Juul, the American vape brand that awarded its employees an annual prize of $1.3 million per capita last year, is planning to enter China and has now begun to build a Chinese team secretly.
Juul was valued at $38 billion last year
In December 2018, Marlboro’s parent tobacco giant Altria (NYSE listed company, code MO) took a 35% stake in Juul for $12.8 billion, with a valuation of up to $38 billion. Altria has a market value of more than $100 billion.
As part of the $12.8 billion investment agreement, Juul will receive a one-time dividend of $2 billion, which the company decided to award as a year-end bonus to its 1,500 employees, with an average of $1.3 million per person.
Juul is currently the highest valued start-up company in the vape industry and the most well-known representative of the vape genre. Its market share has soared from 13.6% in early 2017 to 75%.
Juul has two founders, Adam Bowen and James Moncis. Two older brothers founded the electronic cigarette company Ploom in 2007. They also studied for a master’s degree at Stanford University. Eight years later, around 2015, they sold the brand to Japan Tobacco Company. Then they launched the U-disk-shaped electronic cigarette and named it as Juul, which quickly became the leader of the American electronic cigarette market.
Juul’s current shareholders include Tiger Fund and Fidelity Investment Group.
Juul has the patent to extract nicotine salt from tobacco. It tastes like real smoke. It’s very simple and innovative in appearance. At the same time, Juul likes marketing in social media. It’s a super-popular product with talent, beauty and keeping pace with the times.
Although the control of IQOS heat not burn electronic cigarettes is controlled stricter in the U.S. market, it does not mean that the vape represented by Juul will be liberalized. After the rapid spread of electronic cigarettes through social networks among teenagers, the Food and Drug Administration of the United States (FDA) began to intervene.
In an interview in early April, Scott Gottlieb, head of the FDA, named and criticized Juul for blaming electronic cigarettes for the crisis of nicotine addiction among American teenagers.
According to a report released by the National Institutes of Health at the end of last year, e-cigarette use among high school students in the United States has nearly doubled from 11% to 20.9% in the past 30 days.
The FDA has also announced that it is investigating 35 cases of epileptic seizures after vaping, but the results have not yet been published. Officials say it is unclear whether electronic cigarettes have caused these cases.
Juul’s revenue is expected to reach $3.4 billion this year, almost three times that of last year, according to Bloomberg. Juul’s revenue in the fourth quarter of last year was $424 million, down 2.5% from the previous quarter, with an adjusted loss of $70.4 million and a loss of $17 million in the previous quarter.
Although regulation is being strengthened, Juul sees this as a small setback and tells investors that international market revenue will help offset the downturn in the U.S. market.
Last November, Juul entered the European market in Germany, before this, Juul had already entered the UK.
It’s obvious that Juul has begun to replicate the success of the U.S. market and gradually entered the more developed European countries.
China becomes Juul’s first stop in developing countries
According to the global market, the global vape market in 2017 is about 17.7 billion US dollars, accounting for 2.54% of the global tobacco market.
According to the National Adult Tobacco Survey Report of 2018 edition, there are about 320 million smokers in China, accounting for one-third of the world’s smokers. The number of users is relatively large, but most of them are still traditional tobacco users. China’s electronic tobacco market is still in the development stage.
At present, the supervision of vapes in China is at the stage of government unregulation, industry disorder and product non-standard. Especially, the supervision of vapes is blank at present. Heat not burn products are included in the national tobacco monopoly control. It is illegal to buy and sell IQOS in China.
Vape hk learns from sources that Juul has started planning to enter China since the beginning of the year, and has begun to entrust headhunting companies to identify management teams in China. It is known that Juul has entered the stage of CEO assignation.
According to sources, Juul headquarters does not know much about the Chinese market. They intend to use China as the first test station for developing countries. If they succeed, they will continue to enter other developing countries. If they fail, they will focus on developed markets such as Europe and the United States.
Vape hk learns that Juul is cautious about entering China. Especially after government publicly criticized e-cigarettes at CCTV 315 party this year, Juul’s pace slowed down significantly and he began to hesitate whether to venture into the Chinese market with unknown policies and unknown users.
At present, China’s e-cigarette market is in its infancy, including RELX, Linx, Flow, Moti and other Chinese domestic online influencers brands, and there are many more other e-cigarette brands in Shenzhen that are making a fortune in silence.
It is reported that the latest round of financing valuation of RELX has approached US$3 billion, and RELX said in its BP to investment institutions that it is trying to become the world’s largest e-cigarette brand.
Juul’s entry into China will face competition from many domestic brands, but as the market is still in its infancy, Juul’s resources, capital and brand strength will determine that it is still a high-quality player.
Juul’s patent for nicotine salt in electronic cigarettes may be a killer weapon against domestic brands. In January 2018, Juul’s brand PAX Laboratory announced that it had won a patent for nicotine salt in electronic cigarettes in the United States.
But what makes Juul headquarters uneasy is that the development of international Internet companies in the Chinese market has almost all ended in failure, from the earliest Yahoo, Google, eBay, Uber, to the latest Amazon’s withdrawal from China, which makes Juul headquarters uneasy.
The localization of Internet products and consumer goods needs to be based on a full understanding of local users. The strategy of global replication may not work in China. Especially in the new tobacco market of electronic cigarettes, the country is in a wait-and-see state and belongs to an industry with high uncertainty.
Juul’s Way Choice of Entering China
Vape hk analyses Juul’s choice of ways to enter China.
One is to establish new companies directly in China, Juul authorized technology and brand, operated by domestic wholly-owned companies, injected capital from headquarters to expand the market, and can attract investment institutions to invest in Chinese companies at an appropriate time. Juul’s valuation in the United States is too high, and it is too difficult to operate as the main body in the new market. As to relevant cases, you can refer to the joint office brand WeWork to enter China and finance China’s business independently.
The second is to establish a joint venture company with the new vape brand in China to authorize the brand and technology. This brand is suitable for watching and testing. The localized vape brand has certain market promotion ability and understanding of the domestic market. It is easy for headquarters to obtain information. It belongs to the strategy of “walking while watching”. Once the model runs through, it can invest on a large scale, and once the model is unknown, it can withdraw. The joint venture company is a defensible choice.
Third, establish joint ventures with domestic cigarette companies or tobacco label companies to authorize brands and technologies. This is a conservative practice. Traditional Chinese tobacco and tobacco label companies have begun to develop new tobacco markets. According to Vape hk statistics, since 2017, local Chinese tobacco companies have begun to apply for new tobacco patents, and have begun to test new tobacco products overseas. In cooperation with China Tobacco or tobacco label companies, it will be safer to control policy risks, but the disadvantage is that traditional Chinese tobacco companies have less knowledge of the preferences of e-cigarette users and marketing.
Once Juul enters China, the pressure on domestic e-cigarette brands will begin to increase. After all, the ancestors have various intellectual property rights, such as patents, and their mature product research and development system will be a great pressure for the current domestic e-cigarette start-ups with a low threshold.
But with uncertain policies and sufficient knowledge of the needs of China local users, Juul is not fully sure if he will succeed in entering China, which will be a protracted war once he is dragged down by the Chinese war.