What is awaiting E-cigarette wholesaler: Spring or Winter?

The last two years have seen some of the most painful struggles in the vaping industry. Laws and regulations have been drafted and enforced to restrict the manufacturing and consuming of E-cigarettes and related products. To cite two of them:

From April next year E-liquid will be illegal to sell within the City of San Francisco; the Flavored Tabacco Sales Restriction Ordinance bans flavors in all tobacco products without exemption.

The FDA regulates that all vaping products on the market will have two years to submit a Premarket Tabacco Application in order to remain legal and every product invented after 8/8/16 would need FDA authorization to be approved prior to marketing. Companies will need to spend millions of dollars per individual product just to get a hearing.

These new regulations will no doubt inflict heavy damages upon the vaping industry. Thousands of small retailers and vaping communities across the United States would be swept out of existence in two years time. What awaits E-cig wholesalers does seem to have a bleak prospect. But this is not a war in which everyone loses; those who change for the better might have a chance to win yet.

The E-cigarette wholesaler business is heavily fragmented, with thousands of distributors of various sizes serving a market with huge potential and low saturation. Once the regulations are in effect, the market as a whole will take the blow and suffer heavy losses, but that would mean the extinction of some participants and the survival of others, instead of an equal decline of revenue for everyone. Because of the low concentration of the market, while many would be forced to exit, the remaining may take advantage by mergers and acquisitions. The misfortunes of one often present opportunities for another.

Apart from acquring failed competitors, the wholesaler may also consider to integrate the distribution channel. This can be achieved either by closer cooperation with local retailers or acquisition of smaller brands.

While deep collaboration may lead to a slightly weakened bargaining power for small retailers (however, this is compensated by lower unit price in bulk purchasing), there is no question of the wholesaler killing the hen for the egg in the harsh winter of the market. With reduced shipping costs by placing large orders to a single wholesaler, the local retailer benefits in aggregate.

In face of the FDA regulations, small E-Cigarrete companies would certainly react differently than the larger ones. Without sufficient financial resources and limited by weak cash flow, small companies would find themselves in a most precarious position. They are either forced to exit the market with heavy losses or struggle to remain with no prospect of profit. The wholesaler in this situation may take the initiative to acquire and integrate the smaller brands, by means of which to increase its distribution channel depth and build its bargaining power.

Winter is coming; FDA’s new regulations may only foreshadowed a force more mighty in power and more brutal in nature that is yet to come. We may pray and hope the regulations to be less destructive and the market miraculously preserved; when that day comes, all will have to take the inevitable blow. But until that day comes, there is still business and a prepared wholesaler has better chances of surviving. Those who anticipate threats and opportunities and react accordingly are less likely to fail.


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