Healthy Markups on E-Cigarettes Turn Vacant Storefronts Into 'Vape Shops'

Across the country, small storefronts shuttered during the recession are reopening. The new occupants aren’t coffee shops or dry cleaners: They’re small retailers catering to the fast-growing electronic cigarette market. Known as “vape shops,” because e-cigarettes dispense vaporized nicotine rather than tobacco smoke, their products provide “a great business for us with excellent margins,” says Sam Bahhur, who in June expanded his 10-employee U Smoke Shop in Miami, adding a second location in Coral Gables dedicated solely to e-cigs.

While he can mark up traditional cigarettes by 10 percent to 20 percent, the numbers jump to 200 percent to 400 percent on e-cigarette dispensers, nicotine cartridges, and accessories, he says. Bahhur expects to bring in $1.3 million in revenue this year from the two stores. Vaping, he says, is “cost-effective for our customers.”

Electronic Cigarettes for Sale

There are more than 3,500 independent vape shops around the country, according to Aaron LoCascio, chief executive officer of Vape World, a distributor based in Boca Raton, Fla. E-cigs’ manufacture and sale are not regulated or taxed in most states, making them more profitable than tobacco products. While a 2009 U.S. Food and Drug Administration ban on sales of the devices was overturned by a federal court in 2010, industry groups the Smoke-Free Alternatives Trade Association and the Tobacco Vapor Electronic Cigarette Association expect the FDA to propose regulations on the devices as early as this month. Those regulations could lead to taxes on manufacturing and sales.

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Some regulations, including a potential ban on Internet sales, could help brick-and-mortars. The TVECA estimates that physical stores will sell more than $1 billion in vaping equipment and products this year. If online sales—estimated at about $500 million in 2013—move offline next year, many of those independent retailers could benefit, the group says.

Most vape shops are independent ventures put together by owners of traditional tobacco stores and small groups of investors, such as self-employed marketing consultant James Ting and five business partners, most of whom are smokers. So far, they’ve come up with $90,000 and plan to open Ja’Vape in about a week in El Monte, Calif., near Los Angeles.

A neighboring town “already has 10 or 11 vape shops that have popped up within the last three months,” Ting says. “That’s how crazy this market is now—the demand is so high.” He and his fellow investors have refitted a 1,500-square-foot video store that went out of business a few years ago. No special licenses or permits were required for the store, and the city had no apparent concerns about it, Ting says. The partners are waiting on inventory and store furnishings to arrive before they can open Ja’Vape.

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Electronic cigarettes remain controversial, and their health effects are still being studied. Proponents tout them as a safer, cleaner alternative than inhaling tobacco smoke’s hazardous chemicals and an effective way to quit cigarettes. Because they supply nicotine and mimic the physical act of smoking, e-cigs are psychologically satisfying in a way that nicotine gum or patches aren’t, they say.

Opponents worry that because e-cig cartridges are unregulated, there’s no quality control on what goes into the mix of nicotine, propylene glycol, and flavorings that are included in them. There are also concerns that e-cigs’ sweet flavors, such as cherry and bubble gum, may get teens who wouldn’t have started smoking hooked on vaping, and also that these new products may make the use of nicotine glamorous in a way it hasn’t been for decades.

The large tobacco corporations have latched on to the disruptive technology in recent years, buying established e-cigarette brands or starting their own. Reynolds American (RAI) estimates electronic products account for about 1 percent of U.S. cigarette sales and projects e-cig revenue will reach $3 billion within five years. Other forecasts show e-cig sales reaching more than $10 billion by 2017.

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Collin Spencer is hoping for a slice of that market. His two OG Smoke Shops in Los Angeles County will bring in combined revenues of $750,000 this year; he’d like to top $1 million in 2014 and predicts a quarter of that will come from vaping customers. He says about half of those customers smoke traditional cigarettes and are looking for ways to stop smoking or to at least cut back. The rest are just curious or have smoked hookahs as a social experience and “want some of the same effects in a portable fashion,”

Article Credit: http://www.businessweek.com

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