Will a proposed $56B Big Tobacco merger make e-cigarettes as dirty as traditional smokes?
Last week, R.J. Reynolds and Lorillard, the second and third largest tobacco companies in the U.S., revealed talks to complete a $56 billion merger. While the deal, which would give the proposed cigarette giant 42 percent of the market, is almost certainly going to face scrutiny from antitrust legislators in Washington, analysts told Reuters today they are optimistic that the merger will go through.
One big question this deal raises, however, is how it will impact the nascent electronic cigarette field, a fast-growing industry that, with its lack of cancerous tar and odor-less vapor, has poised itself as a cleaner and (according to the research at hand) healthier alternative to traditional cigarettes. With Big Tobacco, including these companies, making moves to enter the e-cigarette market, will they knock out independent sellers and bring along decades of public health baggage?
To find out, I spoke to Andries Verleur, the CEO and cofounder of VMR, the makers of V2 e-cigarettes which claims to be the world's largest online retailer in the space. One of its biggest rivals, Blu, was bought by Lorillard last year for $135 million, and with the marketing muscle of one of Big Tobacco's largest contenders, Blu was able to increase its retail presence from 13,000 stores to 80,000. With Lorillard poised to grow even bigger thanks to the merger, could this pose an existential threat to independent sellers like V2?
"It's certainly not going to keep us up at night," Verleur says. "We as a company sell in 40,000 stores domestically, and we rely heavily on the Web where neither of those compete." By "neither of those" he means Lorillard-owned Blu and Reynolds-owned VUSE. "From my companies' perspective, we don't see any challenge on the Web."
Time will tell if an effective duopoly in the tobacco space will really push out independent sellers or if there's room, particularly on the Web, for innovative upstarts like V2 to survive. The bigger concern for many when it comes to the consolidation and absorption of e-cigarettes into Big Tobacco is health-related. Big Tobacco companies have a history of tweaking formulas in incredibly harmful ways in order to make cigarettes more addictive. Indeed, cancer risk for men who smoke has doubled since 1959. For women, the risk has jumped tenfold. With a huge company like R.J. Reynolds with a nasty legacy in terms of public safety controlling such a huge chunk of the e-cigarette market, what's to say these new age devices, which for now are “generally regarded as safe” by the FDA, won't become as harmful as traditional cigarettes?
At these questions, Verleur adopts a tone that's familiar to anyone well-versed in the language of Silicon Valley disruption:
"I think that regulation can be a good thing if done correctly and I think regulation can lead to massive public health consequences if done incorrectly. Does the FDA have enough bandwidth to handle thousands of new product applications? Does the FDA understand that process?"
Verleur boasts of his Research and Development team's efforts to make the e-cigarette experience "closer to that of traditional smoking." The goal, he says, is not to make them more addictive. But even assuming that Verleur's operation has the best of intentions, the whole point of a business is to sell as much of your product as possible -- and to be sure, making it more addictive is a great way of achieving that. Even companies like McDonald's have done extensive psychological research in order to make its food more irresistible.
Verleur's laissez-faire attitude toward regulation (he says V2 is the only company in the industry that publishes detailed testing information on each of its batches) stems in large part from his firm belief that, no matter what tinkering is done to e-cigarettes, they will never be as harmful as traditional cigarettes which create a host of carcinogens when combustion occurs. And thus attempts to curb innovation in the e-cigarette space can result in more people smoking traditional cigarettes and, in turn, higher cancer rates. But with the long term effects of e-cigarettes in their current form still unknown, that's a potentially dangerous attitude to take toward public health.
I also asked Verleur if he thought V2, as an independent seller without the dark history and public record of R.J. Reynolds, will benefit from its lack of association with the tobacco industry's past. To this, Verleur gave a somewhat surprising, though refreshingly honest, answer.
"I certainly would love to think that," Verleur says. "I think that there is a segment of the consumer base that allows their politics into their buying decisions. And I think that, inherently, the fact that we are independent of big tobacco and we intend to stay independent of big tobacco gives us a certain advantage."
But Verleur goes on to say, "At the end of the day [consumers] select a product based on its capabilities and how good it is. And if given equal or comparable accessibility to consumers the best product usually wins."
So there you have it. There's a tech war burning in the e-cigarette space that's as heated and competitive as anything we see in the ridesharing or social networking space. And with good reason: Traditional tobacco sales still total $80 billion a year, and while e-cigarettes only made up $1 billion in revenue last year, analysts predict that e-cigarette sales will surpass traditional cigarette sales by 2047. And with billions at stake, there's no guarantee the e-cigarette industry, whether controlled by Big Tobacco or young upstarts, will act in the best interest of public health.
[illustration by Brad Jonas]