Electronic cigarettes are not profitable now – Here are the reasons

Free riders finally tailed at e-cigarettes.

They are active in promotional meetings, free trial platforms, and promotional Wechat groups. In the form of free experience, users can receive electronic cigarettes in batches. “Every brand of e-cigarettes is available when the drawer in my house is opened.” A free rider said.

Sales channel vendors also squabbles for electronic cigarettes.

Thousands-of-cigarette-brands war came, and the sales channel became the king now. Some channels raise the price at the transaction location, and some take advantage of the fire to rob. In the long chain of e-cigarettes industry, each participant are come for a share.

Although four to five times the rate of price increase is the prevailing practice in the industry, 80% of the sale price has been transferred to the sales channel through serveral layers of distribution in offline sales. The situation of online is not optimistic, too. Because traditional cigarettes are prohibited from selling online, the habit of purchasing electronic cigarettes online has not been formed, and the number of user reached is limited. At present, the focus of e-cig brand shop is still offline. In the process of competing for channels, some brands offer discounts below cost price to stimulate vicious competition.

There are electronic cigarette entrepreneurs criticizing, “C-end free riders get freebies, B-end agents get subsidies. I think if we go on like this, we will end up turning a very profitable industry into a non-profitable business.”

Tobacco is a trillion-level market. Electronic cigarettes are regarded as the next big outlet worth pursuing in the industry. Crossover influencers have entered electronic cigarette field, which makes people feel that this business is profitable.

How much money do e-cigarettes make? Why is a seemingly profitable industry turning into a losing business? Vape HK analyzes electronic cigarettes here for you.

True and False trillion Market

To see how much space there is in the electronic cigarette market, we might as well look at the stand of capital first.

In June 2018, RELX launched the first electronic cigarette war with an investment of 38 million yuan from IDG and Source Capital. A year has passed, and capital’s enthusiasm for the electronic cigarette has not diminished at all.

The special feature of electronic cigarette is that it belongs to electronic consumer goods in terms of product form and tobacco in terms of functional use. In the public perception, tobacco is a monopolistic and profitable industry.

In 2018, the total annual industrial and commercial tax and profit of China’s tobacco industry reached 1155.6 billion yuan, of which 1 trillion yuan was handed over to the state finance. This is an enormous volume, and the total national tax revenue was less than 14 trillion in that year. In addition, the number of smokers in China has exceeded 300 million, which will be potential users of electronic cigarettes.

So, how much market space does the electronic cigarette with the function of replacing cigarettes have?

According to the research data of Guosheng Securities, the global tobacco market is calculated at 770 billion US dollars, and the market size of electronic cigarette is 12 billion US dollars when the market penetration rate of electronic cigarette is 1.56%. When electronic cigarettes further encroach on the traditional tobacco industry, the penetration rate reaches 3%, the market size is 23.1 billion US dollars.

Specifically, if the total annual revenue of China National Tobacco Corporation is calculated at 1 trillion yuan, when the penetration rate of electronic cigarette market is 1%, the domestic market scale of electronic cigarette is 10 billion yuan. Many insiders told us that China’s electronic cigarette market is still in a very early stage. In the past long time, the penetration rate of domestic electronic cigarettes was less than 1%.

Penetration rate has become a key indicator to determine the size of vape market. On the other side of the ocean, the proportion has reached 13%. This means that there is at least more than 100 billion yuan of market increment space in China.

Zhao Yangbo, Vice President of Qichen Capital Investment, told us that the domestic pod vape market in 2019 had a market scale of at least 10 billion yuan. In the long run, this is at least a market of more than 100 billion yuan. He believes that the core users of electronic cigarettes are not old smokers, in fact, the proportion of young people is very high. In the future, traditional cigarettes can not completely eliminate electronic cigarettes, and electronic cigarettes can not completely replace cigarettes, which will be the coexistence of two types of products.

From 1% to 13%, a company with a market capitalization of 10 billion dollars is likely to emerge. In fact, JUUL, the U.S. electronic cigarette company, was valued at $38 billion in its acquisition at the end of last year. Less than four years after its establishment, the company’s market share in the United States grew from 2% in 2015 to 76% by the end of 2018.

This is an opportunity for Chinese players. Even if it is not a trillion scale, the goal of 100 billion is not far away.

In addition, according to the standards of consumer goods, electronic cigarettes have almost all the elements of a qualified fast consumer product: rigid demand, high frequency, repurchase, high turnover. Mobile phone industry is often used to analogize electronic cigarettes. Some e-cigarette entrepreneurs asked, “Since the mobile phone industry can be Internet-based, why can’t we use the Internet to fight off e-cigarettes?”

Therefore, a group of entrepreneurs from across the Internet, under the support of capital, plunged into the electronic cigarette industry. They are betting on the next real trillion market.

Sales channel that cannot e-cig brands bypass

The stereotype of traditional cigarette leaves electronic cigarettes labeled as profitable.

In terms of terminal price, the current market mainstream e-cigarette starter kit is usually sold at 299 yuan. Liu Huidong, the founder of an electronic cigarette brand in Shenzhen, revealed that most of the electronic cigarette brands are manufactured by OEM factories. The factory price of this kind of kit is about 60 yuan. Four to five times the rate of price increase is a common practice in the industry.

But even so, the profits that remain in the hands of e-cigarette brands are not much. In fact, the current domestic e-cigarette industry is still a little far from “windfall profits”.

Unlike tobacco, the traditional cigarette market is monopolized, eliminating industry competition, and the profit margin of products is huge. Where electronic cigarettes are located is a fully competitive market.

Liu Huidong introduced that under normal circumstances, an electronic cigarette with a market price of 299 yuan, the first-class dealer takes 120 yuan, the second-class dealer takes 150 yuan, and the third-class dealer 180 yuan. Layers of distribution, each link should “eat up” part of the profits. The profit margin between 120 yuan and 299 yuan was all given to the sales channel.

It’s still in the ideal state. In the process of brand competition, the actual price to distributors is lower, and the subsidies can be as low as 30% or even 20% discount, which leads to a significant reduction in the profits of brands. Some brands sell devices at a loss, trying to make money through the purchase of pods.

Sun Haiming, founder and CEO of POOLAN Electronic Cigarette, uses “235” to describe the profit sharing model of the electronic cigarette industry chain. “Brand profit 20%, trader profit 30%, terminal profit 50%. The domestic market, roughly so. This means that 80% of the profits of electronic cigarettes entering the circulation link are distributed to sales channels.

But at the current stage, brand companies can not bypass the channel and reach consumers directly through the online. “You don’t buy it, nobody buys your products,” Qiu Yiwu, founder and CEO of Wel, told. He found that direct sales to C-end users had little effect, and online traffic cost was high and conversion rate was low.

Channel has become the sword of electronic cigarette brand to occupy the market at the current stage, and occupies the main link of the pricing of electronic cigarette industry.

“The core of this business is terminal marketing. Now electronic cigarettes need terminal assistance in educating market.” Liu Huilin, co-founder of ESUN Electronic Cigarette, told.

Taking Wel vape as an example, Qiu Yiwu shifted the focus of the shop from online to offline, and opened the market through wide coverage of channels. He has laid out more than 100 distributors at all levels in wide 3C channel, and has covered more than 2000 Internet cafes. In addition, night clubs, convenience stores, digital markets and other channels are also the focus of his layout.

According to Yu Lei, general manager of HIMOP and Beijing HIMOP Company, “In the early years, Meituan did food delivery and Didi did taxi business, all of which depended on subsidies to burn cash to buy traffic.” The media advertising of electronic cigarettes is restricted. Brand companies can only transfer profits to sales channels in order to obtain traffic.

Some people in the electronic cigarette industry have made a financial calculation for the industry. In the case of fierce competition among brand companies, a set of electronic cigarettes with gross profit of 30 yuan should be sold at least 50,000 sets per month to cover after-sales, promotion, personnel and other costs and achieve a balance of profits and losses. However, “there are few brands that can sell 50,000 sets in a month.”

Who made the money?

High-quality sales channels become popular overnight. Are the “windfall profits” in the eyes of the public earned by sales channels?

Qiu Yiwu cited an example. He took his team to the mall to talk about a booth. When the other party heard that it was an electronic cigarette enterprise, he would bite the price dead and not let go at all. “They think e-cigarette companies are very rich, and if you don’t do it, other shops will rush to ask for it. Would you like it or not?” This makes Qiu Yiwu feel depressed and robbed.

Liu Huidong said that some e-commerce platforms have come to his door and invited him to advertise on this year’s Double Eleventh. “They said that this year the electronic cigarettes will play very fiercely. Anyway, the whole world feels that the electronic cigarette enterprises are super-rich.”

On the other hand, each brand is increasingly sabotaging each other. Liu Huidong disclosed that the form of sabotaging is generally, “first to find out, then to visit, and then to find people to lead, and finally to give more discounts, then start a price war”.

In the process of competing for sales channels, brand offer discounts below cost price to stimulate vicious competition.

When a brand gets financing, it cuts off all its profits and subsidizes its terminals. Users can buy two packs of pods then will get a free device, which will be renewed free of charge for half a year. But the high rate of return, coupled with high after-sales costs, makes the brand overwhelmed.

In the process of distribution, some brands introduce free distribution policy to agents, take goods for free, sell them and return the rest. This has brought about serious consequences. The products that can not be sold back are all turned into the inventory of brand companies, squeezing out cash flow and further turning into losses and liabilities. After-sales disputes caused by product quality problems make agents love but hate brand.

“Many companies may choose to offer free goods like sharing bicycles, but if the quality of products and sales rate fail to keep up, they will be like unmanned shelves, fail finally.” Qiu Yiwu said.

Some agents find out the routine, run to Shenzhen for OEM factories, quickly launch a brand of their own, and finally find that the product can not be sold, then they begin to low down prices, sell, lose money and clear the stock.

Qiu Yiwu said bitterly, “The e-cigarette industry looks very profitable, but the profits of each link are not as high as imagined. It may eventually become a less profitable industry. Anyway, now there is a craze, both upstream and downstream are earning the money of the e-cigarette brand.”

So, how’s life in sales channel?

According to Andy, Chief Operating Officer of Juemiao Electronic Cigarette, sale channels are also in crisis. He said that the acceptance of electronic cigarettes is not high enough in the four major retail outlets of electronic cigarettes: nightclubs, online game cafes, convenience stores and digital products stores. “In some second-tier cities, you may run to ten, five or six shops, but they will refuse you, and then two or three will tell you to think about it.”

The direct consequence of the failure to open the terminal market is that the goods taken by the channel merchants and agents can not be shipped, resulting in serious pressure.

Zhao Yang Bo said that the main task of most brands now is to distribute the products. But the problem is that distributing the products to the agent does not mean that the products can be sold. Though lowering profits and even losing money, a lot of goods are still left in the hands of agents. Agents often do not cash out, which leads to many brands burning their own cash flow.

A provincial general agent of FLOW said, “The agent is an old scalper, and the profit is very thin. We general agent is to be annoyed by the both ends, to inherit the brand and to undertake the agency. If you want your subordinate agent to play with you, you have to offer more profitd.

Agents and sales channel providers earn channel differentials, and there are several people who share money offline. Agents at all levels, terminals, and finally to the hands of consumers. If sales do not go up, then the profits in the channel will not be enlarged. This means that not only brands, but also every link of the channel is difficult to make money.

In addition, the professional free riders (People who love freebies and live on it) have been tailing at electronic cigarettes.

Qiu Yiwu found that for every e-cigarette campaign now, a large number of free rider party members will receive e-cigarette products through free trial and other forms. “These people are active on various trial platforms, and you will find that when many users open their drawers, almost all brands of e-cigarettes are available.”

How long will electronic cigarette fever last?

A seemingly profitable industry has been turned into a losing business. How long will the electronic cigarette fever that has just stepped onto the capital fastlane last?

Leakage is a headache for almost all e-cigarette brands at present. “A box of kits, four pods, two leak.” There is feedback from users of electronic cigarettes. And to ensure that the pod does not leak e-liquid, it even has begun to be part a product promotional point among some vape brands.

The problem is that the repurchase of pod is the key to the future profitability of e-cigarette brands. Liu Huidong revealed that the cost of a pod is several yuan, but the average price is more than 20 yuan, which is the highest profit margin.

But at present, there is no high-frequency repurchase in the market. According to Zhao Yangbo, there are three ways to break through the current electronic cigarette brand. One is to spend a lot of money on marketing, so that users can get the knowledge of the product through marketing; the other is to compress their profits to a very low level, or even lose money to seize the sales channel first; the third is to settle down to make products, through the quality of products of brand. But at present, the vast majority of brands take the second road.

Although Luo Yonghao, Zhu Xiaomu, Cai Yuedong and other Internet celebrities with their own traffic have increased the exposure of electronic cigarettes, and head brands such as FLOW, MOTI and Shanlan Laan have been put on a large scale investment in music festivals and other activities, the feedback from the domestic market is slow and lagged.

“The key is the sales quantity, if the quantity is not up, e-cigarettes to make money are empty talk.” In Yu Lei’s view, the core of e-cigarette profitability lies in sales. Sales are too low to cover costs and break-even.