The E-Cigarette Industry in China By Roger Luo Operation Director of CECMOL Introduction of CECMOL Purpose: To promote tobacco harm reduction, improve people’s life quality, and build a smoke-free society. 1. E-cigarette Industry Association 2. Held the first and biggest E-cigarette Forum in China. 3. Organized the first Vapor Expo in China 4. World No-smoking Day: Press Conference 5. Our next Vapor Expo: October 20-23 2015, Shenzhen The 2rd CECMOL China International Vapor Expo October 20-23 2015 The 3rd CECMOL China E-cig Summit Forum April 10-11, 2016 Shenzhen Convention and Exhibition Center Contents 1. Market Environment of E-cigarette in China 2. Market Capacity of E-cigarette in China 3. Consumer Behavior of E-cigarette Market in China 4. Consumer Preference of E-cigarette in China 5. Historical Sales Data of E-cigarette in China 6. Suggestions on Future Development of E-cigarette Industry In 2003, E-cigarette was invented; in 2004, patent was filed. In 2005, E-cigarette was introduced to Europe by the British. In 2007, E-cigarette entered the US market. With the reputation of “tobacco alternative” and “smoking cessation product”, E-cigarette attracts the attention of global smokers. Statistics show that in 2011 in Japan and the USA the tobacco sales dropped by 10.8% and 2.8% respectively, while E-cigarette sales had significant increase. Therefore, when E-cigarette is noticed by tobacco consumers, the market starts transforming and developing. Mr. Ling, the leader of China Tobacco, has attached importance to domestic market of E-cigarette in China. On the National Tobacco Industry Conference this year, Mr. Ling pointed out that “We should grasp the international tobacco market trends, attach great importance to the research and development of new tobacco products, such as heat-not-burn cigarette, E-cigarette, Snus etc, and take it as the major project for the sustainable development of the industry. The China Tobacco has set up a leading team to work on the planning, designing and major projects of new tobacco products.” With such development trend, what’s the policy environment? World Health Organization strengthens supervision Since 2008, WHO Framework Convention on Tobacco Control (FCTC) has gradually brought E-cigarette and other tobacco alternatives into supervision. In 2010, according to the 4th session of the Conference of the Parties to the WHO FCTC, WHO published a report: Control and Prevention of Smokeless Tobacco Products and Electronic Cigarette. On the 5th session of the Conference of the Parties to the WHO FCTC, WHO confirmed regulations on prevention and control of smokeless tobacco products, electronic cigarettes and nicotine alternatives; had health hazard tests on new nicotine alternatives and submitted the results to the 6th session in 2014 for further discussion. Regulations in China a. China Tobacco regards the contents of E-cigarette as high purity nicotine extracted from tobacco, so it suggests State Administration of Work Safety be responsible for the regulations, according to Hazardous Chemicals Control Ordinance. b. State Administration of Work Safety thinks that it’s only responsible for the safety of production and transportation of hazardous chemicals, but it’s other regulator’s responsibility for the possible hazard from consuming hazardous chemicals. However, there’s no legal restrictions on consuming nicotine at present in China. How to analyze the policies? Legislation Comes First Tobacco Monopoly Law came into effect in 1991. It’s amended in 2009, but it’s not binding for E-cigarettes. There should be at least 5 conditions for legislation: 1. WHO must confirm whether the smoking conditions of traditional cigarette apply to E-cigarette; 2. WHO must confirm whether E-cigarette is harmful to human health; 3. Some countries have legislations on E-cigarette, which can be used as reference in China; 4. According to the feedback from domestic market, E-cigarette is growing continuously and exponentially in China. 5. Some e-cigarette brands have been involved in the competition of global tobacco market. The Twelfth Five-year Plan of Tobacco In the 12th Five-year Plan (2011-2015) made by China Tobacco, the core strategic target is “upper level of tobacco”, and there’s no planning or goal about E-cigarette, which is one of the reasons why it’s not regulated at present. After the change in leadership of China Tobacco in 2014, the new Leader Mr. Ling’s comments means strategic planning for E-cigarette. However, at the end of the 12th Five-year plan, there’s little possibility of setting clear regulations for E-cigarette. Thus in the near future there will still be lack of regulations. The 13th Five-year Plan will come to a conclusion (2016-2020) Two hot phrases before the 13th Five-year Plan: 1. New Normal: the new normal of the market segment of traditional cigarette, and the new normal of technological innovation. 2. Three Major Issues: a. How to gain bonus from reforming? To adhere to the monopoly system of tobacco. b. How to reach the potential of development? To focus on the new development of global market. c. What is our goal? To aim at reaching global prominence and catching up with the Top 3 multinational brands. When will E-cigarette be regulated in China? Analysts conservatively estimate that in 2 years (2017) the policy will be gradually clear; at the end of the 13th Five-year Plan, there will be clear regulations. Contents 1. Market Environment of E-cigarette in China 2. Market Capacity of E-cigarette in China 3. Consumer Behavior of E-cigarette Market in China 4. Consumer Preference of E-cigarette in China 5. Historical Sales Data of E-cigarette in China 6. Suggestions on Future Development of E-cigarette Industry The E-cigarette Consumption Rate in major cities of China According to the statistics of the 5 major cities, the E-cigarette consumption rate is 3.4%, among which the rate in Beijing is the highest, followed by Shanghai and Guangzhou; the rate in Xi’an is close to average, while Harbin’s rate is only 1.7%, much lower than average. The percentage of E-cig consumption in the past half a year (N=2038) Source: CATI E-commerce (online) Sales • Taobao.com: 1575 online stores. A level stores: 59; B level: 565; C level: 683. • Tmall.com: 71 online stores. Mostly are flagship stores and self-owned domestic brands; seldom international brands. • Main stores: top-ranked stores are from Tmall.com, mainly are self-owned brands made in China. • Search engine index: the site search index is increasing, and in July 2014 the average number of people who search is 43,000; the industry search index vs. product index of all sites is 1:0.8. The market capacity is huge and the competition is small, indicating a good trend. Estimation on E-cigarette Market Capacity Formula: Market Capacity=population * percentage of ppl aging 15 - 64 * usage rate * percentage of E-cigarette usage * E-cigarette average usage each year City Population (10,000) Percentage of ppl aging 15 - 64 Usage Rate Percentage of E-cig Usage E-cig average usage each year Market Capacity (10,000) Beijing 2069 72.70% 27% 4.9% 118 2348 Shanghai 2380 72.70% 26.20% 4.1% 118 2193 Guangzhou 1275 72.70% 25.40% 3.9% 295.5 1083 Xi’an 846 72.70% 22.20% 2.3% 118 370 Harbin 993 72.70% 30.10% 1.7% 130.6 435 • ①This is the first field research on E-cigarette in China, so there’re no other case study data about E-cigarette usage for reference. • ②This CATI research is based on 500 samples of each city; since the E-cigarette usage rate is low, so that in the sample database the number of people using E-cigarette in each city is too low, plus in the database the frequency of using Ecigarette by consumers is too scattered, so it can’t be regarded as effective reference. • ③According to the data of consumer questionnaire collected by an entrusting party, the frequency of using E-cigarette by consumers is: 21.5% consume 1 piece or above per day on average, 13% consume 4 to 6 pieces (include refills) per week, 10% consume 2-3 pieces (include refills) per week, 10.4% consume 1 piece (include refills ) per week, 22.6% consume 2 to 3 pieces (include refills) per month, 10.7% consume 1 piece (include refills) per month, 5.25% consume 1 piece (include refills) every 2 months, 6.7% consume less than 1 piece every 2 month on average. Based on this frequency, it’s estimated that the average usage is 118 to 789 pieces (include refills) per person per year; since the data of Beijing, Xi’an and Shanghai are not ideal, it’s conservatively estimated as 118 pieces of E-cigarette usage per person per year in those 3 cities. • ④This research is based on a small scale of consumer questionnaires, so the estimated average annual use of Ecigarette usage is only for reference. Sai Le Bao 2007 Ru Yan 2002 2006 First Union 2005 Jian Kang Yuan 2005 Kanger 2006 DESONIC 2007 Kimree 2008 JSB 2009 Tian Rui Xing Nuo Kang JOMO Wei Qi Aspire Feng Tian Yuan Playboy Chen Xiang Fei Yan Tian Xia Yan Qu Dekon 2005 Smoore 2006 Joytech 2008 Boge 2008 BoDi 2008 Si Mo Ke Innokin Sai Er Mei LTD GREEN SIGELEI …….. Contents 1. Market Environment of E-cigarette in China 2. Market Capacity of E-cigarette in China 3. Consumer Behavior of E-cigarette Market in China 4. Consumer Preference of E-cigarette in China 5. Historical Sales Data of E-cigarette in China 6. Suggestions on Future Development of E-cigarette Industry The Characteristics of domestic E-cigarette consumers The average age of E-cigarette consumers is 33.5 years old, and there are mainly 2 kinds: 1. Moderate to heavy smokers (daily smoking is over 15 pieces of cigarettes), trying to quit smoking gradually; 2. Young light smokers (daily smoking is less than 8 pieces), regarding E-cigarettes as fashion and fun. College degree or above accounts for 53.6%, overall education is above average; income peaks at 2 levels, one is for low income groups whose annual family income is 10,000 to 50,000RMB, and the other is relatively high income groups whose annual family income is 100,000 to 200,000RMB, among which those with annual family income over 100,000RMB account for 33.9%。 Source: CATI 3.60% 2.90% Occupation 15.2 Education 7.2 7.20% 8.0 9.4 8.0 23.90% 44.9 12.3 5.8 8.0 5.1 36.20% 6.5 1.4 4.3 2.2 5.1 0.7 Junior High School Senior High School College Bachelor Master or above 18.1 8.7 Annual Individual Income (10,000) 16.7 10.1 10.1 5.1 10.1 7.2 7.2 2.9 0.7 1.4 0.7 0.7 N o in Le com ss e th an 1 1- 2. 9 3- 4. 9 5- 6. 9 7- 8. 9 9- 9. 10 9 - 14 15 .9 - 19 30 .9 - 39 40 .9 - 49 60 .9 - 69 R ef Ov .9 us er e 1 to 00 an sw er 20 18 16 14 12 10 8 6 4 2 0 党政军机关/社团/事业单位领导干部 高级专业技术人员 企业/公司高层管理人员 企业/公司一般职员 个体户/私营业主 其它,请说明 20 18 16 14 12 10 8 6 4 2 0 党政军机关/社团/事业单位一般干部 中级专业技术人员 企业/公司中层管理人员 商业/服务业一般职工 自由职业者 12.3 11.610.9 党政军机关/社团/事业单位科员 初级专业技术人员 企业/公司一般管理人员 制造业/生产性企业一般职工 学生 Annual Family 18.1 Income (10,000) 10.9 8.7 6.5 6.5 2.2 1.4 4.3 2.9 1.4 0.7 0.7 0.7 N o in Le co ss me th an 1- 1 2. 3- 9 4. 5- 9 6. 7- 9 8. 9- 9 10 9. 9 - 1 15 4.9 - 1 20 9.9 - 2 30 9.9 - 3 40 9.9 - 4 80 9.9 - 8 90 9.9 - 9 R ef O 9.9 us ve e r1 to 0 an 0 sw er 26.10% Primary School or below 0.7 The Reason Why People Use E-cigarette E-cig is healthier 43.3 Sense of satisfaction Reasons for using E-cigarette 20.9 More options 17.9 No second hand smoke 11.5 Lasting longer 16.1 Different flavors 30.6 Fashionable 26.0 Good taste/upscale 28.0 Personality Manliness Status symbol 22.5 3.2 2.6 Suitable for social situations Convenient to buy Many people are using it Other's recommendation 12.1 1.6 5.8 15.8 • Compared with traditional cigarette, E-cigarette’s unique feature is the biggest attraction for consumers; it’s healthier, less harmful, brings consumers certain satisfaction, which has a great appeal to them. • E-cigarette is a symbol of identity. It indicates good taste, high-level and individuation, which is another feature to attract consumers. • E-cigarette products’ diversity is realized by a few people gradually. • Others’ recommendation is another driving force for consumers to use E-cigarettes. Division Criteria for E-cigarette by Domestic Consumers Division criteria include price, domestic/imported, product, packaging, brand, material etc, but for most consumers, price is an important criterion, as well as the popularity and quality of the brand. At present most consumers are emotional for dividing E-cigarettes. Division Criteria Price • The most intuitive criterion • • Domestic/ Imported • Imported is high level • Domestic is mid-low level Technology • Refill is good • Disposable is not good In the interviews most consumers divide ecigarettes on a superficial level, they have much blindness on dividing E-cigarettes: Price is the most intuitive criterion for consumers; Imported E-cigarette is better than domestic ones. Flavor Appearance • Better flavor, • Woodiness is higher level better; • On the market there’re more disposable & EGO Brand Good brand is good-looking, with better techniques, safe to use. Material Battery, atomizer, nozzle, packaging Other consumers have good knowledge of E-cigarette products, and they are more rational when dividing Ecigarettes. Contents 1. Market Environment of E-cigarette in China 2. Market Capacity of E-cigarette in China 3. Consumer Behavior of E-cigarette Market in China 4. Consumer Preference of E-cigarette in China 5. Historical Sales Data of E-cigarette in China 6. Suggestions on Future Development of E-cigarette Industry Features of good E-cigarettes – different levels Consumers divide E-cigarettes from brand, packaging, technique, flavor etc, but different levels of consumers have different division criteria: High-end consumers are rational, instead of caring about the appearance, they evaluate Ecigarette from its techniques, such as the model, exquisiteness, fashionable taste, volume of cloud or sealability etc. Although such consumers haven’t made clear requirements for brands, their demand for high quality products indicates that for high-end consumers, good E-cigarettes need to be of high quality and created by really good brands. Mid-end consumers care more about brand and packaging, believing that good E-cigarettes should be famous, upscale and with exquisite packaging. Ordinary consumers care more about the product itself instead of the brand; they focus on the flavor and sense of satisfactio, and they have direct & clear requirements about packaging. Low to High •Flavor – More direct need for ordinary consumers •Technology •Brand (famous, upscale) – Requirement of mid-end consumers – Necessary & basic criterion for midend consumers Middle to High •Packaging – Criterion of high-end consumers Features of good E-cigarettes •Specifically, we define good E-cigarettes from the flavor, model, packaging and techniques. Here are the features of good E-cigarettes considered by consumers: •Flavor:pure natural flavor of tobacco, original flavor; mellow and soft, a sense of satisfaction. Change to other flavors once in a while. •Techniques Feel great in the hand; Taste great, easy to smoke; Good sealability, no e-liquid leak. •External Packing Upscale, presents nobility; Color not too bright, better be calm & decent; Has it’s own feature, great visual effect to be easily remembered; Material: most consumers recommend wood box or similar as iPhone packing. •Appearance Brand Portable, fashionable, simple; Upscale, has a deep culture & connotation; Received recognition from most mid-high end consumers (such as pipe model) •Single Packing For refillable E-cigarettes, single packing has great sales potential; For disposable E-cigarettes, most consumers regard a pack of 5pcs as the best. But refillable E-cigarettes are more popular among consumers. Consumer Preference on Flavor Flavor Preference - Overall Specifically, consumers prefer E-cigarette with original flavor, especially in Shenzhen and Beijing, followed by Harbin, Guangzhou and Xi’an; Consumers in Shanghai have great interest in new flavors, such as fruit, wood, cocoa etc. In terms of age, young consumers aging from 18 to 35 prefer other flavors, and easier to accept mixed or additive flavors. Flavor Preference - City Flavor Preference - Age 18-35 36-45 46 or above Origin 80.3 84.5 85.7 19 Cocoa 10.2 6.9 6.1 16 11 Wood 4.7 34 49 9.6 24 20 Fruit 8.7 6.9 4.1 6 28 12.5 Coffee 6.3 3.4 6.1 Beijing Harbin Xi’an Shanghai Guangzhou Origin 89.1 84.3 72 64 80.0 Cocoa 15.2 14 14.3 21 Wood 18 8.1 9 10.4 6 9 7.1 Fruit Coffee Source: Consumer Questionnaire Consumer Preference on Appearance From the appearance, consumers prefer portable and pipe model, between disposable and personalized ones. For pipe model, Appearance Preference - Overall consumers preference in Shanghai accounts for 73.8% which is high, followed by Beijing. In terms of age, young consumers prefer portable E-cigarettes, while elder ones prefer pipe model. It can be seen that young consumers pursue the fashion, while elder ones prefer the cultural charm. Appearance Preference - City Appearance Preference - Age 18-35 36-45 46 /above Personalized 45.7 22.4 10.9 Pipe Model 21 45.4 63.2 Portable 56 30.1 17.5 Disposable 16 19.3 9.1 Source: Consumer Questionnaire Consumers hope we will have publicity or promotion about E-cigarettes as currently there’s none. In 四、宣传与推广偏好 terms of the category of E-cigarette, it should be based on promoting a healthy and relaxing lifestyle, combined with E-cigarette branding; meanwhile, run promotions like terminal display. However, different consumers prefer different promotions: High-end consumers dislike discounts; they believe we should focus on brand culture for promotions, such as tasting, introducing E-cigarette experts, or providing brands in high-end places etc; Mid-end consumers prefer promotions that promote them more about E-cigarette products & flavors, cultivating them for a better taste, such as giving away E-cigarette professional appliances etc; Ordinary consumers are more pragmatic, preferring promotions like giving away gifts etc. Mid-high End Consumers Cultural Promotion Promote the taste & brand culture of E-cigarette Brand Publicity Fashion magazines, introduce E-cig experts, provide E-cig in high-end places or hotels. (Brand stories, lifestyle, usage) Distribution Channel High-end hotels, office buildings, clubs, coffee shops Terminal Display Ways of Promotion Ordinary Consumers Style: low key, decent Advertisements, bars/clubs, websites (brand awareness; benefits of using E-cig: healthy, flavors) Websites, supermarkets, tobacco specialty shops, cigarette and wine shop •Introduce the lifestyle, brand history and usage of E-cigarettes. •No discounts Not mentioned •Free tasting •Give away disposables Great quantity & variety •Promotional benefits Contents 1. Market Environment of E-cigarette in China 2. Market Capacity of E-cigarette in China 3. Consumer Behavior of E-cigarette Market in China 4. Consumer Preference of E-cigarette in China 5. Historical Sales Data of E-cigarette in China 6. Suggestions on Future Development of E-cigarette Industry Analysis on Domestic Market Total Turnover of the Top 10 Brands on Taobao.com in 2012 to 2014 Source: database of Taobao.com Unit: CNY Analysis on Domestic Market In 2014, the E-cigarette market in China was growing dramatically, the market sales soared 263% year on year compared with 2013, and the number of consumers rose by 259% year on year. On one hand, consumers’ awareness of health increased; on the other hand, the products spread faster. In 2014, the total sales of Top 10 brands on Taobao.com reached 140 million yuan. The growth rate of 2015 is the same as that of 2014, which is estimated to exceed 400 million yuan on Taobao.com 。 E-cigarette Industry in China Top 10 Brands of Smoking Cessation Products in 2012 No. Brand Turnover No. of Sold Products No. of Buyers 1 Zhen Wei Ru Yan 5,539,645 109,653 48,589 2 Yi Xing 2,869,124 64,695 25,496 3 OVALE 2,782,393 29,647 7,905 2,726,360 33,555 14,508 4 Wei Er 5 Yi Kang 2,332,684 20,404 15,986 6 Ling Ze 1,473,441 15,917 7,726 7 Kingsong 1,049,995 25,395 9,493 8 Kang Jian 566,063 11,208 3,216 9 Han Cao 309,848 9,233 1,544 10 Zhong Yan Ke 295,230 16,094 4,899 E-cigarette Industry in China Top 10 Brands of Smoking Cessation Products in 2013 No. Brand Turnover No. of Buyers No. of Sold Products 1 Yi Kang 12,469,385 86,213 112,703 2 OVALE 9,549,986 21,409 79,415 3 Kingsong 7,564,618 50,854 109,892 4 Ru Yan 6,210,293 26,290 54,338 5 Le Xiang 4,318,415 29,984 51,834 6 Sanjods 3,825,200 25,411 55,238 7 Zhen Wei Ru Yan 2,825,998 28,922 65,032 8 Doulton 2,739,338 16,164 34,976 9 Fei Yi Qing 2,427,984 20,947 58,161 10 Yi Xing 1,638,813 11,350 22,417 53,570,032 317,544 644,006 In Total E-cigarette Industry in China Top 10 Brands of Smoking Cessation Products in 2013 No Brand Turnover No. of Buyers No. of Sold Products 1 Doulton 41,611,078 266,500 452,229 2 Yi Xing 24,221,559 117,922 172,942 3 OVALE 21,243,171 43,892 110,488 4 Yi Kang 10,306,378 67,277 112,995 5 EGO-T 10,135,296 64,989 134,520 6 Ru Kang 9,561,088 58,722 96,069 7 Ru Yan 8,886,244 39,931 79,935 8 Di Ya Si 5,834,896 47,143 63,200 9 CRENTIA 5,528,592 60,870 94,444 10 Zhen Wei Ru Yan 4,078,990 55,798 78,260 141,387,293 823,044 1,395,082 In Total Analysis on E-cigarette Industry at Tmall.com Percentage of Top 10 Brands on Tmall.com in 2013 Analysis on E-cigarette Industry at Tmall.com Percentage of Top 10 Brands on Tmall.com in 2013 Contents 1. Market Environment of E-cigarette in China 2. Market Capacity of E-cigarette in China 3. Consumer Behavior of E-cigarette Market in China 4. Consumer Preference of E-cigarette in China 5. Historical Sales Data of E-cigarette in China 6. Suggestions on Future Development of E-cigarette Industry As long as your product is good enough, people will choose it. The product is the basis for development of the industry, and continuous innovation is necessary for leading the industry and products to maturity. We should seek for combination point between the traditional tobacco products and electronic heat-not-burn cigarettes, or develop the similar flavors of traditional tobacco products for E-cigarettes. The flavor, sense of smoking and satisfaction of traditional cigarettes and individual needs will be the basis for the innovation of E-cigarette products. Channel and convenience are the emphasis of marketing According to the sales data of E-cigarette distribution channels, the traditional stores sales account for about 56%, while the sales of tobacco shops and online stores are only 20%. With the development of modern information technology, especially e-commerce, there’s wider space for the key enterprises launching marketing campaigns, building modern marketing network, and reducing marketing costs. Since 2012, Lorillard Tobacco Company has placed E-cigarette ads starred by famous actors on the US TV shows which have good results. The brand operation of E-cigarette not only requires increasing efforts on position design and tonal development, but also innovations on advertising screen, advertising channels, advertising language, sales methods, O2O (online and offline interaction), and crossover marketing etc. Promotion and Communication Brand is the basic point Compared with traditional tobacco products, the prices of E-cigarettes are generally higher, ranging from tens of RMB to a few thousand RMB, sold as ordinary products or gifts. Most consumers are high-end, whose habits are developed for years and difficult to change. Instead of trying to change their habits, we can cater to them so that the consumers will enjoy the pleasure of tobacco alternatives and healthy vaping, while they are aware of the harm of smoking but not able to quit it. Thus they don’t have to change the habits or suffer from smoking cessation, but meanwhile their demands can be satisfied. Focus on the domestic market Look to the international market In any emerging market, the freedom of development and competition is the greatest. We should grasp the opportunity to do everything possible to build our brands, grow them rapidly, form the scale, and seize the benefits! 1. Within the limited time and space, we should have clear goals of developing brands, build sales network of brands, attract consumer groups for the brands, and create brand value and reputation! 2. Strengthen the brand against any future risk of new policies and regulations. Focus on the domestic market to build the brand, and look to the international market for export! The 2rd CECMOL China International Vapor Expo October 20-23 2015 The 3rd CECMOL China E-cig Summit Forum April 10-11, 2016 Shenzhen Convention and Exhibition Center Thank you!