Menu icon

A Vape and E-Cigarette Market Overview for Asset Based Lenders

By Jason Gomes
Home / Perspectives / A Vape and E-Cigarette Market Overview for Asset Based Lenders
HVS Vapes 1272025
SMARTER PERSPECTIVES: Tobacco

January 2025

In this, the second article in our three-part series on tobacco, vapes/e-cigarettes and cannabis, we provide a detailed overview and insights for lenders with current or potential portfolio exposure in the vape and e-cigarette market.   

Vape/E-Cigarette Market Trends in the U.S.

With a market value now estimated at over $9 billion, the U.S. vape & e-cigarette market is expected to broaden at a compound annual growth rate (CAGR) of 29.8% through 2030. Despite increasing regulations in many countries, the domestic e-cigarette market continues to thrive, fueled by a growing number of young adult consumers. This growth can be attributed in large part to increased awareness of these offerings as safer nicotine and tobacco alternatives. In comparison with traditional tobacco products, these elaborate electronic cigarettes and vape dispensers are designed to deliver a similar dose of nicotine found in combustible tobacco cigarettes, but without the harmful effects of tobacco smoke.  

Chart 1 (4)

Health concerns related to smoking have considerably increased in the past few years as individual organizations and governments treat this issue with high priority. Conversely, vaping is now broadly considered a potentially healthier alternative to cigarette smoking by many medical professionals, as well as a substantial portion of the public. There are mixed reviews, however, on how safe vaping may actually be and additional research will likely be required to make a more accurate determination. Nonetheless, it is worth noting that organizations overseas, such as Public Health England, have claimed that vaping is 95% less harmful than smoking. Findings such as these are shaping public opinion, playing a key role in attracting smokers looking for safer nicotine alternatives, and contributing to the industry’s continued growth.  

According to Samuel Hampsher-Monk, Managing Director of BOTEC Analysis, if regulators choose to implement harsh e-cigarette regulations, traditional youth cigarette use may increase, and many former cigarette smokers may return to traditional cigarette usage. He argues that policymakers must weigh the potential harms of vaping against the larger public health risks of smoking, pointing out the fact that cigarette smokers see improvement in chronic lung disease symptoms after switching from traditional cigarettes to vaping. In long-term cigarette smokers, in fact, switching to e-cigarettes decreases smoking biomarkers in the lungs, increases vascular function, and decreases respiratory illness. We expect that continued efforts to increase awareness of the health concerns associated with traditional smoking will further propel vape market growth in the coming years.  

Chart 2 (3)

Unauthorized and Illegal Products 

While the global vape market is valued at around $18 billion in terms of revenue, the illicit market for unauthorized, or illegal vape products around the world is estimated to amount to an alarming two-thirds of that value. As sales continue to increase, certain e-cigarette companies continue to flagrantly disregard the regulatory process required to legally enter the U.S. market by releasing a slew of new products without receiving FDA authorization. Furthermore, while all disposable vapes (most of which are imported from China) have been banned for sale in the U.S. by the FDA and mandated for removal from retail shelves in Q3 2021, enforcement has been lax. This, in turn, has created a free-for-all all dynamic in which many e-cigarette manufacturers are openly flouting the law.  

In 2022, the candy-flavored e-cigarettes being supplied by Juul drew national concern because their marketed was targeted at a youth audience. US officials immediately banned the supply of these flavors. A year later, the FDA sent out warning letters to shops that were selling candy and fruit-flavored disposable e-cigarettes. While the U.S. has undertaken several steps to curb the sale of illegal disposable electronic cigarettes, about one-third of North American countries and a few European nations have banned the sale of electronic cigarettes altogether, according to the Pan-American Health Organization. A report by the National Institutes of Health concluded that over 48.5 million European citizens have used e-cigarettes and almost 76.8% have used nicotine-based electronic cigarettes. Lenders should keep a close eye on illegal product volumes in aggregate and the evolving actions of regulators, as notable shifts could either negatively or positively impact the performance of legal domestic producers and distributors. 

Regulatory Environment 

Regulation surrounding e-cigarettes has yet to evolve fully. The U.S. Food and Drug Administration only claimed regulatory authority over the products in 2016 and the previous five-year period was characterized by explosive growth in e-cigarettes. While the Centers for Disease Control (CDC) reported an overall 122.2% increase in sales between 2014 and 2020, the more stringent government regulations imposed in the U.S. since that time have served to hamper more recent market growth. Even though vaping use among teens and young adults has contributed to positive momentum in smoking cessation, governments around the world remain concerned. Lenders should be aware of this evolving consumer/user landscape and regulatory environment when considering an engagement with a vape manufacturer or distributor. Such ever-present, everchanging regulatory risks related to regulation and consumption alternatives add to the uncertainty of a volatile industry and warrant close monitoring by any potential lender.   

Product Categories  

Three constructs of vapes currently dominate the marketplace: rechargeable, modular and disposable. Although disposables have been banned by the FDA, many retail stores around the country continue to carry these illegal goods and consumers continue to purchase them. The following is a brief summary of the two types of legal vape products available in the U.S. based on the most current data available: 

  • The rechargeable segment led the U.S. market with a 46% share of revenue in 2022. The lower costs of rechargeable cigarettes are expected to drive broad adoption of these devices among users. A rechargeable cigarette is a battery-powered vaping device which can be reused and refilled. The interchangeable cartridges found in these devices also enable users to try and alternate various flavors based on their preferences. 
  • The modular devices segment is expected to grow the fastest, with an anticipated CAGR of 31%. These devices are being widely adopted by consumers based on their ability to accommodate larger batteries and hold more e-liquid. Other device features include wattage, voltage and temperature control as well as a battery monitoring feature, which provides users with a better indication of remaining battery power. 

Chart 3 (1)

Channels of Distribution 

The retail store segment dominates the e-cigarette & vape market and is comprised of specialty vape and smoke shops in addition to gas stations, convenience and general stores. Retail stores allow customers to sample numerous e-liquid flavors and check the various kinds of vaporizers available in the market. With users continuing to shop these retail stores for purchases. their popularity is increasing across several states of the U.S., although the online segment expected to expand the fastest in the coming years. Numerous vendors in the U.S. are opting for online channels as their preferred distribution channel over retail stores due to stringent regulations about the sale and distribution of e-cigarettes. It is critical for lenders to fully understand the landscape, channels of distribution, and footprint of operations for any given company in this space, as these can have a direct impact on an inventory appraisal valuation.  

Chart 4 (1)

E-Cigarettes as an Asset to Lend Against 

As touched on earlier in this article, e-cigarette and related manufacturers continue to experience a period of explosive growth despite regulatory and other efforts to curtail the market in various countries and states. While these factors pose notable risks to the segment and the companies that produce its high-demand products, the upside opportunity for growth remains significant. Consider, for example, the ongoing use of traditional combustible cigarettes by millions of smokers around the world. If even a modest percentage of this group decided to transition to vaping as a healthier substitute, the impact of that market shift and the resulting incremental revenue stream for vape companies would be substantial. Rest assured, marketers are currently hard at work utilizing the very large budgets allocated by the industry to deliver highly targeted messaging directly to combustible cigarette users to achieve precisely that type of outcome.   

Chart 5 (1)

Inventory Aging/Obsolescence 

Most e-liquids, which is the nicotine containing fluid in an e-cigarette or vape device, have a shelf-life of around two years from the manufacturing date. This, however, can vary slightly depending on the formulation used. For example, nicotine salt e-liquids degrade slower than freebase nicotine e-liquids. Also, fruity flavors tend to degrade quicker than more complex flavored vapes. Accordingly, prospective lenders should be aware of and monitor inventory aging of vape stocks on a regular basis. Aged items would recover lower than fresher, newer products in a liquidation. Also, should a company carry older models or obsolete products, recovery rates would be negatively impacted. Importantly, any banned flavor cartridges or related devices would need to be scrapped or destroyed. For these reasons, it is in a lender’s best interest to closely monitor the inventory composition of potential or existing industry borrowers to ensure that aged or obsolete items represent only a minimal percentage of on-hand inventory stocks.   

Gross Margin Fluctuations 

Gross margin fluctuations have a direct effect on recovery values. Any significant changes in sales mix across product categories, whether it be flavors or delivery construct, have the potential to impact a company’s gross margin and recovery values in an inventory appraisal. Additionally, a reduction to gross margin driven by general economic factors, higher fuel or input costs, or increased competition could also adversely affect recovery values in a liquidation scenario. A potential lender should closely monitor these factors as well as any trends in volume discounts that the borrower offers to the consumer. Retailers often offer such discounts to incentivize consumers into purchasing multiple vape products during a single visit. Should these discounts deepen, whether driven by excess supply or positive purchasing trends, gross margins may be impacted. 

Macroeconomic Factors 

In addition to the guidance provided in the categories discussed above, we advise that lenders also actively monitor the current economic environment, as inflation continues to affect two of the industry’s critical purchasing targets; those in both the middle and lower income brackets.

Hilco Global, through its overall deal count volume and diversified platform of business verticals, conducts thousands of hours of senior executive conversations each month with borrowers. These management conversations provide a wealth of knowledge with up-to-the-minute insights on the constantly changing market environment, which Hilco is then able to pass along to its clients. We are here to help our lending clients and borrowers leverage Hilco’s collective knowledge base to make critical and informed lending decisions. 

Contributors
View Bio
JG

Jason Gomes

Valuation Director
Hilco Valuation Services
View Bio
jgomes@hilcoglobal.com phone vcard linkedin

Let’s connect and work together

If your business or a business in your portfolio is facing a current challenge, our team can provide a qualified perspective and experience-based guidance toward an optimized resolution.
Contact us