As part of our year-end wrap-ups, my colleague Charlie Minato asks 10 questions that he thinks will affect either the cigar industry as a whole or a specific company or individual in the coming year. My role in this exercise is to not only help him craft and refine his questions for the coming year, but also to grade his predictions.
(To read the full Ten Questions of 2016, click here.)
This year has been one of the more interesting years in recent memory both for the cigar industry and our country as a whole. FDA regulation and the election of a new president are certainly the two big headlines, but we’ve also seen issues at state and local levels that will likely have an impact in 2017, as well as shakeups at individual companies where the results won’t likely be felt until a few months into the new yea.
As you might recall from previous installments of this feature, there isn’t a strict format by which I dish out grades; sometimes it is as simple as a letter grade, other times its more nuanced and still other times it involves a bit of editorializing both on Charlie’s predictions and the subject which he attempted to tackle, hopefully interspersing a bit of humor as well.
With 2017 quickly approaching, it’s time for Ten Questions for 2016, graded.
1. How will FDA be regulating cigars by the end of 2016?
Prediction: FDA will not regulate cigars for the majority of 2016.
While it might not be the industry’s worst nightmare, FDA regulation of cigars did indeed come to pass in 2016, at least in its first steps.
In early May, it was announced that the U.S. Food and Drug Administration (FDA) had selected Option 1 of two potential courses to deal with premium cigars. It was a shock to many in the industry who thought that premium cigars would earn an exemption from regulation based on the fact that they are markedly different from cigarettes and other tobacco products. As the industry had to quickly accept this new reality, the 499-page document ended up creating more questions than answers, and by July’s IPCPR Convention & Trade Show, three cigar industry associations had filed a lawsuit seeking resolutions and clarification to, if not repeal of, nine different aspects of the new regulations.
Just three months after the announcement, the first step of regulation would go into effect: a requirement that a cigar would have to be commercially available prior to Aug. 8 without it needing FDA approval prior to being released. This resulted in a literal tidal wave of new cigars hitting the market, some with formal announcements and seemingly many, many more without as manufacturers and brand owners scrambled to get at least one box onto a retail shelf.
That also set off a countdown clock for manufacturers and brand owners to decide which of these new releases will end up getting submitted to FDA for approval, since they had two years from that date to submit the appropriate paperwork to get FDA approval to continue selling cigars that didn’t qualify for grandfathering. It’s a cost and process that many still don’t have a clear answer about, but hopefully something we should begin to see answers to in the coming year.
Over the summer we also heard that FDA was requiring additional paperwork to be filed out during the importation process of cigars, a standard procedure to bring FDA-regulated products into the U.S., but one that caught more than a few importers and cigar companies off guard when it went into effect on Aug. 9. It didn’t help that there was an issue with the importation of drugs from the Dominican Republic around the same time, and a number of cigars were destroyed in the process, leaving some feeling as targets of an anti-cigar campaign by FDA.
In late November, it was announced that FDA had begun to collect user fees from cigar companies, a monetary wakeup call that FDA regulation was now in effect.
Charlie predicted that FDA will not regulate cigars for the majority of 2016, a prediction that is fairly accurate, at least in some senses. The decision came towards the end of the first half of the year, while the first regulation date happened shortly after the midway point of 2016. But the reality is that FDA regulation is here and will only get more prevalent in 2017 as costs begin to come into focus for testing and submission, decisions get made as to which cigars will stay and which will go, and the flow of new cigars slows from a flood to a slow drip, if not completely shutting down completely.
Grade: B+, as FDA didn’t regulate cigars through the majority of 2016. Given that the big decision was yet-to-be-announced at the start of 2016, it would have been near impossible to get this completely correct, particularly the schedule.
2. Where will Hirochi Robaina end up?
Prediction: No clue, but why not: Robaina ends up with General.
Charlie took a shot in the dark and said General Cigar Co., which was a complete miss, though given the vagueness of Robaina’s path at the point that Ten Questions was written, it was as viable an option as any.
While he had signed on to work with La Palina in some capacity in July 2015, that relationship didn’t deliver any cigars. In January 2016 we learned that Spence Drake would be launching a new company called White Hat Tobacco that would bring Robaina’s cigars back to the market. The company would add two new lines over the summer, H.R. Claro and H.R. Blue, while the H.R. Habano would have a new path to consumers and also gain a new vitola.
What might be most interesting is how Hirochi Robaina has fallen out of the public eye, especially compared to 2014 and 2015, when he was touring the country promoting his cigars.
3. How long before the changes at General take place?
Prediction: Sooner rather than later, hopefully.
Not that long at all. In November 2015, Dan Carr was dismissed and replaced by Régis Broersma as president of General Cigar Co., with Craig Reynolds appointed head of Scandanivan Tobacco Group’s (STG) premium cigar business in addition to running Cigars International.
That would set the stage for a couple of notable departures in 2016, most notably Michael Giannini in September and Alan Willner in November. The former was creative director and director of innovations of General Cigar Co., and perhaps best known for Foundry Tobacco Co., which was launched in 2012, as well as his revitalization of the La Gloria Cubana brand. The latter was the company’s vp of marketing and had been with General since 2011, including serving as the company’s interim president during the transition from Carr to Broersma.
From a product side, General had a fairly typical year, releasing new cigars across nearly all of its brands, scoring points with the rerelease of CAO Amazon Basin and getting some buzz with CAO Consigliere, while the other new cigars had a fairly typical year: some good ones, some not so good ones. The company made its first moves with Toraño, including bringing Jack Toraño on in support of the brand, and like many others, announced a price increase due to FDA regulation.
Then just about two weeks ago, Reynolds was appointed to oversee all of STG’s North American business unit, which includes General Cigar Co., Cigars International, STG Lane and STG Canada.
What all that move leads to in 2017 will be something to keep an eye on, as will how the company fills the holes left by Willner and Giannini. Companies as big as General don’t change course over night, but this could be the year we see some noticeable changes. Reynolds has shown strong performance with Cigars International; General has been stripping down its trade show spending—or at least appears to have been—in recent years; and the marketing department will almost certainly have some new staff before long. While 2016 saw some changes, 2017 might see even more as the company looks to solidify and refresh its place in the cigar industry.
Grade: Generally speaking, pretty good.
4. Who will own Altadis & General at the end of 2016?
Prediction: STG’s IPO happens, Imperial does not get purchased.
Charlie nailed this one, so I’m not going to spend a ton of time on it.
STG’s IPO happened in February when it became listed on the Copenhagen Stock Exchange, while Imperial Tobacco, owner of Altadis U.S.A./Tabacalera USA, remained as is despite rumors that both Japan Tobacco and British American Tobacco were interested.
Grade: An opening bell ringing success.
5. How many stores will JR acquire/open this year?
Prediction: It won’t be 12. Over/under is set at five new stores for JR in 2016.
JR Cigar, which is part of Tabacalera USA along with Altadis U.S.A., made some big moves in 2015 to grow its brick-and-mortar business along with its catalog and online shop. Charlie had set the over/under at five new stores, a reasonable if ultimately ambitious number, even though Tabacalera USA, JR’s parent company, acquired Serious Cigars’ four Houston-area stores in November.
Part of this may be due to the increased focus on the Casa de Montecristo brand, a subsidiary of Imperial Brands, plc. Tabacalera USA announced in April that it wanted to expand the reach of the Casa de Montecristo brand and would be rebranding the two Cigar Inn stores acquired in 2015 to be Casa de Montecristo by Cigar Inn.
In September, Casa de Montecristo opened in Dallas, while in November it was announced that Austin, Texas and Nashville, Tenn. would both be getting Casa de Montecristo locations. So with all these additions, even in their various forms and headers, the retail arm of Tabacalera USA grew quite a bit in 2016, and five was a pretty good guess, even if they won’t be branded as JR Cigar.
Grade: A doorbuster of a prediction, A.
6. How bad was Cuba’s crop really?
Prediction: There’s going to be a lot of binder on cigars.
In a country that protects the facts as much as Cuba does, we may never know the real answer to this, but it certainly seems like it wasn’t good, which is exactly what Cuba didn’t need after several years dealing with heavy rains and the resulting affects it has on tobacco.
The island got hit with a brutal El Niño system in the last year, causing drought before heavy rains closed out 2015 and started off 2016, the peak of the growing season. A report from Reuters had farmers calling it “a disaster” that would require a significant amount of replanting, with one 60-year-old veguero saying it was the worst harvest he had ever seen.
This year, it became apparent that consumers would be feeling the impacts, with some La Casa del Habano owners sending out advisory emails saying that large wrappers have become quite scarce and as such the production of large ring gauge cigars will be slowing, somewhat ironic given how Cuba has moved towards fat cigars in recent years.
Habanos S.A. and Tabacuba have maintained that they have enough tobacco in storage to handle a dip in production, but how long that can last is uncertain and there have been more vocal expressions about the ability of the Cuban cigar monopoly to ride this out for much longer. With the easing of restrictions on Americans’ purchases of Cuban cigars both on and off the island, demand will certainly be increasing, making for an even more difficult reality.
The answer will ultimately be found at the retail level, as cigars go on indefinite backorder or show up looking subpar, let alone smoking that way.
Grade: We might not be seeing binder used as wrapper yet, but Cuba’s crop year wasn’t nearly as good as Charlie’s answer.
7. What effect will TPD2 have on the recent push for premiums in Europe?
Prediction: Warning label restrictions increased, but not much else in 2016. U.S. cigar makers still think Europe will be their savior.
The thought that Europe would be the next frontier for non-Cuban cigars may have cooled amongst some manufacturers, but certainly not the industry as a whole, as evidenced by the number of first-time participants at Intertabac this year. But while younger cigar smokers are opening up to the idea of “new world” cigars and Cuba seems to be struggling to fill every order, the fragmented nature of the European Union is presenting its own challenges.
Tobacco Products Directive 2014/40/EU (TPD2), which was passed in 2014, directed member countries to expand the warning labels that go on tobacco product packaging, adhering to a minimum standard set by the EU or to come up with a minimum as a country. With 28 member countries, it’s pretty easy to see how complicated of a process a manufacturer would have to be in compliance with, and at some point it simply may not be worth it to maintain stocks of warning labels in different sizes and languages, as well as staff knowledgable in how they must be applied.
Then of course, there is plain packaging, something that could be much more of a reality across the EU within the next five years.
Just looking over this year’s stories, we didn’t write nearly as much about companies expanding to Europe or releasing exclusive product for those markets. Mombacho Cigars S.A. did, as did 1502 Cigars, but other than Joya de Nicaragua releasing Rosalones Reserva, there just wasn’t as much news as in years past, suggesting that Europe isn’t seen as quite the savior it might have appeared to be.
There are still a number of brand owners looking to grow their footprint in Europe, so TPD2 hasn’t been a complete roadblock. But it has implemented new challenges that will certainly affect how the industry moves forward.
Grade: A delayed B given the fractured nature of implementation, though I certainly don’t think the industry sees Europe as a savior.
8. Are the changes enough for the IPCPR Convention & Trade Show?
Prediction: Nothing is going to be enough to stop people from complaining, but the IPCPR will make more noticeable changes for the 2016 show.
Like a lot of items on this list, the answer gets affected and graded due to a factor that wasn’t known at the time the question was asked. In the case of the IPCPR Convention & Trade Show, it was how the yet-to-be-announced FDA regulation of premium cigars would affect things.
On its own, the IPCPR did make some good changes, noticeable shrinking the trade show floor a bit to make the event feel more packed. Bringing it back to Las Vegas helped as well, as despite the higher costs of doing business it’s a place that many people are at least comfortable with attending, and the wealth and proximity of dining and entertainment options make filling the non-show hours quite a bit easier. The trade group also held the second installment of its Cigar Bash, with Eddie Money tapped to perform.
The show floor itself was a different story, however, as retailers and manufacturers now had to contend with FDA regulation and how that would dictate what products both groups would carry. While there wasn’t a move away from boutique and smaller cigar makers, per se, there definitely seemed to be a sentiment among retailers that they were gravitating towards cigars that would either be grandfathered in or would be submitted for approval, since they won’t be allowed to sell unapproved products or those without a submitted application after Aug. 8, 2019.
That doesn’t take into account the absolute flood of new products, both officially and unofficially, part of which is normal for IPCPR but a good chunk of which was spurred on by FDA regulation requiring products to be commercially available prior to Aug. 8 in order to be sold without approval for two years. If the bubble was starting to burst this year as Charlie opined, all of the new releases tested its ability to keep from exploding. As we have said for several years now, even though the number of new cigars has increased, humidor space and consumer consumption haven’t been keeping pace. This might finally be the year that the cracks turn into all out fractures.
At a visual and perception level, it certainly seemed to be a better show, especially in regards to the things we usually hear complaints about, so the IPCPR is to be commended for that. However not even the organization could have adequately predicted or handled how FDA regulations would affect what happened once the show floor doors opened.
Grade: Since I didn’t hear a ton of complaining, I give the IPCPR a solid A for this year’s show, higher than the B- I’m giving Charlie for his prediction.
9. Will there be a fight in California?
Prediction: There will be a fight. Let’s hope it goes our way.
California became the focal point of anti-tobacco legislation for much of 2016, mainly because of seven bills that were introduced in the fall of 2015 but delayed until 2016 for action. Most notable among them was an increase in the minimum age to purchase tobacco products from 18 to 21-years-old, an extension of the smoking ban to businesses with more than five employees, and the ability for local governments to impose additional taxes beyond the state’s rate.
After the legislature approved them in March, Gov. Jerry Brown approved all but one of them—the local tax increase allowance—and made California the second state in the union (joining Hawaii) to raise the minimum purchase age to 21, and in spite of a threat from a noted lobbyist for big tobacco to sidetrack the governor’s favored legislation should he sign the bills that passed.
But the fight wasn’t over, as a proposal to raise the state’s cigarette tax by $2 per pack qualified for the November ballot, which if approved would nearly triple the state’s cigar tax because of how the latter is calculated. It did pass, getting 64.4 percent of the vote.
Speaking as someone who doesn’t live in California, I never got the sense that the cigar industry specifically put up as much of a fight as they had in years past, showing a very clear deference to big tobacco’s vastly better funded and organized opposition, which even in its most creative forms, failed.
Grade: There was a fight, though not led by the cigar industry, and it certainly didn’t go our way. B.
10. How will Villiger stay in the U.S. market?
Prediction: Villiger will play it safe, and as such, small.
Charlie was pretty spot on with this. Case in point, no new products on display at the trade show (at least officially), and only one “new” product was added to the portfolio this year, a relaunched limited edition that would serve as the basis for the refreshed Villiger 1888 line.
Other than the announcement of Rene Castaneda as president of Villiger Cigars North America in February, it was a year flown well under the radar, something that might have been needed after a turbulent 2015 that left a lot of the retailers who carried the line feeling burnt as they saw the bulk of the staff get let go prior to the holiday season.
Villiger didn’t take Charlie’s suggestion to buy a company such as Oliva and reenter the premium cigar space that way, though that could still be a tact that take in 2017. Regardless, it will be hard for Villiger to get itself back to a place of remote prominence in U.S. humidors.