The Unprecedented - and Unregulated - Rise of an Electronic Cigarette Company
| Originally posted on November 12th, 2018.
|| INTRODUCTION
JUUL, now the most prominent brand of electronic cigarette (e-cigarette or e-cig) on the market was conceived by PAX Labs just three years ago. Initially established in 2014, the product was launched in July 2017 out of PAX Labs as an independent company. Very quickly after its release, JUUL products were adopted by millions and in just five short months, the e-cigarette was the most popular on the market. Less than a year later, JUUL had laid claim to approximately 72% of the U.S. e-cig market share. The act of “Juuling” has become a widespread trend across the country, largely thanks to its popularity among pre-teens and teens; this demographic group has acted as the perfect opportunity for JUUL to capture not only more market share, but a new piece of the pie entirely. Of course, this has triggered much criticism and scrutiny from the public, and, more threatening to the business, from the U.S. Food and Drug Administration (FDA). In this paper, I will illustrate how the controversial strategy undertaken by JUUL has led it to become an overnight sensation, what challenges and threats the company currently faces, and how it will need to make changes to its operating strategies in order to hold on to its explosive success.
BACKGROUND & HISTORY
The massive success of JUUL is due to the sharp and competitive strategy that sets JUUL apart from competitors in the e-cigarette arena. This strategy rests on two main pillars: the design of the product and the marketing methods used to promote it. These two factors drove the intrusive, ubiquitous trend of “Juuling” that has permeated every region in America over the course of the last two years. However, each of these strategy pillars has aspects to it that lend themselves to increased nicotine consumption among teens and pre-teens.
JUUL’s strategy has echoes of Big Tobacco’s unregulated siren songs, popular throughout the 20th century, that led to the explosive use of cigarettes among teens and adults. The all-pervading tobacco advertisements of the time, which featured happy and attractive individuals and couples, misled many Americans who did not understand the addiction that was forming as a consequence of cigarette smoking, nor the damage that cigarette smoking caused. JUUL, with its many online advertisements featuring models and young people, found almost exclusively on social media platforms (Business Insider), has landed the company in hot water with the public and the FDA. In addition, the design of the device itself, as well as the many different fruit and dessert flavored nicotine cartridges that are available, are said to appeal more to young people. Indeed, several studies have found that many young adults and teenagers started JUULing without realizing that they were inhaling an addictive substance (Tonic). JUUL leadership has said it never sought out teenage users, but whether or not the company intentionally tried to market their product to the attractive new market of teens and young adults remains to be seen. Regardless, the company will need to change their strategy in order to stay in line with federal regulations and in the good graces of consumers.
RECORD-BREAKING INVESTMENT
In December 2017, shortly after the launch of JUUL products, then CEO Tyler Goldman was replaced by Kevin Burns after Goldman left to “pursue new entrepreneurial opportunities.” Included in the company’s board of directors is Nicholas Pritzker, whose family owned the tobacco giant Conwood. JUUL has been able to garner billions of dollars from investors since the conception of the idea in 2014, and the funding hasn’t stopped despite the legal trouble that has been challenging the company over the last year; JUUL reportedly raised $1.2 billion in a financing round in June 2018, just two months after receiving an initial request from the FDA for information. This valued the company at more than $16 billion, a record-breaking financial feat. JUUL was able to make it to Decacorn status (or a valuation of greater than 10 billion) in a shorter period of time than many tech giants, including Facebook and Twitter. On news of this achievement, on venture capitalist had to say: “…well they're [JUUL] is selling an addictive drug, so that helps…” (Yahoo Finance). Nevertheless, the volume of funding flowing into JUUL headquarters reflects the immense volume of growth the company has seen, and it demonstrates that the market has confidence in consumer demand for JUUL products. In addition, the backing of investors and this impressive valuation serves as a significant strength for JUUL moving forward; the company has the clout and the resources to battle future legal and regulatory challenges.
DESIGN STRATEGY
The design of JUUL e-cigarettes is innovative, immensely practical, and a key reason for the success of the company. The e-cig itself is sleek, is only available in black, and it mirrors a USB flash drive. It is easy to charge using a magnetic USB deck. It has commonly been referred to as “the iPhone of e-cigs” and has a retail value of $49.99. JUULpods, the disposable cartridges containing the nicotine juice used by the JUUL, come in a variety of eight flavors, many of which are fruit or dessert flavored – the most popular being Mango. A pack of four JUULpods is available from about $15 to $25 in the U.S.
JUUL pods contain nicotine salts, the preparation of which JUUL received a patent for in 2015. These salts provide several competitive advantages for JUUL, as well as an impossible barrier for copycats to surmount (according to Kaiser Health News, while some brands have attempted to copy the design, JUUL has been relatively successful in thwarting threats of this nature in legal battles). The advantages of this innovation include the ability to contain a very high concentration of nicotine per JUULpod, making JUUL e-cigs significantly stronger than most alternatives on the market. The nicotine salts also provide an experience that very closely mimics that of smoking, and users describe the strong “hit” of a JUUL as very appealing. These pods are also able to deliver a nicotine rush or peak within five minutes, much like a traditional cigarette. In addition to these factors, the nicotine salts reduce the harshness of vaping a JUUL, making it more appealing to those who have not tried vaping before, such as loyal cigarette smokers, or young children.
The design, from the fruit-flavored cartridges and nicotine salts used, to the look and feel of the device, the design of JUUL is said to appeal to young people. One advantage of JUUL is its ease of concealment, which has been seen to lend itself to students who want to use and hide the device while at school. The flavors have been very popular among young people, and some studies say that individuals are drawn to these sweet-tasting flavors without realizing that the cartridges contain nicotine (Public Health). These factors are some of the strongest indicators of a predatory strategy employed by JUUL, but this is yet to be determined.
MARKETING STRATEGY
JUUL spent one million dollars, or almost half of their marketing budget, on social media marketing alone from 2015 to 2016. While this amount is significantly higher than any of their competitors, this strategy also proved to be significantly cheaper overall. While some competitors, such as R.J. Reynolds Vapor Company, spent over $16 million on television ads over the same time period, JUUL placed most of their spend on Instagram. The strong social media marketing strategy undertaken by JUUL is seen as one of the biggest reasons for their explosive success, and a 2018 study found that JUUL’s social media activity was highly correlated with retail sales.
In terms of capturing the elusive market of young people, JUUL’s social media strategy performs very well. The brand’s use of young, attractive models and the emphasis placed on themes of luxury, relaxation, and sex appeal is thought to target and appeal to younger audiences. JUUL has also employed many social media influencers in the past that have large youth followings. To many public figures, lawmakers, and public health advocates, these advertisements are a little too reminiscent of the same themes that tobacco companies have always used to transform non-smoking kids and young adults into life-long cigarette buyers; the only difference is that in the 21st century, these alarming tactics are powered by social media.
THE THREAT OF THE FDA
The strong foundation of product design and marketing established by JUUL has propelled it to capture more than 70% of the e-cigarette market share, but the strategies employed by JUUL are clearly problematic. These tactics could be considered clever, innovative, and strong – they haven’t been done before by other e-cigarette or vape brands and the numbers show that they work. However, in practice, these maneuvers by JUUL have led to underage and youth nicotine consumption increases of epidemic proportions. This has, of course, led to a large public outcry, mostly from parents, teachers, and school administrators, against JUUL products. In response to the commotion, the FDA initially moved in to “better understand the reportedly high rates of youth use and the particular youth appeal of these products” in April 2018. By September, the FDA had shown up to JUUL headquarters unannounced to gather information on the firm’s marketing methods, and seized thousands of documents related to marketing strategy and product design. It was then that the FDA began issuing notices to JUUL and other large e-cigarette brands that they had 60 days to demonstrate their plans to address widespread youth misuse of their products to the FDA. The FDA also curtailed JUUL’s unregulated fun run by cracking down on retailers and issuing fines to those that sold JUUL products to minors. JUUL Labs has stated that they will work proactively with the FDA in response to the request, in addition to announcing that JUUL had removed many of their social media posts and created private patrol of retailers who advertise and sell to underage youth (New York Times).
STRATEGY CHANGES
JUUL has had to make many changes to its strategy since coming under fire by the FDA, but it is difficult for onlookers to discern if their efforts are genuine. The most ostentatious changes JUUL has made include its new, intense support for a national increase of the minimum legal age necessary to purchase vape or e-cig products, from 18 to 21 years of age. Another big change is JUUL’s new Youth Education Strategy, a $30 million campaign to keep JUUL out of the hands of young people and underage groups. In addition to these broader changes, JUUL has also made changes to the design of its pods. Select flavors of JUULpods, including Virginia Tobacco and Mint flavors, are now available in lower nicotine concentrations (from 5% to 3%); flavors have been renamed from names that might appeal to youth to more standard flavors (for example, “cool cucumber” is now just “cucumber”); JUUL has also rolled out major changes to their marketing strategy. With these changes to their online marketing strategy in particular, JUUL now only employs people 35 years of age and above to be their influencers and models on platforms like Instagram. JUUL petitioned Facebook and Instagram to remove many problematic posts and accounts that featured younger or under-age individuals promoting JUUL products, whether or not they had done so on behalf of the company. In addition to these changes, JUUL changed the physical product promotion itself by adding the tagline “the alternative for adult smoking” to all of its product labels.
LOOKING TO THE FUTURE
While many of these strategy changes look great on paper, it’s up for debate whether these measures will be enough to keep the company in good standing with the federal government and the public as the FDA investigation continues. The ominous presence of the FDA looms over JUUL, threatening to pull their products from the shelves. It is a major threat to the entire JUUL business and should be taken seriously by management.
However, JUUL’s strategy changes and their very public announcement of such changes are working to rescue the brand. As previously alluded to, investor dollars have not stopped rolling into JUUL headquarters despite the criticism of the company’s questionable ethics, and now the real threat the company faces with FDA inspections. The steps that the company has taken so far provide a great start on the path towards recovery.
Although, when it comes down to it American market, money talks. Throughout the past few centuries, we have seen the U.S. government shy away from cracking down on addictive substances or otherwise harmful products, lest they muddle the operations of the invisible hand in the free market. JUUL’s $16 billion valuation, growing market share and sales numbers all demonstrate that consumers want JUUL products, and I believe that the government wouldn’t actually go so far as to get in the way of all that money to be made. As long as JUUL does enough to cover their tail and save face, they’ll likely be excused with a few slaps to the wrist.
Even if JUUL is safe from the FDA and JUUL products remain on store shelves, the company will likely take a hit to their market share in the months to come due to the loss of consumers they will experience and to the damage their reputation will have suffered by the time their fight with regulation is over. First, by making these changes to their marketing and product design strategies as previously outlined, JUUL is marketing less effectively to teens and pre-teens. While this is great news to parents and others, it does mean that there will be fewer total sales as it will likely be harder for these groups to obtain a JUUL device, legally or otherwise. In addition to a reduced market size, JUUL’s reputation may be irreversibly damaged. The company is still facing a widespread backlash from parents, teachers, and the public – adults that could potentially be part of JUUL’s target audience. There is still a large population of adult smokers looking to stop smoking cigarettes, but the news surrounding JUUL in recent months has placed a stigma on the brand that might not be easy to shake. A respectable adult may not want to buy the same JUUL products that have “traditionally” been used by teenagers and frat boys. Luckily for JUUL, they can count on a large portion of their most loyal (read: addicted) customers to help keep sales up while in this time of stress.
RECOMMENDATION & GRADE
The steps that have been taken so far to repair the company’s image are a good start, but JUUL should also channel efforts into a proactive go-forward plan for when the dust from their FDA battle settles and is left behind. This means more intensive marketing campaigns towards the target audience JUUL has supposedly been chasing all along – adults who are attempting to stop smoking cigarettes. Thus far, JUUL has made a name for itself in young spaces like Instagram and Snapchat. I would recommend that JUUL reevaluate its user demographics and think strategically about which market segments would be easy to convert to JUUL usage (besides naïve teenagers), and then work to meet that audience in spaces they frequent. These spaces may take the form of less prominent sites, like Pinterest, where many older millennials and GenX-ers spend their attention. A new marketing strategy may involve JUUL focusing more of their advertising budget on something other than online ads and social media campaigns. For example, JUUL may find that the sleek and easy-to-operate design of the JUUL may lend itself to the usage of older generations, in which case they should consider forms of TV and print advertising.
On the topic of design, as this was the other main point of criticism from the parents of juuling teenagers, JUUL might consider introducing a new product in addition to its current product or reissuing the product in a new design entirely. The current design is thought to appeal to young people due to its modern look but especially due to its ease of concealment, which makes it easy to use in bathroom stalls of a high school, for instance. If JUUL wants to demonstrate that it’s not after this young demographic, a design change to please the preferences of older users may be in order.
It is true that these changes suggested shatter the innovative strategy that JUUL has led over the past couple of years – the strategy that has allowed them to raise billions of dollars and to command the entire e-cigarette market virtually overnight – but these changes are necessary if the company wants to continue to thrive in this market.
The initial strategy of the company proved to be short-sited and has left JUUL looking like a very predatory company indeed. However, JUUL is not entirely powerless as the company was able to seize large amounts of capital and market share in its heyday that can provide the foundation for future success. JUUL needs to keep its head up, power through the next few months or years of legal and regulatory battles, and essentially rewrite its blueprint for market takeover.
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