For years now, economists have been seeing signs that traditional tobacco cigarettes are gradually going the way of the dinosaurs—a.k.a. extinct. This downward trend is likely due to the fact that many Americans are discovering that the many harmful side effects of smoking simply aren’t worth the risk.
To solidify this fact, recent data indicates that traditional cigs may actually be in trouble much sooner than anticipated thanks to the fast rising tide of demand for smoking alternatives—the most popular of which is electronic cigs.
Last month, Reuters published a report saying the first tobacco bond defaults could be right around the corner.
In 1998, Big Tobacco made an agreement between 46 U.S. states essentially stating they would pay compensation each year for additional healthcare costs incurred through smoking. These payments are based on annual cigarette sales and run into the billions of dollars. As a result, the states sold bonds that would keep paying out as long as Big Tobacco made a profit. Up till now, tobacco has been a safe investment.
However, forecasters are warning investors that some tobacco bonds may start defaulting as soon as 2020 since Americans are giving up smoking at a faster rate than previously estimated.
Most bonds were only structured to withstand a 2 to 3 percent annual decline. Yet since 2000, cigarette sales have dropped an annual average of 3.4 percent.
“If the decline goes to 6 or 7 percent, it will be very quick,” said Tom Metzold, portfolio manager at Eaton Vance Investment Managers. “I think that the first [defaults] are probably five years away,” he said.
The Rise of the E-Cig
Meanwhile, as tobacco sales plummet, the e-cig industry is thriving due to a growing number of Americans switching to a less risky and more enjoyable smoking experience.
Currently, electronic cigs only make up a fraction of the market compared to Big Tobacco, but the industry is still so young. Four years ago, e-cigs were a niche subculture for just a handful of hobbyists. But in only a few years, sales of e-cigs have grown to more than $2.2 billion annually and the number of e-cigs sold has skyrocketed from 50,000 units to over 3.5 million by 2012, according to some estimates.
If this trend continues, it won’t be long before electronic cigs take control over a majority share of the market.
“We believe consumption of e-vapor will eclipse consumption of combustible cigs over the next decade as technology improves,” wrote Bonnie Herzog, an analyst at Wells Fargo who has tracked the tobacco industry for years, in a recent report.
In other words, it is an exciting time to be an e-smoker! Learn more about how e-cigs are becoming the new normal and where they might be headed by reading our related article in the Eversmoke Knowledge Center.
If you would like to try out e-cigs for yourself, take a look at our popular electronic cig starter kits today!