COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A HOT DILEMMA. 17-1200 EN

Blu eCigs UK – A Smoking Hot Dilemma.

Case study

Reference No. 17-1200 EN

This case was written by Apolline Coat, Adrien Normand, Martin Panhofer, Richa Rawat, Elodie Zanella under supervision of Prof. Dr. Jan-Philipp Büchler, at the HEC Paris.

© 2017, CASEM, FH Dortmund, Emil-Figge-Str. 44, 44227 Dortmund, Germany

No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.

Abstract

The Blu eCigs Case deals with the leading electronic brand in the U.S. market, holding 50% of the retail market share. Leveraging the market growth on a global scale, Blu eCigs entered the UK electronic cigarette market by acquiring a leading premium brand of electronic in the UK, SkyCig.1 2 The case describes their course of action in the decision and acquiring process and especially the challenge of rebranding the purchased brand, SkyCig. The case has an open question structure, so that it can be used for different learning objectives.

Learning Objectives

• Market segmentation

• Brand (re-)positioning

• Brand strategy

• Local adaptation vs. global standardization in brand management

Target Group

The case is recommended for master students or advanced bachelor students that have already successfully completed marketing and strategy classes.

1 Cf. Feeley (2015). 2 Cf. Fox (2014).

0 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN

Blu eCigs UK – A Smoking Hot Dilemma.

Smoking Returns to Hollywood

James steps out of the cab into the bright sunlight of L.A., feeling slightly exhausted after a long twelve-hour flight from London. He gladly recalls the five-star treatment received in the business class, making his journey comfortable and giving him the time to prepare for the upcoming meeting with a prospective, new advertising agency. James had a long day ahead full of meetings but enjoying the sun warming his skin, he was already beginning to love the California vibe. After taking a deep breath, he started walking towards the entrance of the massive black skyscraper in front of him.

James Dodkin had ten years of experience in marketing and brand management, having previously worked for well-known brands such as L’Oreal and Foster Wine Estate in senior brand management positions.3 To cite some of his accomplishments, James was known to have successfully launched businesses, which generated over 35 million Euros of turnover. James has made himself a reputation in the corporate world and, since recently, has been holding the position as Marketing Director at the electronic cigarette producer Blu eCigs in the UK.4 5

The inside of the black skyscraper was even more impressive, he felt at ease immediately since various different colors and pieces of design seemed to fight for his attention. It was clearly the headquarters of a creative business, namely Partizan. Amidst the magnificent Hollywood hills of L.A., Partizan has made itself a name as a top-notch advertising agency, known to produce Hollywood music videos, commercials, documentaries, digital online content and interactive events. 6

James finally meets Anthony Hall, Production Manager at Partizan, who personified the Californian lifestyle of a marketer with his navy-blue Ray Ban glasses, yellow Penguin T-Shirt, grey shorts and pink Nike Air boots. He greets James with a casual handshake and offers him some drinks as a starter. “It’s good to finally see you Anthony. I love your office, great set-up, something I haven’t really seen before.” “Thanks, James. Happy to have you here with us. So, I was actually going through your script the other day and I think we’re the right ones who can help you deliver.”

Anthony takes James around his office and leads him to a large conference room, which was covered with beautiful wallpapers and graffiti of Marilyn Monroe. “As you know Anthony”, exclaims James, “Blu eCigs is big in the U.S. and we’ve just entered the UK market, after having acquired a local UK e- cig brand, formerly known as SkyCig. We’re now looking to increase our awareness through a TV

3 Cf. Mortimer (2014). 4 Cf. Brownsell (2014a). 5 Cf. Owens (2014a). 6 Cf. Owens (2014b).

1 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN commercial, which will help us to lead attention to our new brand in the UK market. We’re looking for something cool, hipsterish and sexy. Something more informal than SkyCig’s earlier strategy. We think you’re the best guys for the job.” Anthony knew about the TV commercial and confirmed, “You’re right James. You’ve come to the right place. Who exactly do you want to target through this commercial?”7

“We’re looking more at youngsters between the ages of 18 to 30. We want the advertisement to look young and sexy, resonating with the youth and encouraging them to dare and explore our product. Epic background music, cool hipsters puffing our e-cigs and sex appeal are must-haves in our rebranding commercials!” Anthony chimed in with excitement, “Wow, recently we signed a new deal with Two Fingers, a hip-hop electronic ninja tune artist and I think he’s the best guy for your mission. He’s generated quite a buzz lately within the music industry and done quite a few successful launch ads. We could sign him up for some cool funky hipsterish tunes. I will show you some audio demos he has produced!” Feeling extremely happy that the meeting was going so well, James felt optimistic. “Sounds great! I would love to go through those samples. In the end, we wish to create a Blu nation representing a new lifestyle around Blu’s core values.”

“Sounds exciting!”, exclaims Anthony in a reassuring tone. “We are a very creative team here at Partizan with great experience in creating world-class commercials aimed at youngsters and have good experience in this type of industry. We definitely think we could create that needed swing and coolness for Blu because we have the best resources for the job.” James responded delighted, “That’s perfect, Anthony! Thanks a lot. You can definitely send me some screenplays to look over along with some music samples. I will get back to you within two weeks after getting a final approval from our CEO and then we can finalize our project.” James and Anthony clinked their glasses with a loud cheer and called it a day.

U.S. Electronic Cigarette Leader Blu eCigs Acquires SkyCig to Exploit UK Market

Blu eCigs, an electronic cigarettes producer and distributor, was founded in 2009 and has since then evolved as the leading electronic cigarette brand in the U.S. market, holding 50% of the retail market share.8 Electronic cigarettes offer a similar feeling to smoking, producing vapor instead of cigarette smoke, ash or smell. With a forecasted market growth in the U.S. of 25% p.a. until 2018, the electronic cigarette market has aroused the interest of traditional tobacco companies, which are struggling with a declining market.9 10 Hence, in April 2012, the third largest traditional tobacco

7 Cf. Owens (2014c). 8 Cf. Blu eCigs US (2014). 9 Cf. Gemma (2014).

2 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN company, Lorillard, which wanted to leverage the tremendous growth opportunity of the leading electronic cigarette brand, acquired Blu eCigs.11 12However, due to an acquisition of Lorillard by Reynolds, the third and second largest tobacco producers of the U.S., respectively, Lorillard had to sell Blu eCigs off to the British and forth largest tobacco producer, Imperial Tobacco, to comply with regulatory requirements.13 14

Being the clear market leader in the U.S. electronic cigarette market with a presence in over 127,000 retail locations, Blu eCigs wanted to leverage the electronic cigarette market growth on a global scale.15 In October 2013, Blu eCigs entered the UK electronic cigarette market by acquiring a leading premium brand of electronic cigarettes in the UK, SkyCig. SkyCig will operate as a separate subsidiary and Blu eCigs wants to keep its current management team and business locations in the UK. Currently, the UK electronic cigarette market is one of the most advanced worldwide, amounting to 1,3 million users and projected £340 million in sales by 2015.16 Although several startups and independent suppliers have emerged since the introduction of the electronic cigarette in the UK in 2007, large tobacco multinationals are increasingly taking over the market by acquiring small competitors.17 Another fact that makes the UK market interesting for electronic cigarette companies is that electronic cigarettes are still classified as consumer products, so far avoiding firm regulation.18 19

Both, Blu eCigs and SkyCig, sell replaceable liquid cartridges and face increased competition by open system vaping devices. The open system devices allow users to refill the vaping devices with a nicotine liquid by any brand of their choosing and their market is growing twice as fast as the overall electronic cigarette market.20

London Calling

Back in London, James was on his way to the office where he had a meeting with Jacob. Jacob Fuller was the founder of SkyCig and the newly appointed CEO of Blu eCigs UK. Jacob had built a successful electronic cigarette brand in the UK, and deeply valued trust and relationships at work. Some say, he

10 Cf. Wahba (2014). 11 Cf. De la Merced, Bray (2014). 12 Cf. Mangan (2014). 13 Cf. Blu eCigs US (2014). 14 Cf. Vranks (2014). 15 Cf. Strauss (2012). 16 Cf. Kinder (2014). 17 Cf. Polidori (2013). 18 Cf. Euromonitor International (2012). 19 Cf. Euromonitor International (2014). 20 Cf. Solomon (2013).

3 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN still loved SkyCig and would often be spotted smoking a SkyCig, some of the few remaining in his stock.

James greeted the secretary, “Good morning Amanda, how are you doing? Is Jacob here yet”? “Hi James, good morning! I heard L.A. was good. Jacob’s yet to arrive, you can take a seat in his office. He should be here soon.” James felt a slight jolt in his stomach as he was nervous but at the same time very optimistic considering the encouraging meeting with Partizan in L.A. Given its experience and popularity, James knew Partizan was the right partner for a successful advertising campaign. However, James knew that switching the agency would be a tough sell to Jacob since he highly values the business relationship with the former advertising agency of SkyCig, PHA.21 Walking into Jacob’s office, he pulled out his Blu eCigs package and sent a relieved puff into the office air, “Today’s going to be a long day.”

Sound Branding Starts with the Right Winning Concept

James looked around the room, he had been here on quite a few occasions when finalizing projects with Jacob and the Board members. The room decoration and design were much to his own taste and James slowly breathed in the lily room fragrance as it gently spread across the room. He ran his finger on the newly designed leather seats from the U.S. and was impressed with the quality and comfort it provided. Deeply engrossed in his thoughts, James puffed some few Blu smokes while Jacob was yet to arrive. Amidst the wait, James recalled some of the conversations he had with his team regarding the marketing strategies for the promotion of Blu eCigs, which he was soon to finalize with Jacob.22

He remembered one of his team members saying, “James, if we offer a flat 50% off on the Blu Starter Kits, it would be a great start for Blu where consumers can sample our products offered at reasonable prices. This would keep us competitive and, at the same time, allow us to offer affordable prices to our young clients. This can be promoted on our official website, and they could shop via the Blu Outlet. The promotional offers would help us generate more online traffic.”

Last week, James had a meeting with the Sales Director, Steve Jones, to discuss the best distribution ways to sell electronic cigarettes, “So it’s final. We contacted four major retail stores in UK: Asda, Co- operative, Morrisons and WH Smith”, exclaimed Steve in excitement. “They will provide us with good

21 Cf. Tilley (2014). 22 Cf. De Andrade et al. (2013).

4 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN shelf space and visibility, and they are waiting for our final word once we launch Blu. We’ve also contacted other retail stores and are in touch with over 30,000 stockists in the UK to sell Blu.”23

“James, here is the progress report of the Blu Social Hub marketing project”, said Peter, the Social Media Team Leader who directly reported to James. “We have our Facebook page ready, we’re awaiting the official verification from Facebook. The Instagram page has been set up, too. As for Twitter, the account is ready, and our team has been in touch with Twitter for the account validation process. The best part is we got our website and social media ratings reviewed by Nibbler (see Figures 1a and 1b) and I think we’re doing a pretty good job. As for the YouTube channel, it is already up and running, and we’ve managed to upload some really cool videos on the functioning of Blu eCigs kits and some of the different products and flavors offered. We’re still waiting for your approval on the “Freedom of the DJ” episodes, to be launched soon on the channel. We really Jacob agrees to it, music is a great way to connect to our young consumers.”

Fig. 1a: Website user statistics for Blu eCigs’ homepage (Source: Silktide Ltd. (2014)).

23 Cf. Stock (2013).

5 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN

Fig. 1b: Efficiency report on the official website, overview social media ratings (Source: Blu eCigs UK (2014)).

Blu eCigs meets SkyCig – Rebranding? Yes, but how?

Fast-paced approaching steps followed by the leaping noise of the golden door handle unlocking the oaken, heavy door to Jacob’s office abruptly interrupted James’ thoughts. Quickly glancing over his shoulder, James saw a distressed Jacob rushing into his office, registering James with a short, approving nod of his sweaty, red head. It was hot this summer in London, hotter than usual and James was struggling with the heat himself but with the rebranding of SkyCig as Blu eCigs right ahead, the whole atmosphere in the London office was heated.

“I have just talked to Lyndsey. She says that our decline in sales is related to the insecurity of our approaching re-launch. Naturally, people are reluctant to buy a vaping device when they do not know whether supporting items and cartridges are available for the SkyCig product in a months’ time.” He leaned back in his new American leather chair and pulled a SkyCig package out of his pocket.

“You still smoke SkyCig?”, James wondered, confused by the bad example Jacob, the CEO, was setting for the rest of the staff. “I prefer this taste and feel”, Jacob snored back to James, slowly puffing out a cloud of vapor in the hot office air. James decided to ignore his offensive tone and demonstratively put back his Blu eCigs into his package on the desk. “I wanted to talk about our upcoming rebranding strategy. I came back from L.A. yesterday and have some great ideas about

6 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN how we can transform SkyCig into Blu eCigs as fast as possible. I really believe it is key that we start the rebranding with our full marketing force to change the perception in people’s minds.”24 25

“Alright, elaborate”, Jacob commanded. “The starting point of our whole branding strategy and of how we define the core of our brand identity is the customer segment that we want to target. SkyCig has focused on the 30+, classy performers with above the average income and education. I really like the way Lyndsey put it when she explained to the press that SkyCig promised smokers a way to move away from smoking, whereas Blu eCigs offers smokers a positive lifestyle choice and not simply an alternative to smoking. That’s a whole new way of thinking about smoking.”26

“I know, I know, Lyndsey has been talking about this on and on”, Jacob interrupted impatiently, “but what does it mean for our brand? Do you want to paint smileys on each cigarette? What values do you see Blu eCigs standing for?” James took a deep breath and continued, “Ok, let’s start with the product. SkyCig and Blu eCigs look quite similar. The color-coding of the packaging is black in both cases. Therefore, at first sight, there is not much change going to happen in the way customers perceive our product. The only thing that is different is that instead of a white electronic cigarette you will have a black one with a blue light. This should not be a major problem though because the color- coding is in sync with the packaging. Overall, the product might appeal more to men than to women because the dark design might be more associated with traditionally male characteristics such as power, dominance and status. We believe this is ok, though, because SkyCig has been focused too much on balance, safety and security whereas we want to make the brand sexier to appeal to younger customers.” (see Figures 2a and 2b).27

24 Cf. Blanding (2014). 25 Cf. Griggs (2014). 26 Cf. Briggs (2014). 27 Cf. Bauld et al. (2014).

7 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN

Fig. 2a: Product offering of SkyCig (Source: Blu eCigs UK (2014)).

Fig. 2b: Product offering of Blu eCigs (Source: Blu eCigs UK (2014)).

“Ok, I see where you are coming from but why do you want to make the brand appear sexier? It has worked great so far. So, why change the targeted customers? Have you ever seen how Blu eCigs tries

8 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN to make the brand sexy in the U.S.? Printing our ads on tight bikinis – that’s disgusting! I don’t want to do that kind of ads.” (see Figures 3a and 3b). James sighed – he has been expecting this question. “I agree”, he started, “that SkyCig has done well in the UK. However, I strongly believe that we have to open the brand to new customer segments, in particular to younger people, to guarantee long- term success. Given the overwhelming success of Blu eCigs in the U.S. and the strong marketing power of Imperial Tobacco, I feel that we have to adapt the brand for the UK market. Imagine the brand would be a person. Our current customers would describe SkyCig as a healthy, reliable and sociable person. On the other hand, Blu eCigs customers see their brand as individualistic, free and adventurous, triggering completely different emotions and appealing to diverse areas in the brain. Let me ask you one question, Jacob. When you smoke your SkyCig in a bar, how do you want to be perceived by other people?”28 29 30

Fig. 3a: Blu eCigs’ attempt to make the brand sexy and appeal to a younger audience (Source: Forbes (2014)).

28 Cf. Brownsell, A. (2013). 29 Cf. De Andrade et al. (2013). 30 Cf. Frick (2014).

9 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN

Fig. 3b: Blu eCigs’ attempt to make the brand sexy and appeal to a younger audience (Source: Forbes (2014)).

Jacob seemed to be caught off-guard by this frank question and frowned before he replied, “Of course, I want the other people to find me cool and admiring.” “See”, James interrupted exited, “this is exactly what we want to convey with our new brand. Currently, SkyCig is not conveying this message at all. Look at the setting, actors and music involved in the previous ads of SkyCig and reflect whether you would consider the people in the ad as cool and sexy. We have to include people in our ads that our customers admire. Jacob, young people do not want to see people applying for a job or getting married using our product. This is not cool at all!” (Figure 4).31

31 Cf. PR Newswire (2013).

10 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN

Fig. 4: Screenshot of an advertising video by SkyCig (Source: YouTube LLC (2013)).

Jacob leaned forward in his leather chair and fixed James with his eyes. “Let me make one thing very clear, James, I do not want to have anybody throw dirt on SkyCig in any way. Do you hear me? Do you want to know why our industry is not growing as fast as it could be? It is exactly because marketing

11 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN directors try to be smart and aim at attracting young customers by making the ads as sexy as possible and putting a bad light on the whole industry.32

Have you ever heard about our competitor VIP, whose ads had been banned because they were too explicit in the eyes of the regulator? They are still struggling to recover from the shitstorm they sparked. As long as this is my brand, we are not going to sexualize our brand.”33

“Of course, I know them”, James tried to calm Jacob down, “the campaign has been a shame, indeed. However, the brand does not belong to you, Jacob. It belongs to the customers and they want to be perceived cool and they want to feel sexy when they use our product. We absolutely have to convey this message, or we will continue to lose market share!” “Enough”, yelled Jacob, “I do not want to hear anything more from this. Find a way to rebrand SkyCig because it is what Imperial wants us to. But make it in a decent and noble way. A way that will not make us lose all our existing customers because they are ashamed of using a pornographic brand. We are done here. Come back to me once you have come up with something new.” James was upset because of the abrupt rejection of his plans but he could feel that Jacob was not in the mood for further discussion – at least today. Hence, he left the room without saying a word, determined that he might have lost a battle but that he will eventually win the war.

Doubt Kills More Dreams than Failure Ever Will

After a stressful day at work, James decided to end the day at his favorite bar in London, “XOYO”. The hipster bar in the center of London is crowded with exactly those people he wants to attract as users of Blu eCigs. Glancing over the people surrounding him in the bar, he could see the perfect fit between his rebranding plan and the future generation of electronic cigarette users. However, as he continued to observe people in the bar chat, he realized that all those people were very similar to him in terms of looks, interests and attitudes. The painful insight struck him that he might be a prisoner of his own milieu. Reflecting on the conversation he had with Jacob earlier this day, he started to wonder whether he was right. Maybe he should adapt a rebranding strategy that focuses more on the values of existing customers. In addition, he questioned whether he should continue to work with Partizan as the new ads they are proposing are indeed very daunting and risky, potentially reflecting bad on the brand. When he flipped through the menu of “XOYO”, he realized that in small letters it was written that his very favorite bar was actually part of a larger restaurant chain. He wondered whether this new insight might change his perception of the bar. Maybe, he thought, I should also think globally but act locally.

32 Cf. Brownsell (2014b). 33 Cf. Cave (2014).

12 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN

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14 COAT, NORMAND, PANHOFER, RAWAT, ZANELLA (2017) BLU ECIGS UK – A SMOKING HOT DILEMMA. 17-1200 EN

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