The winds of change are blowing in the cigarette arena, and though in a superficial sense it looks like the usual big tobacco names such as Reynolds American, Inc. (NYSE:RAI) or Lorillard Inc. (NYSE:LO) are positioning to retain their dominance in the new era of cigarette smoking, in reality, it's a little name like American Heritage International Inc. (OTCBB:AHII) that could end up beating the big guys at their own game.
The new smoking battleground is electronic cigarettes, or e-cigs, for short. Last year could be considered a breakout year for e-cigs, with sales of them reaching a little over $1 billion. Citigroup expects sales of e-cigs to exceed $3 billion this year, however, suggesting the industry has yet to reach its critical mass.
No, it's barely a drop in the bucket compared to the $100 billion or so that traditional cigarettes made by Lorillard and Reynolds American see in sales every year, and through the heart of 2012, big tobacco largely dismissed e-cigs, expecting them to be little more than a cute niche, and not expecting electronic cigarette companies like NJOY or American Heritage International to grow into a real threat. What a difference a few months can make, however.
Seeing the writing on the wall, Lorillard Inc. acquired Blu Ecigs (the ones Jenny McCarthy is promoting) in April of 2012. Reynolds American is now wading waist-deep into e-cig waters, launching a nationwide rollout of its Vuse line of electronic cigarettes latte last ear... complete with television ads (the first time in decades cigarettes have been on TV ads, though Blu followed shortly after that). Altria Group Inc. (NYSE:MO) finally got into the game last August with its MarkTen brand... the last of the major U.S. big tobacco names to get into the electronic cigarette game. And, Imperial Tobacco Group PLC (OTCMKTS:ITYBY) is putting the finishing touches on its acquisition of Dragonlite International's e-cig division.
Point being, if there wasn't something game-changing about electronic cigarettes, every single traditional tobacco name wouldn't be getting into the game. The fact that big tobacco - not exactly a group of companies known for innovating or breaking ground or even taking risks - are pushing into the e-cig market speaks volumes about where they're going.
There's just one problem with companies like Altria Group and Reynolds American getting into the electronic cigarette business - for all their marketing know-how and distribution channel muscle, they're not very good at it. That's how a little company like NJOY still controls 40% of the United States electronic cigarette market. Even NJOY, however, may want to look over its shoulder, as nobody is truly entrenched yet. The competition coming on fast is the aforementioned American Heritage International, which brings something unique to the table.... two unique somethings, to be precise.
First, while most e-cigs are made in China, AHII makes its own electronic cigarettes in the United States, where it can control - and see - what goes into them. While there are no known manufacturing issues with Chinese-made electronic cigarettes yet, sourcing them from overseas leaves an enormous amount of opportunity for problems, the biggest of which is toxic ingredients.
Second, though an e-cig is an electronic device, that doesn't necessarily mean consumers want to walk around with what looks like a glowing ball-point pen sticking out of their mouth. American Heritage International e-cigs actually look and feel like traditional cigarettes, giving the company some serious marketing firepower. And, it seems to be an effective idea - AHII sold out of its first production run of electronic cigarettes within just a few weeks.
Bottom line? The e-cig industry hasn't quite made its first gel yet, but we're getting close to that point, and American Heritage International is rapidly but quietly working its way towards the front of the line. Investors who can take a step back and see the bigger picture may want to consider AHII before the gel completely firms up, if not as a long-term play in the electronic cigarette arena, then perhaps as an acquisition candidate as late-to-the-party big tobacco seeks ways to catch up quickly with a stand-out product.
For more on American Heritage, its investor presentation PDF offers the most insight. The corporate website can be found here.
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