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E-cigarette stores face extremes of risk, opportunity

Square Vape Factory and Lounge owner Tony Napolitano

Square Vape Factory and Lounge owner Tony Napolitano mixes a new flavor on July 22, 2014. Electronic cigarette smokers can adjust nicotine levels and flavors, and shops like Napolitano's sell the supplies. Credit: Johnny Milano

They're anything but typical Long Island retailers.

At least six electronic cigarette stores have been established on the Island in the past two years, bringing the local total of these quirky and controversial shops to eight. These "vape shops" sell devices that vaporize flavored liquid, often containing nicotine, rather than tobacco. Their customers are mostly former tobacco smokers who enjoy "vaping."

The small businesses, typically storefront operations with names like Xhale Custom Vapors, in Ronkonkoma, and Square Vape Factory and Lounge, in Franklin Square, are recent additions to Long Island's small-business dominated economy, where employers of less than 50 people form 96 percent of all firms.

Store owners say their sales, unlike those of tobacco, are growing rapidly. Jeff Hirsch, who has been distributing cigarettes to Long Island convenience stores for 27 years, said declining sales in that business drove him to distribute e-cigarettes starting in 2006, and open Long Island Vaporium in Lake Ronkonkoma with a partner in January.

"In the last 10 years our cigarette sales have just dropped tremendously -- I would say 35 percent," Hirsch said. But his e-cigarette distribution sales to convenience stores doubled in the last year, and sales in his vape shop increase weekly.

Vape shops present an extreme example of the opportunities and risks faced by new types of retail businesses struggling for a foothold in the marketplace.

Erica Chase-Gregory, acting director of the Small Business Development Center at Farmingdale State College, said all entrepreneurs must weigh the ramifications of their business decisions, but vape shop owners have a difficult challenge because of the public health debate about their products.

"It's a danger for those small businesses entering into that, because there's a big unknown," Chase-Gregory said of the industry's regulatory risk. "We know what is going to be in a cupcake. No one is banning a cupcake."

Severe regulation of e-cigarettes could restrict or even close these businesses. The U.S. Food and Drug Administration recently proposed regulating e-cigarettes and their liquids nationally for the first time, requiring warning labels about nicotine addiction, banning their sale to minors, and requiring all of the products to go through an agency approval process.

Though the FDA said it remains open to the idea that e-cigarettes might reduce tobacco-related deaths and disease, it says studies of the devices' health impact have had mixed conclusions; some have shown e-cigarette vapor contains toxic substances; others have shown that it contains far less than tobacco smoke. Large-scale studies of e-cigarettes are ongoing, the FDA said.

Addiction concerns
One key concern is whether they are addicting more young people to nicotine, which some research from the Centers for Disease Control and Prevention has suggested. New York State banned sales of e-cigarettes to minors in 2013.

State Sen. Kemp Hannon (R-Garden City) sponsored a bill this year that would have banned the sale of bottled nicotine liquid that fills the vape shops' e-cigarettes. Hannon's bill passed in the Senate and died in the Assembly.

"What I really love are people [who] go, 'You're destroying our business,' " Hannon said. "I said, 'wait a minute, it didn't exist 18 months ago.'"

Disposable e-cigs often look like cigarettes and come in limited flavors and nicotine levels.

Vape shop products, unlike disposables, are refillable and customizable. The tanks of these larger, rod-shaped vaporizers can be filled with thousands of different flavors containing any level of nicotine the customer wants, including no nicotine, allowing the user to wean off the chemical.

E-cigarettes offer potentially enormous growth, as smokers turn to vaping for what they hope will be a healthier alternative to tobacco.

Bonnie Herzog, senior beverage and tobacco analyst at Wells Fargo Securities, pegs the total e-cigarette market in the United States at $2.5 billion in sales and projects it will overtake conventional cigarette sales in the next decade. She estimates that tank-style vaporizers and e-liquids are now a $1.1 billion market -- with $800 million coming from more than 5,000 vape shops -- and growing twice as fast as the market overall.

However, that growth is attracting powerful competition. Big tobacco companies, after initially selling disposable e-cigarettes to convenience stores, are now getting into devices similar to products sold at vape shops, whose typical customer was disappointed with disposable e-cigs from convenience stores.

E-cigarettes don't face the same restrictions on marketing as tobacco, the products are not taxed like cigarettes and they go through no approval process. As a result, e-cigarettes are much less expensive than cigarettes, and vape shop products are the least expensive, Herzog said.

A pack-a-day smoker spending about $60 per week can switch to one of the personal vaporizers sold at vape shops, which cost $80; a week's worth of liquid, equivalent to a pack a day, is $10 thereafter.

Revenues at the shops are modest. E-Liquid Planet does $750,000 in sales annually at its three stores -- in Massapequa, Levittown and in North Carolina -- and online, said AnnMarie Gregory, wife of owner Josh Gregory.

At Square Vape, located in a strip mall, dozens of glass bottles line the shelf of the bar. But they don't contain alcohol -- no food or drink is served here.

Owner Anthony Napolitano, a roofer by trade, uses his flavor bottles to mix "e-juices" for his customers in such flavors as watermelon, chocolate chip or banana cream pie.

Napolitano can custom-mix an e-juice on demand using his makeshift bar-lab and a gallon jug -- costing him $1,500 -- of 50 percent liquid nicotine solution purchased from one of several online wholesalers. He opened his business in November.

'Starbucks meets vapor'
Customers say the shops offer a place to mingle in a subculture that disapproves of tobacco. Many shops, like Napolitano's, offer lounge areas with leather couches and televisions.

"It's like Starbucks meets vapor meets club," Napolitano said.

Long Island Vaporium in Lake Ronkonkoma offers classes on vaping and once had an acoustic guitarist perform. Maria Hirsch, who handles social media marketing for the shop, said on a typical night customers fill its bar, sharing tips, socializing and supporting each other's attempts to quit smoking.

"We kind of just sit back and kind of let the customers sell the products to each other," she said.

Not all vape shops custom-mix their liquids on site. Others have their flavor recipes mixed by labs registered as food manufacturers with the U.S. Food and Drug Administration. Still others, like Long Island Vaporium, only sell name brand e-juices ordered wholesale.

Hirsch and his business partner Paul Davis said they tried thousands of liquids over months before selecting their brands. Since neither of them uses nicotine -- the two met in spin class at a gym -- they sampled the nicotine-free versions of the liquids in Hirsch's kitchen.

"We want to make sure that we have the best standards and quality in the juices that we bring in here," Davis said.

Hirsch and Davis wouldn't disclose the profit margins on their products, but Herzog estimates products like theirs carry margins of about 30 percent. She said that is about double the average cigarette pack margins.

Store owners say they already follow many proposed regulations. "As far as the child safety caps, we already have that covered," said E-Liquid Planet's AnnMarie Gregory. "Child safety warnings we have already been doing. As far as the liquid coming from an FDA-approved lab, ours are already registered."

Store owners said they are opposed to bans on vaping in public places -- as proposed this year in the New York legislature -- and taxes. Many of the owners are former smokers who switched to vaping and said the regulations would deprive people of a chance to quit tobacco.

Steve Smith, co-owner of Xhale Custom Vapors, said more than 700 customers have made purchases since his shop opened in January and 80 percent of them were former smokers who haven't looked back.

Wells Fargo's Herzog has projected that the three largest tobacco companies will control 80 percent of the e-cigarette market in 10 years.

But after viewing the vape shop experience firsthand recently, she said she is questioning that conclusion.

"We increasingly question which companies will capture the bulk of the profits ... especially given part of the vaping culture is a disdain for Big Tobacco and not wanting to be associated with smoking," she said.

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