The tobacco industry may be undergoing a radical change. Electronic cigarettes have become a popular alternative to traditional cigarettes and have started to exert pressure on the demand for the traditional product. The electronic cigarettes have been listed as one of the most disruptive technologies to existing firms according to Goldman Sachs. This has led to many tobacco firms trying to make their own brand of electronic cigarettes. The biggest question the industry faces is whether or not electronic cigarettes will completely wipe out the demand for the traditional cigarette. If this is the case, the tobacco industry could have to go through many changes.
The tobacco industry is going to have to undergo a transformation to cater to the demands of the consumers. Traditional tobacco companies (Philip Morris, RJ Reynolds) already produce cigarette alternatives, such as snuff and chewing tobacco. They have not, however, broken into the electronic cigarette market. The need to enter into this new aspect of the market will lead to many operational changes since traditional and electronic cigarettes are not made the same way. In addition to this problem, other companies have entered the market for electronic cigarettes giving traditional firms more competition.
Another concern for tobacco companies is the study of the health effects of electronic cigarettes. Since they are a relatively new technology not much research has been conducted on the long term health problems that can be caused by electronic cigarettes. If there are severe health problems associated with electronic cigarettes consumers may be less likely to buy them. Some early tests have deemed electronic cigarettes worse than the traditional ones. This possible decreased future demand could lead to economic loss for firms.
Mergers and acquisitions could also come into play with a new product being introduced into the market. It may be cheaper for a large traditional firm to acquire a smaller electronic cigarette firm than to shift its current operations to making electronic cigarettes. The concern with this, however, is whether or not electronic cigarettes are a fad or will become a social norm. The uncertainty of their future demand adds another aspect to such a large investment for a firm.
How will the tobacco industry look in the future? Will electronic cigarettes become a staple for tobacco companies? Will this new technology increase the number of firms in the market, or will the large traditional firms find a way to incorporate it into their current operations?
2 Comments
I think that many of your questions at the end depend on the difference in production between traditional cigarettes and electronic cigarettes. If traditional cigarette plants can be easily adopted to producing electronic cigarettes, then it will be very easy for the traditional cigarette companies to switch to producing electronic cigarettes to please consumer demand. If traditional cigarette plants cannot adopt well to producing electronic cigarettes, then the traditional cigarette companies will face very high costs to meet consumer demand, which ultimately may not be worth it if the demand for electronic cigarettes is ephemeral due to fad or is not high enough to outweigh costs and allow the traditional cigarette companies to keep earning positive profits.
Electronic cigarettes were originally introduced to help people quit smoking, were they not? If they are effective in that, there’s no market for Philip Morris and RJR.
Second, what matters may not be the manufacturing process but the ability to brand on something other than price. If not, then these firms commit stock market suicide no matter what they do.
Third, they can try to undermine the market, engaging in health studeies not to try to cast aspersions on the deleterious effects of using tobacco, there past foray into public health research, but instead to try to cast doubts on the safety of e-cigarettes. After all, they have experience in, uh, rebranding R&D results.
Data? What are the relative market sizes? Price points?
Comments are closed.