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Sales of e-cigarettes continue to soar

The inventor of the electronic cigarette, Hon Lik smokes his invention in Beiijng on May 25, 2009.

Story highlights

  • Analysts: Growing demand for "e-cigarettes" in US peeling customers from tobacco giants
  • US CDC: Consumption of smoked tobacco products fell 27% from 2000 to 2011
  • "E-cig" sales doubled during past two years to $300mn in 2012, says Goldman Sachs

Electronic cigarette makers have become increasingly aggressive in their advertising in the US, with one company even proclaiming that "Big Tobacco" has met its match. But the burgeoning industry is worried that an onslaught of taxes and regulations could snuff out its recent success.

The new assertiveness comes as tobacco analysts have started to acknowledge that growing demand for "e-cigs" in the US is peeling away customers from tobacco giants such as Altria, Lorillard and RJ Reynolds.

Upstarts such as NJOY, Vapor and Logic are spending more on marketing and advertising, to make the case for their products as a viable smoking alternative.

E-cigarette makers have even ventured into television in both the US and UK -- taboo for tobacco groups -- with advertising for their products

"Our mission is to 'obsolete' cigarettes," said Craig Weiss, chief executive of NJOY, the leading US e-cigarette maker by market share. "We think of ourselves as the digital to their analogue."

Sales of traditional cigarettes have been declining steadily in the past decade. According to the US Centers for Disease Control and Prevention, consumption of smoked tobacco products fell 27 per cent from 2000 to 2011, as taxes increased and smoking bans at bars and restaurants took hold.

    Meanwhile, sales of e-cigarettes have soared, doubling during the past two years to $300m in 2012 and on pace to reach $1bn in annual sales in the next few years, according to estimates by Goldman Sachs. The category is being compared with energy drinks and Greek yoghurt -- bright spots in declining consumer markets.

    "We continue to expect consumption of e-cigarettes could surpass consumption of traditional cigarettes within the next decade," said Bonnie Herzog, tobacco analyst at Wells Fargo.

    E-cigarettes work by vaporising nicotine-laced liquid that can be inhaled, replicating the effect of smoking without all of the carcinogens.

    The success of e-cigarettes could soon hit some obstacles, however, with health regulators preparing new restrictions on the products and state legislatures considering taxing them.

    E-cigarettes currently fall into a regulatory grey area. The US Food and Drug Administration is expected to offer guidance in April about how the products should be regulated. The agency lost a legal battle with e-cigarette companies in 2010 after trying to block imports of e-cigarettes and has been sceptical about claims they are not harmful.

    "Further research is needed to assess the potential public health benefits and risks of electronic cigarettes and other novel tobacco products," said Jennifer Haliski, an FDA spokeswoman.

    Manufacturers say they are looking forward to greater oversight to make it more difficult for anyone to start importing and distributing low quality e-cigarettes to the US, but they are fearful of more states planning to tax their products.

    Minnesota recently moved to tax e-cigarettes and Hawaii also considered a tax last year.

    "The government is going to tax this industry and try to recoup the revenues they've lost from cigarettes," said Eli Alelov, chief executive of Logic, a New Jersey-based e-cigarette company.

    Ray Story, chief executive of the Tobacco Vapor Electronic Cigarette Association, warned that tax rises on e-cigarettes would only benefit tobacco companies, to the detriment of public health. One reason consumers have been trying e-cigarettes is because they can be as little as half the price of traditional cigarettes sold by big tobacco companies.

    The increasing acceptance of e-cigarettes caught big tobacco companies off guard initially but they are slowly recognising that they cannot ignore the changing tastes of their consumers.

    Last year, Lorillard bought Blu Ecigs for $135m and RJ Reynolds has started to develop its own electronic cigarette technology. Altria, the US maker of Marlboro, has stayed on the sidelines thus far, but analysts expect the tobacco giant to either acquire an e-cigarette manufacturer or launch its own brand soon.

    Declining to divulge its plans, an Altria spokesman said: "Obviously we're monitoring what's going on in that category."

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