What Are the Barriers to Entry in the E-Cigarette Industry?

E-cigarettes are attracting more and more attention from capital. With the entry of top capital such as source code and IDG, companies in the e-cigarette industry that have obtained financing have concentrated this year. Those who know a little about e-cigarettes have more or less heard of domestic brands such as relx, Gippro Dragon Dance, Firearms, and Laan Shanlan.

Recently, Yiou heard that many investment institutions in the primary market that focus on the consumer sector are gathering together to watch e-cigarettes. There are even rumors that projects that have already received financing, and investors continue to advise founders to adjust to e-cigarette tracks. Behind the capital's attention are the favorable development prospects of the e-cigarette industry. On the one hand, e-cigarettes are becoming a substitute for cigarettes, close to those of cigarettes in terms of taste and use, and the content of toxic substances such as tar, carbon monoxide, nitrous acid, etc. has been greatly reduced; on the other hand, the world's cigarette production is decreasing, and the subdivisions such as e-cigarettes are ushering in high growth.

Entrepreneurship opportunities for new e-cigarettes

New things are often fragile. Looking back on the history of e-cigarettes, it was invented and patented by Han Li, a Beijing TCM doctor in 2004. In the same year, he founded the Ruyan brand, with sales reaching 21 billion yuan in 2008. Later, CCTV's "News 30 Points" questioned that the Tobacco Bureau requested control. Its own problem is that it exaggerates the effect of publicity and claims to allow consumers to successfully quit smoking. In 2013, founder Han Li sold the patent to British Imperial Tobacco for US$75 million.

At present, the new e-cigarettes appearing on the market are generally divided into three types: heated non-burning e-cigarettes, e-cigarettes, and inhaled energy bars. The third nicotine product is not strictly addictive. For example, there are sleep bars with melatonin added, energy bars with taurine and caffeine added to fight fatigue, and beauty bars with added vitamins. Tobacco properties are not obvious, but they have great development potential and are more like smokable food. In Japan, etc., industries in some developed countries have gradually matured, and people have strong acceptance of concepts.

The second type, heated and non-burning e-cigarettes, represents the world's largest tobacco company, IQOS (I Quit Original Smoking) produced by Marlboro manufacturer Philip Morris International, which is committed to developing new types of harm-reducing tobacco. This kind of heated and non-combustible cigarette bomb contains traditional cigarette consumables, is closer to the true taste of traditional cigarettes, and is more easily accepted by people with smoking habits. However, these consumables are tobacco products, are controlled by the state, are allowed to be exported, and are not allowed to be sold domestically.

The third type of e-cigarettes is an important direction for domestic entrepreneurship. Its most basic construction includes battery modules, atomizers, and smoke bombs. The tobacco oil in cigarette bombs is generally made from a mixture of nicotine, propylene glycol, glycerol and essence. Unlike cigarettes, it does not contain tar. The atomizer is powered by a battery rod and converts liquid nicotine in the cartridge into mist, giving the consumer a feeling similar to smoking.

From a health perspective: The main substance that causes harm to the human body from ordinary cigarettes comes from the burning process. Cigarettes generally burn at 800 ° C. If burned insufficiently, the tar produced will affect lung health, the carbon monoxide produced will affect heart health, and there are more than 40 chemical carcinogens. In addition, cigarettes have become the main source of indoor PM2.5 and form second-hand smoke. Beijing once issued the strictest smoking ban in history, but e-cigarettes are not included in the smoking ban. The burning temperature of e-cigarettes is about 200 ° C. The burning method is to heat the smoke liquid into steam through an atomizer. There is no tar and carbon monoxide, which is relatively less harmful to people and will not produce second-hand smoke.

However, this does not mean that e-cigarettes are healthy and harmless. The U.S. Food and Drug Administration (FDA) has tested e-cigarettes for the presence of trace amounts of carcinogenic nitrosamines and other potentially harmful substances. Internationally, there is controversy about the health impact of the materials (ceramics/glass fiber) used in e-cigarette atomization cores.

In terms of price, the average selling price of e-cigarettes is higher than that of traditional cigarettes. In addition to purchasing equipment, you also need to purchase consumables. The price of equipment in most retail stores ranges from 100 to 10,000 yuan, and the price of tobacco oil ranges from 80 to 200 yuan depending on different milliliters and brands. The median price of a pack of cigarettes per capita consumption is about 12 yuan in Beijing, about 20 yuan in Chengdu, and about 14 yuan in Shanghai.

There are more than 600 e-cigarette manufacturers in China, and representative companies listed on the New Third Board include Avips, McWeir, Five-Wheel Electronics, Segray, Yingqu Technology, etc. In addition, the scale is generally small, with 95% of products mainly sold abroad, with a small proportion in the domestic market. The following is a list of e-cigarette brands that have announced financing news in the past three years, compiled by Yiou. It can be seen that 2018 is a year for concentrated financing in the e-cigarette industry.
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Why are many investment institutions optimistic about the e-cigarette industry? The author suspects that there may be three reasons:

1. There have been successful cases of e-cigarettes abroad

In July this year, Juul, the start-up e-cigarette brand in the United States, was valued at US$15 billion. It has a 68% share of the U.S. e-cigarette market, which is already half of the valuation of a century-old tobacco company, Imperial Tobacco, and makes Juul the sixth-most valued startup in the United States. Similarly, Philip Morris International began to announce this year that the company's future vision is smoke-free, and the product iQOS was launched to respond to this trend. At present, the domestic e-cigarette industry is scattered and no brand has been formed at its head.

2. The consumer group of e-cigarettes is young people, and a trend culture is forming

As a fashionable product, e-cigarettes have beautiful design and gradually form a trend culture. The taste is richer, healthier than traditional cigarettes, and the endorsement and participation of celebrities make e-cigarettes more acceptable to young people. In the circle of advanced players, trendy ways such as burning equipment, DIY smoke oil, and fancy smoke rings are emerging.

3. Tobacco is an addictive commodity

E-cigarette products contain nicotine, taurine or caffeine, which is easy to become addicted. Moreover, the profits of e-cigarettes are generally higher than those of cigarettes, making it a good business.

In addition to investment institutions taking action, domestic China Tobacco Group is also accumulating strength. Nearly 10 local tobacco factories under China National Tobacco Corporation are also constantly developing e-cigarettes. However, it is mainly in the testing stage, and only exports to South Korea and Japan on a small scale. Because the traditional cigarette market continues to be profitable, China Tobacco's e-cigarette products are still defensive.

Innovations in the e-cigarette industry

1. R & D innovation and brand innovation

With the development of the industry, e-cigarettes are no longer positioned as a product to help quit smoking. Internationally, brands are increasingly differentiated and trendy. This can be found from the well-known e-cigarette group in the United States, International Vapor Group, Inc. The VaporFi brand operated by (International Steam Tobacco Group) is spied out. This brand is positioned as a trendy e-cigarette, emphasizing coolness, fun, sociability, sexiness and desire. The target group is 18-45 years old. Many foreign fashion celebrities and stars are diehard fans.

For example, the following domestic brands that have received financing in the past three years have also attracted consumers through R & D innovation and brand differentiation:

RELX: Provides convenient cleaning and maintenance and large-capacity cigarettes (one RELX cigarette bomb equals 60 IQOS cigarettes);

Gippro Dragon Dance: Provide more subdivided product categories (including heating non-burning, e-cigarettes, inhalable energy bars) and nicotine-free e-liquid products;

Wisdom and energy: Integrate the entire industry chain in terms of business model, focusing on the B2B2C model;

Laan Shanlan: The product breaks through in terms of greater smoke volume and atomization effect.

However, more e-cigarette brands in China are manufacturing-oriented companies with weak R & D and branding capabilities, which will bring challenges to many small and medium-sized brands.

2. Channel innovation: Social channels are the main focus, with little reliance on traditional cigarette channels;

The business channels of new tobacco do not rely much on traditional channels and are more spread through social and word-of-mouth recommendations. Among the six e-cigarette consumers the author came into contact with, four tried them because of their friends 'recommendations. At present, e-cigarette brands that have received financing are also developing multiple channels: circle of friends, post bars, WeChat, Short Video, and Mini programs to develop users. A friend who has been engaged in the e-cigarette industry for 3 years and has ODM/OEM experience in e-cigarettes said that the channel for e-cigarettes is quite critical. As the division of labor becomes more detailed, professional channel providers may even emerge in the future, including convenience stores, KTVs, restaurants, Bars, etc. Supply.

Difficulties in the e-cigarette market

1. The deviation between e-cigarettes and traditional cigarette culture

In China, cigarettes were once a symbol of social status, and different brands of cigarettes represented different consumption capabilities. In addition, cigarettes have strong social attributes. In addition to self-smoking, it is also widely used in gift markets and daily relationship maintenance. We can often see the gift economy that delivers cigarettes and alcohol around us, and when we hear about the leadership of XX, we go to smoke together. However, e-cigarettes cannot be shared. Each person has one device, which is a personal experience scene.

Secondly, when e-cigarettes do not form a mainstream consumer product, consumers are unfamiliar with their brands, and the cost of market education is quite high.# p#pagination title #e#

2. The e-cigarette industry has low entry barriers and uncontrolled industrial chain

90% of domestic e-cigarette production sites are in Shenzhen. It seems that the industry concentration is high, but in fact, no brand has formed strong control over the entire industry chain. Industry insiders revealed that you can build a brand by investing about 5 million yuan. If you go through the gift market or through the agency direct sales channel, you can earn a profit of about 2 million yuan if the annual sales volume reaches 10,000 - 20,000 pieces, and the profit margin can reach 60%.

From the upstream perspective, the production of batteries and atomizers is relatively difficult, and the most critical thing is the factory that produces smoke bombs. In Shenzhen, there are only 3-5 companies with R & D capabilities that can synthesize nicotine salts, so the pricing power of cigarette bombs lies in the hands of the factories, not the companies.

From the midstream perspective, production equipment and assembly generally adopt OEM and ODM models, with low technical content. The cheapest OEM can produce a set of equipment for about 30 yuan.

From a downstream perspective, the e-cigarette market has just begun. The circulation channels of goods are self-built e-commerce online; offline supply channels are traditional cigarette shops, electronic goods stores, e-cigarette specialty stores and other channels. Enterprises do not have strong control over channels, and commodity sales will be limited.

In addition to sufficient start-up capital, the e-cigarette industry has a low entry threshold. According to industry insiders, the current e-cigarette market is similar to the copycat market in China ten years ago. If some brands don't sell well this year, they will sell under another brand tomorrow. In the future, only companies that have control over the entire industrial chain will be competitive.

Why is it greatly influenced by policies?

The tobacco industry plays an important role in driving the economy and belongs to a highly regulated industry by the state. Therefore, the development of e-cigarettes is also easily influenced and restricted by policies. According to data released annually by the State Tobacco Administration, tobacco tax revenue in 2014 was 1,051.76 billion yuan; in 2015, tax revenue was 1,143.6 billion yuan; in 2016, the total tax revenue was 10795 billion yuan (a decrease of 5.6% compared with 2015). Tobacco tax revenue in 2017 was 1,114.51 billion yuan, and the overall growth trend is slow. Data from Fortune China in 2017 shows that Tobacco Corporation's annual profits exceed one trillion yuan, and one company can directly challenge the profits of the four major banks + Sinopec and PetroChina.
 
However, China's tobacco tax rate has long been maintained at 40%. Take the 65-yuan package of soft Chinese cigarettes on the market as an example. It is estimated that the cost of a pack of Chinese cigarettes with a market price of 65 yuan will not exceed 3 yuan, and the comprehensive tax burden (including tobacco tax, value-added tax, etc.) required to pay this pack of Chinese cigarettes is about 59.5%, which means that a tax of about 39 yuan will be paid. The remaining 20 yuan is circulation costs, profits from all aspects of production, sales profits, etc. Therefore, the tobacco industry is also an industry with profits exceeding one trillion yuan and taxes exceeding one trillion yuan. However, my country's tobacco tax rate is not high. Compared with the tax rate of more than 80% in Israel, the United Kingdom, Greece, Turkey and other countries, the price of cigarettes is relatively cheap.

On the other hand, influenced by health concepts and demographic structure, the percentage of global smokers has declined in recent years. According to statistics from a research paper published in the British medical journal The Lavet in April 2017. The daily smoking rate for men dropped from 35% in 1990 to 25% in 2015, and for women dropped from 8% to 5%. In 1990, 1 in 3 men smoked and 1 in 12 women smoked, but in 2015 it dropped to an average of 1 in 4 men and 1 in 20 women.

Corresponding to this is the explosive growth of the global population using e-cigarettes. Research reports show that the global e-cigarette market size in 2016 was about 60 - 70 billion yuan, with a compound growth rate of 41%. my country's market only accounts for about 5%, with a market size of 3 billion yuan, but the growth rate is very rapid, with a growth rate of 316% in 2016. According to BBC estimates, there were approximately 7 million users of e-cigarettes worldwide in 2011 and approximately 35 million users in 2016. According to Euromonitor International's estimates, by 2021, the number of adult e-cigarette users will increase to 55 million.
 
Data shows that as of the end of 2016, 68 countries had enacted relevant laws and regulations to regulate e-cigarettes. In my country's e-cigarette industry is still in a stage of mixed and rapid development, and supervision is almost blank. It is neither drugs or medical devices, nor is it officially classified as tobacco. As the growth rate of tobacco taxation slows down, the number of smokers continues to decrease, and the number of e-cigarette users has increased significantly. Veterans believe that if e-cigarettes form a larger industrial scale, it will directly affect cigarette sales. In the future, the country's regulation of e-cigarettes is inevitable, but it is only a matter of sooner or later.# p#pagination title #e#

However, some other practitioners have put forward the opposite opinion. Products with strong R & D capabilities, strong channel capabilities, and outstanding brand capabilities will win. The development of e-cigarettes is an unstoppable global trend. With the entry of top capital, it is sending a good signal to the industry. If the country is regulated once, the development of e-cigarettes can also transform into nicotine-free, breathable energy bars.