Reynolds American Sees E-Cigarette Launch as a 'Game Changer'

It's not every day that a major tobacco company stands before an audience to introduce a product, but that's what Reynolds American did Thursday, insisting that its electronic cigarette, Vuse, will be a "game changer." But just how big that game is remains to be seen.

"This is a game-changing product in the e-cigarette category," said Stephanie Cordisco, president of subsidiary R.J. Reynolds Vapor, which will start marketing the digital Vuse product line in Colorado retail outlets July 1, with an eye toward quick sales expansion nationwide.

"We plan to be a large, strong national leader in a very short period of time, and Colorado represents just one of our major states as we roll it out," said Cordisco, who said the product is aimed at existing smokers.

Cordisco and other Reynolds executives told reporters at the product presentation in New York on Thursday that Vuse's advantage over hundreds of competitors is digital technology that maintains consistency in the taste of the nicotine vapor that users will be inhaling.

"A perfect puff, first time, every time," Cordisco said of Vuse, which combines the traditional shape of a cigarette with a metallic, high-tech look that Reynolds believes consumers looking to switch from regular cigarettes will prefer.

As she spoke, Danny Herko, Reynolds' senior vice president of research and development, stood next to Cordisco on stage at Pier 59 Studios, puffing contentedly on a Vuse and exhaling the vapor from the rechargeable device, whose name rhymes with "news."

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There will be three separate Vuse product offerings. The Solo package, which will retail for about $10, contains a single rechargeable e-cigarette, a USB charger, and either a original flavor or menthol cartridge (a cartridge being equivalent to about a pack of conventional cigarettes in terms of use). Refill cartridges will be sold in packages of two, at a price point of about $10.

The System package will retail for about $30. It contains an e-cigarette device, three cartridges, a USB charge, an AC wall adapter and a carrying case. None of the products will be sold online.

Reynolds' major competitors are already selling e-cigarettes or preparing to—a development that shows how seriously Big Tobacco is taking the new market as the industry faces the continued decline in traditional cigarette sales.

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Lorillard jumped into e-cigarettes last year by buying Blu Ecigs, a top-selling brand, for $135 million. And Altria, the parent of leading cigarette maker Phillip Morris, is planning to start selling e-cigarettes later this year.

Analysts have estimated that e-cigarettes sales will be as high as $1 billion this year—a fraction of the $80 billion of regular cigarettes expected to sell in the U.S., but nearly double 2012 sales. That is stunning growth, particularly given that the devices have only been around for a decade.

Source: Reynold's American Inc.

Reynold's Vuse E-Cigarette

At least one analyst, Bonnie Herzog of Wells Fargo, speculated earlier this year that consumption of electronic cigarettes would overtake those of traditional cigarettes within another decade.

"It's a fantastic business opportunity for us," Reynolds American president and CEO Daniel Delen told CNBC.

The market demands a better device, Delen said, as statistics show that while consumption of e-cigarettes remains relatively tiny, a significant 30 percent of consumers have tried an e-cigarette in the past six months.

"They're trying, but few consumers are actually converting," Delen said, blaming the lack of new users on dissatisfaction with existing products.

"But I think within a few short months, when we get feedback on the rate of conversion by people that are actually adopting this product and using it regularly, it will be much easier to make some estimates to how big this category can get over time," Delen said.

Reynolds expects the product to be "margin enhancing," Delen said, though he declined to estimate the size of its market. "It's a little bit early to actually wager a number, and say 'this could be this large,' " he said.

Asked if Vuse could cannibalize Reynolds' tobacco-smoking customers, Delen acknowledged that "we are very much targeting existing smokers, and there will be some cannibalization."

UBS tobacco industry analyst Nik Modi said the e-cigarettes category is relatively small compared with regular cigarettes, but "this is a very important category in growth terms."

Modi noted that Lorillard's e-cigarette line accounted for just "2 percent of total sales but for over 50 percent of revenue growth."

Reynolds could benefit in the same way, he said, but its bottom line could be adversely affected if Vuse doesn't sell well. "It'll be a big issue if they can't grab share, a big negative."

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A selling point of electronic cigarettes, even if Big Tobacco doesn't blare it, is that they do not burn tobacco, a significant contributor to risks for cancer, and heart and lung disease. But the health effects of e-cigarettes—whose vapor is created from a nicotine-infused liquid—remain unclear.

The Food and Drug Administration is expected to issue regulations for the devices, which could affect sales and the price of the products.

Asked if Vuse would be marketed as a smoking-cessation tool, Herko said, "No, sir. Vuse is a tobacco product. And we're not making any health claims."

But Reynolds was happy to highlight Vuse's environmental benefits, pointing out that the product is not offered in disposable models, and the the company is creating a program to recycle both Vuse and competitors' products.