line.
While that may represent a long-term transition for a centuries old industry, the notion was bolstered last month by a report from investment bank Canaccord Genuity who cut its recommendations at Imperial and British American Tobacco (BAT) for just that reason.
“We think electronic cigarettes will prove to be the most significant development in the history of the organised tobacco industry,” it said assuredly, with consumers worldwide expected to “migrate from tobacco smoking to e-cigarettes at an accelerating rate through 2020”.
And in countries such as Ireland, where e-cigarettes are all but free of regulation, the industry is sizing up a lucrative marketplace at the mercy of whoever can exploit it to its fullest potential.
The products are a no-brainer; simple nicotine-dispensing, cigarette-shaped devices that release a vapour cloud similar to smoke, designed to wean people off the real thing.
Canaccord analysts Eddy Hargreaves and Alicia Forry say that the demise of tobacco may begin to take hold more quickly than people expect.
From a numbers perspective, they estimate the e-cigarette market will grow from $2 billion in 2012 to $3 billion in 2013, whereas the tobacco industry today is worth approximately $700 billion.
The main players, however, in the race for a foothold in the electronic landscape, face the same paradox as with the introduction of nicotine replacement products like gum: an attractive product for those wishing to give up smoking but one whose purpose, by its own definition, is to do away with itself.
“Winners and losers will emerge, but are hard to predict at this relatively early stage in e-cigarettes’ development, and there will be margin pressure in the short term across the board as companies race for share,” say the analysts.
“This new uncertainty, and the faster, long-term decline of tobacco which we predict, should cause investors to reassess their holdings in the sector.
“Our modelling suggests that tobacco companies will need to win a greater share of e-cigarettes than they have in tobacco to preserve short-term margins.”
Let the race begin. Last week, Imperial Tobacco found that its efforts to diversify – despite lagging behind BAT – have been welcomed by investors. And the move is certainly played down by the company itself.
Nevertheless, the owner of such household names as Drum, Golden Virginia and Gauloises, thought it prudent to form Fontem Ventures within the last year to examine the market and develop a product.
Its spokesman Simon Evans preferred to put the stock bounce down to a healthy overall quarterly report in which the e-cigarette aspect was mentioned only briefly.
“That was us just saying it’s on the radar. We are not really saying anything new here. We have said over the last few months that e-cigarettes are something that we are looking at and we are building our knowledge,” he told The Irish Times.