One notable aspect of Reynolds American’s recent move to acquire Lorillard is that as part of the deal Lorillard will reportedly give up its Blu e-cigarette unit to Imperial Tobacco. The shedding of Blu is ironic because its purchase by Lorillard was an early example of a tobacco company buying its way into a space that threatens its long-term survival.
With reported total revenue around $2 billion, new vapor products have badly disrupted combustible cigarettes, whose use has been declining 3.4 percent annually since 2000. Vapor products like e-cigarettes are expected to grow to $10 billion or more by 2017. Tobacco, on the other hand, is a stagnant category, conservative by nature, heavily regulated, and unaccustomed to innovation. Its DNA is in agriculture, not technology. As analyst James Bushnell put it, “The only thing that’s fundamentally changed in cigarettes since the 1960s is that they put a filter in.”
But make no mistake about who has the upper hand here. Big Tobacco isn’t rolling over. What it lacks in inventiveness it makes up for in financial might, political clout, and dominance of the retail distribution chain. Tobacco companies are late to the party, but they are rushing to make up for lost time. Lorillard, Reynolds, and Altria have all entered the e-cigarette space, raising ire among anti-tobacco activists, who smell a conflict of interest.
The anti-smoking advocates are right not to trust Big Tobacco, though perhaps not for the same reasons that concern the independent companies. As the industry responds to the FDA’s proposed regulations for the category, there’s a great deal at stake. Ironically, the proposed rules could hand over the industry to tobacco interests, letting the cigarette companies control marketing, distribution, and product development of these new products.
The FDA’s proposed regulations treat this new category almost exactly like tobacco, which will likely play into the hands – and deep pockets — of the cigarette companies. A particularly onerous stipulation is the one will allow all e-cigarettes that are “substantially equivalent” to devices existing prior to February 15, 2007 to remain on the market. Newer and more innovative products must be submitted to the FDA for approval, forcing companies to undergo a product approval process that would cost an estimated $1 to $4 million per product. A neighborhood vape shop or midsize e-liquid provider simply cannot afford that type of regulatory hurdle.
Appropriate regulation to ensure vapor product quality and safety, particularly as technology results in newer and more customizable devices, is essential to the industry’s long-term health. But excessive regulation of a category where growth and innovation has been driven by small, independent businesses could effectively cede the industry – along with its huge potential for harm reduction — to Big Tobacco, the very guys who hooked smokers in the first place. And by pushing for tighter regulation of new products that leverage their enormous influence over distribution, merchandising, and in-store displays, cigarette companies can make sure no one else will be able to afford to stay in business. Is this really what we want for a product category that many health experts believe could rid the world of smoking?
Under the proposed rules, the Big Three tobacco companies could be the only companies able to meet the regulatory burden. Not only will big tobacco, with its troublesome history, control the category, but the breathless pace of innovation that has propelled vapor products from zero to $2 billion will be choked off.
As the public comment period for FDA regulation of this new and very promising category comes to a close, Big Tobacco should not be the loudest and most powerful player in the debate over the classification and regulation of vapor products. The cost – to smaller businesses, vape customers, and the industry at large – is simply too great.