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E-Cig Sales Rapidly Lose Steam

11/17/2015 | 05:34pm US/Eastern
By Tripp Mickle 

Sales of electronic cigarettes have fallen sharply in recent months, bringing an end to five years of triple-digit growth and making the much-touted category look more like a potential fad than real threat to Big Tobacco.

Growing dissatisfaction among customers, inventory backlogs, new state laws and rising safety concerns are expected to cut the rate of e-cigarette growth in half next year to 57% from its compound annual growth rate of 114% over the past five years, according to the research firm Euromonitor International. Because of the rapid sales declines, Euromonitor research analyst Eric Penicka said he is preparing to "pull back that forecast" even further.

The slowdown has been most noticeable among Big Tobacco's "cigalike" devices, which look like cigarettes. Sales of those fell 21% and volume dropped 11% during the 12-week period ended Oct. 31, marking the first quarterly decline in sales and volume, according to Nielsen data cited by Wells Fargo.

Reynolds American Inc., the nation's second-largest tobacco company behind Altria Group Inc., said in September that it would post $100 million in asset write-downs and exit charges to consolidate its e-cig manufacturing. In July, Reynolds told investors it would miss its goal of making its Vuse e-cigarette brand profitable in the second half of the year.

Sales of vaporizers--the bigger, refillable devices sold at independent vape shops--along with the liquid nicotine used to fill them, have decelerated in recent months, too. The segment is expected to grow just 51% next year, down from an estimated 126% this year and 455% from 2013 to 2014, according to Euromonitor.

"Consumers are disenchanted right now with these products," said Bonnie Herzog, an analyst with Wells Fargo who estimates the e-cigarette market totaled $2.5 billion last year. She said e-cigs need to mimic cigarettes or users won't switch. She added, "It's not that different from diet soda."

The current devices fail to deliver nicotine into the bloodstream as quickly as cigarettes and lack the same so-called "throat hit" that cigarettes offer. Many e-cigarette users have found them so disappointing that they have returned to cigarettes, Ms. Herzog said. The $100 billion U.S. tobacco industry estimates that cigarette volumes are down 0.5% so far this year, far better than the more typical recent declines of 3% to 4% annually.

Reynolds and Altria recently finished a national rollout of Vuse and MarkTen e-cigs to more than 100,000 stores. They offered promotions that gave consumers coupons for free starter kits or packets of cartridges for $1.

Delores DeMaria, a 31-year old stay-at home mother from Lake Wales, Fla., tried Reynolds's Vuse after getting a coupon. She said she choked the first time she used it but continues to take two puffs daily and credits it with cutting her daily cigarettes to two from six. She keeps smoking because cigarettes are easier to inhale than Vuse vapor, which is "so strong and so different that I'll start coughing."

Nick Pepper, a 31-year-old waiter in Providence, R.I., had a similar experience with the Blu e-cigarette brand owned by Imperial Tobacco Group PLC. He had to draw "really, really hard on it to get the vapor out." He's back to smoking a half pack of cigarettes a day.

Consumer feedback like that is leading retailers to reduce inventory. Some retailers like Texas grocer and tobacco-shop operator Brookshire Brothers Ltd. have begun requiring that suppliers guarantee that they would buy back products that don't sell.

David Woodley, executive vice president of sales and marketing at the convenience-store chain Sheetz Inc., said much of the e-cigarette categories' growth was sales to retailers--not customers. He added, "That is beginning to normalize and you are starting to see what the business looks like."

Many vape shops say they are seeing the slowdown. The shops aren't tracked by Nielsen, but vape shop owner Schell Hammel said the number of smokers--who often become new customers--visiting her store in McKinney, Texas, has dropped to about one a week from five a week last year--and 50 in 2013. She lobbies the state government on behalf of 110 vape shops across Texas--all of which she says are reporting sales declines this year.

Part of the problem is confusion about the devices' safety, she said. Most researchers have agreed that e-cigarettes are less harmful than traditional cigarettes because they don't combust and release carcinogens, but the long-term effects of e-cigarettes remain unknown. A January study in the New England Journal of Medicine found the devices can release cancer-causing formaldehyde.

New taxes on e-cigs in cities like Washington, D.C., are damping sales, as are new regulations, like measures passed this year in Indiana that require manufacturers to secure permits and list ingredients.

The industry also is awaiting final rules from the Food and Drug Administration, which could require federal approval for nearly all flavored liquid nicotine juices and e-cig devices.

"That's creating stagnation," said Dimitris Agrafiotis, chief operations officer at Mountain Oak Vapors, referring to the relative safety of his products when compared to cigarettes. "We have a big uphill battle if we can't accurately describe our product."

Write to Tripp Mickle at Tripp.Mickle@wsj.com

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