When the success of America’s largest companies is threatened, they often turn to the government for a helping hand. They have been doing that for at least the past century. In recent years Congress gave more than $1 trillion in bailouts to banks, car companies, and credit lenders in the midst of great financial turmoil. But that kind of generosity isn’t the only way Uncle Sam has helped many of America’s biggest companies maintain market share. Using the growing bureaucracy’s powerful regulations, many corporations have worked hand in hand with government to snuff out competition.
A recent example of this offensive is Big Tobacco’s actions against the thousands of small startups that are helping people quit smoking. Cigarette companies are spending millions of dollars to push product bans, higher taxes, and expensive regulations on their competitors.
The cigarettes sold by Reynolds American Inc. and Altria (formerly Philip Morris) are highly taxed and regulated by the Food and Drug Administration, and over the past several years cigarette consumption has declined more rapidly than forecast by analysts and shareholders. Electronic cigarettes (“e-cigs,” or “vapor products”) have accounted for a significant portion of this reduction. These battery-operated and smokeless devices represent a free-market solution to a grave public-health problem. As alternatives to cigarettes, which kill more than 400,000 people each year, vapor products are far less hazardous.
When Reynolds and Altria decided belatedly to enter the e-cigarette market last year, the two companies chose to develop and manufacture only e-cigs that are known as “cigalikes.” Cigalike e-cigs are designed to look, feel, and taste like traditional cigarettes. These products have cartridges that are pre-filled and sealed and must be thrown away or recycled after several hours of use. Cigalikes work for some smokers, but they generally suffer from poor battery life, inadequate nicotine delivery, a lack of flavor options, and high prices that make switching to vaping with these products nearly as expensive as smoking cigarettes or even more so.
Premium vapor products (PVs) evolved out of consumer frustration with the limitations imposed by cigalikes. PVs are larger than cigalike e-cigs and tend to look more like sonic screwdrivers than traditional cigarettes. Small bottles of nicotine-containing or nicotine-free e-liquid are used to refill PVs with any flavor and nicotine level the consumer desires. Studies are unsurprisingly finding that users of these fill-it-yourself vapor products are significantly more likely to quit smoking than those who use cigalike e-cigs. Many ex-smokers credit the ability to switch between a variety of flavors as being a prime reason for their being able to quit.
At the moment, the largest player in the cigalike market is Reynolds, which still makes by far most of its money selling cigarettes. Its cigalike product, Vuse, was launched nationwide last summer in tens of thousands of convenience stores and gas stations. Unfortunately for Reynolds, sales of PVs and e-liquid surpassed cigalike e-cigs in 2014. Wells Fargo analyst Bonnie Herzog estimates that the PV and e-liquid market in the U.S. is about $1.5 billion and rapidly growing, compared with a stagnant $1 billion market for cigalikes.
Even before this news broke, Reynolds had devised a vapor-product regulatory strategy to protect its cigarettes and cigalike e-cig products from thousands of smaller PV and e-liquid competitors in several states. To raise costs on and limit the number of competitors in the market, they lobbied for all vapor products to be taxed in South Carolina, Michigan, Oklahoma, and other states and for the same regulatory and licensing regimes that apply to cigarettes to be imposed on vapor products.
Reynolds also has urged the FDA to ban all PV and e-liquid products as well as most flavored vapor products. That’s right. A company that made $4.6 billion in profits in 2013, selling products that cause cancer, illness, and disease, asked the FDA to ban the products that are both preferred by consumers and proven to help people quit smoking.
In Big Tobacco’s war on these innovative technology products, it’s not just adult smokers and ex-smokers who will suffer at the hands of misguided regulators and lawmakers. Most of the sales in the $1.5 billion vapor product market are taking place in the more than 5,000 specialty retail outlets (“vape shops”) across the country. These new businesses are occupying what may otherwise be empty storefronts. They are also providing local jobs, paying sales and income taxes, and improving communities by helping reduce the toll from smoking.
Reynolds’s push for more-coercive taxation, burdensome regulations, and even bans on their competitors make sense, as no company wants to see its consumers switch to products it doesn’t sell. Unfortunately, if the FDA and state lawmakers merely accept the agenda being pushed by Reynolds and other large cigarette companies, public health and market freedom will suffer. It’s time lawmakers and bureaucrats realize this and stop trying to protect cigarette companies from consumer choice.
— Gregory Conley is the president of the American Vaping Association, a nonprofit that advocates for and is partially funded by small- and medium-sized businesses in the vapor-product and electronic-cigarette market.