By Jilian Mincer
(Reuters) - Lorillard Inc. on Wednesday reported significant declines in its electronic cigarettes sales, raising questions about the strength of the nascent market.
The 3rd largest U.S. tobacco company owns industry leader blu eCig, which once had 47 percent of the U.S. market share. Sales of its electronic devices dropped 35 percent to $37 million for the second quarter ended June 30, 2014 compared to $57 million for the same period last year. Its retail share fell 1.1 percentage point to 40.9 percent.
Lorillard blamed much of the decline on greater competition from rivals Altria Group Inc and Reynolds American Inc, which are rolling out this summer their own e-cigarettes brands - Vuse and MarkTen - nationwide. Until now, they've only been available in two states.
But industry analysts are concerned that consumers are shifting from the smaller e-cigarettes to so-called tank devices, which typically are larger and have longer-lasting stronger batteries and a puff that is more similar to a combustible cigarette. The tanks also can be customized with thousands of different flavors ranging from bacon to bubble gum.
"The eCig category possesses none of the wide moat characteristics of cigarettes, and we are concerned that today's market leader could be usurped by one of the emerging technologies," said Morningstar analyst Philip Gorham.
E-cigarettes are slim, reusable, metal tube devices containing nicotine-laced liquids that come in exotic flavors. When users puff, the nicotine is heated and released as a vapor containing no tar, unlike conventional cigarettes smoke.
After initially soaring, e-cig sales declined 12.9 percent in the period ending July 5 because of pricing declines and slower sales, according to Bonnie Herzog, a senior analyst at Wells Fargo, who estimates that the entire vapor market is about $2.5 billion. She said the sales decline is more reflective of "a move to vapors-tanks" and expects the industry to keep growing.
Gorham said he is confident that one or more of the new technologies will emerge but "What I don’t know is which technology will win out, and that is why I question the wisdom in buying the market leader at such an early stage. Why pay up for something with no guarantee of success?"
Earlier this month Imperial Tobacco Group Plc agreed to buy a group of brands from Reynolds and Lorillard as part of their merger, including the blu e-cigarette unit.
E-cigarettes are consider crucial business for big tobacco companies, which have bought or developed their own brands in recent years to offset shrinking sales of conventional tobacco cigarettes.
"It’s a new technology. People are experimenting," said Gorham. "Think VHS-Betamax in the 1980s. You wouldn’t have done very well from buying Betamax, but you wouldn’t have known it at the time because people were buying the Betamax technology."
Lorillard was down about 1 percent in mid-day trading.
(Reporting By Jilian Mincer; editing by Andrew Hay)