Taming the Cowboys
Image: JEANNE
Altria has declared war on the illicit disposable devices that are impacting its bottom line.
By Timothy S. Donahue
The illicit e-cigarette market is soaring. Illicit products are estimated to account for more than 60 percent of the $8.3 billion U.S. vaping industry. Statista expects the U.S. electronic nicotine-delivery system (ENDS) market to grow at a compound annual growth rate of 3.93 percent from 2023 to 2028. If the illicit market continues to go unchecked, however, companies that market legal vaping products fear many consumers will simply switch back to combustible products.
“It is very much worth noting that this rapid apparent substitution is happening in an environment where half the vapor market is illicit; the FDA [U.S Food and Drug Administration] has hugely hampered vaping products making it onto the legal market, and consumers are hugely misled on relative risks,” said David Sweanor, an adjunct law professor at the University of Ottawa and a longtime tobacco harm reduction advocate. “As with other markets seeing similarly historic drops in cigarette use as alternative sales soar, it raises the question of just how rapidly cigarette sales could fall if policies were aimed at facilitating that rather than doing things to stymie it.”
Altria, parent to Njoy, a leading brand of legal vaping products in the U.S., according to Nielsen, told investors during a recent conference call that the current state of the market is “intolerable” for both legitimate manufacturers and consumers. Altria CEO Billy Gifford said the regulated market is being overrun by illegal flavored disposable products manufactured and distributed by companies violating the rules and guidance laid out by the FDA. He said that regulation not enforced is indistinguishable from no regulation at all.
“Illegal e-vapor products circumvent the actions of regulators, responsible manufacturers and retailers by evading scientific review, quality manufacturing controls, marketing oversight and legal aids or purchase restrictions. Despite recent actions by the FDA, enforcement has been inadequate and ineffective,” explained Gifford. “We believe the FDA has good tools necessary to bring order to the market. For our part, we are actively engaged with regulators, state and federal lawmakers, and trade partners and other stakeholders to build awareness of these serious issues and drive marketplace enforcement.”
According to Gifford, the lack of enforcement has forced Altria to take a “targeted but necessary action.” The company filed a lawsuit in the District Court for the Central District of California against 34 organizations. Njoy alleges that the defendants are manufacturing, marketing, distributing, selling and/or marketing their flavored disposable ENDS unlawfully for three primary reasons:
- They are not authorized pursuant to FDA marketing granted orders as part of the premarket tobacco product application process.
- California bans the retail sale of flavored ENDS.
- The defendants do not comply with the Prevent All Cigarette Trafficking Act’s delivery sale age verification, registration and filing, record keeping, tax payment and labeling requirements.
Altria is asking for the court to provide appropriate restitution for harm suffered by Njoy due to the defendants’ unfair competition.
“We want to protect harm reduction and the opportunity for the 30 million smokers in the U.S.,” said Gifford. “We really need to have enforcement where the smokers can make informed choices as they are moving across categories. I think that there’s an underlying positive is that we see adult smokers moving over, so they’re ready to have potentially reduced harm products. We just need them to be regulated and based on science to be in the marketplace.”
Sal Mancuso, Altria’s chief financial officer, said that traditional cigarette volumes continued to decline in the third quarter of 2023. He said that the decline is impacted by the number of illegal products on the market; however, because illicit products are largely distributed through nontraditional untracked channels, the company has had to refine its ability to estimate the illicit product impacts on the legal vaping industry.
“With the information we have today, we believe that there is more cross-category movement than previously assumed. And we now estimate that growth of illegal flavor[ed] disposable e-vapor products contributed to industry, cigarette industry declines in the range of 1.5 percent to 2.5 percent and over the last 12 months,” said Mancuso. “We will continue to monitor this dynamic trend and are actively pursuing better data sources to enhance our estimates in this space.”
"We believe the FDA has good tools necessary to bring order to the market."
Amplifying Actions
Altria Group completed its acquisition of Njoy Holdings in May. In 2022, Njoy Holdings received marketing orders for its Njoy Ace device along with several tobacco-flavored pods. At the time of writing, Njoy Holdings had received six of the 23 marketing orders granted by the FDA for the entire vaping product category, including pods, disposables and open systems. The regulatory agency is still reviewing Njoy’s premarket tobacco product applications for several Njoy menthol-flavored e-vapor products.
Gifford said that the company executed Njoy’s business plans with “speed and focus,” adding that the goal is to grow the Njoy brand responsibly and sustainably. To set the foundation for success, Altria first strengthened Njoy’s supply chain. He said the company successfully solidified the entire Njoy supply chain from sourcing direct materials through the shipment to retail.
“As a result, we do not anticipate capacity constraints as we execute our initial expansion plan. Next, during the third quarter, our teams prioritized closing inventory gaps at retail and expanding distribution of ACE,” said Gifford. “Prior to the acquisition, Njoy had a small-scale sales force, which resulted in inventory volatility and significant distribution gaps at retail …. Upon completion of the Njoy transaction, we immediately unleashed our sales force to focus on closing the inventory gaps in stores that already had distribution. We improved inventory conditions in stores and are actively working to close remaining gaps at retail.”
Pamala Kaufman, a financial analyst with Morgan Stanley, asked Gifford if he believed Njoy could be successful and grow in a marketplace dominated by illegal products. Gifford said that the FDA still needs to get through its authorization process, and the agency’s actions will translate to the marketplace.
Since its acquisition by Altria, distribution grew to approximately 42,000 stores during the third quarter of 2023 for the Njoy Ace, the company’s flagship device. The product is now distributed in all the top 25 U.S. convenience store chains by vaping product volume, according to Gifford. The company has also started to amplify visibility with new point-of-sale and fixture signage at retail.
“During the fourth quarter, we continue to expect ACE expansion to reach a total of 70,000 stores by year end, representing approximately 70 percent of e-vapor volume and 55 percent of cigarette volume sold in the U.S. multi-outlet and convenience scanner,” said Gifford. “As we continue to expand distribution and close inventory gaps, we expect to further enhance visibility and product fixture space at retail.”
Last month, Njoy unveiled its first retail trade program. The program allows retail partners to sign up for the program at various levels with merchandising options designed to position Njoy “strategically and responsibly” to current combustible tobacco consumers while boosting the awareness of the Njoy brand. Gifford said the company is beginning to test various promotional plans and anticipates more disruptive execution at retail in the fourth quarter. Moving into 2024.
“We will continue to refine our promotional plans, implement Njoy’s retail trade program, further expand distribution and evolve our consumer engagement strategy. Our strategies will focus on informing adult vapors and smokers of the attributes of ACE, such as battery capacity and pod size, relative to other leading brands, generating trial and growing brand loyalty,” said Gifford. “In addition, plans for a new brand equity campaign are well underway. We expect the equity campaign to further amplify the brand’s presence at retail and drive consumer engagement.”
Jacob de Klerk, an analyst for Redburn Atlantic, asked Gifford what the impact would be on Njoy’s projected market growth if the FDA doesn’t approve any flavors other than tobacco. Would only allowing tobacco flavors create enough demand for Njoy to remain profitable? Gifford said he believes there is room, and he wouldn’t rule out the potential for an authorized menthol product.
“I wouldn’t rule out menthol. We feel good about the application—the current application in front of the FDA from a menthol standpoint. I think if you look at some of the recent marketing denial orders, it was related to ‘new following,’” he replied. “When we made the Njoy transaction, there was virtually no new following. As far as additional flavors are concerned, we’re excited and currently looking forward to being able to file [marketing applications] in the near future. We believe that [flavor] allows for adult consumers to have it as an offramp but not an on-ramp for underage users. So, we still see the potential for flavors.”
