Another year almost over, another Ten Questions to grade.
As loyal readers of the site are aware, my colleague Charlie Minato wraps up each year by posing 10 questions that he thinks will face the cigar industry in the coming year. Some are specific to certain companies, some are more wide-ranging, all are accompanied by a prediction for that question and then a year later, get a grade from me as to how well he did with those predictions.
(You can read the full Ten Questions for 2017 here.)
FDA remained at the top of the list once again, and while we’re a good bit closer to understanding what the regulation of premium cigars will look like, there’s still a tremendous amount to be resolved, including a lawsuit brought by the cigar industry’s three prominent lobbying entities against FDA. Yet there were plenty of other questions facing the industry over the past 12 months.
So with just a few days left in 2017, it’s time to look back at my colleague’s questions and predictions for the year and see just how he did.
Here are Ten Questions for 2017, graded.
1. Are FDA regulations suspended or overturned in 2017?
Prediction: FDA will continue to delay some parts of the deeming regulations, though likely not the larger parts as those deadlines don’t begin until 2018. Congress goes nowhere, Trump does nothing and the lawsuit is too early to have any effect in 2017.
If there was a word to describe the implementation of FDA regulations on the cigar industry in 2017, delay would be as good as any of them. Just searching FDA delay on halfwheel turns up a half dozen articles since the tail end of 2016.
Most recently, FDA delayed the submission deadline for cigar approval from May 2018 to Aug. 8, 2021. Earlier in the year, the agency agreed to delay a number of enforcement dates by 30 days in conjunction with the delay of the lawsuit between FDA and CRA, IPCPR, and CAA by 30 days.
The biggest part of FDA regulation of cigars has been pushed back substantially: the due date for substantial equivalence was originally due in 18 months following the in-effect date of regulations but it has been stretched out to five years.
As for the lawsuit, oral hearings were held in mid-December with a number of topics being discussed, including warning labels, user fees, and retailer requirements. Also brought up was how FDA commissioner Dr. Scott Gottlieb’s statement that the agency would be reevaluating its plans to regulate the premium cigar industry would affect where things stand now. Judge Amit Mehta made it clear that he didn’t find it right or feasible to make a ruling that would have multi-million dollar implications based on a rule that might not even be official in a year’s time. While we aren’t likely to hear Mehta’s ruling until late January, it certainly brought to light some key issues that still need to be resolved.
Which brings us to Congress. We should know more in January when Congress finally takes up the spending bill, something that could have an affect on cigars.
President Trump has also been quiet on this issue, and it’s hard to imagine him stepping up on such a relatively minor issue in the grand scheme of what’s going on in the world.
While I can’t delay giving Charlie a grade on this, he certainly used the right word to describe what most of 2017 would hold for the FDA regulation of premium cigars.
2. Do CRA & IPCPR merge?
Prediction: There will not be a merger between the two groups in 2017.
If there was one scenario I could imagine playing out in 2017, it was the merger of Cigar Rights of America (CRA) and the International Premium Cigar and Pipe Retailers’ Association (IPCPR), even though fleshing out the logistics of what such a new entity would look like was a bit challenging.
As Charlie noted, both groups were—and remain—on the same side of the FDA regulation fight, and the seeming differences between the two kept shrinking.
Charlie was correct in that there wasn’t a merger between IPCPR and CRA, and talks seem to have cooled considerably from where they were at the end of 2016.
3. How many new stores will STG (Cigars International) open in 2017?
Prediction: Five new/newly-acquired stores from STG by the end of 2017 with plans for more.
STG ended up not opening any stores in 2017, though that doesn’t mean that the company has abandoned plans to do so; it’s just going to happen in 2018.
In November, Craig Reynolds, president of Cigars International, confirmed to halfwheel that two stores were in the works for the Dallas area; specifically, one in The Colony, a suburb 25 miles north of the downtown core.
It would be hard to imagine more locations aren’t at least on a white board somewhere. However, 2017 saw none of them open, nor were there any acquisitions.
4. How many new cigars will there be in 2017?
Prediction: 1,500 “new” SKUs for 2017, roughly similar to 2015.
By my most recent count, we had just crossed the 1,100 mark, though I know that our release list is in need of a bit of updating so that number is likely closer to 1,400.
While there was certainly plenty of reason to think that the flow of new cigars would dry up this year in light of FDA regulations, that was hardly the case as numerous phantom brands came to market and manufacturers continued to introduce “new” lines, sizes, and extensions. There was also the reintroduction of a number of lines, which we don’t count, but which added to the number of choices a cigar smoker had when visiting the local humidor.
Simply put, 2017 was a good year for those looking for more choices.
5. Which premium cigar company is the first to be penalized by FDA?
Prediction: The first violation will be for a domestic manufacturer, likely a retail store that rolls its own cigars that is completely oblivious to the regulations. We will have to wait until 2018 to see the first nationally distributed cigar company paying fines.
To my knowledge, no stores or retailers have been penalized by the FDA for violating an aspect of the deeming regulations of premium cigars. FDA’s own violations page show that some companies have received warning letters, but largely for selling to minors or non-cigar related issues.
I think Charlie’s prediction is fairly viable in that it would likely be a store that rolls its own cigars and was either oblivious of or felt above the new regulations. Who that is remains to be seen, though.
6. Will FDA regulations lead to more mergers and acquisitions of cigar companies and brands?
Prediction: Let’s put the over/under at six manufacturer/brand acquisitions for 2017. Almost as many retail stores get acquired by multi-national corporations in 2017.
If there was one part of this that was correct, it was the retail side of it, particularly under the Imperial Tobacco/Tabacalera USA/JR Cigar header, which opened stores in Nashville and Austin, acquired a new location in Boca Raton, Fla., and entered into a licensing agreement with four stores in Arizona.
On the brand/manufacturer side, it was an incredibly quiet year for mergers and acquisitions. While Rafael Nodal joined Tabacalera USA as head of product capability and Boutique Blends shifted sales and distribution under the Altadis U.S.A. umbrella, it remained an independently owned brand.
That’s not to say it was totally quiet:
- Altria acquired Nat Sherman in January
- Quality Importers picked up Cigar Mechanic in February
- Gurkha Cigars acquired the American Caribbean Cigars factory in May
- Arango Cigar Co. acquired a portion of Music City Marketing in June
- Ventura Cigar Co. acquired Cuban Cigar Factory in June
- JM Tobacco picked up Zoidian Cigar in July
- Dion Giolito of Illusione purchased OneOff in September
What you’ll notice about many of those is the scratching of your head. A lot of those companies have been dormant or defunct, not the type of headline news you were expecting.
I even noted in my IPCPR 2017 Day 3 recap that the rumor mill seemed much quieter this year, and I maintain that sentiment today.
So while the industry’s mergers and acquisitions departments weren’t totally quiet this year, they were certainly far less busy than Charlie predicted, and making much less flashy moves.
7. Is there any company that doesn’t raise prices between August 2016 and the end of 2017?
Prediction: Many small companies won’t raise prices, but Oliva will be the only major manufacturer to absorb FDA costs in 2017.
Oliva definitely raised its prices and so did everyone else it seems.
8. When does the big sell off take place?
Prediction: 2017 is going to be a great year for consumers when it comes to cigar deals. Catalogs try to sell the majority of the non-compliant inventory in 2017.
As someone who is on the mailing list of pretty much every online cigar retailer, I was eager to see just what the big sell off looked like when the dam finally broke and retailers decided it was time to clean house of non-compliant cigars.
Then, the delay was announced.
The key to Charlie’s prediction hinged on non-compliant inventory, and as we’ve covered, the FDA pushed back the deadline to get cigars submitted for substantial equivalence from May 2018 until Aug. 8, 2021. Under the previous deadline, cigars that weren’t submitted for equivalence could stay on the market until Aug. 8, 2019 before they had to be pulled from shelves, with the assumption that retailers would sell them off at fire sale prices.
With the change, cigars that were on the market prior to Aug. 8, 2016 can stay on the market for an additional two years, as long as they meet other compliance requirements, such as warning labels. That’s two additional years to sell cigars, develop the brand, and decide on whether or not to apply for the cigars to be compliant.
While the big sell off didn’t take place in 2017 as Charlie predicted, that doesn’t mean it hasn’t started in some regards and that it won’t continue in 2018. There were plenty of big sales this year and aggressive pricing, but it seems that until manufacturers and brands leave the cigar business, it will more or less look like the usual deluge of daily deals.
Yet it also might mean that with the deadline extended, companies submit more of their blends for substantial equivalence or another path to keeping them on the market, which could drastically reduce the number of cigars needing to be sold before they would have to be pulled from shelves.
9. How many new Nicaraguan factories open outside Estelí in 2017?
Prediction: There won’t be many more new factories from established companies outside of Estelí. Over/under is set at 1.5 new factories outside of Estelí for 2017.
As far as established companies, Charlie got this one correct. We’re still waiting to see exactly what Davidoff is going to do with its facility in Condega, but other than the previously announced factories from AGANORSA and A.J. Fernández, the cigar industry is staying put in Estelí.
It will be interesting to see what the updated climate is when I’m in Nicaragua for the Puro Sabor festival, and whether companies are looking to other areas of the country or think that Estelí will continue to be the hub of cigars in the country.
10. Will global warming become a concern of the collective cigar industry?
Prediction: Global warming enters the fray for some in the industry, but only on the peripheral. The “big issues” for the industry remain FDA and taxes, not a big three of FDA, taxes and global warming.
If you heard me ask one question of manufacturers and growers during the Procigar or Puro Sabor festivals this past year, it was most likely about global warming, and regardless of where an individual happened to stand on the issue of causation, pretty much everyone acknowledged that something is happening with the weather.
Charlie’s prediction was correct in that it remained a minor issue in 2017, and certainly never reached the level of FDA regulation, which is understandably the most pressing issue of the moment.
Manuel Quesada Jr. told me that he and the farmers he works with are actively looking for ways to adjust to the changes that are at hand, such as altering the schedule of the growing process. If anything, since they can’t control the rains or how much sunlight they get, they are exploring ways to better deal with it. This is an industry that needs a healthy ecosystem in order to do its business, as well as one that is as predictable as possible. In turn, this may end up spurring some interesting innovations in the growing process.
Weather was a major headline for 2017, and thankfully most of it missed the tobacco growing regions. For the people who deal with growing tobacco, the changes in both weather and climate are a daily reality that they are working to address, and luckily it hasn’t caused enough issues to alarm most cigar smokers, though Cuban cigar fans and workers are certainly aware of the challenges facing that country, probably more so than most others.