After the great change: who is the winner in the 100 billion e-cigarette market?
A Circular from the State Tobacco Monopoly Bureau and the State Administration of Market Regulation and Administration completely rewrites the pattern of China’s e-cigarette market.
1. Speculators are out
The notice, entitled “further protection of minors from electronic cigarettes”, was issued on November 1, 2019. Under the “urging” of the notice, several e-commerce platforms, including Tmall, Taobao, Jingdong and Pnduoduo, almost removed all e-cigarette products from the shelves in a week; while on Wechat, Weibo and other platforms, some e-cigarette brands were searched, and even the prompt “according to relevant laws and regulations and policies, the topic page is not displayed” appeared.
“For those who value online electronic cigarette first, it is equivalent to breaking one arm.” “RELX, for example, may not be able to maintain its position as the No. 1 seller in the market,” said a person in the industry
Just a month before the announcement, Wang Ying, founder of RELX, said in an interview with Tencent’s “deep net” column: “the proportion of online and offline (Sales) is about 1:2 and 1:3.” According to the data of Tmall and Jingdong platforms, RELX once occupied the first place of sales under the category of “electronic cigarettes”; from August to October, the sales volume in Tmall was about 120 million yuan.
In addition, what bothers the company is the handling of goods from e-commerce dealers and the transformation of more than 100 e-commerce teams.
For other e-cigarettes that are good at online marketing, the “urging enterprises or individuals to withdraw advertisements published through the Internet” in the “notice” is a huge blow. For example, vvild, the new brand, led by Luo Yonghao, has spent tens of millions of yuan to sign up with star Chen Guanxi as its spokesperson. It plans to focus on online marketing and attract more consumers by “rebellious spirit”. Just half an hour before the announcement, Luo also advertised on his microblog: announcing that vvild’s disposable vape A1 has opened its reservation in Tmall and Jingdong, and will be officially sold on November 11. The fat man who is good at marketing is also called the sad person among entrepreneurs by netizens.
For some small and medium-sized enterprises, disconnection is a life and death disaster. Production relies on “OEM + OEM” and sales relies on “online shop + Wechat business”, which is the basic operation mode of many e-cigarettes. “Many e-cigarette start-ups don’t have core technology and efficient production capacity. They are basically brand marketing.” Wei Zhe, chairman of Smoore investor Jiayu Fund, said.
Therefore, there has been a saying in the industry that “3-5 million yuan can build up an e-cigarette”. Speculators are also flocking to see this. We can find 170777 related enterprises by searching the keyword “e-cigarettes” in the industrial and commercial information query tool. According to the China Investment New Consumption observation, more than 10000 e-cigarette brands have been established in the past two months.
At an offline Salon of e-cigarettes, some investors asked why e-cigarettes didn’t start in the past few years. Instead, in recent years, a group of Internet practitioners have setting up the trend of e-cigarettes? Many experienced practitioners of e-cigarettes will attribute the reason to marketing, or the unskilled “Internet method” of traditional e-cigarette manufacturers.
After November 1, the Internet mode of e-cigarettes was ended.
2. Fierce offline battle
Authoritative data shows that at present, the number of people using e-cigarettes in China is about 10 million, while the proportion of people obtaining vapes online is about 45.4%. The network has been cut off, but the demand is still there, so the transformation of “half of the demand” has become the most important issue for e-cigarette enterprises.
The closure of online channels means higher customer acquisition costs, while slow cash flow and user growth will bring great pressure on new brands.
This is also a “heavy battle” for brands currently in the first rank of the market.
Before the announcement, Qiu Yiwu, the founder of Wel, once felt that “the sales channel fee is too expensive like being robbed”. After the online sales were stopped, the cost of offline channels was even higher, tens of millions or even hundreds of millions is not strange now.
But it’s the only way out and we have to fight.
According to the Beijing Business Daily, in July this year, RELX had more than 30000 offline stores; another e-cigarette head enterprise, SNOWPLUS, also arranged more than 20000 offline stores three months after the product went on the market. According to China Business News and other media reports, before and after the announcement, all kinds of offline stores of SNOWPLUS and Boulder have been around 100000.
“Because we first defined e-cigarettes as fast consumering goods, we opened up the national chain convenience store (CVS) channels, such as Sinopec’s Yijie, PetroChina’s Kunlun Hospitality, domestic Meiikea, foreign-funded company Rosen, etc.” Liu Chaohua, head of offline sales of SNOWPLUS, said.
Statistics from China Chain Operation Association (CCFA) show that by the end of 2018, the total number of CVS in China is 120000, which is a large export. And hundreds of thousands of grocery stores, as well as KTV, Internet cafes, nightclubs, are also the places where all brands of e-cigarettes must compete. SNOWPLUS even produces a NEON edition fluorescent product for the nightclub, which mainly focuses on the nightclub channel.
Liu Chaohua, 44, who has 22 years of experience in FMCG, previously served as the vice president of Wrigley Candy (China) sales and led an executive team of more than 10000 people, directly covering 1.3 million retail terminal stores in more than 200 cities across the country.
Similar to Liu Chaohua’s background, most of SNOWPLUS’s off-line sales leaders are senior people from such FMCG giants as Heineken, Budweiser InBev, Mars Wrigley, Jiaduobao and Unilever. At present, Liu Shuo, the head of SNOWPLUS market, has been responsible for the marketing of Budweiser, Heineken and other brands in Europe and the domestic Omni channel consumer marketing business. Before that, the national channel director and retail director of Boulder were Cheng Yuncai, former national channel general manager of Duowei mobile, and Duanfei, former retail business director of Oppo specialty store. Search the resume of Jiang long, the co-founder of RELX, and you’ll find that he has previous experience in FMCG industry.
More important than FMCG channel is to open stores – including direct stores and franchise stores of the brand itself. In this industry, “0 franchise fee” has always been a basic condition. In order to reduce the concerns brought by the storm to the partners, some brands even include “If e-cigarettes cannot be sold due to changes in national laws and regulations and policies, then you can return it” in the franchise contract. “This has increased the threshold of competition. Brands without strength dare not make such a commitment.” One industry person said.
The potential of offline channels is inevitable. It comes from a simple competition logic in this industry. The users of e-cigarettes and traditional tobacco consumers are partially overlapped. Whoever can send e-cigarettes to the places within the reach of these people will have the most effective competitiveness.
Wang Sheng, partner of Inno Angel Fund, mentioned on several occasions that the current situation of e-cigarette industry is that the agent factory is highly mature, and the core competitiveness of this market must be the competition for channels. As an early investor focusing on e-cigarettes, Inno Angel Fund invested in Shanlan Laan e-cigarettes in 2017.
Li oucheng, a partner of BOPAI capital, is also one of the earliest domestic investors focusing on e-cigarettes. He invested in Refined Salt Technology of e-cigarettes in 2016. In his opinion, at present, the channel cost of e-cigarette industry is still high. Most brands only require outlets to be covered and goods to be laid out, and do not consider sales rate, re purchase and after-sales.
Zhao Yangbo, vice president of Qichen Capital, has not only invested in the e-cigarette industry, but also personally worked on relevant projects. In an exclusive interview with Inspur New Consumption, he said that it is difficult to have real differentiated channels for domestic consumer goods, so the core is to make differentiation on products.
Boulder partner and CMO Fang Hui also believe that after this round of reshuffle, 3-5 national brands and 10 regional brands will remain in the e-cigarette market in the future. In addition to channels, the core competitiveness that survives in this knockout competition must be the substantial improvement of product technology.
3. Products are king
Products determine the lifeblood. In the eyes of the old electronic cigarette veterans, this kind of saying is right at the center of the bull’s eye.
The rapid transformation of e-cigarettes from mod vape market to pod vape market is due to the improvement of Juul’s products from nicotine oil to nicotine salt. Different from other emerging industries, the upstream manufacturer system of China’s e-cigarette industry is very mature and strong. At present, no e-cigarette brand has been successfully listed, but there are nearly ten manufacturers related to e-cigarette in the A-share market and the new third board market.
At the same time, it also said that if an e-cigarette brand does not have its own core technology, it will be replaced by a stronger brand at any time, and the loyalty of users and channels can not be talked about.
Xing Chenyue, who left from Juul, wants to avoid teenagers through the ongoing “nicotine X” technology and gain the favor of mature smokers. Boulder hopes that its entire industrial chain system will create a barrier for at least half a year, so that its peers will not catch up.
In August this year, SNOWPLUS launched two new products, one is the “night magic NEON” edition, which focuses on nightclubs; the other is Smokeless Edition, which tries to make smokers and non-smokers get along harmoniously. At the end of November, a pod system Lite, which costs 79.9 yuan, will be launched on a large scale. This new product is known as the spoiler. “The reason for doing all this is to create their own unique product attributes and win the unique user group.” Said a product owner of SNOWPLUS.
It’s bound to be a long-distance race track to be the king of products. Capital investment, technical strength, product team and precise grasp of user needs are indispensable.
At the recent e-cigarette exhibition in Shanghai, Li oucheng mentioned that the whole industry will start to vertically integrate and merge, and brands will choose the upstream and downstream of the industrial chain rather than horizontal integration. Judging from the trend of top brands in the industry, this conclusion has been proved.
The exclusive Laboratory of RELX and Smoore has appeared in October this year, while the laboratory of SNOWPLUS, which is more than 4000 square meters and established according to CNAS standard, will be put into use in the first half of next year. According to media reports, the two e-cigarette brands have invested more than 20 million yuan in the laboratory.
“In addition to project cooperation with domestic universities and scientific research institutes, our laboratory is equipped with large-scale precision analytical instruments such as inductively coupled plasma mass spectrometer (ICP-MS), gas chromatography-mass spectrometer (GC-MS), ultra high performance liquid chromatography (UPLC).” Said Mo Zhiwen, technical director of SNOWPLUS electronic cigarette.
As an import of consumer goods, the safety of e-cigarettes has always been the Achilles heel of the industry, which has been controversial. According to Mo Zhiwen, SNOWPLUS is committed to using the industry’s most stringent standards for e-liquid enterprises to ease consumer concerns. Each factory produced electronic cigarette will undergo 13 quality analyses, including atomization liquid total composition analysis, flue gas total composition analysis, release stability analysis, and 12 safety tests, including carbon based compounds, heavy metals test, and flue gas cell test. All the crude oil put into use will be put into production line only after passing the three tests of crude oil manufacturer, SNOWPLUS laboratory and vape juice filling factory. At the same time, a traceable mechanism will be established for each batch of e-liquid, and all e-liquid samples will be kept in the laboratory for 2 years.
In November this year, Xuewu Technology(Snow Fog Technology), the parent company of SNOWPLUS, was introduced into Guangming District of Shenzhen as a key industrial project. “This cooperation focuses on the technological innovation of SNOWPLUS as the first tier brand of e-cigarettes.” “At the same time, SNOWPLUS has always put youth protection above business, and we also care about corporate social responsibility,” said a person from Guangming district.
4. Giant waits for opportunity
According to Wang Chunrong, founder of Vdfun, who has been in business for ten years, the test brought by regulation to the industry can only be regarded as a “small thing”. Referring to the development history of e-cigarettes in the United States, the United States banned all sales channels of e-cigarettes directly 10 years ago, but now the United States has become the largest e-cigarette market in the world. This incident is just a pain in the process of industry development.
What’s more, only electronic cigarettes have rules to follow, can the industry develop on a large scale. Take the U.S. market as an example. After the FDA “certified” e-cigarettes, the annual performance has doubled. Although nearly 2 billion yuan has already flowed into the e-cigarette industry in China, the real tycoon is still waiting and worrying about the uncertainty brought by regulation.
For the judgment of policy, there are two voices in the market: first, e-cigarettes will be classified into traditional tobacco management; second, regulation according to special electronic products.
“However, according to this announcement, e-cigarettes are still defined as’ supplements to tobacco products’, rather than ‘special tobacco products’ or’ new tobacco products’, which shows that the competent authorities have taken this into consideration.” A person close to the Tobacco Monopoly Bureau said.
After this pain, the industry will enter a relatively short period of stability, the person said. Because in the period from this announcement to the issuance of real regulatory policies in the future, no similar “announcement” will appear. What the e-cigarette enterprises have to do is to implement the offline minors protection to the end. “Only when the values are correct can we go further.”.
Another noteworthy phenomenon is the focus of China Tobacco Group on electronic cigarettes. According to statistics of data research department of China investment, China Tobacco Group has invested 57 tobacco subsidiaries and upstream and downstream companies, with an investment amount of 77.3 billion yuan. Among them, Yunnan, Sichuan, Hunan, Guangdong, Hubei, Guizhou, Shandong, Anhui, Heilongjiang and other local Chinese tobacco enterprises have promoted the research, development, production and sales of Heat not Burn tobacco products (similar to IQOS) to varying degrees. However, at present, the electronic cigarette products of each subsidiary of China tobacco have not reached the level of mass production, most of which are completed in cooperation with other companies.
At the Shanghai e-cigarette exhibition, which ended at the end of October, Zhongxin obtained a e-liquid vape kit produced by China Tobacco Hubei. Besides HNB products, China Tobacco will also be involved in vaporizers.
As a rigid, high-frequency and addictive product, the market of electronic cigarette is huge. As the fastest growing e-cigarette market in the world, the penetration rate of China’s e-cigarette market is only 0.6%. In many aspects, we can refer to the changes in the electronic cigarette market in the United States. However, because traditional tobacco is monopolized in China, the development of e-cigarettes should be combined with China’s national conditions.
Today’s latest news is that the future development trend of new domestic tobacco is more optimistic – it is expected that the vapes will not be included in the monopoly jurisdiction.
According to the analysis of Tianfeng securities team after investigating the experts in the industry: from the perspective of upstream production, the State Administration will not “monopolize” the vapes, but only restrict and govern some raw materials, such as imposing ad valorem tax on the production of nicotine salt or nicotine containing e-liquid, and the tax rate is expected to be about 20-30%. At the same time, we will issue the qualification certificate of qualified supplier to the manufacturer of vape juice. From the perspective of the downstream sales channels, online sales are still closed, and offline regulation focuses on youth prevention and control. It is expected that offline sales channels may be shared with traditional cigarettes in the future.
For the major e-cigarette brands that are still exploring the way to break the situation, this analysis from the securities companies can be said to be an optimistic estimate of the future. Whether it’s the laying of offline channels or the polishing of products, or the endorsement of state-owned assets or China Tobacco brands, it’s to win the trust of users. At that time, the whole pattern of electronic cigarette industry will be truly reshaped.