(Reuters) – As electronic cigarettes flew off shelves on both sides of the Atlantic in recent years, investors flocked to a business some hope will be the future for tobacco.
Now sales growth is slowing from a 2011 peak and private funds are more cautious about the smokeless devices, making it harder for independent e-cigarette firms to raise capital and hitting their share prices.
The entry of Big Tobacco and a push for tighter regulation has led outside investors to question the potential of the e-cigarette market, where sales are at a modest $3.5 billion worldwide but still growing faster than for most consumer goods.
“Everybody knows regulation is coming so investors are concerned about investing in companies that won’t be able to meet those rules,” said Craig Weiss, CEO of NJOY, one of the more established e-cigarette makers, which sources say could pursue an IPO or a takeover by tobacco or healthcare firms.
The World Health Organization last month called for bans on indoor use, advertising and sales to minors of the metal tubes that heat nicotine-laced liquid into vapor, arguing that the jury was still out on how safe they were.
This would go further than the European Union’s rule coming into force in 2016 to ban advertising and regulate nicotine content, and a proposal by the U.S. Food and Drug Administration (FDA) to ban sales to minors.
“For smaller companies, it is challenging – they have to answer for FDA uncertainty and questions about Big Tobacco,” Weiss said.
Gamucci, one of Britain’s earliest e-cigarette makers, has been seeking capital for about 12 months, while rival E-Lites weighed options for a year before agreeing in June to sell out to Big Tobacco’s No. 3 player, Japan Tobacco.
With sales of traditional cigarettes declining in many countries due to health concerns, almost all the major tobacco companies have either bought e-cigarette companies or set up in-house development.
This means the independent players must be extra nimble.
Gamucci CEO Tony Scanlan, who worked at a leading tobacco company for 17 years before branching out, told Reuters Gamucci is close to securing an injection of about 20 million pounds ($32.4 million) and may weigh going public when it gets bigger.
It is planning a new range that is refillable rather than disposable in line with market trends and is considering marketing products as medical devices, as British American Tobacco’s Nicoventures unit is doing.
Innovation is now key to survival in a business whose products have piqued consumer interest, but not loyalty.
“Last summer … you were seeing a big build-up of consumer trial, but that trial hasn’t come through to regular usage,” said Martin Deboo, an analyst with Jefferies.
He cited research showing that half of all smokers had tried e-cigarettes but only 10 percent said they were regular users.
“The first generation ‘cig-a-likes’, from a smokers’ point of view, have only been a partial solution,” Deboo said.
Lorillard, America’s No. 3 tobacco firm and No. 1 e-cigarette firm, said e-cigarette sales fell 35 percent to $37 million in the quarter to June 30, but its retail market share fell only 1.1 percent, which suggests the entire category shrank dramatically.
“APPLE PIE” TO “ZOMBIE JUICE”
Some vapers complain that with the slim, disposable e-cigarettes, poor vapor quality makes the nicotine hit weaker than with tobacco, that battery life is too short, and that they are too pricey, at as much as $15 a day for a very heavy user.
As such, they have been losing share to next-generation models that pack a bigger puff at a lower price in a market of which 70 percent is in the United States and Europe.
“You’d be hard-pressed for someone to invest today in the smaller, independent e-cigarette companies because it’s tough to know whether they’ll ever get distribution,” said a source financially involved in the sector.
“Investors are shifting their attention now, trying to figure out what other areas they should be investing in.”
One such area is so-called vaping products, a rainbow of do-it-yourself tanks, batteries and e-liquids.
U.S. financial services giant Wells Fargo estimates that business at $1.1 billion of a $2.5 billion U.S. vapor market including e-cigarettes. Particularly bullish, it says vaping could surpass smoking in the U.S. in the next decade.