Winter 2011 Lighting up Sales!

Publicly traded (OTCBB:VPCO)

Website: www.smoke51.com

2009 Sales: $8 million

Projected 2010 Sales: $12 million

Projected cart locations holiday 2010: 400 plus

Current Number of Shopping Center Locations: 250 plus

Number of Corporate Employees: 25 plus

Headquarters: Hallandale, FL

Strength: "Residual sales are one of the biggest benefits. Customers return for weekly and monthly refills. Retailers don't always need to attract new customers to turn a profit." —Kevin

Publicly traded Vapor Corp. has a hot product on its hands. Its electronic cigarettes are delivering glowing profits to specialty retailers all across the country.

What’s smokin’ in the common area? Electronic cigarettes and the registers of retailers ringing them up, thanks to Kevin Frija, president of Vapor Corp., and his brother Adam, director of business development and licensing.

There are approximately 46 million smokers in the United States, according to the American Heart Association. All of them are potential customers of Miami-based Vapor Corp.’s electronic cigarettes. “Our target market are smokers, the existing tobacco consumer; men, women, young and old,” says Kevin. “They are already spending money on a smoking product, they just need to make the switch. It’s a bit of an easier sale,” he adds.

Especially when you factor in the benefits. “There are millions of smokers, and everyone’s banned public smoking,” says Kevin. Electronic cigarettes allow smokers to enjoy a smoke, or a “vape” as it’s called in the electronic cigarette industry, in public places again. How so? Because, Kevin says, electronic cigarettes are smokeless, “producing a vapor that’s mostly water that dissipates into the air seconds later, with no lingering particles,” unlike smoke from burning tobacco which attaches itself to clothing, and offends others in the nearby vicinity.

Kevin adds that the products are free of tobacco, which means they can’t be blamed for bad breath, yellow teeth, or foul odor. It isn’t any wonder that the electronic cigarette is taking the specialty retail market by storm. In just two years, Vapor Corp. has grown to be a publicly traded company (OTCBB:VPCO) starting from a handful of carts to hundreds of them.

Early launch

Kevin came across the electronic cigarette in China in 2008. He was traveling at the time as president of InGear, a company he has run successfully for the past 20 years. InGear wholesales swim wear, resort wear and casual lifestyle fashions to independent stores, national chains and department stores. One of InGear’s lines, Kariza, has achieved large success selling through specialty retail channels. Launched in 2005, Kariza is a line of multi-wear wrap skirts sold through effective demonstrations; the skirts can be worn a multitude of ways.

In China, Kevin connected with his friend, Isaac Galazan, who was also visiting the country. At that time Galazan happened to be at an electronic cigarette factory. Kevin joined him, saw the product and its potential to be a strong contender in the specialty retail market. (Galazan later became a shareholder in Vapor Corp. and is a consultant to the company today.)

Having already had specialty retail experience, existing relationships with mall developers and the knowledge of what it takes to sell a demonstration product, Kevin saw the electronic cigarettes as a great sales opportunity. In addition, he knew the common area was the perfect place to highlight a new product.

And so it was, that in the summer of 2008, Kevin took his electronic cigarettes to market for an initial test run on a cart in the Staten Island Mall in Staten Island, NY. Success followed as expected. One cart quickly grew to two, and three, and then four. Early on, Kevin and his crew knew they were on to something.

“Once a product is in the limelight, specialty retailers catch on very fast, and many kiosk operators approached us,” says Adam.

As the business grew from a handful to approximately 35 locations by year’s end, Vapor Corp. pulled out of any company-owned locations to focus on distribution. Vapor Corp.’s electronic cigarette components are assembled initially in China, and then finished and packaged for distribution in the United States.

As the specialty retail movement grew, so did the company’s marketing efforts. Not only did company representatives attend every trade show related to tobacco and electronics, both domestic and abroad, they went to unrelated shows, like apparel, where they drew even more attention, says Adam.

It paid off: by the end of 2009, the company had over 150 locations.

What is an electronic cigarette?

In November 2009, Vapor Corp. became a publicly traded company that designs, markets and distributes personal vaporizers under various brand names. Fifty-One and Krave are the primary brands sold through specialty retail venues. Brands sold in other outlets, such as convenience stores, include EZ Smoker, Smoke Star and Green Puffer.

Personal vaporizers are essentially electronic devices that vaporize a liquid solution. In this case, the device is an electronic “cigarette” and the solution is propylene glycol, a common food additive, nicotine (which may or may not be included) and tobacco flavorings. Smoke 51’s Duo product offers a wide concentration of nicotine from 0 mg per electronic cigarette to 16 mg. Electronic cigarettes typically do not have many of the other chemicals that traditional cigarettes do. They also don’t generate ash like cigarettes do.

The components of an electronic cigarette include a cartridge with a propylene-glycol-moistened material, an electronic airflow sensor, a heating element (the atomizer that vaporizes the liquid to be inhaled) and a rechargeable lithium-ion battery. Other components include a timed cutoff switch to prevent overheating, an LED to signal activation of the device and an external charger, to recharge the battery, says Kevin.

It works like this: “When a user draws air through the device, the air flow is detected by a sensor, which activates a heating element. The solution is then vaporized and it is this vapor that is inhaled by the user,” Kevin says.

Product options

Products are sold both as starter kits and as individual components. Replacement cartridges are available for use with non-disposable personal vaporizers. Vapor Corp. also markets USB, home and car charging devices, as well as a variety of other accessories.

Fifty-One starter kits retail between $99-$150, with recently introduced leather and wooden gift boxes selling for as high as $250. Starter kits include everything—even a rechargeable battery—a customer needs to enjoy an electronic cigarette, says Adam. “They can continue to use it, as long as they continue to charge it,” he says. For those wanting to spend a little less, before making the commitment to the rechargeable kit, the disposable Krave brand is offered. “In general, Krave is meant to be a
stepping-stone to Fifty-One,” says Adam. Disposables range in price from $9.95-$19.95.

With a 500% mark-up, retailers reap the rewards of both first time and repeat purchases. Approximately 20-30% of sales are customers returning for replacement cartridges.

Regulating e-cigarettes

When selling cigarettes of any kind, that may or may not contain nicotine, there is going to be controversy. Recently a U.S. federal appeals court found that as long as electronic cigarettes aren’t marketed as a way to treat or cure a disease, i.e. as smoking cessation aids, the U.S. Food andDrug Administration lacks the authority to regulate these products under the Federal Food, Drug, and Cosmetic Act (“FDCA”). According to the ruling, e-cigarettes containing nicotine will be regulated as tobacco products.
“We are extremely pleased with this court ruling,” says Kevin. “It finally resolves any lingering doubt which has challenged the electronic cigarette industry for quite some time now. With today’s legal victory, we are best positioned among our competitors to quickly capture an even greater market share for our products,” Kevin adds.

“Vapor Corp. has always been proactive in taking many steps to ensure the responsible marketing or our eletronic cigarettes,” Kevin says. It is worth noting: Fifty-One is not marketed as a way to quit smoking, it is marketed as analternative to smoking. “The products are not approved as smoking cessation devices, which means that they cannot be marketed with claims to help people stop smoking. The products are legally sold as recreational tobacco products; as the nicotine is derived from tobacco.

Retailers selling the Fifty-One brand need to choose their words carefully. “We tell them what they can and cannot say legally. You cannot sell the product by saying: ‘Quit smoking now,'” says Lawrence Markx, creative director.

Building on the brand

Vapor Corp. isn’t the only one in the specialty retail arena selling electronic cigarettes. But Kevin will tell you: “We’re going to be the last ones standing.”

Why? For starters, Kevin says, Fifty-One has a simple cartridge replacement system. Quite literally all customers need to do is unscrew the old cartridge and replace it with the new one. Other brands require partial or complete disassembly of the device. Kevin points out that competitor brands often have sticky cartridges to change, leaving residue on fingers, making for an unpleasant experience.

But most important, Vapor Corp. works hard to deliver an authentic smoking experience. Kevin points out that Fifty-One is the same shape, color and size as a tobacco cigarette. Competitor brands, he says, often feel like “plastic gadgetry” between smokers’ fingers.

The tips of Fifty-One cigarettes even have a bright LED that lights up when a smoker inhales, replicating the effect of a burning cigarette. And by use of propylene glycol, smokers exhale a dense vapor, also similar to a traditional smoking experience.

“Additionally, we pride ourselves in our portfolio of products,” says Markx, having recently introduced accessories, lighters, key chains and pens, to take the concept a bit farther. “Offering products at all different price points, and brands which cover all demographical interests, Vapor Corp. has positioned itself as the leader in electronic cigarettes,” he adds.

Where there’s smoke

While many smokers have heard about electronic cigarettes, they haven’t had the opportunity to try them. This is where specialty retail comes in: the common area offers them just the place. The key is in hiring operators who smoke. Think a smoking demo is unheard of in the common area? Think again. And that’s the beauty of it. Smoking grabs attention, especially because it is unseen in public places these days.

“As many carts are positioned within indoor facilities, this product truly demonstrates itself as a ‘smoke anywhere’ device. We encourage cart operators to smoke the e-cig at their cart to gain attention, which leads to inquiry, which converts to sales,” says Markx. “The cart model is a valuable education tool.

They have central locations in malls and reach a tremendous amount of people/traffic,” he adds.

“At first there was an issue in some malls, a handful probably,” says Kevin. “The majority are fine with it and feel it adds value.” In fact, GGP, Simon and Westfield have approved Vapor Corps.’ products, and the demonstrations thereof, in their shopping centers, “subject to the very few jurisdictions—mostly counties—that restrict the public, indoor use of electronic cigarettes,” says Adam.

“As soon as mall management becomes aware of a product with hype behind it, they are quick to want it,” says Adam. Couple that with the fact the company already had many established relationships through InGear’s Kariza, and developers eagerly hopped on board.

A pack of support

To get up and running, the tab for retailers is approximately $5,000 which includes support every breath of the way. Typically a kiosk will start with 100 kits, 150 packs of replacement cartridges and an assortment of accessories, including chargers. “We have sales training, displays, signs and videos. We coach operators on sales techniques,” says Kevin. In-depth customer service and sales training can take place in person or through phone video conference.

Vapor Corp. encourages retailers to create as much visual interest as possible. There should be at least one large, flat- screen TV playing the Vapor Corp. DVD and four to seven different signs with different catch phrases to grab customers’ attention, such as “No Smoking.” The DVDs feature a four-minute testimonial and two-minute instructional video.

Taster caps, which are small rubber caps for placement on filters, are also available. This way several people can try the product on a single filter, says Kevin. You simply throw away the taster cap at the end of each customer trial.

Vapor Corp. offers its retailers an online incentive to stock their brands as well. Many times customers come to the mall, try the product, and then place their refill orders online. To compensate for this, Vapor Corp. introduced a program where retailers can set up their own website, or give their customers retailer-specific coupon codes to use, so when ordering online, retailers receive 30-50% of the sale, says Kevin.

Supporting their retailers and building upon their success, Vapor Corp. is poised for growth. “We intend to focus on distribution. Big tobacco has a tremendous lead on us and our focus is to work towards closing that gap,” says Kevin. “Electronic cigarettes will prove to be disruptive to traditional cigarettes. It is what the calculator was to the abacus.”

Emily Lambert

Lambert, a senior writer for SRR, resides in Philadelphia. She can be reached at .
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