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2017-12-27 / Featured / Front Page / Observer Business

How Chesterfield’s Avail is vaporizing the cigarette market

BY PETER GALUSZKA CONTRIBUTING WRITER


In a span of four years, Avail Vapor’s chief executive and co-founder, James Xu, above, has grown the company to 102 stores in 12 states. 
ASH DANIEL In a span of four years, Avail Vapor’s chief executive and co-founder, James Xu, above, has grown the company to 102 stores in 12 states. ASH DANIEL On the other side of the broad glass windows, masked workers in protective bunny suits run a small assembly line. They’re preparing “e-liquid” – a concoction of vegetable glycerin, propylene glycol, nicotine and one of 200 flavors – so it can be poured into 15- or 60-milliliter glass bottles with eye-dropper caps. It’s an elaborate production that has an ultimate goal: romanticizing the science behind Avail’s vapors.

The flavors are exotic and whimsical sounding, such as “Tortuga,” with a taste resembling Key lime pie and rum, and “Cascade,” which blends watermelon flavor with lemonade. On the company’s website, where roughly 70 flavors are marketed at a time, the chemical cocktails are given detailed descriptions, similar to those in a boutique catalog. For example, “Stargazer” promises a heavenly experience:


At company headquarters in Midlothian, left, Avail showcases its vaping devices and other products with a science-themed flair. 
ASH DANIEL At company headquarters in Midlothian, left, Avail showcases its vaping devices and other products with a science-themed flair. ASH DANIEL If you gaze at the stars long enough, you might get a glimpse of the proverbial “pie in the sky.” Reward yourself here on Earth, instead, by trying this incredibly delicious toasted coconut cream flavor. The buttery baked pie crust and the sweet vanilla with coconut filling are enough to make you feel like you’ve tasted heaven!

Avail Vapor, a four-year-old company based in Chesterfield, brands itself as a premium purveyor of smokeless products. When customers enter the company’s headquarters, a 38,000-squarefoot building at 820 Southlake Boulevard near Midlothian Turnpike, they can watch the entire e-fluid laboratory and manufacturing process – the clean room is viewable a short indoor walk from an Avail retail store. The layout is strategic, promoting the science and technology, and quality control, behind Avail products.


Customers can choose from roughly 70 different nicotine-infused e-liquids at a given time, including “Moon Glow,” above, which combines the flavors of “ripened pears” and honeysuckle. 
ASH DANIEL Customers can choose from roughly 70 different nicotine-infused e-liquids at a given time, including “Moon Glow,” above, which combines the flavors of “ripened pears” and honeysuckle. ASH DANIEL For many “vapers,” this is where the experience begins: After purchasing their e-liquids, customers pipe the fluid into their battery-powered vaping devices and hit the “on” switch. A coil superheats the liquid, transforming it into vapor, and the user breathes in a nicotine buzz without the potentially fatal health risks associated with tobacco smoking.

For some, it’s a lifeline – a path to quitting smoking. For others, it’s a new nicotine habit with as yet unknown long-term consequences. Managing that complex brand identity is a challenge, but challenges are nothing new to Avail’s chief executive. James Xu is a man who jumped into the vaping race early, building the world’s largest e-cigarette retailer while the big tobacco companies were just getting out of the gate.  

For all its popularity, vaping is a relatively new technology. And as with any new technology, its implementation has outpaced regulation.


Vaping devices at Avail, top right, are battery powered and reusable, ranging in price from about $8 to more than $100. 
ASH DANIEL Vaping devices at Avail, top right, are battery powered and reusable, ranging in price from about $8 to more than $100. ASH DANIEL The vaping industry, which got underway about a decade ago, still has no federally mandated standards for any of the e-liquids that are brewed up. There are various types of vaping devices, typically imported from Asian factories, especially China, with no real guidelines. Some have been known to break and leak nicotine. There have been reports of defective batteries used to power them catching fire.


Avail store managers George Peterson and Ben Mays at the company’s flagship store and headquarters on Southlake Boulevard in Midlothian. 
ASH DANIEL Avail store managers George Peterson and Ben Mays at the company’s flagship store and headquarters on Southlake Boulevard in Midlothian. ASH DANIEL Pressed by former President Barack Obama, the U.S. Food and Drug Administration decided in 2016 to promulgate new regulations for e-cigarette manufacturers, importers and retailers to bring them in line with requirements for other tobacco products.

Under industry lobbying, the new rules were delayed this summer when President Donald Trump’s new FDA commissioner, Scott Gottleib, pushed back their review by several years. James Xu, Avail’s CEO and co-founder, seems unconcerned about the delayed regulations. He stands behind his product, saying quality assurance and standardization are essential to Avail. “One thing we’ve learned in business is that if you want to sell, you must make an honest product at a reasonable price,” he says.

And they do sell. In four years, Avail has established 102 stores in 12 states. According to ECigIntelligence, an industry analysis firm, Avail Vapor is the national leader in e-cigarette retailers, followed by Mooresville, North Carolina-based Madvapes, with 79 stores.

Avail’s remarkable growth has caught the eye of Richmond-based Altria (Philip Morris USA), the world’s largest tobacco cigarette maker. Earlier this fall, Altria announced it had taken a minority interest in Avail. Neither company would divulge how much money is involved or how much Altria now controls.

Altria already makes a disposable electronic cigarette called a MarkTen that it sells at 65,000 convenience stores. The MarkTen is among the lower priced so-called “cigalikes” of a relatively simple design and can only be used a few times.

Up until now, the company has been slow to jump into the more sophisticated, reusable vaping products that are Avail’s specialty. Like all of the big tobacco companies, Altria was badly stung in 1998 by a massive settlement with 46 states that required payments of more than $200 billion. An industry-wide push to expand offerings to less-threatening tobacco products followed, but Altria only started producing electronic cigarettes in 2013, after many of its competitors.

During a recent conference call with stock analysts, Jody Begley, president and general manager of NuMark, the Altria subsidiary that makes MarkTens, praised Avail as a market leader with plenty of hands-on experience with store sales, notably in open source vaping devices.

“The company manufactures its own liquids in a state-of-the-art ISO-certified clean room,” he told analysts. “It also has a full-service analytical science laboratory to support regulatory compliance. We have already benefited in various ways from this investment in Avail. We’ve gained a better understanding of the vape store channel and adult open-system vapers, and have access to extensive data around adult vapor purchasing patterns.”

Xu, Avail’s co-founder, discovered vaping by accident about five years ago.

At the time, he was helping run a successful family business in Richmond, Evergreen Enterprises, which had gotten its start selling flags at the Virginia State Fair. After earning computer science degrees from the University of Shanghai and Old Dominion University, Xu left Washington, D.C., in the mid-1990s to help his sister, Ting Xu, their parents and Ting’s husband, Frank Qiu, grow the business into wholesale house furnishings and knick-knacks. Some of the products were made and stocked in China, necessitating regular travel. In 2010, Evergreen bought Plow and Hearth, a Madison, Virginia-based firm that retails fireplace accessories. Over time, the company grew from a few dozen employees to 900 today.

Evergreen had hired a talented special projects coordinator, Donovan Phillips, who had worked as a professional magician. Xu recalls being impressed with Phillips and his creative approach, attacking problems from all angles.

About five years ago, Xu and his wife, Gail, a cardiology nurse, were visiting Phillips at his home and noticed he was smoking a pipe-like object that emitted water vapor.

Xu’s wife was a heavy smoker, in part because her job was stressful. “After a code call, she’d need several cigarettes to calm,” Xu says. On Phillips’ recommendation, she tried vaping and was able to stop smoking in two months. During her annual medical checkup four months later, Xu says the results showed dramatic improvement in her blood work and lung capacity. “It was a night and day difference,” Xu recalls.

So Xu huddled with Phillips and Cole Smith, another local entrepreneur. They opened the first Avail Vapor store on Cary Street in Richmond in 2013, and quickly grew from there. Given his experience with Evergreen Enterprises, Xu knew how to ramp up sales. One strategy was to make sure that all Avail stores are company owned and are financed through organic growth or through his own private funds, Xu says.

Such strong controls make it easier to standardize the retail experience. In the first years of Avail’s expansion, that was a crucial step. When vaping got started, many outlets were decorated with outlaw-like “head shop” or heavy metal themes. The Avail store at the headquarters’ location is spanking clean and lit with blue lights. “We wanted a soccer mom to feel as comfortable in here as a truck driver,” says company marketing director Maggie Gowen. The look is replicated at all of Avail’s stores.

Mindful of the complaints about shoddily made if not dangerous vaping devices, Xu says he only buys from Chinese firms he knows. He says he or his team visits the factories where the devices are made in China to make sure quality standards are high.

Indeed, there have been problems. Other companies have sold vaping devices with lithium ion batteries that caught fire. Gowen says many of the battery issues result when vapers don’t follow recharging instructions or use another manufacturer’s recharging device. “If someone buys a kit from us, we make sure they know how to use it,” she says.

Besides choosing a flavor, vapers must understand how to adjust the nicotine settings to specify how much of the addictive, tobacco-derived substance they want. Avail buys its nicotine from Richmond-based Universal Corp., a major tobacco broker that operates in 30 countries. “We get the best nicotine from them,” Xu says.  

For several years, analysts have wondered why big tobacco companies such as Altria and British American Tobacco, owner of Reynolds American, didn’t charge into vaping sooner and more aggressively. Altria has MarkTen and Reynolds has Vuse e-cigarette models. While big sellers, they are at the lower end of the industry, costing about $10 for a product that can be used a few times. By contrast, Avail’s models range in price from $8 to more than $100.

Vaping seems to be a promising market. Despite a slowdown in 2015, when sales topped $1.7 billion, overall sales have been robust. Bonnie Herzog, an analyst at Wells Fargo Securities, predicts the U.S. vaping industry will reach $4.4 billion in sales this year, based on proprietary data and convenience store sales.

So why have big tobacco companies remained on the sidelines? Some analysts say the major players have been biding their time, waiting to see how the new industry and health regulations pan out. Large tobacco companies have been badly burned by health lawsuit settlements over the past 25 years. They also face declining sales for traditional cigarette products and are heavily invested in tobacco-based products, carefully looking for new alternatives to cigarettes such as smokeless snuff, or cigarettes that heat but do not burn tobacco.

Xu says the e-cigarette market has grown from the bottom up, outside of the periphery of large, top-down corporations, “like crowd-funding.”

The vaping trend started about 20 years ago in Asia and then spread. Each time, small improvements were made. “There is an incredible amount of innovation every day,” he says.

While Xu believes that electronic cigarettes are “95 percent safer” than regular smokes, “vaping is not 100 percent safe,” he admits. Anti-smoking advocates and some researchers remain skeptical about vaping, in part because no long-term data exists about the safety of e-cigarettes. Nicotine has its own negative health effects and can be fatal if inhaled in high amounts, and research shows that other e-liquid components can be converted into toxic compounds like formaldehyde by high-wattage vaporizers.

Meanwhile, groups such as the Campaign for Tobacco Free Kids worry that sweet e-liquid flavors make vaping appealing to kids, who could become addicted to nicotine and move on to other tobacco products. While traditional cigarette use among youth has fallen in recent years, in 2016, the Centers for Disease Control reported that e-cigarettes were the most popular tobacco product among middle and high school students, with more than 2 million having used a device in the past 30 days.

Thus, a lot rides on the FDA and its regulations – which could come in the next four to five years.

In the meantime, Xu and Avail Vapor intend to maintain their own standards of quality control. As for Altria’s vaping future, one hint came out at the stock analysts conference when Begley of NuMark said, “We have a promising pipeline of future e-vapor products in development.” 

Correction: In earlier print and online versions of this story, we misidentified the gender of Jody Begley, president and general manager of NuMark, a subsidiary of Altria. We regret the error. 

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