How Altria and Juul Can Benefit From China’s Ban on Online E-Cig Sales

The electronic cigarette industry experienced tremendous growth in 2019, until the outbreak of a lung illness tied to vaping caused sales to crater. Where industry researchers at ECigIntelligence had previously estimated global e-cig growth of 14% between 2019 and 2020, it now sees the market being flat at $14.4 billion and the U.S. bearing the brunt, with the e-cig market contracting 13% year over year.

Although e-cigs still have the potential to positively affect the health of smokers worldwide, regulatory actions like last month’s ban on online sales and marketing of all electronic cigarettes in China mean access to these devices will be increasingly limited.

Coupled with health scares like those seen in the U.S., it’s clear why the industry may have a hard time bouncing back.

Juul stopped making flavored pods for its electronic cigarettes after a global backlash against it over rising teen use. Image source: Juul Labs.

Losing its luster

Juul Labs is going to be the hardest hit since it is the leading e-cig in the U.S., which is also the world’s biggest e-cig market. But the Asia-Pacific region is seen as the fastest growing and potentially the most lucrative since it is also the largest tobacco market.

While global growth for Juul remains important, it is now hunkering down after coming under attack by governments everywhere for contributing to teen use of e-cigs. It recently announced it was firing 650 employees, scaling back its expansion plans, and cutting some $1 billion in marketing and lobbying expenses.

Juul has also stopped making flavored pods for its e-cig and announced it would also end production of mint-flavored pods. Pods are the nicotine-infused e-liquid cartridges that are heated to create a vapor.

No longer the crown jewel

This isn’t working out quite as Altria (NYSE: MO) expected when it invested $12.8 billion in Juul last year. At the time, the e-cig maker was growing exponentially and sucking up all the available market share, eventually accumulating three quarters of all sales in the industry.

Yet that growth also attracted the attention and ire of regulators, who accused of it luring teenagers to vaping. As scrutiny mounted and investigations were launched, Altria was forced to write off $4.5 billion from the value of its investment. It subsequently ousted Juul’s CEO and tasked several executives from the tobacco giant to take control of the suddenly careening company.

While the Chinese ban on internet sales and marketing of e-cigs might seem to be a problem for any ambitions Juul might have for expanding there, the vast majority of online sales in China are actually exports, and most of them go to the U.S.

A near monopoly on e-cig production

Chinese manufacturers make 90% of all vaping devices in the world and 80% of the e-liquids. Untested Chinese e-liquids laced with THC, the psychotropic compound in marijuana, were linked to the outbreak of lung illness in the U.S. It’s not the THC that’s the problem, but rather vitamin E acetate, an oil used as a diluting agent.

Although the oil is safely used as an additive in food and topical solutions, it’s problematic when inhaled. That’s because heating the solution allows it to vaporize. And when it cools, it returns to its original consistency, but by then has coated the interior of the lungs.

Looking for a clue

The Food and Drug Administration has not fully confirmed that vitamin E acetate is the sole cause of the illnesses and deaths seen, and it advises stopping use of any e-cig device until it can determine the actual cause.

The health scare has certainly hurt the e-cig industry as analysts have seen sales growth diminish, while declines in traditional combustible cigarettes have moderated. That suggests people are halting their use of e-cigs and returning to cigarettes.

Yet Juul and Altria may be able to still benefit from China’s actions. Although Juul e-cigs have been cited as the most common device used during the FDA’s investigation of the outbreak, it is not Juul’s own pods that have been implicated, but rather illicit third-party pods that can be purchased over the internet.

Now that China has banned all online sales of e-cig devices and e-liquids, Juul’s own pods will undoubtedly see a boost. Since users can no longer turn to aftermarket pods, they’ll use the OEM versions, to borrow a car industry analogy.

A small reason for hope

It’s at best a small silver lining to what is otherwise a darkening cloud for Altria, Juul Labs, and other e-cig manufacturers, and it may be short-lived if doubts about Juul’s ability to make it through the FDA’s regulatory process prove well founded.

Yet with so much going against the leading e-cig maker, it needs to grasp at every straw to hang on to its viability as a manufacturer and as an investment for Altria.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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