Smoke shops are a dying breed – unless they evolve and adapt to the world of vape. In 2015 the e-cig and vaping market is projected to be approximately $3.5 billion, comprised of about $2B in the VTM market (which may be under-represented) and $1.5B in the e-cigarette and closed system space. The combined volume is expected to reach $10B by 2018 per Wells Fargo Securities estimates.
The world of smoke shops is rapidly evolving while profit margins from tobacco sales are slim and getting slimmer. If today’s smoke shops don’t go with the flow, their days may be numbered.
Riding the new wave – the wave of vape – could well be their best chance for survival in a world that’s turning against smokers.
Smokers are Turning Into Vapers
There are fewer smokers today than at any time in the past several decades. From a high when nearly 50 percent of adults smoked in the mid 1960’s, the smoking rate has dropped to a new low of 17.8 percent according to a 2014 report by the Centers for Disease Control and Prevention. <http://www.cdc.gov/media/releases/2014/p1126-adult-smoking.html>
Part of the reason it’s dropping rapidly, and especially among Gen Xers and the Millennials, is due to a whole new industry – the vaping industry — that has quickly taken off as an alternative to smoking.
Vaping products include both electronic cigarettes or “cigalikes” as well as vaping hardware and e-liquids – collectively known as the VTM market (short for vapors, tanks & mods).
While the growth in the e-cigarette market is slowing, the VTM market is on fire. Last year, the e-cig market totaled about $1.4 billion, while the VTM market rose to $2.5 billion. Bonnie Herzog, an industry analyst with Wells Fargo and the vaping industry’s primary market prognosticator, estimates the VTM market could surpass tobacco cigarettes within 10 years.
Products in the VTM market fall into two major categories: hardware and e-liquids. Most people who are new to vaping buy a “starter kit” which is relatively inexpensive – generally less than $30. These simple devices allow the consumer to vape an e-liquid, usually containing nicotine. They’re not that complicated and don’t require a lot of education.
The e-liquid side of the market offers fantastic profit margins – as high as 100 to 300 percent. Compare that to the margins for most tobacco products and you’ll see the advantage of offering the same high volume, high profit products that have become the lifeblood of vape shops.
There are literally thousands of e-liquid brands on the market, so building a product line can be a little daunting. Research and looking for those companies and/or individuals who can assist you is key. Product reviews, asking customers, or talking to a consultant should be your first step. Eventually, it will be up to you to find out which products your customers prefer and those preferences will dictate the products you offer.
Making the Conversion to Vape Products
Businesses who have transitioned as smoke-to-vape shop conversion can vouch for the wisdom of that transition.
For example, Chad Love, purchased Blue Ridge Smoke and Vapor in Wytheville, VA, a rural conventional smoke shop that had been in business for 15 years with a high volume clientele. Though business was steady, their profits were squeezed.
Chad converted about half the store to create a vape shop, complete with a tasting bar and a wide selection of hardware and e-liquids. “Initially we started off with about 20 percent of our display space dedicated to vape products,” Chad said.
Chad said they are slowly phasing out tobacco products, since their monthly vape revenue continues to increase about 20 percent every month. “As our vape profits grew, we converted more and more space to this side of our business. It’s grown to about 50 percent now and increasing monthly.”
Chad said vape hardware sales were robust from the outset, which enabled them to increase their inventory by several hundred percent. “In the first three months, most of our sales were starter kits. It’s now about 50-50 between hardware and e-liquids.”
Keep in mind that margins on hardware are usually over 100 percent, and e-liquid margins are even higher. Tobacco products were strong, but resulted in more work and less profit, Chad said.
The store continues to evolve as Chad has applied for an alcohol license, which will enable Blue Ridge to offer local craft beers. This will complete the transition from a standard smoke shop selling a commodity product to a destination venue offering a total experience.
As remarkable as this shop is, it’s not unique. In fact, it’s part of a nationwide pattern.
The National Association of Tobacco Outlets (NATO), a trade association of tobacco retailers and one of the primary tobacco trade shows, was exclusively the domain of tobacco until just recently. The vaping industry has encroached their territory, and at their recent annual trade show “43 percent were e-cig exhibitors and vape and 57 percent were others,” per a NATO representative
Like every other business, changing with the times is not an option.
But the advantage to smoke shops is that there’s a clear path to a profitable future. SVBS
Norm Bour is the founder of VapeMentors, the first and largest business consultancy focused on offering information and guidance for vape space business owners and those who want to get into this industry. They offer many free special reports and a wealth of resources, as well as one-on-one consulting services. Their focus on the vape space has lead them to sponsor VAPE U: Six Pillars to Vape Space Success. He’s also the host of Vape Radio, a podcast series that interviews the masters of vape and thought leaders in the vape space. Contact him at [email protected], or visit the website at www.VapeMentors.com to learn all the services they can offer.