American Heritage International: A Strong Competitor In A High Growth Industry
In 2008, sales of e-cigarettes totaled $20M. Last year, this figure had risen to $1.7B. By 2017, Wells Fargo estimates e-cigarette sales to reach $10B. The rapid expansion of this relatively young industry offers investors an opportunity for exponential gains, but as with any young industry, it can be difficult to pick a future market leader. Here's one company high up on the list of potential candidates.
American Heritage International Inc.
American Heritage International Inc. (AHII) is a development stage company set up with the specific focus of taking advantage of the rapid growth of the e-cigarette industry. The company sells a range of branded disposable products, comprising three graded strength e-cigarettes and one menthol e-cigarette.
The company describes its products as 'best in class', basing this description on a number of key characteristics. The first is that they are the first and only disposable e-cig to have a soft filter. The soft filter affords the company's customers a realistic look and feel, comparable to that of a standard cigarette product. The second, that the product's ingredients are food grade quality and 100% produced in America. The company states that this offers its customers a safer and more enjoyable experience than the majority of its competitors can provide. The third characteristic is the technology the product incorporates. The final factor is the brand's true to life flavor. According to a survey conducted by American Heritage International, the brand scored over 90% favorability with focus groups and peer reviews when compared with direct competitors.
Strategy and Execution
American Heritage International is focusing on high volume, long-term relationships across a range of distribution channels, including grocery store distribution groups, mass retailers, tobacco distributors and hotel and casino operators. In addition, the company has developed an online sales platform, through which it aims to drive sales via an aggressive affiliate marketing platform, targeted advertising, forum participation and email marketing.
Regarding execution, on March 10 American Heritage International announced it had expanded its distribution channel by 251 outlets across New York and Oklahoma, bringing the total number of outlet locations to more than 400.
More recently, on March 19, the company announced it had secured shelf space in a number of 7-Eleven stores across Florida. Using the sales data from this initial 7-Eleven foothold, company CEO Anthony Sarvucci states the company will be able to prove that "that it is not only profitable to carry our American Heritage brand of premium disposable e-cigs, but to also prove that a high sell-through rate at the retail level can be achieved."
On March 24, the company announced it had reached an agreement with Chevron, giving the American Heritage Brand a solid foothold in a number of Tier-1 stores across Florida, Texas and California.
Finally, and most recently, American Heritage International announced on April 3, that it had expanded its retail distribution channel into Nevada and Illinois, bringing the total number of states to 11.
Other Events of Note
On March 21, the company revealed that its initial inventory of e-cigarettes had completely sold out. The initial order totaled 20,300 e-cigarettes, and the company has now received a secondary shipment of 50,000 e-cigarettes, with a further 100,000 set for delivery in April. Parallel to the announcement, the company reported it had received $500,000 pursuant to a non-brokered private placement. This illustrates that not only is there demand for the company's product, but also that the company's cash flow can withstand the demand.
From a marketing perspective, American Heritage sponsored the winning fighter, Johnny Nunez, at the World Series of Fighting Main Event on March 30. NBC broadcast the event, which reportedly attracts over 900,000 pay-per view viewers.
As of 2013, there are approximately 300,000,000 individuals in the United States, with approximately 28% or 84,000,000 classified as active cigarette smokers. Euromonitor forecasts the retail sales value of e-cigarettes worldwide for 2014 at $2.5 billion. As mentioned in the introductory paragraph of this piece, Wells Fargo estimates that figure will top $10 billion by 2017. Perhaps more pertinent, Bloomberg Industries projects that sales of e-cigarettes will exceed those of traditional cigarettes by 2047. US tobacco revenues are notoriously difficult to uncover, but global cigarette revenues totaled $753B during 2012. A report last year stated that the US accounts for approximately 20% of the total cigarette market. This gives an approximate US market size of $150B, which falls in line with the most recent revenues Phillip Morris (PM), Reynolds American (RAI) and Lorillard (LO), which reportedly account for more than 80% of the total US tobacco market.
According to the Bloomberg forecast therefore, the e-cigarette industry generate more than $75B in revenues 30 years from now.
The main risk associated with an investment in American Heritage is that of competition. Big tobacco, namely the three companies mentioned in the 'Industry Size' section, will recognize the market potential and move to offset the revenue they lose through cigarette smokers switching to e-cigarettes with e-cigarette products of their own. The up side of the big tobacco involvement however, is that it will, and already has, involve consolidation. In April 2012, Lorillard acquired e-cigarette brand blu cigs for $135M. In October last year, the same company announced it had acquired SKYCIG, a British e-cigarette brand for $49M. If American Heritage International can continue expanding its market share at its current rate, it could become a prime candidate for a takeover from a big tobacco company.
The second main risk relates to regulation. Minnesota is, at present, the only state to have imposed tax policy on e-cigarettes, but many other states are scheduled to impose their own policies during the coming months. Mitigating the effect of pending tax regulation however, is that the tax is, and will be, stapled to the wholesale cost of the product. While there is a chance that the higher cost to retailers and consumers may affect demand, the structure of the taxation policy means American Heritage will not bear any direct costs of regulation. It is also worth mentioning that demand for tobacco is highly inelastic, meaning any increase in price translates to a proportionally small decrease in demand. It is reasonable to assume that e-cigarette demand will be similarly inelastic, and in turn, that tax regulation will not dramatically reduce consumer demand.
American Heritage International has an established, competitive product and a rapidly expanding distribution channel in an industry that experts predict will more than treble in size within three years. The company offers investors direct exposure to this growth through the purchase of its stock.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.