Roebling Research, in conjunction with VAPE Magazine and the Wingle Group, recently compiled some numbers on the evolution of vape shops. Their findings are found here and below:
When vape shops first started appearing just a few years ago, they seemed more likely single-door passion projects opened by vapers wanting to turn a hobby into a living. But the channel is maturing quickly. Today, many of these passion projects look more like budding empires. Take Avail Vapor of Chesterfield County, Virginia for instance. This operator of retail stores has grown to 45 locations in under two years with plans to add more. In addition to manufacturing their private label juice in a 4,000 square foot pharmaceutical-grade production facility, Avail also distributes e-juice to other vape shops.
According to estimates from Wells Fargo, the e-cigarette market is expected to grow to $3.5B this year with the Vapor-Tanks-Mods (VTM) segment expected to account for $2B. Cig-a-likes, which only a few years ago dominated the market, are supposed to account for the remaining $1.5B.
The growth of the VTM sector is due in large part to the fact that vape shops are opening in communities across the country. Claims vary as to how many vape shops there are but we estimate that between 6,000 and 8,000 stores operate in the U.S. At an expected $1.2B in retail sales for 2015, the vape shop channel is the largest in the VTM segment. But beyond the numbers, vape shops have nurtured the growth of the market one vapor at a time. Vape shops know that consumers new to the practice require handholding when it comes to selecting the right gear and using a personal vaporizer for the first time. As well, vape shops offer a sense of community to smokers trying to quit. This personal attention is a key driver of the channel’s growth. Indeed, convenience stores and other traditional tobacco retailers have acknowledged that they have trouble competing with this high-touch service.
Despite the increasing focus from all industry stakeholders on vape shops, we have found very little data available on their activity. So from January to April of this year, Roebling Research conducted a study to gain insight into the channel. Our findings show signs of maturing businesses with many increasing in operating experience, number of locations, and developing sales through the online and brick-and-mortar channels. However we have also identified sources of risk. Most stores in our study manufacture their own juice. Small e-juice manufacturers, including vape shops, will likely have trouble dealing with regulatory requirements from the Food and Drug Administration and may have to cease production. If stores are heavily dependent on revenue from their private label e-juice, regulation may have a negative impact on the channel as a whole.
From January to April of 2015, Roebling Research, in conjunction with VAPE Magazine and Wingle Consulting Group, conducted a survey of U.S. vape shops to gather basic business metrics.
For the purposes of our study, we wanted to capture results from “pure” vape shops meaning the vast majority of their sales come from the sale of open system devices, accessories, and e-juice. As well, we screened for business names that alluded to vaping or e-juice; indicating the focus of their business was on vaping products. Only one of our respondents sold any tobacco products. Our study was comprised of results from 44 vape businesses.
Length of Operation and Proliferation of Vape Chains
The vape shop channel is relatively new and our data on length of operation reflects that. 86% of businesses surveyed were less than two years old and almost half were less than a year old. These proportions reflect the rapid expansion of the channel in the past two years. However, we expect that local regulation will slow growth in number of vape store retailers in some areas. In particular, local governments may discourage the opening of vape shops by imposing zoning laws, licensing laws, and hefty taxes.
Though the vast majority of businesses in our survey were single-location businesses, about half of locations (46%) accounted for in our survey were part of a multi-store chain. As the channel matures, we expect vape chains to grow in number of locations and as a proportion of the channel. Presumably, chains benefit from branding and the other advantages of larger scale (lower per unit cost, proven management, etc.). For brands, finding ways to reach these chains would be vital.
Multiple Lines of Business
Vape retail businesses have expanded in scale but they have also grown their businesses by adding lines of business. Our survey shows that shops are also manufacturing, distributing, and selling goods online. In a regulated environment, specific authorization from state and federal authorizes would be needed to perform all three functions. We expect that as regulation is introduced, vape retail businesses will disaggregate in terms of function.
E-juice Manufacturing and Distributing
In its infancy, the VTM market’s value was predicated on devices. Bigger batteries meant more power and more vapor. Over time, however, juice flavor became a major component of consumer satisfaction. As juices evolved, small U.S. brands came on the market to compete with Chinese e-liquids. Branding and unique flavoring created great perceived value, allowing brands to charge higher prices.
Thus it is no surprise that vape stores are selling private label e-juice. 68% of businesses surveyed manufacture and sell private label e-juice. Because e-juice ingredients (propylene glycol and / or vegetable glycerin, flavoring, and nicotine) are relatively inexpensive, this can be a high margin product for the manufacturers / retailers.
Private label brand owners should be concerned about impending FDA regulation and the effect that it will have on their business. Industry experts expect that many smaller brands, including private label, will be unable to comply with per SKU cost of regulation. Thus, if vape retailers are dependent on private label juice for a large portion of their profit, their businesses may be jeopardized by regulation.
According to estimates from Wells Fargo, the online channel in the VTM sector is expected to grow 25% this year. Our survey shows that vape shops are taking advantage of this growth by selling their products online. For vape shops that produce private label juice, online sales is a way to market to consumers who are outside of their geographic region. As well, many vapors shop online and in brick-and-mortar shops so having the virtual store front is way to capture more spend.
The vast majority of retailers in our survey expected their revenues to increase this year as compared to 2014. Despite the challenges that the industry faces, these results reflect a confidence in the future of vaping from those who have driven growth in the industry to date. Vape shops are important nerve centers in the vape landscape. Studying this channel is also important because these retailers are market makers that have kept vaping alive and flourishing in the U.S. market.
Roebling Research is currently recruiting vape shop retailers to participate in studies. Those who participate are eligible for honorariums, contests, and free market research. Go to http://roeblingresearch.com/vape-shop-panel/ for more details.