121 Vaping Companies Closed in Two Months; Founders Turn to Aphrodisiacs

Under the pandemic, electronic cigarette creators are seeking new paths.

Luo Yonghao once made a high-profile entry into the e-cigarette market with Xiaoye e-cigarettes, securing 30 million yuan in funding. Now, he has dived into the live-streaming sales scene, even promoting Xiaoye-branded T-shirts and other merchandise, and the Xiaoye official website no longer features any information about e-cigarettes.

Recently, Fulu e-cigarettes, which raised 10.89 million dollars, were reported to be facing employee wage disputes and a tight cash flow. Now, Zhu Xiaomu has also hopped on the live-streaming sales bandwagon, becoming a live-streaming host.

Recently, insiders revealed that LINX, which completed three rounds of financing in one year, has disbanded its team and is applying for deregistration.

According to Tianyancha data, from January 1, 2020, to June 17, 2020, 197 e-cigarette companies met the criteria for "liquidation, closure, deregistration, or revocation," with 121 of these occurring in just two months from April 1 to May 31.

During the pandemic, the rise and fall of popular e-cigarette brands reflect a microcosm of the domestic e-cigarette industry. In addition to brand owners seeking alternative livelihoods, numerous e-cigarette agents are also starting to stir.

"When masks were hot, they sold masks; when thermometers were hot, they sold thermometers; when helmets were hot, they sold helmets. It's all the same group of people," said one e-cigarette entrepreneur, describing the situation of agents in his social circle. Even a co-founder who previously invested in an e-cigarette brand has turned to selling male enhancement products in his social circle during the pandemic.

In fact, the pandemic has only accelerated the industry's decline, which had already shown signs.

Before last year's Double 11 shopping festival, the domestic e-cigarette industry faced a real turning point. On November 1, 2019, the State Administration for Market Regulation and the State Tobacco Monopoly Administration jointly issued a notice on "Further Protecting Minors from the Harm of E-cigarettes," prohibiting e-cigarette manufacturers or individuals from selling e-cigarettes online and requiring e-cigarette companies to remove related advertisements.

With public traffic shut down and consumer doubts about the health of e-cigarettes, selling these products became more difficult. The fierce competition among e-cigarettes quickly cooled, and to convert the large inventory in warehouses into cash, brand owners had to quickly expand offline channels.

A story circulating among various distributors is that just to sign a contract with the chain nightclub "Noah's Ark" (Noah's Ark Cultural Group is one of China's largest nightclub groups, with hundreds of bars under its umbrella), brand owners had to spend tens of millions. One e-cigarette brand initially wanted to sign an exclusive partnership for 15 million yuan, but later added another 15 million because Fulu offered 50 million, and RELX offered 70 million.

In hindsight, compared to the complete paralysis of offline channels during the pandemic, the competitive landscape at that time was not the worst for the industry.

Setting up a stall to sell e-cigarettes earned 2000 yuan in one night

"February was basically a dead month, as malls were mostly closed. During this time, we focused more on refining our strategies and improving our internal capabilities; by March, offline channels had recovered to 70%, and now overall recovery is at 80%, with an additional 100 specialty stores opened," said Liu Dongyuan, founder of the e-cigarette brand vitavp. When the pandemic first hit, offline sales were essentially halted.

Before the pandemic, vitavp had over tens of thousands of offline outlets, growing at a rate of over 1000 per month. However, COVID-19 pressed the pause button on all of that. To regain offline customers, Liu Dongyuan began focusing on connecting with end users starting in February.

"Many users asked me how to purchase vitavp's pods while being quarantined at home." There were many such customers, so Liu Dongyuan decided to organize customer service colleagues for a round of phone follow-ups. If users expressed a desire to purchase, he would help match them with nearby specialty stores for home delivery services.

By early June, the national pandemic situation stabilized, and the street stall economy was widely discussed. "I like to stir things up," Liu Dongyuan said, driving two sports cars to set up a stall.

"I want to show our distributors that they should lower their pride and not think that opening a store in a mall is the only way to be prestigious." Liu Dongyuan revealed that he made 2000 yuan in one night selling e-cigarettes at a stall in Chengdu. "Some good stalls can earn as much in a day as a store would."
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Similar experiences have also occurred for another e-cigarette brand executive, Li Chao (a pseudonym).

"Before the pandemic, the monthly sales volume of disposable e-cigarettes was about 20,000 units, while the kit sales were in the thousands. However, during the pandemic, the former's sales dropped to less than 100 units, and the latter even less," Li Chao revealed. Fortunately, by June, sales had basically recovered to one-third of previous levels. Looking ahead, he is optimistic, estimating that in another two months, everything will be back to normal.

Unlike other players, Li Chao does not plan to expand product sales by lowering prices or subsidizing distributors, as he believes this could harm the interests of distributors and is not very meaningful. Therefore, he is focusing his efforts on the upcoming new products set to launch in August. "The key is still product positioning and performance."

However, he also admits that low prices are indeed a good way to attract new customers. RXR's previous kit series was positioned as high-end, priced at 399 yuan per set, mainly targeting mature men aged 30-40. Now, he plans to relaunch a budget sub-brand aimed at young people aged 20-30, priced at only 99 yuan, with three pods costing just 75 yuan. "The product isn't even out yet, and nearly 3000 sets have already been reserved by suppliers."

Have e-cigarettes been "abandoned" by capital?

In fact, during the pandemic, e-cigarette players have resorted to various means such as price cuts, subsidies, live streaming, street stalls, and micro-businesses, reflecting the industry's decline.

"I don't think any investors would continue to invest in e-cigarettes now," multiple e-cigarette investors told reporters. A review of financing information from January to June this year found that only two e-cigarette brands announced financing: Feixi e-cigarettes and Weipo e-cigarettes.

Last year, according to incomplete statistics, at least 30 brands secured 37 rounds of financing, with investors including top-tier institutions like Zhenge Fund, SIG Asia Investment Fund, Meihua Venture Capital, Sequoia Capital, Matrix Partners China, and Puxin Capital. Last year, the disclosed financing amount in the e-cigarette sector reached 1.511 billion yuan, with 31 rounds exceeding ten million yuan.

"There are significant policy risks, unclear exit paths, and unhealthy profit structures. From a purely financial investor's perspective, I am unwilling to invest in such enterprises," said Zhao Yangbo, vice president of Qichen Capital, noting that the e-cigarette industry currently has a situation where one brand dominates while many others are strong, and few brands can truly make a profit. Everyone's primary concern is survival and maintaining stable cash flow.

YOOZ has already taken the lead. In April, YOOZ launched the YOOZ Mini, which includes a 240mAh battery capacity pod system and a USB charging cable. The price dropped from 299 yuan to 9.9 yuan, a dramatic price cut that caused a stir in the industry.

In media interviews, Cai Yuedong revealed, "The 9.9 yuan pricing is definitely a loss leader; good products become very noticeable when priced low enough, increasing sales and reducing our marketing expenses with distributors."

It is reported that YOOZ has high hopes for the YOOZ Mini, planning to invest 100 million yuan in 2020 to support channels, allowing more original disposable e-cigarette distributors and fast-moving consumer goods distributors to participate.

"Maintaining the 299 yuan price point will ensure better overall profits for brands and distributors, but attracting new users at this price is not easy; prices under 100 yuan facilitate attracting new users, but distributors will be in a passive position," Zhao Yangbo stated. "99 yuan is likely to break even, relying on profits from refill pods, but if prices continue to drop, brands will have to subsidize distributors, which is not conducive to achieving positive cash flow."

The low-price strategy has faced ongoing skepticism. "The product contains a battery; can such a low price ensure battery safety?" "There is hardly any profit margin at 9.9 yuan for the device."

However, some players have decided to follow suit with low prices. After all, gaining more user experiences now means a better chance of capturing potential users. Vitavp chose to give away the 2.0 main device for free, launching pods at 99 yuan for four, effectively reducing the price per pod by 7.25 yuan compared to before; they also raised the subsidy for franchise stores to a maximum of 130,000 yuan per store. RXR also lowered its price from 399 yuan per set to 99 yuan per set.

Liu Dongyuan believes, "Starting an e-cigarette business is different from traditional internet entrepreneurship, which focuses on quickly entering the market, rapidly acquiring new users, increasing valuation, and then monetizing. E-cigarettes are more suited for steady progress, using time and product quality to cultivate user loyalty to the brand."