The Future of Electronic Cigarettes: Challenges and Transformations

Wearing a pendant resembling a USB flash drive around the neck, taking it off occasionally to take a few puffs, exhaling clouds of smoke... Currently, some teenagers consider vaping to be a fashionable trend.

Photo credit: Unsplash-Mathew MacQuarrie. Unlike traditional cigarettes, the competitive edge of electronic cigarettes lies in their branding, design, and flavor. The wide variety of flavors, in particular, are highly attractive to e-cigarette users.

With the backing of capital, the "excellent player" in the industry, RLX Technology (RLX.N), sprinted towards success and quickly landed on the New York Stock Exchange. However, the peak of going public was followed by a downward slope. As of the close of August 7th, its stock price was reported at $1.57 USD, with a market value of $2.43 billion USD, representing a loss of more than 90% from its highest point.

In fact, the most significant impact on the development of the electronic cigarette industry occurred on March 11th of this year, when the National Tobacco Monopoly Bureau released the "Electronic Cigarette Management Regulations," which will officially be implemented on May 1, 2022. This also signals the start of a new era of strong regulation for the electronic cigarette industry, which has been developing in an unregulated manner for many years. Despite many positive developments from companies such as Wuxian Technology, their decline has been irreversible, leading to speculation about the future and fate of the electronic cigarette industry.

The offline sales channels are a competitive advantage.

According to its official website, Fogcore Technology is a Chinese consumer electronics vaporizer brand company specializing in the research, design, and sales of the RELX YUEKE brand electronic vaporizer.

In terms of performance, according to its recent financial report, the company achieved a revenue of 1.714 billion yuan in Q1 2022, a year-on-year decrease of 28.52%. During the same period, the gross profit margin was 38.3%, which is nearly 10 percentage points lower than the roughly 46% gross profit level of the same period last year.

However, despite a decline in revenue and gross profit margin, Fogcore Technology achieved a net profit of RMB 705 million (approximately USD 110 million) in Q1 2022, primarily due to reduced operating expenses. According to a report by Daily Finance, the company's operating expenses in Q1 2022 were RMB 33.6 million (approximately USD 5.3 million), which represents a 97.2% decrease compared to the same period in 2021 when it was RMB 1.216 billion (approximately USD 190 million).

Currently, in the domestic e-cigarette market, the brand RELX YUEKE under the company Fogcore Technology holds over 60% market share and remains firmly in first place.

Fogcore Technology's efforts to build market competitiveness have encountered several setbacks. According to the Daily Financial Report, in the beginning, most of Fogcore Technology's e-cigarettes relied on third-party online platforms established by individuals and distributors through social media marketing. Like other e-cigarette brands, YUEKE's sales channels started mainly online.

Following the announcement made by the national regulatory authority in 2019 that prohibits online sales of electronic cigarettes, the industry has faced stricter regulations which have heavily impacted the sales of Yooz vape products. As a result, the market has shifted towards offline sales and promotion in recent times.

FogCore Technology has been rapidly expanding its offline distribution channels in recent years due to its size and funding. Currently, its YUEKE stores have a nationwide coverage of approximately 15,000 outlets, which is its strongest defense.

Strategic Shift in Coffee Industry Layout

In late last month, Fogcore Technology, the owner of the Yooz e-cigarette trademark, announced that its subsidiary had obtained a production enterprise license from the National Tobacco Administration, approving a production capacity of 15.05 million cigarette rods, 328.7 million pods, and 6.1 million disposable e-cigarettes per year. The Manufacturing Enterprise License obtained is valid from July 18, 2022, to July 31, 2023.

However, according to the Daily Economic News, Fogcore Technology is not the first in the industry to obtain the license. Previously, they had been struggling to acquire an electronic cigarette production license while many other brands ranked lower in the industry had already obtained theirs during the same period.

It is worth mentioning that even if electronic cigarette companies are granted tobacco production permits, they will still face significant tax pressure. After all, tobacco is a monopoly product subject to much higher tax rates than ordinary consumer goods.

According to a research report by Huachuang Securities, in the production process, cigarette factories allocate cigarettes produced to the tobacco bureau. The cigarette factories are required to pay a consumption tax of 150 yuan per box based on quantity, as well as a value-added tax rate of 13%, in addition to a consumption tax rate of 56% (for Class A cigarettes) or 36% (for Class B cigarettes) based on value. Currently, electronic cigarettes are generally taxed at a rate of 13% as regular goods.

Furthermore, one can see that relying on reducing operational costs to squeeze out net profits is not a sustainable path for Fogcore Technology in the long run. If tax rates impact the cost of their products, raising prices could result in losing some of their consumers, thus affecting the company's profit margin, which is a major "risk".

In fact, Fogcore Technology is also seeking a new growth trajectory. On July 15th, the sub-brand "Xingke ON" coffee shop of Yueke opened its second branch in the Chengdu Hejing Mofang Shopping Center. It is reported that the store adopts a self-pickup model similar to Luckin Coffee's, saving store rent and implementing a similar membership mechanism. For a monthly fee of 20 yuan, members can enjoy special benefits such as instant discounts and free delivery.

The coffee market is well-known for having two major players, Starbucks and Luckin Coffee. For Whisker Technology to carve out a piece of that market, it may not be an easy task. The intention to open a coffee shop is likely to serve as a risk hedge, and it is unrealistic to expect revenue growth like that seen in e-cigarettes in the future.

The outlook is not optimistic.

According to a report by CIC, the global e-cigarette market reached a scale of $63.1 billion in 2019, with a compound annual growth rate of 26.3% from 2016 to 2019. It is projected to reach a scale of $124 billion by 2023, with a compound annual growth rate of 18.4% from 2019 to 2023.

According to the latest data, the electronic vaporization industry (including closed and open electronic vaporization devices) is expected to reach a scale of $82 billion, with a compound annual growth rate of 23.5% from 2019 to 2023. This shows that with advances in technology and changes in lifestyle preferences, there is a strong surge in the market for new tobacco products.

However, we must also acknowledge the other side of the coin. Despite the rapid expansion of the e-cigarette market, controversies surrounding e-cigarettes have persisted. These controversies include whether e-cigarettes are more appealing to non-smokers, particularly minors, whether they are healthier than traditional cigarettes, and whether they can aid in smoking cessation. However, there is no conclusive research on these issues.

The key issue is that policy regulations remain a looming sword hanging over the electronic cigarette industry. In China's electronic cigarette market, there is a tightening trend in government policy.

On March 11th of this year, the State Tobacco Monopoly Administration released the "Electronic Cigarette Management Measures", which will officially take effect on May 1st, 2022. The measures include increasing the industry's access threshold, implementing comprehensive management of the entire e-cigarette operation chain through a nationwide unified e-cigarette trading management platform, and requiring e-cigarette companies seeking IPOs to pass review by the tobacco regulatory authorities.

Of particular concern is the new regulation that prohibits the sale of flavored electronic cigarettes that are not tobacco-flavored and e-cigarettes that can have vapor additives added to them. However, in comparison to traditional cigarettes, the appeal of e-cigarettes lies in their imaginative designs and a variety of pods that cater to consumer taste preferences. If these are banned, the competitiveness and even the viability of e-cigarettes may be compromised.

As a result, it is not surprising that the value of e-cigarette companies would plummet by 90% if their "lifeblood" was shaken. As for the future of Huixin Technology, besides selling their "limited capacity" products under regulation, their reliance on a few experimental coffee shops may not sustain their revenue scale, and a downturn may already be underway.

This article contains excerpts or reprints from third-party sources, whose copyright belongs to the original media and authors. If there is any infringement, please contact us for deletion. Any unit or individual who needs to reprint should contact the author and not directly reprint.