E-Cig Maker Juul Eyes Its Own Retail Store Chain

Under intense regulatory scrutiny thanks to a purported rise in teen use of electronic cigarettes, leading manufacturer Juul Labs is considering opening its own stores to sell its vapor device.

Although Juul and other manufacturers have little control over third party retailers selling e-cigs to underage users, former FDA commissioner Scott Gottlieb excoriated Juul for failing to do more to stop teen usage. When Altria (NYSE: MO) invested $13 billion in Juul, many assumed Juul would use the tobacco giant's decades of experience to regulate access to its own device. Gottlieb called both on the carpet, saying they were reneging on their promise to cut teen use.

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By opening a chain of retail outlets, however, Juul would have much greater control over who buys its product. Moreover, because Altria previously invested in the largest chain of vape shops, Juul might gain valuable insights into the practice, be able to test and monitor ways to better enforce age restrictions, and be able to sell the full complement of flavors that it offers, a policy it limited at other retail establishments because they were seen as attractive to teens.

Under the microscope

With its sleek, thumb drive-looking devices, Juul quickly became the leading e-cig manufacturer, with an estimated 75% share. Adults -- and apparently teens -- found them more unobtrusive than e-cigs that looked more like a traditional cigarette, or the large personal vaping devices called mods.

Yet that leadership has brought unwanted attention, with surveys showing teen use rising to "epidemic" levels. Of course, teen cigarette smoking has also plummeted to the lowest levels on record, suggesting e-cigs are achieving their goals with teens and adults alike, even if they're bringing in casual users and non-smokers, too.

But Juul has invested in industry-leading technology to limit teen access to its device where it has control over the process. On its website, for example, Juul uses third-party age verification, vigorously vetting buyers and checking IDs against publicly available records to verify their age. It also prohibits bulk purchasing of products to prevent them from being redistributed.

A Juul retail store would undoubtedly stringently age-screen customers, but would also give the company an opportunity to sell more and different products.

Controlled access to e-cigs

Late last year Juul pulled flavored e-liquids out of 90,000 retail locations because some of its flavors were seen as enticing to youth (it still sells them on its website), and the FDA subsequently limited the availability of flavored pods, permitting them to be sold only in adult-only stores like vape shops. Tobacco, mint, and menthol flavors were still allowed to be sold in stores where the general public can buy them.

The Wall Street Journal reports Juul has also developed a vending machine that scans a customer's photo ID that it might use in its own stores or other retail locations.

Last year Altria took a minority stake in Avail Vapor, one of the biggest vape shop chains with over 100 stores in a dozen states, which also manufactures its own e-liquids. Because of its investment in Juul, as well as its agreement with Philip Morris International (NYSE: PM) to market its recently approved IQOS heated tobacco e-cig in the U.S., Altria has a unique opportunity to be a vertically integrated e-cig leader that could share experiences as Juul builds out its own network of stores.

An expansion opportunity

Of course, Juul is reportedly starting small. The Journal says it may open in two cities in Texas because they have high rates of smoking, but reportedly rejected others cities including Baltimore and Chicago. It is also said to be looking internationally, and should be opening a store in South Korea soon. Philip Morris operates IQOS stores in Japan, Germany, and other countries where the device has been introduced.

While Juul certainly won't pull its devices from third-party retailers, its own branded stores, with their highly controlled access and greatly expanded inventories, could be a model it successfully replicates across the country.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.