As feds meddle, players bet on vaping’s future
Kure hopes to become a national brand in vaping, and offers free WiFi, snacks, ergonomic seating and a pleasant ambiance.
Add e-cigs and vaping to the same category—including butter, salt, cell phones and red wine—of things that are either really good or really bad for public health. Although there are studies on either side, and anecdotal stories of exploding batteries or disgusting “cauliflower lungs” as part of the mix, the latest major study points back to the original thinking that electronic smoking is less harmful than cigarettes and successful in moving smokers away from tobacco.
Public Health England recently concluded that e-cigarettes are approximately 95 percent less harmful than smoking, and added there is no evidence e-cigarettes are the smoking gateway some have claimed.
That’s the good news. Clamping down on a decade-old industry that operated in a regulatory gray area, this spring the U.S. Food and Drug Administration announced it will begin regulating the manufacturing and sales of so-called “electronic nicotine delivery systems” in the same way as traditional tobacco products. Some industry watchers predict this move will decimate the mom-and-pop e-cig and vape shops while also turning over this still-nascent industry to Big Tobacco.
By requiring costly new testing that will likely be insurmountable for small producers, the e-cig and vaping industries are preparing for unprecedented FDA upheaval that appears to favor larger, more established, multi-unit players in an industry that Wells Fargo estimates is generating more than $2.5 billion in annual sales in the U.S.
The Starbucks of vaping?
Before diving deeper, it’s important to understand some basic terminology. The difference between e-cigs and vaping is fairly straightforward: E-cigs look like old-school cigarettes and work by heating a nicotine-infused liquid to produce the telltale cloud of vapor. Vaping “pens” are larger and hold more liquid that is heated more gradually to produce even more “smoke” than first-generation e-cigs. Some have likened it to the difference between a Bic and a fancier, larger fountain pen.
Marty Sumichrast is chairman of Kure Corp., with 34 units.
Because mixing a proprietary liquid is relatively easy—with infinite combinations of flavors, tastes and nicotine strengths—individual shops have flourished during the last decade. Drive through any commercial district and you’ll see shops offering startup kits, unique flavors and funky lounges where vape-ers can hang out in comfort and camaraderie.
As the industry matures, some shops have traded tiny strip center storefronts for larger, much fancier environments designed to be classier, welcoming and much more luxurious. At the same time, large cigarette makers have gotten into the action, with Reynolds, Altria and Imperial Tobacco buying e-cig and vaping brands.
Marty Sumichrast, chairman of Kure Corp., said his company operates on a larger scale with upscale storefronts and nationwide name recognition on its quest to become the “Starbucks of vapes. This industry is totally fragmented, and we see that as a huge opportunity,” he said. “The vape store business is going to increase and demand is going to increase, but there’s no national brand out there—so we set out to create a retail concept that was above and beyond anything that was out there.”
Kure stores offer free WiFi, snacks, ergonomic seating and a pleasant ambiance. Its “Race to Zero” campaign seeks to gradually move its customers to lower levels of nicotine—eventually getting them hooked on a no-nicotine juice that it sees as a healthier move. Its locations are designed to appeal to a range of customers, and the Charlotte, North Carolina-based chain has 34 units along the East Coast, with pending deals in five other states.
Sumichrast sees the new FDA regulations as inevitable, but also part of large tobacco companies grabbing a portion of the less harmful industry as traditional smoking rates fall.
“This probably in a lot of ways was a necessary step in the industry and we saw it coming from when we first got involved,” he said, before suggesting Big Tobacco is behind the new federal regulations. “My feeling is that we kind of all know who is driving this thing.”
In June, Kure announced a new CEO, Jonathan Benjamin, and a $4.7 million financing package to fund its continued expansion primarily through franchising.
Chip Paul, CEO of Palm Beach Vapors, is up to 19 units.
Sumichrast likens the coming shift in the vaping biz to the hardware store business when Home Depot and Lowe’s hit the scene and drove out many of the smaller, long-time neighborhood fixtures. As uncertainty increases, Sumichrast said the company is focused on attracting sophisticated franchisees who understand the risks involved in order to “make a great return on your investment.”
Beachy vape vibes
Chip Paul, CEO of Palm Beach Vapors, is up to 19 units with the concept he and his wife, Cynthia, started in 2013. The Owasso, Oklahoma-based concept claims to be “paving the way toward a healthier way of life.”
After growing throughout Oklahoma, Florida, Texas, California, Indiana, Missouri, Alabama and Mississippi, Paul says the industry as a whole has slowed down in anticipation of the FDA’s recent ruling.
“That’s been hanging over our heads for two years—almost the entire time we’ve been in business,” he said. “The big money and big investment in the vapor industry has not happened yet … so that presents good opportunities for bigger investors, and we feel that will bubble down to us and people who are interested in continuing to develop this industry.”
Even while Paul regrets the impact these new rules will have on the overall industry, he asserts this will likely be good for Palm Beach Vapors. The new juice testing, he estimates, will result in skyrocketing juice costs that could result in a five- or six-times advantage for his company over smaller independent stores.
“At one time it was hardware margins, but now it’s almost all juice margins—that’s going to go away,” he said. “Those nice margins go away on the juice side and the mom and pops won’t be able to make it.”
While Palm Beach is not currently cash flow positive, Paul said the company is very close and still looking to expand now that uncertainty has been replaced with higher industrywide costs. He views the company’s best opportunities to be “the 42-year-old soccer mom who pulls up in her minivan” rather than younger guys coming in and “blowing giant clouds.”
Its stores and sales approach are designed to be gender neutral, themed around promoting a healthier lifestyle and reminiscent of a relaxing, beachside experience.
Diversifying its offerings, Palm Beach recently launched a line of GnuPharma herbal supplements that includes capsule-based herbal supplements and vape-able liquids largely based on food. What the company calls “the industry’s first nutraceutical” options contain active ingredients like horseradish, onion and licorice, and are claimed to be less harmful than other liquids on the market.
Its herbal nicotine replacement that it is about to start selling, he feels, could become a major differentiator for the Palm Beach system as it focuses on moving its customers off of their nicotine addictions.
Calling the industry’s liquid solutions “as safe as it can possibly be,” Paul says a lot of the negative press e-cigs and vaping receive is the result of big players demonizing the little guys.
“It’s a pattern that exists because we’re threatening,” he added. “Ten years ago, 24 percent of the U.S. population smoked and now it’s 15—where do you think those people went?”