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E-cigarette sales are smoking hot, set to hit $1.7 billion

electronic cigarettes.
Christopher Furlong | Getty Images
electronic cigarettes.

Booming electronic cigarette sales in the U.S. will more than double this year, hitting $1.7 billion, a top tobacco analyst predicts.

Analyst Bonnie Herzog of Wells Fargo Securities said "conservative data" already indicates that sales of e-cigarettes this year have already reached $700 million from traditional retail outlets like convenience stores. Throw in estimated online sales of $500 million to $625 million and total year-to-date sales are above $1 billion.

The pace will only pick up this fall. "We estimate that it will be $1.7 billion by the end of the year," Herzog said.

Although Herzog has been bullish on e-cigarettes, she said she was "surprised to some extent" by how fast sales have grown.

But, she noted, "everything we've been hearing" about e-cigs has suggested increased awareness and interest in the products—which electronically spark a nicotine-infused liquid so that users can inhale a smokeless vapor, giving the practice the name "vaping." E-cigs began being sold in earnest in the U.S. in 2007.

While a pack of traditional cigarettes can cost $15 in places like Manhattan, an equivalent amount of e-cigs costs about $1.50, manufacturers estimate.

"A lot of the awareness is the perceived lower health risks, and definitely the affordability," said Herzog, adding that the ability to use e-cigs in locations where traditional cigarettes are banned is another factor.

E-cig sales are still dwarfed by sales of traditional tobacco cigarettes, whose sales are still about $80 billion annually.

(Read more: E-cig sellers jockey for market before FDA floats regs)

But the explosive growth of the electronic devices has made even the Big Three tobacco companies wake up and jump into the market with various products.

Herzog, in a recent report, wrote: "We have increased conviction that consumption of e-cigs could surpass consumption of conventional cigs within the next decade."

Herzog's nearly $2 billion sales prediction for 2013 comes at a critical point for the industry, which is anticipating possible Food and Drug Administration regulations. The Wall Street Journal last week reported that the FDA has recently discussed with industry officials a possible ban on online sales to prevent sales to minors.

Andries Verleur, CEO of leading online e-cig company V2 Cigs, said such a ban "would definitely lead to some retraction for the overall category. That would also be giving a substantial advantage to companies that already have a very large retail distribution."

That said, V2 Cigs is dramatically increasing its presence in stores to lessen the impact of an restrictions on Internet-based sales.

(Read more: E-cigarettes could slash tobacco use among smokers: study)

V2 Cigs portable charging case.
Source: V2 Cigs
V2 Cigs portable charging case.

Earlier this year, V2 announced a partnership with distributor National Tobacco Company to boost its retail presence. With more than 10,000 retail outlets now, including Hess gas stations, Verleur's company expects to be in 35,000 retail locations by the end of 2013.

"We've been rolling out about 1,300 stores per week for going on nine weeks," Verleur said, calling that progression "pretty phenomenal."

He now expects that 30 percent of V2's ales will come from retail outlets, up from an earlier 20 percent projection.

And in 2014, the company said, retail store sales are expected to outpace online sales.

Spike Babaian, co-owner of the two Vape New York e-cigarette stores in New York City, agreed. "There's been exponential growth for e-cigarettes that have not reached its capacity yet," said Babaian, who is also president of the National Vapers Club. "Right now, the e-cig market is not what we call saturated. There's a very small percentage of smokers using e-cigarettes."

"There are more smokers that need to be converted," she said. "If you can vape and not smoke, and get the same satisfaction and not kill yourself, then every smoker would do it."

Smoking reduction and cessation are oft-cited reasons given by traditional cigarette users to give e-cigs a try.

Because of the addictive nature of traditional cigarettes, many e-cig manufacturers focus not only on giving users enough of a nicotine "hit" in their vapor, but also on replicating the smoking experience in the design of the products, complete with what appears to be a burning ember at the end of some e-cigs.

"The closer that we get to making that experience feel realistic," Verleur said, "the more you're going to see acceleration for the overall category."

(Read more: E-cig boom could be around corner)

By CNBC's Dan Mangan. Follow him on Twitter @_DanMangan

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