Smokin' Sales

Walking through a gift and merchandising conference in Las Vegas while looking for a new business venture, Danielle and Matt Steingraber noticed a girl in the corner smoking something that looked like a pen. Curious, they asked what it was.

Within two weeks of discovering electronic cigarettes (e-cigarettes) at the 2008 event, the Steingrabers, along with their business partner, Michael Murray, put in a $50,000 order for e-cigarettes from a Chinese manufacturer, and within two months they had set up three mall kiosks.

“We thought this was revolutionary because it revolutionized smoking,” Danielle Steingraber says. “Six years ago this was so nascent. Nobody knew what it was,” Matt Steingraber adds. They named their electronic cigarette (e-cigarette) company White Cloud Cigarettes.

After making the move to manufacture their own e-cigarettes just three months later, the business has grown to gross $15 million in revenue, netting $13 million in sales after discounts, up 69% from the year prior. This year the company is forecasting more than $20 million in sales. With 80 employees in the U.S., White Cloud recently moved into a new 20,000-square-foot office and warehouse, four times the size of its previous headquarters, where the company has its customer service team, developers and distribution.

Although the Tarpon Springs-based company still has eight retail kiosks in the U.S., more than 85% of sales come from its website. Internet sales have grown 60% year over year and the White Cloud's online database now tops 80,000 people.

Because competitors of big tobacco companies have spent millions of dollars over the last several years educating the public on what e-cigarettes are, the Steingrabers say there's no longer a reason to keep the kiosks with dwindling sales open, so the company is working toward 100% online sales.

“The repeat business of the online market has just made it a slam dunk in terms of business opportunity,” Matt says. “You'd be foolish in my opinion to have a retail establishment for this product.”

Underage Smoking
As with any new product, regulation is scrambling to catch up with the industry, and age verification is a hot issue with e-cigarette companies. Critics of e-cigarettes claim that one of the biggest problems is that e-cigarette companies market to minors and develop flavors to entice young people to smoke.

A new Florida law went into effect at the beginning of July prohibiting the sale of e-cigarettes to minors. The federal government is cracking down on underage sales as well. In March alone, the Food and Drug Administration issued 330 warning letters to retail establishments for selling tobacco products to minors, according to White Cloud Director of Corporate and Regulatory Affairs Robert Burton.

That's why White Cloud invested at least $250,000 in developing a transaction software with LexisNexis that uses a complex algorithm to determine that the person buying e-cigarettes online is actually who they say they are, and old enough to buy. The software checks credit history, social security data, details on the credit card, order details, address records and more to determine whether White Cloud's customer service team needs to do an additional manual age verification review.

LexisNexis charges 48 cents per each verification, or new customer, which is why White Cloud does not allow customers to check out as guests. Earlier this year, White Cloud presented its software to the FDA and let it know that it would be happy to license to other companies.

“There was a concern at one point, if the FDA banned Internet sales, then that's our business model down the toilet. That's why we've been actively engaging them,” Burton says.

R&D
Age verification protocols aren't the only thing White Cloud shares with the agency; it also shares all of its research on safety, health impacts and benefits over tobacco products. “We'd rather be proactive and engage with regulators, rather than react to poorly written and developed regulation,” Burton says.

White Cloud works with CORESTA, a Paris-based scientific research company that assists tobacco companies coming up with product standards and testing for various worldwide regulations. The company also has a partnership with University of South Florida to conduct qualitative and quantitative behavioral research to determine why people choose or decide not to switch to e-cigarettes.

All in all, over the last two years, White Cloud has invested $2.8 million in research and development, Burton says. “We invest more than we should in R&D for a company our size.” Research is also centered on streamlining the manufacturing process to improve product quality, ensuring there are specific standards that must be met by manufacturers.

“The standards the FDA is looking to put in place in terms of product quality, we actually applaud them, because we feel we're as high as we can possibly be on product quality to minimize any risk of people getting things that are latent or inherent because of the manufacturing process not being as pure as it should be,” Burton says.

In addition to the company's 80 employees in the U.S., around 100 people through three different shifts work at a factory in China, injecting cartridges with nicotine liquid.

In June, the company released a redesign of its products for automated manufacturing in the U.S. Previously, the company had 50 people at a time in the China factory hand-filling cartridges. Working through a new pharmaceutical grade medical device manufacturing company in Tampa, the process now only requires five people, Matt Steingraber says. He believes having increased control and oversight over the manufacturing process is worth the investment.

The redesign also features a cotton-less system, so users have a more consistent flavor throughout, and can see how much liquid remains in the cartridge while smoking.

Marketing
Keeping up with trends is important because White Cloud is competing against a number of the big-name tobacco companies who have dipped their toes into e-cigarettes, such as Altria and Lorillard. Danielle believes that being small gives White Cloud an advantage in developing new products, because they can be much quicker to react to trends than a big corporation.

The team agrees the company's biggest challenge is marketing. “The big tobacco companies are doing the old playbook,” according to Matt Steingraber, by paying millions for celebrity advertising, Nascar marketing and concert sponsorships.

“We've been punished a little bit in the marketplace because we haven't spent millions of dollars on marketing, we've spent millions of dollars on research and development,” he says. “Creating a better product and user experience is probably paramount, but how do you get that out there?” White Cloud has relied on press releases and general buzz, a somewhat grassroots movement to spread the word.
Furthermore, the company can't advertise digitally like most firms seeking online sales because Google banned e-cigarette and tobacco products from its AdWords network. Instead, the company pushes out Web content to increase the company's search results.

White Cloud also relies heavily on its loyal customers, or “White Cloud Nation,” to help it develop products and test different flavors. With a lot of blogging and interaction through the website, White Cloud has tapped into its customers' preferences.

Hoping to increase the level of interactivity even more, the company is working on developing a “smart” e-cigarette, or one that could connect via a Bluetooth to a user's cell phone, where they could share recipes with other users and track how much liquid they are using and how much is left.

“We're the walk-on team with no squad, no reserves,” Robert says. “But we're still the freshest thing in the salad.”

Regulation Woes
The Steingrabers are no newbies to how changing regulations can affect business.

Just prior to the Steingrabers discovering e-cigarettes, the couple had closed their student-loan company, Atlas Education Finance. The 11th-largest student loan firm in the U.S. in 2008, the Steingrabers shuttered the firm after student loans could no longer be guaranteed by private third-party services.

Executive Summary
Issue. Uncertain regulation Industry. E-Cigarettes Key. Stay proactive with regulators