ECIG Strategic Management Analysis: E-Cigarette Industry

Strategic Purpose

Electronic Cigarettes International Group (ECIG) is a publicly traded (OTC: ECIG) company that specializes in producing, distributing, and selling e-cigarettes, vaporizers, e-liquids, and related merchandise to consumers seeking an alternative smoking experience or a method to help them quit smoking traditional cigarettes or tobacco products. ECIG develops and sells a number of brands — including VIP, FIN, and Vapestick — in the UK, U.S., and Europe. The company uses non-traditional retail strategies, such as kiosks in high-foot-traffic areas in England and the U.S., plus internet-based retail outlets. The company is currently situated in a complex position: in the UK, the British government has promoted e-cigarettes as being 95% less harmful than traditional cigarettes (Public Health England, 2015), while in the U.S., the FDA has adopted a much less favorable view of e-cigarettes and vaporizers, essentially deflating the market for them in the States (Berr, 2016).

The strategic purpose of ECIG is based on a near-term view of rescuing itself from costly acquisitions made under the former CEO that have left the company mired in debt. The mission of the company under the new CEO is to establish VIP as an international premium brand, expand into non-traditional channels, strengthen the organizational talent pool, cut costs, and improve working capital (SA Transcripts, 2015). The long-term mission of ECIG is "to deliver profitable growth to enhance shareholder value" (SA Transcripts, 2015). The company's vision is that it offers a premium product in a burgeoning sector and can make a positive impact on the lives of individuals seeking a healthier alternative to smoking (SA Transcripts, 2015). Its values are rooted in an ethical commitment to providing a quality product to the health-conscious consumer; for that reason, the company values honesty, transparency, and efficiency (SA Transcripts, 2015).

Strategic Statements and Functional Objectives

The CEO's plan to turn the company around from the brink of bankruptcy hinges on the company's ability to refinance its debt obligations, which have caused the stock to be diluted and have substantially hurt shareholder value. A reverse stock split in 2015 caused the share price to plunge, and currently the stock appears to be in a death spiral as loans become due quarterly and the company has no choice but to offer warrants to lenders at lower and lower prices. The stock currently trades at 14 cents on the OTC. In 2015, Wells Fargo was to underwrite the company's jump to the NASDAQ, and when that fell through, the stock was hammered downward from north of $200 per share to mere pennies.

The CEO's strategy of boosting shareholder value depends on making use of the non-traditional channels available to the firm in the UK — primarily kiosks — and reducing debt obligations. After one year at the helm, the CEO has not been able to turn the company around in terms of shareholder value; however, he has reduced costs and managed to reduce SKUs year-over-year (SA Transcripts, 2015).

External Analysis: PESTLE and Opportunities

The broad macro-environment of the company consists of the following factors:

Political: ECIG is well-situated in the UK but not elsewhere. Government regulation in Europe, the Middle East, Asia, and the U.S. is unfavorable to e-cigarette and vaporizer retailers. Only the UK government has given any public indication of promoting e-cigarette usage; for this reason, the company's main sales revenue derives from the UK (SA Transcripts, 2015).

Social: The company is well-positioned to capitalize on the vaping trend, as many communities have banned public smoking in bars, college campuses, workplaces, and other venues. While some communities and governments view vaping as distinct from smoking — since there is no actual smoke, only water vapor — others treat it as equivalent and do not permit it anywhere smoking is banned. There is still considerable public confusion about whether vaping will be embraced or treated with the same social stigma now attached to cigarettes. From an ecological and technological standpoint, some researchers view vaping and the technology it employs as both environmentally problematic and highly dangerous to health (Allen et al., 2015).

Legal: Legal factors remain largely unresolved. Recent settlements have been reached regarding proprietary technology, for which ECIG and several other vape manufacturers were sued. With respect to regulations governing vaping, e-cigarette sales, and e-liquid products, only the UK has enacted favorable legal frameworks for the sector (Cancer Research UK, 2013; Gwynn, 2015).

Threats: Threats facing the company include competitors from Big Tobacco, which possesses far greater distribution capabilities than ECIG, a much higher market capitalization, and a far more stable stock record — all of which make it easier to attract investors, a critical weakness for ECIG at this time (SA Transcripts, 2015). Additional threats include a hostile marketplace shaped by negative research findings citing dangerous additives in e-liquid juice, and regulatory bodies such as the FDA issuing strict industry guidelines that make it difficult for smaller companies like ECIG to compete against larger firms that can absorb the compliance costs (Berr, 2016; Chaudhui, 2015; Giovenco et al., 2014).

Opportunities: Opportunities remain, particularly in the UK, where ECIG operates over 200 kiosks in London and other metropolitan areas. The company is developing a stronger brand image and has the opportunity to cultivate brand loyalty through marketing campaigns such as the Great Giveaway, which it conducted leading up to New Year's 2016 — a period when smokers are motivated to quit and may turn to ECIG's products to help fulfill their resolution (Gwynn, 2015).

Porter's Five Forces Analysis

Porter's Five Forces — Threat of New Entry, Buyer Power, Supplier Power, Competitive Rivalry, and Threat of Substitution — provide a useful framework for assessing the attractiveness of the e-cigarette industry. Existing rivalry includes brands such as Blu, V2, and Apollo, along with many smaller competitors. Because the proprietary technology used in manufacturing e-cigarettes and vaporizers can be generically reproduced, the market is open to a virtually unlimited number of competing brands (Goodman, 2013).

Similarly, the threat of new entrants is high, as the products are relatively inexpensive to manufacture, distribute, and sell — and as ECIG itself demonstrates, a small kiosk is sufficient to enter the market. The competitive nature of the industry gives buyers strong bargaining power, which is why ECIG places emphasis on high-quality customer service to differentiate itself from competitors (SA Transcripts, 2015). The bargaining power of suppliers is limited because ECIG manufactures its e-liquid juice and components locally in order to comply with regulations (SA Transcripts, 2015).

References

Allen, J., Flanigan, S., LeBlanc, M., et al. (2015). Flavoring chemicals in e-cigarettes. Environmental Health Perspectives, 122(12): 23–29.

Berr, J. (2016). Smoke and fire: FDA's e-cig rules spark a battle. CBSNews. Retrieved from http://www.cbsnews.com/news/smoke-and-fire-fdas-e-cig-rules-spark-a-battle/

Cancer Research UK. (2013). The marketing of electronic cigarettes in the UK. UK: ISM.

Chaudhui, S. (2015). Study finds e-cigarettes contain chemical tied to 'popcorn lung'. The Wall Street Journal.

Giovenco, D., Hammond, D., Corey, C., Ambrose, B., & Delnevo, C. (2014). E-cigarette market trends in traditional U.S. retail channels, 2012–2013. Nicotine and Tobacco Research, 16(12): 14–15.

Goodman, A. (2013). E-cigarettes are smoking hot — four ways to invest in them. Forbes. Retrieved from http://www.forbes.com/sites/agoodman/2013/12/05/e-cigarettes-are-smoking-hot-4-ways-to-approach-them/

Gwynn, S. (2015). Great VIP Giveaway to see 10,000 e-cigarettes handed out. The Grocer. Retrieved from http://www.thegrocer.co.uk/buying-and-supplying/marketing/great-vip-giveaway-to-see-10000-e-cigarettes-handed-out/529168.article

Public Health England. (2015). E-cigarettes around 95% less harmful than tobacco estimates landmark review. Gov.uk. Retrieved from https://www.gov.uk/government/news/e-cigarettes-around-95-less-harmful-than-tobacco-estimates-landmark-review

SA Transcripts. (2015). Electronic Cigarettes International's (ECIG) CEO on Q3 2015 results — earnings call transcript. Seeking Alpha. Retrieved from http://seekingalpha.com/article/3669966-electronic-cigarettes-internationals-ecig-ceo-dan-oneill-q3-2015-results-earnings-call

Vapestick ranked the UK's No. 1 e-cigarette brand. (2015). Vapestick. Retrieved from http://www.vapestick.co.uk/e-cigarette-blog/vapestick-ranked-uks-1-ecigarette-brand