No E-Cigs For You! NYC Electronic Cigarette Ban Puts Vapors Out On the Streets

Yesterday, New York City’s city council voted overwhelmingly (43 to 8) to prohibit the use of e-cigs in indoor public areas where regular cigarettes are already banned. The Big Apple now joins New Jersey, North Dakota, Utah, and Arkansas which have already enacted similar bans in bars and restaurants. In recent weeks, we’ve also witnessed initial considerations on e-cig policy percolating in Chicago and Los Angeles.

NYC’s ban is set to take effect in four months, and follows the city’s recent decision to raise the age to buy traditional tobacco and e-cigs to 21 from 18, and raise the minimum price per pack of traditional cigs to $10.50 (set to take effect in APR/MAY 2014).

We view the vote as a marginal headwind to the industry.

In particular, the council’s focus was on fears that e-cigs could be a “gateway” to traditional cigarettes, outweighing “harm reduction” arguments. While we think that consumers intuitively understand that e-cigs offer a healthier alternative to traditional cigarettes (it’s the tar that kills you; the nicotine is simply an addictive agent), we think the industry stands to benefit as more science reveals the health benefits of an e-cig over a traditional cig.

Despite this obvious hit to the convenience of indoor smoking, we still see health considerations and a lower price point advantage driving the category as Big Tobacco’s focus on the category drives awareness, innovation and growth.

Just today, Philip Morris (PM) and Altria (MO) announced e-cig synergies across the two companies, effectively licensing and supplying (perhaps also manufacturing) each other’s brands across the globe. Note that both MO and PM have aspirations for nationwide e-cig distributions by mid-2014, MO under the brand MarkTen and PM with its yet to be disclosed brand.   

As we approach year-end, there remains an industry wide expectation that the FDA is set to imminently announce regulatory restrictions on electronic cigarettes. The exact timing? It’s still anyone’s guess. We believe the industry is bracing for regulation that could include:  

1) A ban of online commerce

2) Age verification standards at retail

3) Flavor limitations (beyond tobacco and menthol)

4) Health/safety certifications

5) Labeling and marketing requirements

We think regulation of e-cigs is positive for the industry so long as it does not, in particular, stifle innovation or price/tax as traditional cigarettes.

For a more comprehensive overview of the industry and regulation please see our recent report: “E-Cigs at the Thanksgiving Table”.

Bottom line: Despite increasing regulatory headwinds, we remain quite bullish on e-cigs.

Matthew Hedrick

Associate