The chaff from the wheat

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The chaff from the wheat

December 1, 2015

Stricter regulations will force brick-and-mortar shops to step up their game, but the shakeout may not be as severe as alarmists predict.

By Stephanie Banfield

Since e-cigarettes were initially introduced to the United States less than a decade ago, the vapor industry has grown exponentially, raking in billions of dollars and giving thousands of vape shops—from enormous enterprises to tiny mom-and-pop shops—the opportunity to flourish. With hundreds of new products entering the market each year, there is no shortage of options to choose from as vapers search for the device that’s right for them. Although the popularity of vaping is virtually undisputed, an increase in the number of online retailers able to sell vapor products at a lower price point—and looming legislation that could stop some shops from conducting business as usual—have recently called into question the future of brick-and-mortar stores.

According to Reuters, the U.S. is currently home to 8,500 vape shops—and estimates from Wells Fargo Securities indicate that the U.S. e-cigarette market will reach $3.5 billion by the end of this year. But despite the constantly climbing sales of vapor products year after year, brick-and-mortar vape shop owners competing with online vendors are faced with an assortment of challenges that range from skyrocketing operating costs and inventory management to hiring knowledgeable staff members and keeping customers coming back for more.

“You have to worry about things such as location and operating hours that are non-issues with an online store,” says Kenny Spotz, public relations specialist for Lynden, Washington-based Mount Baker Vapor, which operates both a brick-and-mortar storefront and an accompanying online store. “Your reach is also limited. With an online store, we open ourselves up to customers around the world, whereas a brick-and-mortar isolates us to a certain geographic area. There’s also the issue of physical space. It’s much easier to stock a warehouse and to ship out of it than to have a retail storefront that is big enough to house the kind of selection we offer on our website.”

For Peter Denholtz, CEO and founder of Henley Premium Vapor and The Henley Vaporium in New York City, inventory is another issue that can’t be ignored.

“One of the biggest challenges of this business, for me, is how much of this product do I buy, how long is it going to be hot, and when is it going to go away?” says Denholtz. “I’ve got $4,000 worth of one mod sitting downstairs that we thought was going to blow off the shelves—and I’ve had it down there for six months. And I’ve got other stuff that I am scared to buy because I don’t know if it’s going to sell. So I’ll buy too little, and then it goes like crazy in a day or two, and then it’s going to take me too long to get more in where I can stay on top of the crest of that wave and make that product a success here at Henley. That balance and understanding of what product to buy and when to get it in is a great, great challenge.”

When it comes to challenges met by brick-and-mortars, being able to compete with the price point offered by online retailers is paramount.

“The biggest disadvantage for brick-and-mortars when being competitive with online stores is price,” says Chip Paul, CEO and co-founder of Oklahoma-based Palm Beach Vapors, which has 17 locations throughout the U.S. “Websites operate at very, very slim margins, and they have very low overhead. So they can offer things at deep, deep discounts. Price is the driver of online purchases. You can just get stuff cheaper online.”

One on one

Despite the high costs associated with operating storefronts, brick-and-mortars have a serious advantage over their virtual competition: the ability to offer one-on-one interactions with their customers.

“Compared to an online shop, the biggest advantage of operating a brick-and-mortar shop is the level of interaction it allows us to have with the consumer,” says Spotz. “There is no replacement for being able to have a face-to-face conversation with someone who is interested in our product. It allows the customer to see the human side of the business, which can be hard to perceive online.”

The customer service component of a brick-and-mortar is key, particularly when it comes to novice vapers attempting to navigate the seemingly endless supply of vapor products on the market, or hoping to find a device that better suits their needs after experiencing a series of failed attempts with previous products.

“Usually, we’re sort of the last stop,” says Paul. “Sometimes people have been educated about vaping a little bit, and they can go online and make purchases, and everything works. But generally people have been through the c-store experience, and they’ve been trying some online stuff, and that hasn’t worked for them. So they just want to come in and find out how everything works—what’s the best tank, what doesn’t leak, and what’s hot and what’s not right now. They just need more information than you can find online. You can find a lot of stuff online, but it’s just in-your-face products, which is just overwhelming.”

According to Spotz, having customer service representatives and knowledgeable staff members in place not only helps people who are new to vaping pick the right product; it can also ensure that their switch to vapor devices from combustible cigarettes is a successful one.

“Every day, new people are getting started, and many are confused by the number of hardware and juice options out there,” he says. “Having a real person to talk to in-person can make all the difference in allowing them to have a successful start to their vaping experience. Also, brick-and-mortar stores allow customers to try juices before they buy them—a huge factor in making sure they get a flavor that will satisfy their needs. One of the reasons customer service has always been the No. 1 priority for us is because it plays such an important role in helping smokers successfully complete the transition to vaping.”

To bridge the customer service gap commonly encountered with online sales, Mount Baker Vapor boasts a customer service center and live chat feature on their website, where experts are available to answer a variety of questions from online shoppers who need extra assistance.

“Customer satisfaction has always been our top priority, and having a convenient, accessible response center is a crucial part of that goal,” says Spotz. “Live chat is an instant service for people that have quick questions on anything from a piece of hardware to the services that we offer. It runs from 7 a.m. to 11 p.m. [PST] and offers a U.S.-based representative to answer any questions a customer might have. The main goal is to provide resources for any problem a vaper might run into in day-to-day operation. Our specialists are knowledgeable about anything from hardware issues to DIY questions. Our main focus is to make the newbies feel advanced, and for advanced vapers to feel as if they are speaking with a peer. The feedback we have received so far makes us feel like we are achieving that goal.”

Looming regulation

While offering superior customer service is a major draw for vapers looking for personalized attention, it can’t protect brick-and-mortars from the impending threat of U.S. Food and Drug Administration (FDA) regulation that has the potential to dramatically alter business as many vape shop owners know it, particularly those who rely on revenue from producing their own e-juices.

“With the deeming regulations, you’re going to have to have very deep pockets and be ISO certified and have cleanrooms and all sorts of things,” says Denholtz. “The guy producing stuff in his garage today might be making some unbelievable e-juices—and there are some great e-juices coming out of people’s garages, and there are some shitty e-juices coming out of the labs. But regardless of whether we think it’s good or bad, the FDA is going to put its foot down and determine that it has to be done in a certain fashion, and that’s going to weed out 90 percent of the people that are currently producing e-juice. I would be very scared if I was in the juice manufacturing business right now. I’m rooting for the guys that might fall by the wayside, but I think it’s a tough road for them.”

While many in the vapor industry fear regulatory changes could result in brick-and-mortar vape shops being forced to close their doors if they are unable to comply, others aren’t concerned with pending legislation and welcome requirements that will standardize the industry and improve the products available on the market.

“With FDA’s deeming regulations, the media is making such a big deal out of this closing down vape shops, and honestly those regulations are childproof caps and warning labels on juice, etc.,” says Paul. “The FDA is not going to shut down an industry, and certainly not an $8 billion industry. A lot of what you read is just a lot of BS and scare tactics. If you really dig down into the facts and go out and read the deeming regulations word for word, [Palm Beach Vapors] already complies with them. Every single unit in our system already complies with every proposed regulation in the FDA deeming regulations. So it’s kind of severe, but it’s not an insurmountable mountain; it’s not going to shut down 90 percent of the industry.”

Differentiation

The effect the FDA’s deeming regulations will ultimately have on vape shops remains to be seen, but many brick-and-mortar vape shop owners are launching a pre-emptive strike and attempting to diversify their business as much as possible. From creating unique lounges where vapers can spend hours socializing or simply relaxing while vaping to hosting competitive vaping tournaments that offer prizes and bring enthusiasts together, brick-and-mortar shops across the U.S. are preparing for changes by providing more offerings to their patrons than ever before.

“We’re very lucky because we have the largest backyard in SoHo in New York City, and we have barbecues and yoga-type events and TED-type talks, mural paintings and bazaars where people can buy stuff,” says Denholtz. “We view Henley Vaporiums as three pieces: an education center where people can come learn about and test different products; a retail operation where we can sell those products if they decide they want to engage; and, lastly, what differentiates us is that we also view ourselves as a community center—as a gathering place for people, whether they are into vaping or they’re not into vaping. And we have our share of both that come in here. People will come into Henley and just use the Wi-Fi, grab a cup of coffee and hang out.”

According to Denholtz, offering an experience for customers to enjoy—rather than just shelf after shelf of vapor devices and supplies—is a surefire way to give his company staying power in a constantly evolving industry.

“I believe that having that differentiation will allow us to be more versatile and keep our options open to where this industry is going, whether it’s educating people or whether it’s selling them more products,” he says. “That differentiation is incredibly important to the long-term survival of vape shops.”

Stepping up their game

Although opinions differ greatly regarding the ultimate fate of brick-and-mortar vape shops, there appears to be agreement on the characteristics of the stores that will ultimately survive.

“We think there will be an uptick in the quality of brick-and-mortars, but fewer of them overall,” says Spotz. “As the market matures and consumers become more informed about the high-quality options, you will see less and less of the dark, dingy storefronts that you hear many vapers complain about.”

For Denholtz, it’s the better businesspeople in the bunch who will continue to enjoy success in the vape store space.

“This industry started when the economy was really bad, and a lot of people that got into this business were people that didn’t have jobs,” says Denholtz. “Some of them were horrible businesspeople who never did business, and some of them turned out to be great businesspeople. There was very little barrier to entry to getting into this business: You could buy some product from China, set up a business, and you’re ready to go. As a result, there is so much crowding and competition among vape shops, but that is starting to change now. So a lot of these people are going to start to go away, and the people with deeper pockets that were better businesspeople are going to remain.”

No matter where the industry goes and which stores are left standing once the FDA’s deeming regulations come into force, one thing is certain: Those who are in the business of helping smokers successfully switch from combustible cigarettes to vapor products won’t give up without a fight because they’re involved in an industry that makes a difference in people’s lives.

“I truly believe we’re changing the world, and I truly believe that we might be working with one of the greatest life-saving devices ever invented in our lifetime—and I’m proud to be a part of that,” says Denholtz. “When you get a chance to save lives and make a living at the same time, that’s pretty awesome.”

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