The e-cigarette market has been one of the great success stories of recent times. Created little more than a decade ago by a Chinese scientist, e-cigarettes are now being used by millions across the world. Sales of the products in UK supermarkets and major multiples have risen to well over £100m, there are an estimated two million users and the market is growing rapidly. Until recently, the e-cigarette industry had been driven by new entrepreneurs, while larger corporations have taken a back seat, maintaining a ‘wait and see’ approach. Yet now they are beginning to assume a greater interest and, as a result, acquisitions are taking place. Both large tobacco companies and big pharmaceuticals have cottoned on to the idea that this is not a sector they want to miss out on.
Although electronic cigarette machines were first created in the 1960s, their modern day incarnation traces its roots back to Chinese scientist Hon Lik, who created the e-cigarette in 2003. His invention was patented and Chinese manufacturers, primarily based in the Shenzhen region, have been selling their wares across the world. Web-savvy UK entrepreneurs soon spotted the potential of the product and created import businesses, shipping in from China and selling online.
Today, analysts believe there to be about 70 e-cigarette companies selling in the UK, with brands such as Nicolites, 10-Motives and E-lites among the biggest names. But the sector has been driven online by entrepreneurs, some of whom have grown very quickly. Mark Winkler is an associate director at FF&P Advisory and worked with e-cigarette business Skycig. The business was formed in 2011, but was sold to Lorillard in a £60m deal at the end of last year. Winkler says the e-cigarette business initially attracted a “very entrepreneurial mindset”, as tobacco companies and big pharmaceutical companies decided to stay out of the fray at the outset. “The sector is very entrepreneurial. Tobacco companies didn’t want to get involved and pharmaceuticals had their own sets of products, so this left an opportunity for independent companies,” he says.
Over the past two years, though, public awareness has grown, the market has matured and e-cigarettes are now becoming a part of more traditional retail set-ups. Winkler says attitudes among bigger businesses, such as tobacco companies and pharmaceuticals, have altered, although it’s still early days for the industry. “There will be more start-ups and there will be more acquisitions as people will still see the opportunity. There isn’t that much brand strength yet. We are seeing advertising on TV and in print, but there are still opportunities.”
Growth
Among those enjoying the boom is Andrew Payne, co-founder of Socialites, the e-cigarette company. The business has been in operation for less than two years but expects to achieve revenues of £15m by the end of its financial year in March. “We’ve grown from zero to having 65 retail stands in the UK,” he says. “The growth of the industry has been massive.”
Indeed, figures from traditional retail sales show a huge rise in take-up. Market research company IRI says growth in the 12 months to April 2014 has been 126%. E-cigarettes are now available in over 90% of supermarkets, grocery and pharmacy outlets across the UK; IRI values the market at £116m. However this figure only accounts for sales made in larger multiples and doesn’t include internet-only retailers, markets or even dedicated e-cigarette stalls. IRI therefore admits this figure is an underestimate, with the true market size being significantly greater.
Water vapour
But the e-cigarette market sits in a peculiar place, with both health and tobacco companies poised to invest. Legislators are still coming to terms with how it should be governed. Is it a health product which helps smokers quit or, as it contains nicotine, a type of cigarette? Also, when people use them, are they smoking and therefore subject to the smoking ban? The industry argues that it is an alternative to smoking for those already addicted to nicotine. They argue that if all smokers switched to e-cigarettes, there would be fewer deaths, and that the product also helps smokers give up tobacco. However, the law does not permit e-cigarettes to be sold as a health product, which places the e-cigarette companies in an awkward spot. “It can help people stop smoking but we don’t promote it as a quitting product,” says Payne. “99% of our customers are smokers. We get customers that want to quit because it’s harmful or it costs too much, or because they have families.”
On the point of harm reduction, the Department of Health appears to agree, stating that it would prefer smokers to switch. However, issues such as the public smoking bans and advertising regulations are still a smoky grey area. Payne argues that employees should be allowed to use them at work in most instances. “There’s no passive smoking, bad smells or carcinogens. It’s just water vapour, so people should be able to use them at work. Some airlines don’t want to allow them as it looks like people are smoking. But some pub groups don’t either. Why they would want their customers to go outside and smoke in the cold, I don’t know.”
Advertising concerns
Promoting e-cigarettes is one of the problems the industry faces and advertisers are calling for clarity. Chris Baker is head of strategy at FCB Inferno, the advertising agency. His business works with the Department of Health on its campaigns but he has made a “conscious decision not to get involved” in e-cigarettes. He says the industry needs better guidelines as, currently, the status of the industry is confused. “The problem is that the regulations regarding e-cigarettes are very vague and the ads end up confusing the hell out of consumers. You can’t talk about the benefits. We have this limbo between it being a cigarette and a health product.”
However, he says the government is keen for consumers to switch from tobacco products to e-cigarettes. “From the government’s point of view, there would be fewer deaths if people stopped smoking and used e-cigarettes instead. Also, there would be a major saving to the economy, as the cost of treating smoking related illnesses is massive.”
Regulations
New regulations from the European Union, set to come into force in 2016, will better clarify their position. Industry insiders are likely to welcome the changes as they will bring some greater clarity to the marketplace. The regulations, as they are currently planned, will limit the strength of the products, the size of the liquids sold and, most importantly, license them as medicines. This final point is contentious and some disagree. Ben Wilson, founder of Freshcig, says he wants regulation but he doesn’t believe that e-cigarettes are health products. “Tighter controls on this industry would be a good thing but I don’t think it should be classed as a medical product,” he says. “If that happens it will kill the product by making it more expensive and a market created by businesspeople will be handed over to the pharmaceutical industry.”
Future
The e-cigarette industry has come out of nowhere and is now waiting for legislators to catch up. As such, this bustling, innovative, entrepreneurial market sits in an awkward no-man’s land. Also, the product arguably contains the seeds of its own destruction; if it really helps people quit then surely one day it will run out of customers? However, right now, the businesses involved are unconcerned. There are millions of smokers worldwide and, so far, only a small minority are using e-cigarettes. Furthermore, despite stark health warnings going back decades, the lure and appeal of nicotine remains a part of many people’s lives. There is still a lot of money to be made from smoking – and this is not likely to change anytime soon.
Trendsetters
Many of the first e-cigarette businesses were set up by young, web savvy entrepreneurs. Ben Wilson, who founded Freshcig in 2011 aged just 21, is a classic example. The business is now on track to produce revenues of £1.2m. He explains how he did it:
“It was Christmas 2010 when I first came across e-cigarettes and bought some for a family member. The products were fairly poor in terms of construction, but I decided to buy a batch and sold them all on Amazon overnight. I carried on selling and, in June 2011, I launched Freshcig. Unfortunately, this was about the time when Amazon decided to stop selling nicotine products. So we sold via our own website and used sites like Groupon – this got us our first batch of customers.
“We are manufactured in China and have established our own product line. We have an English contact out there who controls it on our behalf. We have lots of plans, such as launching different brands and looking to move production to the UK. We are also pursuing further retail and online growth. About 80% of our sales are through our website, so that’s where we are focused.
“The cost saving of using e-cigarettes is something we are allowed to push to customers. A typical user will make a saving of 70-80% and for someone on 20-a-day this will mean a massive £2000 per year.” 
