There are plenty of great reasons to get involved in the electronic cigarette trade. Aside from the myriad advantages e-Cigarettes have over traditional tobacco products – cost, society’s view towards them, etc… – the e-Cigarette industry is one of the fastest growing sectors of the economy, with Wells Fargo projecting over 10 billion dollars in sales by 2018.
However, uncertainty does still loom over this burgeoning industry. E-cigarettes face potential challenges in the form of incoming federal regulation as well as legal obstacles from state and local governments.
In this series of articles, we’ll outline what those challenges are before giving you – as retailers and vendors – advice on how to navigate them and position your business for continued profitability and growth.
The Food and Drug Administration (FDA) is currently in the early stages of its regulatory process with regard to e-Cigarettes. The FDA is expected to unveil its first round of regulations by the end of Summer 2015.
Experts are split on what these regulations could entail. Some believe the FDA will tend towards a conservative set of rules, banning sales to minors and governing the packaging – child-proof caps, labels listing ingredients, best-by dating – while others fear the FDA may enact stringent regulation that could cripple the industry, including bans on e-commerce and sales of flavored e-Liquid.
Some of this regulation is, in fact, needed.
For instance, there absolutely should be a ban on sales to minors—that should already be a part of your business practices. The sale of any sort of e-cigarette product to minors should be off-limits regardless of federal, state or local law. It’s unethical and only serves to damage the long-term prospects of the industry. This restriction will be part of the rules handed down by the FDA regardless of how stringent or lax the rest of their regulatory action is.
Beyond that though, it’s difficult to predict which direction the FDA will take.
A crucial appropriations bill currently pending in the U.S. Congress is a direct obstacle for the grandfather date proposed by the FDA for e-cigarette products. The move comes after leaders in the House of Representatives warned of the grandfather date’s potential to negatively impact the industry. The FDA’s proposed date would exempt only e-cigarettes that were on the market before February 2007, which begs the question, “does anybody even know someone in the US that was using an e-cig in February 2007?”
One of the most powerful economic influences in the modern political landscape is Big Tobacco, whose lobbying efforts are sure to make a significant impact on final regulation. E-cigarettes are a highly disruptive force in the market, hence Big Tobacco’s stake in this decision. To understand why, just follow the money.
Big Tobacco’s main interest lies in controlling the market. Convenience store data collected by Nielsen reflects a 75% market share in the hands of Big Tobacco, who are also experiencing declining sales volume on the combustible tobacco side of its business. Although total sales dollars climbed higher due to recent price per pack increases, the CDC just released a study that shows smoking of traditional cigarettes is at an all-time low.
By deeming e-cigarettes tobacco products and regulating them the same way – as big Tobacco wants – many of the smaller companies involved in the vaping industry will either be forced out of business or forced to sell to larger companies that can afford to undergo the expensive pre-market testing that would be required.
This will ultimately result in consolidation in the industry and could potentially stunt innovation of new technology.
Regardless of the FDA’s ruling, compliance with new regulations will by no means be immediately enforced. Some in the industry believe the window to come into compliance will be between 12-24 months. It’s almost guaranteed that there are going to be lawsuits filed that challenge specific parts of the rule as well, which could further delay implementation or even bring change to the final rule.
You will not wake up one morning and find yourself with a store full of product that you can no longer legally sell. What you could however find, based on the pending decision of the FDA, is that your long-term business prospects have been gravely affected and in the coming years your ability to offer a wide range of products will be diminished greatly.
What’s more immediate, however, is the risk posed to your business by state and local regulation.
State and Local
The other major party influencing the discussion of e-cigarette regulation are governments—both state and local. Around the country, taxation of tobacco products is a major source of revenue for the government. Taxes on the sale of tobacco products range from just a few cents in some places to several dollars in others.
There are also the tobacco bonds that were sold on the front end of the Tobacco Massive Settlement Agreement (MSA) that Big Tobacco made with Attorneys General from 46 states in November 1998. The viability of those bonds has been thrown into question with the diminishing profits of tobacco companies. In other words, if Big Tobacco sells fewer cigarettes it pays less money towards that settlement, leaving state and local governments with reduced payments as outlined in the MSA.
The financial losses are further compounded to most state and local governments after many chose to back their tobacco bonds with secondary pledges of state or local revenues, thereby absorbing the losses of the bondholders. This financial practice is called securitization, and in fact, many of these longer term tobacco bonds have already been downgraded to junk ratings, as some analysts predict many of the bonds will default entirely.
How risky is the financial practice of securitization? Critics suggest that the complexity associated with securitization limits investors’ ability to monitor risk and that markets considered as competitive securitization markets are susceptible to substandard underwriting. This type of financial practice is the same strategy that played a major role in the U.S. subprime mortgage crisis.
Government now finds itself in a precarious position. It may seem cynical, but simple economics hold that it’s actually beneficial in some sense to keep people smoking the same traditional cigarettes that led to the MSA in the first place by keeping them off newer, relatively untaxed products like e-cigarettes.
Given the proliferation of vaping, many states and local municipalities are attempting to tax and restrict e-cigarettes in a way that makes up lost tobacco tax revenues or that pushes consumers back towards more traditional tobacco products.
Again, some states and local governments are taking measured approaches to enacting laws and regulations on e-cigarettes and e-liquids. Bans on sales to minors and requirements on labeling and child-proof caps are sound policies that, quite frankly, all responsible manufacturers and vendors should already be practicing.
But in other places, bans on where citizens can vape, as well as attempts to limit product offerings – like banning candy and fruit flavors under the premise that they appeal to children – could have an adverse impact on your business.
For instance, if you own a vape shop in a location where e-cigarettes are categorized as tobacco products and their use is broadly banned under a clean air act, you may not even be allowed to let customers test your products lest you face a fine or some other civic penalty.
It varies state to state, city to city—but ignorance is no longer an excuse. You need to be aware of what legislation has already passed and what is currently being proposed and debated. Your bottom line is at stake and your voice is needed.
What can you do?
Our next article will focus on what to look for in e-liquid and e-cigarette manufacturers to best position your business in case some of the more aggressive regulations and laws are implemented.
But for now we’ll focus on what you can do in the interim to combat some of the more stringent government overreach that your business could be facing.
As was already mentioned, the first – and perhaps most important – thing you can do is be vigilant. Know what’s going on in your city and state. In New York, four vape businesses recently had to pay a combined $95,000 settlement with the attorney general over a new law banning sales of e-liquid in non-childproof packaging. The owners claimed ignorance of the new law. That ignorance proved to be costly.
Beyond that, you may not want to be politically active—but this is your livelihood at stake. Find organizations and lobby groups that advocate for your business interests, attend city council meetings, make your voice heard! It may not seem like much, but as a business owner – one that’s created jobs in your local economy – your opinion matters.
So do your research, keep abreast of the rules and regulations being discussed and be ready to advocate for your business.
It’s an uncertain time for the industry, but that doesn’t mean you have to be caught off guard.
Join us next time when we discuss what to look for in e-cigarette or e-liquid manufacturers to best position your business for the long-run. SVBS
Jeff Stamler is a co-founder of Nicopure Labs, the parent company of Halo and eVo. After starting the company in 2009 he has overseen its growth into one of the leaders of the vaping industry. Today he presides over Nicopure from its headquarters in Trinity, Florida. He can be reached at [email protected], or 888 270 2449, or visit www.nicopure.com.