Economic Sustainability Coming from the Electronic Cigarette Industry

I was speaking to a friend about what’s going on in this industry…does it have “legs?” How much risk are we taking on by ramping up production in an industry riddled with question marks?

There is no question that our industry is highly risky. There are many exogenous factors that add to the risk, and I would like to give an empirical viewpoint on what we may have in store in the next couple years.

To be frank, I am not as particularly active in politics as some folks might be. I focus on helping our customers, but I also enjoy forming opinions concerning our future.
So…what about the industry?

Job Creation

With over 10,000 shops having opened up in the past two years alone, it would be safe to estimate that there was a national increase in job creation of at least 30,000 jobs. At an average annual salary of $25,000, $750,000,000 worth of additional income is generated, of which at least 25% is disposable. You might say, “Well, they had other jobs.” If that is the case then their former positions had to be filled by new employees, so if anything, it added even more opportunity to the job pool. Of course, there is the matter of jobs in the logistics area. Although I have not purged all the data from the Bureau of Labor Statistics, I would bet that there have been net increases at all of the major shipping companies, as well as at the ports.

Duties and Tariffs

You probably know by now that the major exporter of electronic cigarette hardware is China. What you may not know is that there is typically a 3% assessment of imported electronic cigarette hardware into the USA. If the average vape shop purchases $150,000 in inventory, each shop yields approximately $4,500 in duty assessments. That’s an additional $45,000,000 in revenue generated for the US government.

Commercial Real Estate

These 10,000 vape shops are moving commercial retail. We speak to many shops that say, “Damn, another vape shop moved in across the street,” or “Damn, they took that space we needed for our nth location.” This competition pushes commercial rent up, which in turn yields more tax revenue, which in turn makes investing in commercial real estate more lucrative. If the average vape shop pays $2,000 in monthly rent, an additional $200,000,000 of income is generated.

Disposable Income for Vapers

Those who have chosen to improve their lives by vaping instead of smoking have also increased their disposable income. The rich, the poor and those who receive governmental transfer payments are all seeing their personal incomes rise, however large. This affords people more money for everyday goods such as food and rent, or it may even allow people to make larger purchases. If the vaper receives transfer payments, it lessens the burden on the taxpayers, as it will allow for smaller increases to satisfy the needs of the less fortunate.

Overall health

Now that there is socialized medicine, it is advantageous for the US government to curb potentially harmful byproducts caused by vices such as smoking.
Of course, we all know that the vape shops are also generating revenue, so the owners are making great money while doing a good deed. If the average vape shop yields $150,000 in EBITDA, then $1.5 billion of wealth is generated based on 10,000 shops.

So, why is this important?

Gross Domestic Product (or GDP for short), is the method in which most governments calculate national wealth. Essentially, it is a function of consumption, investment, net exports and government spending (not including transfer payments as noted above). As you can see in my article, all of these factors play into some component of GDP. This makes the electronic cigarette industry important to the US government, not something that can be easily abandoned. For instance, at the end of 2013, our GDP was $16.8T as measured by World Bank. Using the calculus that I have described above, we see that the E-cig industry contributes all positive factors, with the exception of net exports. The logic in part 2 has it so we can calculate that $150,000 x 10,000 shops will yield $1.5B of outflows going toward imported goods. This is unfortunate, however, because we probably already know that there is a major problem concerning net exports in the USA.

The key focus concerns the potential benefits to the US government. In EBITDA alone, we will be making up for these amounts [m1] through wealth creation for vape shop owners. In addition to the wealth generated in EBITDA, there’s 750 million in salaries, 45 million in duty receipts, 200 million in commercial rent and an increase in disposable income for vapers. With all these factors considered, you can easily see why the government should not be so excited to let go of this industry.

Cities and states, although losing excise taxes, are making up for this, but it is too fractionalized for me to make an assertion of estimated gains or losses. As we have seen, this is where some of the risks have come from, such as the issues in NYC where they have coupled smokers and vapers.

All in all, I think this is a great time for vape shops, and although I have absolutely no idea where this is heading, I think that it would be insane for the government to just throw the baby out with the bathwater. There are great solutions up ahead, and we need the government to step up and use reason to help us strengthen this country through the proliferation of the owner-operated vape shops.

Thanks for your time!

Originally posted on the VAPRO Supply Blog on July 19, 2014 by Abe Aboody