Winter 97/98 Volume III Issue 1

by Lew Rothman

For the last five years, various people with "Spanish sounding" names have been crawling out of the woodwork, claiming to be as yet undiscovered manufacturers. Their cigars, originating from non-descript factories with no sources of raw materials, have been pouring into this country by the millions under hundreds of new names. These cigars remain unsold on thousands of shopkeepers' shelves, occupying display space and tying up the capital of small smoke shops in virtually dead items. In wine shops, liquor stores, and duty-free shops, the situation is even worse, as these non-descript brands account for the majority of the handmade cigars available in those outlets. The only thing these new cigar brands have in common is that they are all both over-priced and lousy.

These brands and their manufacturers, principally from the Dominican Republic, will not survive 1998. The same will be true of hundreds of new tobacco shops and cigar bars.

As you read this article, a number of things are already happening, and a number of things will happen in the corning year:

1. These new manufacturers are being forced to sell millions of cigars to the bigger cigar dealers in the United States for a fraction of last year's asking price. Therefore, you will see massive discounting (on the order of 50% or more) on all the Johnny-come-lately brands that have been advertised in the last few years.

2. The smaller smoke shops will discontinue selling these brands entirely, as they discover that the large merchants are selling the very same cigars to the public at prices that are considerably below their cost.

3. With collapsing markets and sales, the newer importers and manufacturers who were convinced they had struck gold (in your pockets) will realize that the game is over. Every week or so during 1998, cigar makers will arrive at some factory door only to find that the factory is closed. The owner is gone; the cigars are gone; the tobacco is gone.... and unfortunately, so are their jobs and their pay.

4. Many cigar makers who were lured away from the established manufacturers will return to these larger factories to reclaim their former jobs. As the trickle of returnees becomes a tidal wave, the pressure for salary increases will abate and some semblance of sanity will return to the cigar manufacturing process.

5. Tobacco crops everywhere have been affected this year by either Blue Mold or, in the case of Ecuador, incessant rain. Therefore, the easing of labor pressures will be offset by increasing tobacco costs associated with the low yielding tobacco crops of 1997. Translated into English, this means that the larger cigar manufacturers will use this as an excuse to continue raising prices.

6. As the prices of the big-name cigars continue to escalate, demand for these brands will be curtailed by simple economics. In other words, many people will no longer be able to afford the brands they have smoked for years and will be forced to switch to more reasonably priced cigars. This will increase the popularity of cigars produced in Nicaragua and Honduras, at the expense of the more expensive cigars from the Dominican Republic and Jamaica.

7. As the demand for the big-name cigars begins to match the number of cigars being produced, you will see an immediate end to the price gouging that has become commonplace in many tobacco shops nationwide. This will help stabilize prices to some extent, as wholesale price increases will be tempered by reduced retailer profit margins. As a result, stores that were marking up their products by 100% or more will be forced to slash their profit margins or lose most, if not all, of their clientele.

8. Smoke shops doing mail-order business on the Internet - all of whom claim to have the largest humidor, best selection, most knowledgeable employees, and best prices - will disappear, as they realize that their entire business was predicated on severe shortages of name-brand cigars and a temporary opportunity to sell products at ridiculously high profit margins.

9. Many of the new shops that have opened in the last few years will close, as profit margins shrink back to those normally associated with a consumable product. As these new retailers are forced to contend with profit margins in the teens instead of 50 - 60%, and as they become aware that everyone in their particular town that needed a humidor, cutter, or other cigar accessory now already owns one, they will find that this is a very tough business.

10. Cigar bars fueled by excessive profits on hard-to-get cigars, such as Opus X, Montecristo, and a host of other cigars that the average person can neither obtain nor afford, will go out of business left and right.

11. The sale of premium cigars will reach record heights as more and more of the baby boom generation enter their fifties, which has historically been the age group of the premium cigar smoker. However, the sales made to this consumer segment will be concentrated in the products of a limited number of factories, principally those with access to large quantities of quality tobacco.

12. Ratings in cigar magazines will have less and less influence over the buying habits of newer cigar smokers, as consumers become more knowledgeable and confident in their own opinions about the quality and value of various cigar brands.

I'm sure that there are a number of people in the industry that will, either publicly or privately, take objection to my views on the coming year. But that will not stop the inevitable, and the inevitable is simple to see: In the long run, quality always prevails. Therefore, those manufacturers who have access to quality raw materials will be able to make quality cigars. Those manufacturers without quality raw materials will disappear.

In the long run, quality merchandise and fair pricing will always prevail. Therefore, those manufacturers, importers, and retailers who give the cigar buying public quality products at fair prices will prosper, and those who do not will fail. The year 1998 should be a very interesting one, as the industry begins to "shake out" from five consecutive years of runaway growth, and the laws of supply and demand thankfully start to swing in favor of the consumer.