Supply Side: E-Cigarettes
A couple years ago, Carlos Bengoa witnessed the inefficiencies of the e-cigarette segment from a wholesaler distributor’s prism. At the time, Bengoa was serving as the exclusive distributor for another manufacturer. As he surveyed the landscape, the executive was troubled by everything from packaging to product formulation to retail merchandising strategies and tactics.
Bengoa had an epiphany: To do something right, you often have to do it yourself. He formed his own e-cigarette manufacturing company, CB Distributors/21st Century Smoke of Beloit, Wis., whose product line today includes disposable e-cigarettes in menthol, regular and fruit flavors, rechargeable kits with a 110-AC wall charger, and refill cartridges with self-contained atomizers.
A 20-year veteran of the retail distribution business, Bengoa said a key reason for 21st Century Smoke’s success in the segment—in January product sales had doubled from like-period 2012, he said—is its focus on every facet of the business, starting with capitalizing on a trend that sees more consumers eager to try new smoking options within the overall category. According to figures from SymphonyIRI Group, c-store sales of electronic smoking devices totaled $179.5 million in 2012, with 15.1 million units sold.
As the first in a series of Q&As with innovative manufacturers and suppliers in the c-store channel, Convenience Store Products caught up with Bengoa recently to discuss a wide range of topics, ranging from the evolution of the category to its prospects with the FDA. Following are edited highlights of that conversation.
Before you formed 21st Century Smoke, what was the state of the e-cigarette category?
The quality of the actual product was something to be desired. In 2010 I traveled to China and forged relationships with the best manufacturing partners I could find. The whole process occurs in China—all e-cigarettes are manufactured in China no matter what a particular brand might claim. But the most compelling problem with e-cigarettes then was confusion among consumers was high. The product I had distributed was packaged in a box, and a lot of people confused it with cigarettes. When I formed 21st Century Smoke, we packaged our product in blister cards.
What operational growing pains did 21st Century Smoke experience as it launched?
My reputation in the industry helped get product placement; for instance, we immediately secured placement with Murphy Oil’s stores. I think the hardest thing was to get retailers to display e-cigarette brands properly. No one wants to give up that valuable counter space.
Provide a snapshot of the typical e-cigarette user.
It consists of people seeking an alternative: those that want to smoke in places where they’re currently prohibited from smoking [tobacco]. I see younger people using the disposable product while older people who are more serious about switching [from tobacco to e-cigarettes] are investing in kits.
What do you see coming down the road with segment consolidation?
If we were to talk one year from today, I would tell you there would be six to eight brands left on the market [there are currently 250] and four or five will be owned by big tobacco companies—it’s inevitable that they will get into the game eventually.
How meaningful is the Internet as a sales channel for e-cigarettes?
E-cigarette sales all began on the Web because at that time there was no representation in c-stores, drug chains or mass merchandisers. [21st Century Smoke] has never taken the Internet very seriously because we believe that market will evaporate in the future under potential FDA regulations.
What is your take on the soon to be announced FDA regulations governing e-cigarettes and OTP products?
For one, I anticipate that some flavors might be closely regulated, and then eliminated. Some of our competitors over the past eight months have expanded their flavors, and cherry is one popular one. But big picture, I look forward to the FDA regulations [due in April] because I see a weeding out of a great majority of brands. I embrace FDA oversight rather than fear it.
What are your company's growth prospects in 2013?
The needle is rising on bringing in new users. There is a tremendous amount of blue sky. One chief reason we will continue to sustain volume and share growth is our recent affiliation with Eby-Brown Co. and McLane Co. Inc. [21st Century Smoke already has existing distribution partnerships with H.T. Hackney Co. and Core-Mark International.] What’s very encouraging is we are associated with the people that understand this segment very well.