Electronic cigarette sales at US convenience stores have fallen for the first time, underlining a shift toward larger devices that are cheaper and allow more customisation.
The data highlight the challenges facing companies looking to gain share in the fragmented e-cigarette market, where technology is evolving rapidly even as some brands are only beginning to roll out their products on a large scale.
The dollar value of sales at shops measured by Nielsen fell 10.4 per cent in the four weeks to May 10, as a 13.9 per cent drop in net pricing outweighed 4.1 per cent volume growth.
The release of the data coincided with a plea by more than 50 public health scientists to the World Health Organisation to avoid burdening e-cigarettes with stringent regulations.
Electronic devices work by heating nicotine-laced liquid into a vapour. The e-cigarettes that have taken off in the past decade – called "cig-alikes" for their resemblance to traditional cigarettes – consist of a long battery unit tipped with a cartridge of liquid. They come in disposable and rechargeable versions that can be fitted with new cartridges, similar to razors and blades.
Bonnie Herzog, analyst at Wells Fargo, said the sales decline reflected not just a lower price per cartridge, but a turn among consumers to vaporisers that can be filled with a variety of "e-liquids", which tend to be sold online or at tobacco or vapour shops and are not captured in Nielsen's data.
These refillable devices, known as vapours, tanks or mods, are growing twice as fast as the overall electronic category and make up about 44 per cent of a $2.5bn market for electronic vapour products, according to Wells Fargo. Ms Herzog has forecast that e-cigarettes and vapour consumption could surpass traditional cigarettes in the next decade.
The shift is also evident in companies' own data. Lorillard, whose Blu Ecigs brand dominates nearly half of the US market, said e-cigarette sales fell 10.5 per cent in the first quarter. Lorillard shares are up more than 16 per cent so far in 2014.
Murray Kessler, Lorillard chief executive, told analysts during the company's April earnings call that the slowdown "is directly related to the rapid rise of vaporiser sales in vape shops".
Nik Modi, analyst at RBC Capital Markets, cited Google data showing US searches for "vape shop" have reached new highs every month this year, while queries for "electronic cigarette" have fallen back to 2009 levels. The pattern is similar in the UK, where e-cigarette sales are estimated at about £200m.
Mr Kessler said vaporisers are growing faster than traditional e-cigarettes "because they deliver a superior consumer experience at a better value . . . bigger batteries, more vapour, more satisfaction, lower cost to refill".
While new consumers may be comfortable starting with a traditional e-cigarette, those who stick with vaping may find the products are "somewhat lacking", said Andries Verleur, chief executive of VMR Products, which sells e-liquids, disposables and cartridge-based e-cigarettes.
"The large-scale devices solve this problem to an extent with the amount of liquid they can carry. You only need to charge and fill it once a week," Mr Verleur said.
The ability to try a wide range of flavours and nicotine levels is also appealing, and liquids tend to be cheaper than e-cigarettes, widening the price gap with traditional cigarettes.
Other market leaders have also taken notice. Njoy, backed by Sean Parker and Peter Thiel, has slipped from second to third place by US market share and said earlier this month it would add a refillable tank system to its product line-up in July and August. Mistic, another big brand, started selling a vaporiser in February.
Analysts say such moves could push big tobacco to move more quickly into refillable systems. The two largest US cigarette makers, Altria and Reynolds American, are expanding their own cig-alike products nationally this year.
Last month, Lorillard's Mr Kessler said the challenge is to "close the performance gap relative to vaporisers and do that in months, not years". The company is working on technical improvements, including battery strength, that he said "will minimise the defection from traditional e-cigs."
Whether those changes will be enough to woo consumers is unclear. After a recent visit to a new vapour shop in New York, Ms Herzog wrote: "The cig-alike e-cigs as they are today are already becoming 'your father's e-cig'."
—By Shannon Bond, Financial Times