Disruptor disrupted

The announcement of NJOY’s bankruptcy shows just how much the vapor market has changed.

By Steve Hong

A few weeks ago, I walked into the office and instead of a “Good Morning” I was greeted with the news that NJOY was bankrupt. I slumped down in my chair as I took in the new information. It felt like an ailing family friend had died much too soon.

It wasn’t totally a surprise, but it’s sad because they were a company I admired. As industry pioneers, NJOY has been part of vaping in America since the very beginning. And of course, their role in the 2009 lawsuit against the FDA is part of industry lore.

Of course, we still don’t know what the final outcome will be for the company. Someone may buy it or possibly pieces of it. But regardless, somewhere along the line, NJOY went from industry pioneer to industry has been. A quick review of some sales figures from their bankruptcy filing might clue us into when the downfall began.

Gross Sales of its NJOY King product were $92.9 million in 2013. That number plummets to $22.6 million in 2014. By 2015, the company was earning less $7.5 million, a more than 90 percent loss.

Sadly, it obvious that sales of NJOY’s disposable e-cigarette product began to fall off just when the industry started to see a seismic shift toward open systems. Go figure. Not to mention the increased competition within the cigalike sector from large tobacco companies with the introduction of products such as VUSE (R.J. Reynolds) and Mark-Ten (Altria).

The reason this is doubly sad for me is because just a couple of years ago, I thought they were the one. NJOY was the company that would fulfill the promise that vaping held. They were independent. They had the right backing, prominent lobbying efforts and were employing some of the most professional people in the industry; a winning combination.

From a market standpoint, they also had a large consumer base of vapers. But by 2014, NJOY’s customer base was ready to defect from the cigalike format to open systems. NJOY did get into open systems that year with the release of an ego-style kit with some basic juices for the c-store channel, as well as the Artist Collection, an artisanal line of e-juices for the vape shop channel. In a certain sense, they were the most diversified vaping company because they were able to play in all channels where vapor was sold.

Though they were sometimes suspected of being affiliated with Big Tobacco by less informed vapers, their credibility as a grand daddy vapor company opened many doors for them. So what happened? Was it a case of falling behind in technology as consumer preference shifted to open systems?

As I tried to answer this for myself, I thought of a line a college friend of mine would use to start conversations with girls he met at parties. He’d ask, “Would you rather fight seven 70-year-olds or 70 7-year-olds?” Now before you accuse me of child or geriatric abuse, remember, this was in the ’90s, when intellectuals on a liberal University of Wisconsin campus could ponder hypothetical scenarios asked to elicit a laugh because of the ridiculous nature of the scenarios and not be accused of being a horrible person. But I digress.

This ridiculous scenario is exactly the one that NJOY found itself in. Would they rather fight against the handful of cigalike brands backed by major tobacco companies or would they rather take on the hundreds of e-liquid manufacturers and the thousands of juice flavors that they offer?

If the choice is the cigalike route, you’re staying in a shrinking segment that may be less risky from a regulatory standpoint. However, you’re also competing with a limited set of brands who make very deliberate moves and have nearly unlimited funds.

In choosing the e-liquid manufacturers, you’re in a fast-growing segment. And as a single product, NJOY’s brand recognition could easily outperform individual brands head to head. However, taken collectively, the market is difficult to impact. Both hardware and liquid manufacturers innovated quickly and released new products at a rapid pace. Also, given the fractured nature of the market, each competitor will likely get only a small slice of the pie.

There is also the likelihood that NJOY’s financial structure was designed more toward hockey-stick-like growth of the cigalike market due to the anticipated rapid disruption of the analog cigarette market. When all of this started, no one thought that open systems would disrupt the disruptor.

Ultimately, not keeping up with technology and consumer demand may have been the undoing of NJOY. It was a company built to do battle with the combustible cigarette giants in a market that is slowing disappearing. Most of the growth in vapor over the past couple years has been in open systems, while the cigalike market has been in a decline.

I don’t believe that many vapers will mourn the loss of the NJOY King on store shelves, but from an industry perspective, we will likely mourn the loss of a leader. No other company has been better able to span market segments and reach all the “tribes” in vape. Especially at this moment of uncertainly, the void left by NJOY leaves me feeling a bit uneasy.