Can Juul Survive?

SMITH BRAIN TRUST – It’s not often that we witness a stunning downfall like the one that Juul appears to be having.

Early this year, the worryingly trendy maker of e-cigarettes was becoming a household name, a mainstay of high school washrooms, a frequent topic of conversation among furrowed-brow parents. It drew the attention of – and a sizable investment from – cigarette giant Altria, with a valuation that was based primarily on a single concept: Growth.

“The company’s valuations are all based on the presumption of growth, and that with growth will come profits,” says Brent Goldfarb, associate professor of management and entrepreneurship at the University of Maryland’s Robert H. Smith School of Business and author of “Bubbles and Crashes: The Boom and Bust of Technological Innovation.”

Then came summer and a series of events that shifted the narrative.

First, came the searing realization that there was a so-called “vaping epidemic” among children (mostly high schoolers), for whom the fruity and candy-inspired flavors had become de rigueur. Parents described kids so addicted to the devices and the nicotine they delivered that they were waking up in the middle of the night to smoke or “vape.” Then came news of e-cigarettes laced with tar (or narcotics) causing lung infections in teens and young adults, leading to several deaths.

Since then, seven states have banned electronic cigarettes. Last week, China effectively banned all online sales of e-cigarettes, limiting its reach into an important market.

This week came reports that the U.S. Food and Drug Administration would ban all e-cigarettes, other than those that taste like tobacco and menthol, prohibiting the vaping flavors that are popular among teens.

“Now, the narrative was that Juul was targeting children with lethal consequences,” Goldfarb says. “This is what led to the rapid succession of regulatory consequences and, indeed China is part of that story.”

Goldfarb and David A. Kirsch, associate professor of management and entrepreneurship at Maryland Smith, have spent years studying the anatomy of asset bubbles. They’ve seen assets rise like Juul and fall as it appears poised to do. In Juul’s case, they say, it’s not overly surprising.

“I would add that Juul did a very poor job of choosing its customers – at least in hindsight. It was clearly marketed to children – and that was a profitable strategy, but this left Juul exposed to negative press. It's hard to see how this was not foreseeable,” Goldfarb says. “Negative press about the flavored e-cigs was abundant early on.”

Kirsch notes that there remain country-by-country differences in the way e-cigarettes are perceived.

“In the U.K., where base rate use of combustion cigarettes is still relatively high, e-cigs are seen as a healthier alternative than continuing to use the old fashioned way. By contrast, here in the U.S., where base rate use of tobacco has declined, especially among younger demographic groups, e-cigs are seen as a new hazard and even possibly a gateway to the use/abuse of other substances. In this case, the same story may get a different reaction from different cultural audiences.”