U.S. Vape Giant Juul Retreats from China, Losing Over $20 Billion in Value

It took the company three years to go from 0 to a valuation of US$38 billion; it only took one year to shrink from US$38 billion to US$16.4 billion. The American e-cigarette company called Juul tells a business story with ups and downs.

Juul was once a myth in the e-cigarette industry. In December last year, it was acquired at a valuation of $38 billion, and 1500 employees received bonuses worth a total of $2 billion.

After its peak, it encountered Waterloo. In 2019, various allegations of e-cigarettes killing and inducing teenagers came to it like snowflakes. In December, early investors in Juul cut its valuation to $16.4 billion.

Juul has long coveted China, which is expected to become the next trillion-dollar e-cigarette market, but is now losing ground. Its stores on Taobao and Jingdong were removed from shelves within a week of launch, and the ban on online sales gave it another blow.

Like most foreign investment in China, it is trying to build a local team in China and become a more down-to-earth multinational company. It rented almost an entire floor of co-office brand WeWork in Beijing's Upper East Twin area, filling it with brand new workstations, but few rooms were filled. Most of the time, there are only a few China executives there who hold weekly telephone conferences with the U.S. headquarters.

A person close to Juul told Ran Finance that after the ban on online sales was introduced in early November, Juul's business in China was basically suspended, and all recruitment plans were suspended. It would first wait for the domestic market and wait for instructions from the US headquarters.

Previous industry rumors that Juul's China CEO will be Wang Huainan, founder of Baby Tree, is actually not true. Industry insiders confirmed to Ran Finance that the actual candidate is Wei Xiaowei, former Baby Tree business partner. However, Juul's senior management team in China is currently in an awkward situation, with a fire in the backyard of the United States and a stagnation in China business.

Regarding Juul's development in China, Juul said it was inconvenient to reply.

This is a typical story of foreign investment entering China and dying before it can start.
 

In July this year, news spread in China's e-cigarette industry that American e-cigarette company Juul would officially enter the China market.

This is an exciting piece of news. To some extent, the popularity of the domestic e-cigarette market is motivated by Juul's success. Only three years old, Juul accounts for more than 70% of the market share in the United States and is the hottest startup in recent years. Domestic players are trying to replicate a Juul in China.

Juul's headquarters are in San Francisco, USA. Its e-cigarette products are designed in the United States, smoke liquids are mixed in the United States, and the hardware is processed by a foundry in China. But the final finished product flows to overseas markets such as the United States. Although China is its largest producer, it is not its main market.

The reason is that before 2018, China's e-cigarette market was not yet mature, so Juul only used China as part of its global industrial chain.

Until the second half of 2018, the domestic e-cigarette industry began to become popular. Cross-border players entered the game, and the industry started a war of thousands of cigarettes, which was very lively for a while.

However, the domestic e-cigarette pattern was uncertain, and Juul came.

Juul is accompanied by a market budget of $100 million. According to media reports in July, Juul plans to put at least US$100 million on the market for brand building and marketing work within 15 months. The first shot in China was in marketing.

Judging from this aggressive stance, Juul's products will soon flow into the China market, which seems to inevitably trigger a fierce battle in China. In fact, as early as the second half of 2018, Juul was already preparing for entering China.

On October 2, 2018, listed company Warburg International announced that it would sell its 62.7% stake in VMR Products for a price of US$75 million. VMR is an established American e-cigarette company founded in 2009. Its V2 brand was once the top three e-cigarette brands in the United States. The company was acquired by China company Warburg International in 2015.

It was Juul who took over the VMR offer from Warburg International this time, and the actual transaction price was US$50 million. At the same time, Juul bought the remaining stake from five other VMR shareholders. After the transaction was completed, VMR became a wholly-owned subsidiary of Juul.

After the acquisition was completed, VMR's product line did not merge with Juul. Instead, it launched the GR Jill brand in China and authorized sales to a company in China called Nanjing Duermei, with Jingdong and Tmall being the main channels. To some extent, this can be seen as a test of Juul's water in the China market.

On December 25, 2018, Juul's operating entity in the mainland of China is Juul's Juul Electronics (Shanghai) Co., Ltd., which is wholly-owned by Juul, was registered and established in the Shanghai Free Trade Zone. Juul's real body officially entered China.

In March and April 2019, Jiuer Electronics 'Suzhou branch and Shenzhen branch were established respectively. Suzhou is home to Feixu Electronics, Juul's largest e-cigarette manufacturer in China. Shenzhen is the home of McQuail, which serves e-cigarette brands such as Juul and Yueshi. Judging from the layout of its branches, Juul has been deploying the China market from the production side since the first half of this year.

Immediately afterwards, Juul's China team began to build. Around June 2019, Juul and Bain Consulting reached a cooperation, which provided them with implementation matters in China, including initial team building, corporate planning, talent recruitment and supply chain implementation. Wei Xiaowei and several other executives with international backgrounds soon became members of Juul's China executive team.

By July, Juul's preparations for entering China were basically completed, with only one order missing.
 

Like most e-cigarette brands when they were just starting out, Juul focused its sales on online e-commerce from the beginning.

“The Juul flagship store quietly launched Tmall in August, adopting the Tmall secondary domain name, and quickly completed the decoration of the store's front page. At the same time, it is rumored in the industry that Juul has reached a strategic cooperation with Jingdong and the store will be launched soon.

An e-cigarette entrepreneur who has long observed Juul's entry into China said that Juul's entry into China was quite low-key at the beginning. It did not do any publicity in the early stage. It adopted the logic of launching online first, and its assets were relatively light. Layout of branches in Suzhou and Shenzhen is to pave the way for the later construction of local supply chains.

Tobacco is a sensitive industry, and e-cigarettes are more like grabbing food from the tiger's mouth. Especially for Juul, a big player with a foreign-funded background, it is obviously not wise to make a high-profile move.

When many multinational foreign investors enter China, they will choose their office address in China in the core areas of Beijing or Shanghai, such as Beijing's Guomao, Huamao, Financial Street and other office locations where Fortune 500 companies are concentrated, striving to be high-tech. Juul's office address in Beijing was chosen in an inconspicuous office building outside the Fourth Ring Road, and the nearest subway station is two kilometers away.

A relatively hidden office address, but a large number of workstations have been prepared. Recruitment in China is quietly proceeding. Wei Xiaowei, who resigned from Baobaoshu and joined Juul, was previously the COO and vice president of Baobaoshu, and the general manager of e-commerce.

In terms of channel expansion, Juul adopts an authorized distribution model. It has selected two distributors in China, Hangzhou Taoyatao Information Technology Co., Ltd. and Hangzhou Jinyonghe Trading Co., Ltd. Industry insiders revealed that in the current field of e-cigarette agency distribution, these two companies are not well-known and sound like they are operating e-commerce agencies.

In fact, these two companies are the owners of Juul Tmall flagship store and Jingdong flagship store respectively. In other words, Juul handed over its distribution authority in China to the two agents, including opening stores in Tmall and Jingdong.

On September 9, Juul Tmall and Jingdong flagship stores were officially launched. The price is slightly higher than that of domestic brands. Domestic users can purchase directly through stores. On September 13, two online stores suddenly went offline. After a brief re-launch on the 15th, they went offline again on the 16th. They have not been online since then, and Juul did not explain the reason.
 

Juul had carefully planned his plan to enter China for more than a year. As soon as he fired the starting gun, he encountered a blow. According to foreign media reports, a spokesperson for Juul told the media on September 17 that we look forward to continuing the dialogue with relevant parties so that our products can be put on shelves again. rdquo;

The long-awaited national standard for e-cigarettes in China was not released in October as scheduled. As Double 11 approaches, e-cigarette players large and small are gearing up to prepare for Double 11, planning to take the opportunity to digest the backlog of inventory. Among them, Juul is included.

However, domestic e-cigarettes received supervision before waiting for the national standard. On November 1, a ban on online sales of e-cigarettes was issued, triggering a major earthquake in the industry. Domestic e-cigarette brands have actively expressed their stance and firmly supported supervision, saying that they will carry out rectification.

Strangely enough, while all e-cigarette brands were removing products from e-commerce platforms, Juul re-launched the Tmall flagship store that day.

According to industry insiders close to Juul, Juul's China management team had no knowledge of the online sales ban's behavior on Tmall's launch of the online sales ban and was a spontaneous behavior by the dealer.

Of course, this seemingly moth to the flame was quickly slapped in the face. Juul's flagship store was quickly removed from shelves. In fact, before the arrival of Double 11, all e-commerce platforms removed or blocked e-cigarettes, and China's e-cigarette market failed to survive Double 11.

E-commerce channels have been completely banned. Juul suffered a setback in the China market and died before he could make a successful start.
 

Juul's business in China has fallen into an awkward situation.

“Why is the product in a hurry to go online? In fact, I still want to use performance as the basis. At least fight a war in China and let the American board of directors know that the China team is still very good.& rdquo; A person close to Juul said.

The Juul China team needs more support from the US headquarters and needs a battle to prove its existence. But the truth is, they don't have many good cards in their hands.

Juul adopted a typical foreign-funded approach when entering China: first, he found a top consulting company to be responsible for top-level design, formed a local team locally, and built a local supply chain. After the local team is formed, the strategy will be gradually implemented. Specifically in China, Juul handed over the work to Bain Consulting, but the establishment of the local team was not smooth.

Distributors undertake specific channel expansion and product sales functions. However, judging from the actual effect, the Juul China team's control over distributors is insufficient, and even lacks a grasp of the national conditions, so that there will be behavior of online stores when the online sales ban is introduced.

After the online sales channels were cut off, domestic e-cigarette players rushed to offline and competed for offline channels. Compared with the flexibility and sensitivity of local players, Juul's movements are much slower. Until now, Juul has only opened one offline experience store in China, located in Huigu, Suning, Nanjing.

Staff at the Juul Experience Store told Ran Finance that the store was opened by Juul dealers, and they obtained the agency rights for Juul sales in the mainland of China this year. Originally, the sales base was on e-commerce platforms such as Taobao and Tmall. After the ban on online sales was introduced in November, they opened an offline experience store.
 

China's market is deadlocked, but the backyard of the United States is on fire.

In its American base camp, Juul is facing the largest crisis in history. Kevin Burns, former CEO of Juul, resigned in September, and Klaus Wite, a former Altria executive, replaced him. In October, Juul experienced a major executive change. The CFO and three other senior executives were replaced, and it was also reported that 500 people would be laid off. The most popular flavored e-cigarette in the United States has been suspended by Juul and is subject to FDA review.

“The direct reason why China's business has stopped expanding is that things in the United States must be settled first, so that we can know what to do next in markets outside the United States. rdquo; A person close to Juul told Ran Caijing.

The China market is not Juul's current priority.& ldquo; At the current stage, if the China market does well, it will not add too many points, but if it does not do well, it will definitely be a decrease in points." rdquo; This is a complete story, and the U.S. headquarters needs various perspectives to support this pattern." rdquo; This person said.

Brands and public opinion are a double-edged sword.

The successive deaths related to e-cigarettes in the United States and the increasingly stringent supervision in the country have made the e-cigarette entrepreneurial environment jittery for a while. The crackdown from the government level and the doubts from the public level have made the e-cigarette market even worse. An e-cigarette entrepreneur bluntly said that in the past, Juul was mentioned in China as adding powder, but now it must be losing powder." rdquo;

In the China market, Juul also faces strong attacks from local players represented by Yueshi.

Only two years after its establishment, RELX electronic cigarettes have already established half of the country in the China market. According to data disclosed by Yueshi, as of August 2019, Yueshi's market share reached 60%. Its founder, Wang Ying, was the general manager of Uber China in Hangzhou, and later promoted to the general manager of the Central District. She fought and made contributions when Uber entered China and knows how foreign investment can enter the China market.

After the news spread that Juul was about to enter China in July this year, Wang Ying said in her circle of friends: In fact, Yuexi has never lost to foreign companies in terms of products, R & D, and social responsibility. Since everyone wants me to protect my family and my country, I will sincerely say this: Uber's personal experience and lessons tell me that home games will be more enjoyable and I can perform more vividly!" rdquo;

At the product level, Juul's largest technological innovation, nicotine salt technology, has not been patented in China. A senior e-cigarette oil expert told Fuel Finance that nicotine salt is the product of combining nicotine and organic acid. This is a traditional technology, but Juul named it nicotine salt and used it on a large scale in e-cigarette products. However, from a technical perspective, it is not innovative and novel, so it cannot be applied and authorized for patents in China. This means that other players can use the technology in China.

Obviously, Juul still has a lot to learn when entering the China market.

At the International Electronic Cigarette Exhibition and Exhibition Center in December, leading brands such as Yueshi, Xuejia, Ono, and Firearms all put their products on shelves for display. Juul also participated in the exhibition, but Juul's shelves were empty. An on-site staff member revealed that their internal policies had not been clarified and their goods had not been shipped." rdquo;