E-Cigarettes: The Wild, Wild West

Abstract

In 2014, tobacco giant Reynolds American Inc. (RAI) had to confront the rapidly evolving global tobacco industry landscape. E-cigarettes, once considered a fad, were becoming increasingly popular. Facing uncharted territory, tobacco companies were uncertain about how to most successfully enter this market and how to do so rapidly. Excerpt UVA-M-0876 Rev. Sept. 21, 2015 E-Cigarettes: The Wild, Wild West In 2014, tobacco giant Reynolds American Inc. (RAI) had to confront the rapidly evolving global tobacco industry landscape. E-cigarettes, once considered a fad, were becoming increasingly popular. Facing uncharted territory, tobacco companies were uncertain about how to most successfully enter this market and how to do so rapidly. An executive from Altria, the largest tobacco company in the United States, recognized the difficulty of predicting how robust the market would become. “Adoption rates are pretty low at this point…there is interest, but probably the products are not meeting the needs of people…that's a challenge that I think we and other people in the space are struggling and dealing with,” he said. RAI faced the same uncertainties. To explore this new market, combat Altria, and address declining cigarette consumption, in 2012, RAI had begun acquisition talks with Lorillard, Inc., a smaller tobacco company. The talks would last two years and culminate in a $ 27.4 billion deal, although there were difficult decisions along the way. RAI had developed its own e-cigarette, Vuse, but Lorillard manufactured the popular blu eCigs, which in 2013 had captured 47% of the U.S. e-cigarette market. Both RAI and Lorillard worried about scrutiny by antitrust regulators if both Vuse and blu eCigs were housed in the same company. Growing health concerns and the possible regulation of e-cigarettes were issues that complicated the decisions that had to be made. In early 2014, the U.S. Food and Drug Administration (FDA) had announced future regulations, and if laws governing e-cigarettes were too draconian, the growth of the e-cigarette industry could be adversely affected. RAI's CEO Susan Cameron had publicly expressed her excitement about e-cigarettes by saying, “[Our] strategic mission to transform the tobacco industry is a fascinating journey. I'm looking forward to the opportunity to not just advance, but accelerate, that momentum.” . . .