E-Cigarette Industry Insights From Victory CEO

On Tuesday we hosted an expert call on electronic cigarettes featuring Brent Willis, CEO of Victory Electronic Cigarettes. Below we summarized Brent’s key industry insights from the call and encourage you to listen to the call replay (~ 50 minutes) as he provides great insight into the rapidly evolving electronic cigarette story that his company is a part of. Here are the links to the replay podcast and presentation


We remain very bullish on the evolving electronic cigarette category. We believe e-cigs offer a compelling alternative to traditional cigarettes and offer the consumer a much different experience than a nicotine patch or gum. There has been a rapid pace of innovation, which, along with increased marketing and distribution, is bringing significant awareness to the category.


Industry estimates suggest that U.S. e-cigs sales were $150 Million in 2011, $500 Million last year, may reach between $1-2 Billion this year, and are poised to double in the coming years. We believe Big Tobacco’s involvement in the category – beginning with Lorillard and the launch of its brand Blu in April of last year to Reynolds American and Altria introducing their own e-cig versions over the last two months – should lend credibility to the category and accelerate growth. We expect e-cigs to be margin-enhancing to the combined cigarette category and 2014 to be a breakout year.


Globally we believe there’s a huge runway of opportunity for large and small e-cig manufacturers, as competition across the category is fragmented and brand development is in its infancy. While we believe that pending regulation from the FDA may come down on online sales and flavored varieties, we expect that e-cig consumption will continue to grow as consumers seek healthier alternatives to traditional cigarettes and given the significant price point advantage of e-cigs to traditional cigarettes. The data is already showing encouraging signs of strong repeat purchase behavior.


We are excited about the developing investment opportunities as this category gains visibility.



Summary of Industry Notes from our call with Victory CEO Brent Willis:

The Opportunity for E-Cigs

  • Unequivocally a healthier alternative to tobacco cigarettes
  • Huge opportunity to eclipse traditional tobacco: 90% of smokers have yet to try e-cigs
  • Highly attractive for retailers based on margin
  • Expects imminent development of next generation products that are more cigarette-like in form and function
  • Believes that because the category is so new, no one really has a brand. Currently, purchase behavior is primarily driven by what’s available
  • Data suggests that consumers score brands based on flavor profiles
  • On affordability, e-cigs are typically 30-40% more affordable than traditional cigarettes
  • Highly fragmented competition creates opportunity
  • > 30% of smokers report “trying to quit” each year

Traditional Tobacco vs. E-cigs

  • Traditional cigarettes category: over 1.3 Billion smokers globally, worth $720 Billion
    • 60 Million smokers in the U.S., $91 Billion category
    • In the U.S., 1 in 4 adults smokes
    • Asia (Japan and Korea in particular) has some of the highest incidence of smoking in the world, 8 of 10 smoke
    • > 6 Million people die each year from tobacco related diseases (a recent study suggested that if all smokers switched to e-cigs the number would go down to 600)
    • 60% of teens have tried cigarettes before they graduate high school in the U.S. and 20% of teens worldwide smoke
  • E-cig category: untapped in most markets globally = huge runway
    • U.S. sales now exceed $1 Billion, doubling every year
    • Volume sources = 99% of existing smokers that are “trying to quit”
    • 90% of consumers have never tried the category. The current trial rate of ~10% is consistently expanding, from around 2.6% “ever tried” at the end of 2010
    • Recent studies show that e-cigs are contributing to cessation of smoking, with up to 20% of smokers quitting completely and >  50% reducing cigarette consumption
    • Reductions in smoking related deaths should continue to propel the e-cig category

On Regulation

  • The reality is that the influence that regulation will have on the category is still unknown, worldwide
  • The e-cig industry has an industry association (TVECA) that is highly active and represents the category well
  • The FDA is potentially considering to regulate/propose restrictions on:  online commerce; flavor; age; communication; and safety/health certifications
    • While Brent has no knowledge on where the FDA will come down on restriction for the category, he has not heard that one of its considerations is an excise tax on e-cigs or a ban on areas where they may be smoked
    • Brent believes any restrictions will impact everyone in the category in the same way, but that the category is here to stay because of the huge consumer proposition of a healthier alternative to traditional cigarettes

On What’s Driving Consumer Behavior

  • Product mimics the smoking behavior, it’s the same experience (hand-to-mouth) without the “cancer causing ingredients in tobacco” (on average traditional tobacco has 4,000 chemicals vs e-cigs with 4 ingredients)
  • Over time as e-cig products develop, and offerings are even more like traditional cigarettes in terms of form, function, performance, and delivery, that’s when the category will really start to take off
  • Negative health effects of tobacco are clear to the public: cancer and heart disease; dramatic tax increases; health care premium increases; public bans; social stigma; and employer mandated cessation
  • E-cigs are the first truly new CPG category in more than a decade. It’s the first real consumer alternative
  • Compared to traditional cigarettes, e-cigs offer the same pleasurable experience, both physical and psychological; are non-carcinogenic; cost less; and reduce the social burden

Industry Outlook

  • Expects that technical performance changes and enhancement of e-cigs will propel the growth in the category even faster than current growth estimates
  • Opportunity is global and only now in an early stage, untapped in most markets internationally; there’s national distribution in the U.S., but huge opportunities for fragmented competition to take market share 


DISCLOSURE: Victory (ECIG) is a newly-public company with limited trading history and liquidity. Hedgeye has no investment opinion on Victory and no current plans to publish research on the company.   Certain Hedgeye executives may at some point become involved in a transaction with Victory or related entities.   This presentation is for information purposes only.



Matthew Hedrick

Senior Analyst

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