Reynolds Launches VUSE Vapor Cigarette

Reynolds American , the second-largest American tobacco company, entered the fast-growing electronic cigarette market today by launching its VUSE Digital Vapor Cigarette in Colorado. VUSE was created within the company’s wholly owned subsidiary RJ Reynolds Vapor Company, and we expect that later this year and next, Reynolds will conduct a broader rollout of VUSE across the United States.

Not only does the e-cig market already has several established players, including blu (owned by Lorillard LO ) and privately held NJOY, but it has a plethora of other small vendors, and we expect that later this year Altria MO will follow Reynolds’ example and launch its own e-cig later this year. During a CNBC interview concerning VUSE, Reynolds CEO Daniel Delen said that the company “designed the product to be margin enhancing.” However, even though electronic cigarettes are not burdened by excise taxes or master settlement agreement payments, we are somewhat skeptical of this claim.

Analysts forecast that Lorillard, which already has scale in the e-cig market and sells the product online, is unlikely to generate e-cig margins above 20% for about three years. Given that VUSE does not plan to have an Internet presence, lacks the scale of NJOY and blu, and the competitive environment is much more fragmented than the cigarette market, we are unconvinced that VUSE’s margins could approach the roughly 30% margins generated from Reynolds’ RJR cigarette business anytime soon. From a consumer standpoint, a VUSE Solo (disposable) will sell for around $10, and a rechargeable VUSE system will retail for $30 and cartridges (roughly equivalent to one pack of traditional cigarettes) will cost about $3 each. This compares with a retail price of around $5.50 to $6 per pack of cigarettes in Colorado, meaning that the rechargeable VUSE may save heavy smokers money.

 

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About the author

Audrey is a senior editor for the business and finance sections.