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From the Ashes

Why e-cigarettes could change Richmond's historic tobacco industry.

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The grand opening of RVA Vapes, the area's newest electronic cigarette store, is heralded by flashing red, green and blue lights in the windows. Inside, one wall lists various e-cig flavors, such as mango and Rams candy. Another wall is painted with a likeness of the Richmond skyline straddling the word "Vapes" in psychedelic bubbles in a distinctive 1960s, head-shop style.

Opened last week, the store is among half a dozen e-cig outlets that have gone into business during the last five years — in a city that for centuries genuflected before the golden leaf. Richmond has been a tobacco-trading center since its beginnings, and is home to the last manufacturing site in the United States for Marlboro, the country's best-selling tobacco cigarette.

So it may seem odd that Richmond is a bit behind the times in the e-cig craze sweeping the country, especially when the new vaping gizmos could help transform its faltering tobacco cigarette business.

"I came up from Tampa and St. Petersburg and there must be a hundred shops there," says Chip Anderson, co-owner of the new store.

David Payne of Powhatan has been anxiously waiting at the door. He used to smoke a pack of day of Swisher Sweets little cigars. Now he's inside at a bar puffing away on an e-cigarette.

He lifts a small, tube-shaped device to his lips, presses a switch and inhales a vapor of water, nicotine and additives. The nicotine juice inside helps supply the same rush provided by traditional cigarettes. The vapor is odorless, but not tasteless. Payne favors bakery flavors such as cakes and cookies. Plus, he gets his nicotine fix, he says: "It's not smoking and it's a lot cheaper than tobacco."

Noelle Pryor and Chip Anderson are co-owners of RVA Vapes, Richmond’s newest electronic cigarette store and lounge. - SCOTT ELMQUIST
  • Scott Elmquist
  • Noelle Pryor and Chip Anderson are co-owners of RVA Vapes, Richmond’s newest electronic cigarette store and lounge.

Electronic cigarettes, which are unregulated and largely untaxed, first emerged in the United States in 2007 at independent stores. Many outlets were started by young people such as Anderson, who started working on Richmond-area stores in October when he got together with his partner who had experience with e-cigarettes stores in Dallas. Anderson has the air of the rebel entrepreneurs who ran head shops catering to marijuana or hashish users with pipes and cleaners 40 years ago.

Vaping finally caught the eye of Big Tobacco last year, when Greensboro, N.C.-based Lorillard, the maker of Kent cigarettes, bought the Blu brand of e-cigarettes — which has about a 45-percent share of the e-cigarette market. You may have seen the television commercials featuring actor Stephen Dorff, who says, "I'm tired of feeling guilty every time I want to light up," before using Blu while strolling along a beach.

An RVA Vapes customer demonstrates loading a vaper with flavored nicotine juice. - SCOTT ELMQUIST
  • Scott Elmquist
  • An RVA Vapes customer demonstrates loading a vaper with flavored nicotine juice.

A few months after Lorillard bought Blu, Richmond-based Philip Morris USA started test-marketing its MarkTen product. And last week the company announced it was paying $110 million for Green Smoke, another e-cigarette maker. E-cig sales have skyrocketed to an estimated $1.8 billion at the end of 2013, says Bonnie Herzog, a senior analyst at Wells Fargo Securities in New York.

Research shows that about 10 percent of traditional tobacco smokers are switching to e-cigarettes.

The sudden explosion of interest has industry analysts agog. "It's really going quite rapidly," Herzog says. "We believe consumption of e-cigs will eclipse consumption of traditional cigs over the next decade." Profit margins could surpass those of traditional cigarettes even sooner, she adds, perhaps by 2017.

The U.S. Food and Drug Administration is set to decide this year whether to regulate e-cigarettes as a tobacco product. Depending on what the FDA does and how the market emerges, e-cigs could become an economic godsend to Richmond. After all, its history of profiting from tobacco runs deep.

 

Shoppers attend the RVA Vapes grand opening Feb. 1 on West Broad Street. - SCOTT ELMQUIST

At Jamestown, Native Americans taught English settlers how to grow tobacco, which was used as money as well as for smoking. The first law passed by this continent's first legislature dealt with tobacco price supports. In 1874, P.H. Mayo & Brothers Co. started producing the first cigarettes in the city. Cigarette manufacturing accelerated with Maj. Lewis Ginter's rolling machines.

For decades, the local economy was dominated by American Tobacco, which made Lucky Strikes in red brick Tobacco Row buildings, and whose proprietary research dominated the Medical College of Virginia. Those factories have been remade into expensive lofts, where monthly rents can run nearly $3,000. One smokestack still has the kitschy Lucky Strike name on its side. 

Philip Morris, which started making cigarettes locally in 1929, morphed into Altria in 2003 after it and three other major tobacco companies agreed to pay $206 billion over 25 years in a massive lawsuit settlement. The corporation moved its headquarters from New York to the more tobacco-friendly Henrico County, forcing a reorganization. Philip Morris International was spun off and sent to Switzerland, where it could hawk tobacco products to Third World countries without government interference. Philip Morris USA consolidated its cigarette manufacturing in Richmond at a sprawling plant south of downtown after shuttering factories in Kentucky and North Carolina.

Together with Philip Morris USA, Altria employs 3,959 people in Virginia, most of them in Richmond, making it the eighth largest private employer in the area. Despite its penchant in the past for tough dealings and secrecy, Altria has a reputation for treating its employees, more than 9,000 nationwide, well. Many rank-and-file career workers, some fanatically loyal, have retired as millionaires with company stock and solid benefits.

Altria also is a huge philanthropic donor. It bankrolls the Richmond Symphony, the Richmond Folk Festival, the Boys and Girls Club of Metro Richmond, the Visual Arts Center and the Virginia Museum of Fine Arts, among other groups. In 2012, Altria made more than $26.7 million in philanthropic donations, according to the company. Most of the beneficiaries were in the Richmond area. Last week, the Black History Museum and Cultural Center announced a $500,000 donation from Altria toward an exhibit.

But Altria also faces a fundamental, long-term problem: Americans are smoking fewer cigarettes. Since the famous 1964 Surgeon General's report linking tobacco smoking to cancer, smoking has declined from about 42.2 percent of the U.S. population in 1965 to 18.1 percent in 2012, according to the National Center for Health Statistics.

That's bad news for Altria, which gets about 88 percent of its more than $23 billion in annual revenue from cigarettes. The cash cow is Marlboro, which has half the market share of all cigarettes smoked in the United States. The problem was underscored last month when Altria reported that its fourth-quarter profit in 2013 fell 56 percent to $488 million. It attributed the decline to fewer cigarette sales and debt payoffs.

An Altria subsidiary is test-marketing MarkTen e-cigarettes in Indiana and Arizona. It’s Philip Morris USA’s first venture into the e-cig business. - PHILIP MORRIS USA
  • Philip Morris USA
  • An Altria subsidiary is test-marketing MarkTen e-cigarettes in Indiana and Arizona. It’s Philip Morris USA’s first venture into the e-cig business.

Altria spokesman David M. Sylvia says smoking in this country is declining by 2 percent to 4 percent annually. "This won't change," he says, "so we need to be innovative."

Diversifying has brought mixed results. At one point, Altria owned Kraft Foods and Miller Brewing. Neither worked out. It sold Kraft and still holds a voting stake in SABMiller, the beer company. More recently, it's ventured into smokeless tobacco and Chateau Ste. Michelle wines. Another newer venture is Verve, which is a chewable disk made from products derived from tobacco.

The company has gone through several iterations of cost cutting. In the past three years, Altria has shed about 2,000 jobs in Virginia alone, mostly through attrition.

Steve Marascia, director of research at Capitol Security Management in Glen Allen, says some of the new ventures are successful but they make up only about 10 percent of the company's revenues, hardly enough to supplant cigarettes.

Electronic cigarettes could provide the opportunity for the company to recapture revenue as traditional cigarette sales drop, Marascia says. In this regard, Altria is a bit behind the curve. Once Lorillard bought the Blu brand and sales shot up, Marascia says, "the others said yes, we'd better, too."

Only last August did Philip Morris USA introduce its prototype MarkTen e-cigarette. It launched the product in Indiana and then in Arizona and now sells the brand in about 5,000 stores in both states. By comparison, NJoy King, a competing brand put out by an independent group in Scottsdale, Ariz., is on sale in 80,000 stores.

MarkTens can be recharged with USB cables and cost about $9.50 each, company spokesman Sylvia says. The company buys nicotine from a third-party source and processes it into juice in Richmond. That juice is exported to China where the final product is made and shipped back to the U.S.

 

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What makes electronic cigarettes promising to Big Tobacco is that they have many of the attractions of regular butts, but seem to pose fewer risks. A user gets the same nicotine kick while handling a device that looks likes and feels like a cigarette.

E-cigs have none of the tar or dozens of other deadly carcinogenic chemicals that traditional cigarettes do. The vapor that users inhale is a mix of water, nicotine and chemical flavoring. Fans say they can be a useful tool to wean smokers off the weed.

But the business of e-cigs is built upon the addictive qualities of nicotine. Once hooked, users typically have trouble abstaining, just as they did with traditional smokes, according to the American Cancer Society, which is ambivalent about the health effects of e-cigs. Nicotine is highly toxic if inhaled directly or if it comes in contact with the skin or is swallowed in significant quantities. A straight dose of 10 milligrams can be fatal if ingested at once by a child. Nicotine can elevate heartbeat rates and blood pressure and could cause birth defects if used by pregnant women. It can hamper brain development in adolescents. With e-cigs, the user chooses the nicotine levels, which can range from none to 30 milligrams.

Researchers at the University of California at Riverside found that e-cigs had confusing warning labels and could be prone to leaking the chemicals they use, including nicotine and propylene glycol.

Matthew Myers, president of the Campaign for Tobacco Free Kids, an influential Washington-based advocacy group, says there's no reliable way of knowing what's in electronic cigarettes because they aren't regulated by any government agency. There isn't much quality control at the head-shop style outlets, he says, "so, you really don't know what you're getting."

Myers also is concerned by how e-cigs are being marketed. Fierce battles long have been waged to stem Big Tobacco's expensive advertising campaigns that promote their products as sexy and sophisticated.

But e-cig promoters are following that lead. "They can still be [used in] a cool Humphrey Bogart smoking away," says Cole Smith, a founder of Avail Vapor, a Richmond-based, independent, electronic cigarette start-up.

Some e-cig advertisements look much like classic ads for venerable tobacco brands. The smooth, youthful guy on the leather sofa vaping a Blu oozes masculinity and confidence just as the familiar Marlboro cowboys did back in the 1960s. "It's disturbing that the ads are aimed at young people and seek to re-glamorize the idea of smoking," Myers says.

Skepticism abounds. Vaping is forbidden on commercial airplanes or Amtrak trains. It's prohibited in public areas at Starbucks and in many restaurant chains. Mexico and the European Union regulate it. So do New York and Chicago among other cities. California is considering a proposal to ban e-cig use anywhere that tobacco smoking is forbidden. In Richmond, some restaurants, such as Kona Grill and Keagan's Restaurant and Tavern, allow it; others don't.

While the FDA determines whether to regulate e-cigs as a tobacco product, it faces a challenge: Tobacco isn't the only plant that can produce nicotine. So, too, do tomatoes, potatoes, eggplants and peppers — not to mention marijuana. In some cases, it might be difficult to claim that e-cigarettes have anything to do with tobacco. That has implications for how they'll be regulated and taxed.

No such debate exists any longer about the health dangers of regular tobacco cigarettes. The World Health Organization believes that a billion people will die from tobacco use during this century. The Centers for Disease Control say that 480,000 people die annually from tobacco smoking in this country. It remains the leading cause of preventable death in the United States.

A recent Surgeon General's report says that because of changes in how cigarettes are made, today's smokers face a higher risk of lung cancer and lung disease than smokers in 1964. The journal Nicotine and Tobacco Research also recently reported that although the quantity of nicotine in the average smoke hasn't changed in years, today's cigarettes deliver more of it to the lungs.

The nation's second-largest drugstore chain, CVS, announced last week that it would stop selling cigarettes and all other tobacco products by Oct. 1.

 

RVA Vapes customer David Payne, once a smoker of Swisher Sweets, puffs on a pineapple-upside-down-cake-flavored e-cig. - SCOTT ELMQUIST
  • Scott Elmquist
  • RVA Vapes customer David Payne, once a smoker of Swisher Sweets, puffs on a pineapple-upside-down-cake-flavored e-cig.

A curious aspect of e-cigarettes is how they're evolving. The usual path looks like this: After years of careful, big-bucks research, development and market-testing, Big Tobacco unleashes products on consumers. Instead, e-cigs emerged off the radar screen as imports from Asia. They entered the market from the bottom up, leaving large tobacco firms in the smoke — or vapor.

So far, smaller, entrepreneurial companies have created and sold their own products marketed under such names as Fin and Mistic, as well as NJoy King. Some stores that sell them are decorated in a classic rock motif with artwork drawn from old record covers. Customers tend to be young and independent-minded, like the punk rocker with tat sleeves recently mulling over a display of rechargeable electronic cigarettes at Avail Vapor in Carytown. The 3,300-square-foot store opened last summer.

At Avail, vaping devices start at about $8 for a disposable device that has roughly the same number of puffs as the usual pack of tobacco smokes. Special models go up to $74. Nicotine juice is available in various strengths, and flavors include mango, mochachino and cinn-a-toast. The poster-covered walls in the back of the store look down upon lounge chairs where customers can sample products or vape at leisure.

Avail also has stores in Short Pump, Fredericksburg, Blacksburg, Norfolk, Northern Virginia and Virginia Beach. Its eighth store is scheduled to open in Chesterfield soon, says Smith, a North Carolinian who co-founded the company with Donovan Phillips, a Richmonder who went to Virginia Commonwealth University.

"We're going for the taste and retail experience," says Smith, who handles the company's marketing. Avail imports most of its devices from China, but has a production facility in Henrico County where it makes its own nicotine juice, a concoction of nicotine, propylene glycol and vegetable glycol. He says the e-cig technology dates to the 1960s, but only recently made its breakthrough.

Smith says the beauty of the product, besides its relative lack of health risks and flavor variety, is that consumers can regulate their nicotine intake. You can start with higher dosages and gradually reduce them. But, he says, "If you are a former smoker who is afraid of nicotine, I say don't do it."

Founded five years ago, Vapors Lounge is the Richmond area's first vaping outlet. Founder James Jackson, a defense contractor in his 50s, was on a business trip in Florida in December 2008. "I'd been smoking Newports for 35 years and my wife was in a ladies' store shopping and I wanted to smoke," he says. "When I went outside, I saw a store that was showing a video of vaping. I tried it."

Jackson liked it so much, he says, he hasn't had a regular smoke since. When he was back in Richmond and ran out of cartridges, he called the manufacturer in Florida. They asked if he'd like to sell them. He soon opened Vapors Lounge in the Buford Shopping Center on Midlothian Turnpike. He opened another store in Merchants Walk in Henrico.

"We have the best juice on the market," boasts Jackson, who says that vaping has enormous pent-up demand. "I don't think that in 10 years there will just be as many vapers as cigarette smokers," he says. "I think there will be three to four times as many. I doubt they'll be selling tobacco then."

Wells Fargo analyst Herzog sees more of a one-to-one replacement of e-cig consumers for tobacco smokers in a decade. She and similar analysts typically track sales of tobacco and tobacco-related products in convenience stores.

There, the numbers tell the story. During the four quarters of 2013, shelf space allotted to cigarettes was slightly down while e-cigs crowded out not just traditional smokes but also smokeless tobacco, snus (like snuff) and cigars. The year-to-year increase for e-cigs in shelf space was up 31 percent, she reports.

Herzog is bullish on the Big Three tobacco companies — Philip Morris USA, Reynolds American and Lorillard — moving briskly ahead. She notes that they have plenty of cash, huge distribution networks and marketing databases. She also predicts that the smaller firms won't be crowded out.

"There is plenty of room for several of the other players including NJoy, Mistic, Fin, Logic and Krave," she says.  Her research also suggests that thus far the response to Philip Morris USA's MarkTen e-cigs has been "tepid."

 

Cole Smith is co-founder of Avail Vapor in Carytown. The store, which opened last summer, makes its own nicotine juice at a factory in Henrico County. - SCOTT ELMQUIST
  • Scott Elmquist
  • Cole Smith is co-founder of Avail Vapor in Carytown. The store, which opened last summer, makes its own nicotine juice at a factory in Henrico County.

Altria's positioning in the e-cig market could have a big impact on its future. Spokesman Sylvia says he doesn't know how many local Altria workers could be involved in e-cig production. But one significant step came in January, when Altria announced a new deal with its former sister company, Philip Morris International.

Philip Morris USA will make e-cigs for both companies, breaking a wall that had been set up between the two. Under the gun from health-related lawsuits, Philip Morris USA advises its website visitors against using its products and doesn't export tobacco products. Meanwhile, Philip Morris International unabashedly markets more potent and dangerous cigarette brands such as Marlboro Mix 9, a smoke with higher levels of tar and nicotine sold in countries such as Indonesia, which lacks similar regulation.

The new e-cig deal is significant. It links the broad manufacturing, distribution and marketing clout of the two companies. It could lead to new job creation in Richmond. Analyst Marascia says that Altria has gone through plenty of cutbacks and can't afford more. Herzog notes that the Richmond company will make e-cigs "exclusively" for the international firm and this could boost Philip Morris USA because it should "generate substantial growth and profits."

If so, e-cigs could take more deadly tobacco products off the market, which is one reason why tobacco critics such as Myers aren't completely opposed to them.

But no one knows for certain, especially because e-cigs are making the image, if not the actual experience, of smoking attractive again. A more cynical view is that Big Tobacco will use them to get extra revenue while using their positive advertising spin to revitalize sagging tobacco sales. Perhaps, they may snap up the pioneering e-cig stores in the process to consolidate their control.

"They could use e-cigarettes as a way to grow both markets overall," Myers says.

That would be a huge and unexpected shift after half a century of battles over smoking. If so, Big Tobacco may crawl out of its ashes after all. S

Editor's Note: An earlier version of this story reported an RVA Vapes customer was using an e-cigarette containing tobacco.

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