Rise in Domestic E-cigarette Sales: Temporary Relief?

According to reports, the sales of e-cigarettes in China have significantly increased in the second quarter. Industry experts analyze that this does not necessarily indicate an improvement in the industry. Some brand owners are purchasing e-cigarettes themselves and giving them as gifts to consumers in order to maintain their market share. Additionally, cracking down on the black market for e-cigarettes has caused some consumers to return to legal sales.

In the first quarter of this year, electronic cigarettes experienced a sharp decline in China. The leading contract manufacturer, Smoore International Holdings, reported revenue of only 15.5 million yuan, a year-on-year decrease of 97.7%. Meanwhile, the top brand, RELX Technology, saw revenue of 189 million yuan, a year-on-year decrease of 88.98% and a month-on-month decrease of 44.45%.

The sharp decline in year-over-year sales was not unexpected as last year, electronic cigarettes were not yet subject to regulation and were still allowed to be sold with flavored tobacco. Electronic cigarette companies were able to establish their own sales channels and operate flexibly without any restrictions. However, since October of last year, they have entered the era of regulation where sales channels, market share, and flavors are all restricted and require proper licensing to operate.

The electronic cigarette industry has experienced a decline of over 90% year-on-year due to consumers seeking fruit-flavored options and abandoning traditionally produced tobacco-flavored e-cigarettes. The decline compared to the previous quarter is because tobacco-flavored e-cigarettes began selling in the fourth quarter last year and required distribution to reach the end consumer, resulting in poor sales. This feedback was communicated to manufacturers and new orders have significantly decreased in the first quarter of this year.

It is understood that the sales of electronic cigarettes in the legitimate channels in the second quarter of the year have increased by approximately 30% in China. This seems to indicate an improvement in the sales of legitimate channel electronic cigarettes. However, industry insiders analyze that this does not necessarily mean that terminal sales have really been consumed, but rather that brand owners are actively purchasing from terminals in order to maintain the share they obtained last year, hoping that sales will not look too bad. It is understood that some brand owners obtained pod shares ranging from tens of millions to hundreds of millions last year, but now with the poor market conditions in the industry, it is likely that they will not be able to complete even half of it.

Last year, electronic cigarette companies aggressively applied for market share. At the time, the belief was that the more share a company obtained, the greater the benefit, signaling a high ceiling and solid industry standing. Some lesser-known companies also received large allocations, causing a stir in the industry. However, it now appears that the significance of obtaining a market share has been overestimated.

Buying from the end consumer is a necessary measure for brand owners, which means they bear the high taxes in the tobacco industry themselves, directly impacting their profit margins. In addition, in order to win over customers who are already lost, the end consumer is engaging in a price war, with the widespread phenomenon of giving away pods, causing the entire industry to be passive.

From a business perspective, the industry faced its toughest period in January of this year. According to management at Fogcore Technology, revenue in March was almost double that of January. Similarly, management at Smartmore reported a year-on-year revenue decline of over 95% in January, but this improved to a 90% decline in April and has since been recovering month-on-month.

The government's efforts to crack down on the black market for electronic cigarettes have had some success. However, due to the simplicity of electronic cigarette production, there are signs of the spread of counterfeit electronic cigarette manufacturing sites, which were once highly concentrated in the Pearl River Delta but have now appeared in different provinces. Some black market electronic cigarette operators have been sentenced, which has had a deterrent effect. Nonetheless, there are still many people who take risks for their own benefit. The core reason for this is that the attraction of fruit-flavored electronic cigarettes to consumers is too great, making it difficult for consumers to convert to tobacco-flavored products.

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In the second quarter, domestic e-cigarette sales significantly increased. Industry insiders say that some brands are purchasing their own products.