Is Big Tobacco Back as a Big Advertiser?
Tobacco advertising, once nearly a $1 billion ad category, may seem as much a relic as Peggy Olson's typewriter. But with the three largest U.S. tobacco companies entering the electronic-cigarette market, Big Tobacco is poised to once again become a significant spender.
The e-cigarette industry is projected to roughly double in size this year to an approximately $1 billion market in 2013 from a $500 million market in 2012, and to grow at a 50% compound annual rate over the next few years, according to a Citibank report. "It's an exciting time to be in U.S. tobacco," said Citibank analyst Vivien Azer.
R.J. Reynolds, the second-largest tobacco company in the U.S., last week held its first press conference in two decades to launch Vuse, its "digital vapor cigarette." Marketed by its R.J. Reynolds Vapor Co., Vuse will next month begin marketing in Colorado -- the first state in an eventual rollout -- with print, TV and direct mail marketing from CHI, London.
Altria, parent company of Philip Morris USA, the nation's No. 1 tobacco company, is expected to announce its own e-cigarette brand at a June 11 investor event. And Lorillard, the third-largest tobacco company in the U.S., will spend $40 million to market its e-cigarette brand Blu, more than double what it spent on measured media last year. "We see real opportunity for the e-cigarette category," said Robert Bannon, director-investor relations.
Because e-cigarettes are unregulated by the Food and Drug Administration, tobacco companies can tap certain media that have long been unavailable to their traditional cigarette brands since a ban on TV advertising took place in 1971.
Spending on e-cigarette TV ads increased 17.9% from 2011 to 2012, while print ad spending increased 71.9%, according to the Citibank report. The rise in print spending could be a boon for magazine publishers. Tobacco, once one of the largest advertisers in U.S. magazines, retreated from print after the Master Settlement Agreement of 1998 created broad restrictions on the marketing of cigarettes.
While ads for Lorillard's Newport and Santa Fe Natural's American Spirit (a subsidiary of Reynolds American) appear in consumer magazines, Philip Morris USA no longer advertises in print. This spring R.J. Reynolds returned to consumer magazines for the first time in five years to promote its Camel Crush cigarette.
Tobacco has been a relatively uninspiring marketing story because of the regulations and negative sentiment, said Michael S. Lavery, an analyst for CLSA Americas, but that may be changing with e-cigarettes: "Companies are advertising as much as they can before any restrictions might come into place."
The continued growth of ad spending on e-cigarettes hinges upon how the FDA decides to regulate the burgeoning category. Reynolds American CEO Daniel Delen said that a decision was "imminent," at which point Big Tobacco could again be turned away from TV.
Gregory Conley, volunteer legislative director for the Consumer Advocates for Smoke-Free Alternatives Association, said that any regulations the FDA may try to impose will likely result in a court battle, thus preventing any regulations from going into effect within the next year. "There definitely is an opportunity to get back into media markets," he added.
Access to previously unavailable media does not mean marketing e-cigarettes will be easy. Big Tobacco has to contend with a lengthy reputation of being disingenuous. "Whenever a major tobacco company introduces a product, we remember the industry's long history of deceiving the public about the health risks of its products," Peter Hamm, director of national communications for the Campaign for Tobacco-Free Kids.
The inherent difficulty in trying to market e-cigarettes as a "more healthful" alternative to traditional cigarettes is that Big Tobacco would bring scrutiny upon itself. As such, tobacco companies have been cautious to market e-cigarettes only to existing adult smokers looking for a viable alternative to traditional smoking.
Blu deftly navigated this problem last year with its "Rise From the Ashes" commercial. In the spot, formerly famous actor Stephen Dorff called Blu a "smarter" alternative to smoking because it has no ash or "offensive odor."
Daniel Herko, Reynold's senior VP-research and development, was smoking Vuse while fielding questions at the Vuse press event. When asked whether Vuse would be marketed as an anti-smoking device, Mr. Herko said, "No, sir. ... And we're not making any health claims."
More than 40% of smokers have tried e-cigarettes, but about 80% go back to exclusively smoking traditional cigarettes, according to Brice O'Brien, the company's exec VP-consumer marketing, so the emphasis, for now, will be on providing an e-smoking experience that accurately replicates the sensation of smoking a real cigarette. Hence RJR's "Promise Landed" tagline for Vuse.
"For the first several years it's about product differentiation and innovation," said Brice O'Brien, RJR's exec VP-consumer marketing. "How that evolves -- does it become more emotional or image-based? -- it's hard to speculate."
Striking a different path from its competitors will be key to Reynolds' success with Vuse, according to CLSA's Mr. Lavery. "I think … it's going to be a little tougher for Altria and Reynolds to play catch up without a compelling product differentiation," he said.
Cigarette advertising reached its peak in 1985 with $932 million in media spending and has been steadily declining since, according to Ad Age DataCenter's analysis of the Federal Trade Commission's annual cigarette reports. In 2011, media spend was just $26.9 million. Those dollars shifted to promotional efforts including events, coupons and retail display. Promotional spending increased from more than $1.5 billion in 1985 to $13 billion in 2005 before dropping to a little more than $8.2 billion in 2011.
Big Tobacco certainly won't reach its previous spending peak, but moving smokers to e-cigarettes has ignited enthusiasm in a previously dormant marketing segment. "It's a marketer's dream," Mr. O'Brien said. "You have a large and substantial consumer base. They want to make this change."