Electronic cigarettes gaining on traditional products

The swelling popularity of electronic cigarettes may add to the regulatory and revenue tension between tobacco manufacturers and states.
Electronic cigarettes, or e-cigs, are battery-powered devices that heat a liquid nicotine solution in a disposable cartridge and create a vapor that is inhaled.

Refill cartridges can be purchased in different sizes and flavors; five-packs typically cost between $9 and $18. By comparison, a carton of cigarettes can cost between $25 and $50 for most name brands.
Bonnie Herzog, a Wells Fargo Securities analyst, believes the e-cig craze has shifted from “fad” to “here to stay.”
So much so that Herzog said recently in a note to investors that e-cig sales could grow fast enough to affect the payments states receive from the landmark Master Settlement Agreement.
Tobacco companies, including R.J. Reynolds Tobacco Co., agreed in 1998 to settle lawsuits filed by 46 state attorneys general over smoking-related health-care costs by paying those states about $206 billion over more than 20 years.
Most states have redirected much, if not all, of their MSA money to general expenditures, much to the chagrin of public-health advocacy groups.
Meanwhile, sales of electronic cigarettes are about $300 million a year and the products have about 2.5 million users, according to Tobacco Vapor Electronic Cigarette Association.
There are projections of $1 billion in annual sales within a few years, Herzog said, in part because there is no federal excise tax on e-cigs. Only Minnesota has a state excise tax.
“If the prospects for e-cig category growth are as robust as we believe, this should have a meaningful positive impact on the industry's profitability long term,” Herzog said.
“Given that the industry's MSA payments are volume based, as e-cigs take share from traditional cigarettes, the decline in these payments to the states should accelerate. In other words, the dollar amount of these MSA payments should drop faster.”
As a result, Herzog said, those manufacturers that embrace e-cigs, either through internal production or acquisition, will gain – at least in the short term – better sales margins.
Anyone who has visited the check-out counter at a convenience store or tobacco outlet has seen what Herzog is describing – multiple e-cig brands on display, according to Winston-Salem Journal.