In the wake of the May SFATA conference, other recent events have demonstrated several important trends when it comes to the vapor products industry:

  1. The industry will be regulated at the federal level, and increasingly at the state and local levels;
  2. We are losing the public relations war; and,
  3. The amount of capital and specialty resources necessary for a vapor products company to survive the next five years will be out-of-reach for most entrepreneurs and business owners if proposed FDA regulations are implemented,

Speakers at the SFATA conference, regardless of specialty, agreed that the FDA will regulate the industry to a greater or lesser degree, and that state and local regulations covering the use and distribution of vaping products is inevitable.

E-liquids are the products that received the most attention at the conference and in current news. The liquids sector is looking at a number of regulatory hurdles and requirements ranging from full FDA registration to labeling and manufacturing requirements. Certain proposed regulations, such as proper labeling child-resistant bottles and high quality and transparent liquid manufacturing processes, make sense. Other aspects, such as requiring every flavor of liquid, in every nicotine strength, to go through an FDA registration process originally intended and designed for tobacco goods, doesn’t provide much benefit to the individual consumer, or the public health; rather it the industry over to the large tobacco concerns.

While organizations like the Smoke-Free Alternatives Trade Association (SFATA), the largest business trade organization dedicated to vapor products in the world, and the Consumer Advocates for Smoke Free Alternatives Association (CASAA), the largest “vapers” consumer group in the U.S., work hand in hand with other organizations to come up with alternative regulations that will protect consumers, maintain industry standards for the manufacture and distribution, and meet important public health goals, we recognize that whatever the final regulations look like, they likely will result in significant increases in the cost to manufacture the various vaping goods.

Everywhere one looks these days, one can find articles on electronic cigarettes dominating the news and opinion “pages,” from the pages in a New York Times hard copy, to a Huffington Post online blog, or television “medi-tainment” like Dr. Oz. Sadly, most of these information outlets are rife with mis-statements, undisclosed bias, and occasional untruths. The only way for the Ecig industry to take effective countermeasures is to bring-i professionals in the public relations, community outreach, and marketing sectors and work with them to tell our industry’s story rather than allowing detractors to dominate the information landscape. The industry must be proactive in figuratively opening the opposition’s kimono, as it were, to demonstrate and document their conflicts of interest in this battle.

Many of the current Ecig related businesses are small establishments meeting the definition of a “mom and pop” shop, particularly those in the liquid and retail sectors.   These businesses find themselves facing daunting challenges such as the need for professional services expertise and the financial wherewithal to meet new manufacturing and distribution requirements. They must also counteract a never ending stream of bad press, and possibly have a “war chest” of capital for litigation related expenses. Inevitably, they will be hard pressed to find both the financial and professional services capital requirements needed to succeed in the future vapor products landscape.

One of the traditional evolutionary steps in any new industry, which describes the vapor industry, is the eventual migration away from purely entrepreneurial enthusiasts to more professionally managed enterprises. This is normally exhibited by companies have increased financial resources and more experienced management teams. The inevitable way this step occurs is by firms combining resources in a number of different ways.

The technique we often see in early market business combinations is called the “Roll-Up.” In this situation, normally, but not always, the stronger companies in an industry will go around purchasing smaller or more niche companies to meet their increasing financial and strategic objectives. In the long term, this tactic not only provides the acquiring company with financial and human capital resources, but also, depending upon the deal structure, may allow the owners of the acquired companies to continue to participate on an equity basis in the growth of the industry. Further, roll-ups often lead companies to hit the revenue, EBITDA, and market share milestones that then make them attractive to professional investors, which also re-invigorates the industry with additional capital and management resources.

Another common tactic is strategic partnerships. The benefit to this structure is that all participating companies normally retain full ownership of themselves and the structure itself is extremely flexible; allowing the participants to work together where they want to while acting separately where they feel appropriate.   Companies may join together to achieve such objectives as co-marketing, sharing manufacturing and/or distribution resources, and/or sharing back office operations and compliance.

A “hybrid” of the strategic partnership, the “Joint Venture”, frequently occurs in situations where companies want to share risk in a new project. A joint venture occurs when two or more separate companies jointly form and share in the ownership of a third entity that has a specific purpose to meet their common objectives. Perhaps the most common example of the joint venture is found in the traditional energy industry where two or more petroleum companies will join together to explore and drill an area for exploration and extraction of oil or gas. In the vapor industry, this structure could be particularly advantageous in areas such as manufacturing, distribution, and public relations.

A variety of business combinations always have been one of the cornerstones of growth within an emerging industry. The pooling of finances and talent in a mutually beneficial manner between companies has led to some of the most successful enterprises in history. It is clear that for the vapor industry to survive without being totally dominated by a few large tobacco companies, the enterprises with the most financial resources and/or experienced management teams must lead the charge to begin the consolidation among firms with brand and revenue strength.

Author: Mark Burton, JD CMAA
Edited By: John R. Nelson, ABV
Edited By: Cynthia Cabrera