Take a deep breath

This New York vapor bar offers 80+ flavors of e-cigarettes, and none of them is from Big Tobacco

October 16, 2013
Obsession
How We Buy
October 16, 2013

We stumbled this week across the Henley Vaporium, New York City’s newest e-cigarette lounge, around the corner from Quartz’s offices in downtown Manhattan. It got us thinking about whether one of the most reliably profitable (yet hugely controversial) industries on the planet could soon, like many others before it,  be faced with disruption from new technology.

The Henley Vaporium is backed by four private investors including socialite Talia Eisenberg, who have been distributing e-cigarette products for the past two and a half years.  Occupying a sprawling space by Manhattan standards, it stocks a wide range of e-cigarette products, including the company’s own Henley brand of disposable and rechargeable iterations, and over 80 flavors of nicotine-loaded vapor.

There’s none of the dark wood and polished brass of a cigar bar here; the Henley Vaporium is clearly aimed at a younger and more health-conscious set, stocked with recycled furniture and with plans to soon start selling cold pressed juices. It aims to open at least two more stores in the New York area by March next year. The first New York store exclusively devoted to e-cigarettes, VapeNY, opened in July.  “We just saw the demand in the marketplace for it,” Eisenberg tells Quartz.

Goldman Sachs earlier this year pegged e-cigarettes as one of eight industry disruptions to watch (p. 7) in the coming years (others included 3D printing and cancer immunotherapy). Goldman estimates that e-cigarette retail sales already totaled $1 billion last year and could reach $10 billion by 2020; by then it estimates e-cigarettes could account for 16% of the US tobacco industry’s profits.

And unlike the big tobacco oligopoly, the e-cigarette industry remains “highly fragmented”, Goldman says, though a handful of companies already dominate. Privately owned NJOY (which is backed by venture capitalists Peter Thiel and Sean Parker and has former US surgeon general Richard Carmona on its board) and Blu, which was bought by tobacco giant Lorillard last year for $135 million in April, are among the biggest players. Big Tobacco is belatedly getting into the game: Altria (paywall) and Reynolds America, which collectively control an estimated 75% of US cigarette sales, are both in the process of launching e-cig products.

E-cigarettes—which contain nicotine, but no tobacco—currently fall outside smoking laws. But this could soon change, with New York City and the US Food and Drug Administration both reviewing the technology.

If e-cigs continue to grow in popularity, it could hasten the demise of traditional cigarettes. But e-cigs also promise fatter profit margins, because they are not taxed as aggressively as traditional cigarettes, nor do they have to fund legal settlements, Goldman says. Moreover, because e-cigarette devices are rechargeable, they can be sold in much the way that companies such as Gillette sell razor blades—subsidize the cost of the basic device but make a healthy profit on the cartridges.

As a result, Goldman estimates that e-cig businesses could eventually achieve profit margins in excess of 50%, compared to 30% for traditional cigarette businesses currently. Whether all three of the major tobacco manufacturers (Altria, Lorillard and Reynolds American) will do well out of this, it says, still remains to be seen.

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