UK consumers are under pressure. Today, 59% of consumers have switched to cheaper grocery brands and 25% claim they have no spare cash. Inevitably, these economic imperatives also effect how people purchase tobacco. Sales of traditional cigarettes are in decline. While 20% of the population today smokes, this percentage is decreasing over time. And, according to a recent Nielsen survey of 150,000 Homescan families, 17% of those that are smokers today claim they want to cut down (up from 11% in 2010 - check figure).
For manufacturers, increased legislation has also brought it’s own set of challenges. In the wake of 2012’s display ban, building brand awareness is now more difficult. Downtrading is also driving increased rationalisation of product lines.
While the UK tobacco industry continues to struggle, the embryonic e-cigarette market has made a small but significant impact in the UK. The pace of growth is already outstripping that of the US. Why? We believe much of early e-cigarette success in the UK has to do with timing. While e-cigarette products have been in the US market for some time, the initial product quality was low, as was the take-up. However, following continued investment, the products that have entered the UK market are more developed. They have also come at a time when consumers are looking for ways to save money. A good experience at a cheaper price point means UK consumers are responding.
Under 24’s lead e-cigarette take-up
From the Nielsen Homescan panel we know that the largest proportion of e-cigarete users in the UK are the under-24’s. The other interesting thing we found from our research is that e-cigarettes are largely more acceptable than other forms of nicotine replacement therapies. Today’s younger generation generally don’t think that there’s any difference between going for a caffeine break and having an e-cigarette nicotine break.
The other interesting thing to look at is how and why people are using e-cigarettes. We conducted a smartphone survey of 330 users of e-cigarettes. Of all of the people who have tried e-cigarettes, 86% are existing smokers (72% smoke every day and a further 14% smoke occasionally). 14% of those that have used e-cigarettes however actually say that they used to smoke but that they’ve stopped. This suggests that there’s a group of people who are not using e-cigarettes to complement an existing habit. While they don’t want to smoke a traditional cigarette, they are using e-cigarettes as it is considered an alternative and more acceptable way to get nicotine into the system.
E-cigarettes – perceived benefits and high repeat potential
When asked what the perceived benefits of e-cigarettes are the responses varied widely. 79% see e-cigarettes as an alternative to smoking, 62% say they don’t make me smell, 58% feel it is a route to reduce intake, 57% use them for harm reduction (either passive or personal), 48% use instead of patches, 32% for convenience, and 26% choose e-cigarettes for price. The fact that there are many varied reasons for e-cigarette use partly contributes to why growth in the UK has been strong as it appeals to different people on many different levels.
The other surprise is that when asked if they would consider buying e-cigarettes again, 91% responded yes. This is extremely high compared to other similar categories. It is also testament that the quality of the experience has increased.
Product design and packaging
For manufacturers, product design and packaging will be key. We know that gadget refill sales are slower than disposables in year one, but stronger in year two. That means that just because we see disposables selling the most at the moment this is potentially deceiving and not where the majority of money should actually be invested.
Communication to consumers around what the product actually does however is difficult. Manufacturers have to be very careful how e-cigarettes are launched to consumers; the message has to be made as simple as possible.
Gadget penetration itself grew steadily through year two. Manufacturers must continue to make sure distribution is out there in stores and continue marketing to make sure penetration continues through year two as well.
Interestingly, the price for the gadget relates very strongly to the loyalty of the refill. If the price of the gadget is low, loyalty will also likely be low. Avoid over promotion as this could result in a lack of consumer loyalty. Equally, refills also shouldn’t be priced too low. Based on studies, the optimum for refill pricing is about 30% less than the gadget itself.
What’s driving growth?
The majority of market growth today relates to distribution. However there are still large distribution opportunities to grow this market. Many retailers have significant distribution gaps to close. The impulse channel has about 30% of distribution at the moment and that will increase over time, which will in itself boost the sales of e-cigarettes. Chemists also only make up about 20% and that has only just started in some of the major chemist chains.
The biggest channel to market though is online. Today, 50% of all retail sales occur from online shops. For manufacturers, online presence will be critical to success, with the majority of consumers (35%) looking for information via an online search engine, followed by an e-cigarette site.
What’s the opportunity?
It’s clear from our research that e-cigarettes are much more than just a new nicotine replacement therapy format with consumers stating many different reasons for choosing to take up e-cigarettes. Debate will continue over holder refill versus disposable, but our insight strongly suggests that the holder refill will become the more valuable franchise in the end. Exploiting online channels will also continue to be crucial to success.
So, with a market currently standing at £100 million, what will success look like going forward? Based on our findings to date, and taking into account distribution gaps that we have to close and the growth in sales per store, we believe the market will be worth £340 million by 2015. Bearing in mind that this value will be just below 3% of the factory made cigarette sales, the e-cigarette market will be a very significant industry indeed.