The Food and Drug Administration (FDA) is attempting to phase out one of the largest and most popular electronic cigarettes, paving the way for its competitor to become the unassailable leader in smoking alternatives.
Although regulators appeared to deal Juul Labs a deathblow by denying its marketing application for the Juul device and requiring it to remove all of its products from store shelves, Juul received a temporary stay from an appeals court, which stayed the order until it passed the The main thing is to be able to decide.
Juul is partially owned by the tobacco giant altria (MO 2.09%), which acquired a 34% stake in the vape maker for $12.8 billion in 2018. If Juul fails to convince a court that the FDA’s decision is “arbitrary, erratic and lacking in substantive evidence,” as it alleges in its filing with the U.S. Court of Appeals for the DC Circuit, it will be a knockout blow to that its what was once the dominant e-cigarette that can ultimately lead to bankruptcy.
It would be an inglorious end for this one-time high achiever whose fortune faltered when it came under scrutiny over teen vaping, but one that would open the gates for Altria rivals British-American Tobacco (BTI 3.34%) to practically dominate the market with its e-cigarette Vuse.
Image source: Getty Images.
Hail to the new king
Juul was the undisputed leader in vaping with a market share of nearly 80%, but the FDA bashed the company for its design, marketing, and ingredients, which reportedly prompted teenagers to take up vaping.
The agency cracked down on the e-cigarette industry, including retailers, by targeting illegal sales to minors. The FDA also banned all flavored e-cigarettes, despite their popularity among adults, because teens liked them too.
Juul responded with a $30 million marketing campaign against teen vaping and supported raising the legal age to purchase tobacco, but the drumbeat of negative press surrounding the device took a toll on sales. Juul’s market share was dwindling, and Vuse surpassed Juul for the first time earlier this year.
Image source: Juul Labs.
The latest Nielsen data puts Vuse’s share at 35.1% compared to 33.1% for Juul. Third-placed NJOY lags far behind the front-runners with a comparatively tiny share of 3.1%. While NJOY and other e-cig makers will no doubt pick up a few Juul users after the device is banned, it’s British-American brand Vuse that will almost certainly be crowned the indomitable king of e-cigs.
Defeat all comers
British American Tobacco is on the road to success. Last year, it obtained a corresponding decision from the US International Trade Commission Phillip Morris International‘s (PM 1.80%) IQOS tobacco heating device infringed on its patents and this device was not allowed to be imported into and sold in the United States
Altria had partnered with Philip Morris, the global leader in e-cigarettes, to market and distribute IQOS in the United States. It had already launched it in three states and planned to roll out the device statewide by late last year, but the ITC ruling put the kibosh on those plans.
Having also previously shelved its own vape brand, MarkTen, in favor of a collaboration with Philip Morris, Altria is the only major tobacco company that can’t sell its own vape device, and the FDA has pretty much wiped out the rest of its Investing in Jul. At the end of the first quarter, Altria reduced the fair value of its Juul position to just $1.6 billion.
If the FDA manages to kill Juul, British American Tobacco will have essentially no obstacles on its way to market dominance.
A profitable venture
Vuse became profitable in the US for British American in the second half of last year and has been able to increase its share as it discounts the device and consumables to attract users. Earlier this month it said it was now ready to raise prices for both, which should give the tobacco stock a big boost to earnings as a key competitor was pulled from the market.
Vapor sales rose 59% last year to £927 million, while its own heated tobacco products, marketed under the glo brand, saw sales rise 46% to £853 million. While British American still derives 85% of its sales from cigarettes and other combustible products, the alternative smoking segment is its fastest growing business.
Now that the FDA has crowned it the king of electronic cigarettes, look to vapor and heated tobacco sales to carve out a deep competitive moat that few competitors can cross.