Graded: Ten Questions for 2020

The idea of the words graded and 2020 bring a bit of a smirk and sigh to my face. Certainly conventional wisdom—and an endless stream of social media posts—would suggest it deserves an F. While a lot of the headlines will be about the bad things that happened in 2020, there were still quite a number of good things.

And that certainly applies to the premium cigar industry.

This isn’t a recap of those things, but rather an article that has become an annual tradition that stems from another annual tradition: Charlie Minato’s Ten Questions for the coming year, and my grading of his predictions.

As Charlie noted in his original article, 2020 already had a number of important topics on the radar, with him saying that most of the Ten Questions for 2020 would easily be the most important or second most important questions for any of the last nine versions of Ten Questions. It was also seen as a year of significant importance for the industry as a whole, as a mix of self-inflicted and external issues were on path to converge and demand a reckoning, whether they were legislative or business-related.

Then, 2020 happened, just for good measure.

Unless he knew something I didn’t and didn’t say anything, Charlie couldn’t have foreseen what 2020 had in store, so a lot of the answers are prefaced with the phrase in light of the pandemic or something similar. But there were a few that weren’t affected, and regardless, I still get to hold him to account and see just how accurate his predictions for the year were.

1. Will the Import Numbers Recover in 2020?

Prediction: My hope is that the first half continues to be below 2018 numbers before the recovery starts in the second half. But I suspect that the 2020 numbers will be better than 2019, worse than 2018.

I don’t know what crystal ball Charlie might have been looking into when he wrote this question, but it played out pretty much exactly as predicted. The first half of 2020 was not good, as imports were down by nearly 20 percent through the first six months per estimates from the Cigar Association of America. Given the continued 2019-related issues in the first quarter and then the complications with production and importing once the pandemic was in full swing, it would have been easy to see the trend continuing. If nothing less, I remember wondering if consumers would simply smoke through what they had in their home humidors before heading to the store to replenish or try something new.

But come June, things turned around. It was a slow increase at first, but each subsequent month brought about more of an increase. After a 1.8 percent year over year increase in June, it went to 2.9 percent in July, 18 percent in August and then a 46.2 percent increase in September compared to the year prior.

It would appear that even with the slow start and issues brought on by the pandemic, cigars were still being purchased, especially as cigar stores and lounges were able to reopen and get back to some normalcy, and potentially people who had been going into the office found themselves working from home and thus able to light up a cigar more often.

We are still waiting for the final numbers to come out, but through September, imports were down only 4 percent overall from 2019, and with a strong finish could potentially beat those numbers. While they may not hit 2018’s marks, it is certainly a better result than one could have seen coming.

Grade: A, pending something really weird happening with the fourth quarter numbers.

2. Can STG’s Stock Rebound?

Prediction: STG’s stock will continue moderate improvement, but it won’t reach early 2018 prices in 2020.

Looking solely at the stock price as of Dec. 28, it sits at DKK 105.70, which is a pretty healthy improvement over the 82.20 mark it sat at on Dec. 27, 2019. It also rebounded from a fairly significant downturn late in the first quarter of 2020, with the 52-week low sitting at 66.75. Just a few weeks after that low, the company announced that it had a strong first quarter, and from there the stock price began a steady ascent to its current price as the company released more good news the rest of the year, so much so that it raised its financial guidance twice, once in August and the other in December.

The reason? Increased demand in the latter part of the year in the Group’s U.S. online distribution channel as well as in the American brick and mortar retail channel. It’s an interesting byproduct of the pandemic in that even while spending was being curtailed in some areas, it was growing in others, possibly as more people were staying home or working from home, and thus had more time to enjoy a cigar or two.

And while the stock has yet to touch the DKK 126 mark that it did in mid-February 2018, it is at its highest point since August 2018.

About the only thing I could argue with is terminology as an increase of 28.59 percent seems worthy of a better descriptor than moderate.

Grade: A.

3. What Does PCA 2020 Look Like? Does CigarCon 2021 Get Scheduled?

Prediction: The big manufacturers attend the 2020 trade show in a slightly smaller way than 2019; CigarCon 2021 does not get scheduled.

Unfortunately, this is a question we didn’t get an answer to as PCA 2020 was canceled on May 14 due to the COVID-19 pandemic and the subsequent restrictions in place in Las Vegas.

Shortly after Charlie published 10 Questions, he began working on a story that would indicate he was about to be very wrong about at least one question. Altadis U.S.A., Davidoff of Geneva USA, Drew Estate and General Cigar Co. announced that they would not be exhibiting at the 2020 PCA Convention & Trade Show due to a variety of issues with the trade show and the PCA itself.

Because the trade show didn’t happen, there’s still some uncertainty as to whether those four companies would have participated in any capacity. They each kept their membership meaning that they presumably could have had employees attend the trade show. Certain people from each company might not have been on or around the trade show floor but each of them besides Drew Estate has retail arms that might be there to place orders and there are non-PCA meetings that happen off the PCA show floor that some employees might need to attend.

But we do know that all four of them made it clear they wouldn’t have booths, and the PCA had redone the show floor without them and begun to try to sell sponsorships that each had previously taken. From everything we heard, there were no plans that those four companies were going to reverse course and suddenly show up on the show floor with smaller booths or create some off-site option.

I still think there could have been some presence by each entity, so I’m hesitant to call this a total whiff. For comparison, I think more people would have known that individuals from those companies were around than say, the amount that knew the Meerapfels were roaming the floor to talk with people who buy their tobacco and just take in all that the show has to offer.

As for CigarCon 2021, that has yet to be scheduled, and currently isn’t on the agenda as the industry begins to turn its eyes to the 2021 show, currently scheduled for July 9-13. That’s not to say it isn’t happening, but unless PCA makes an announcement in the next couple of days, CigarCon remains an idea.

Grade: An A for CigarCon, but a D for the big manufacturers part.

4. Will Tobacco Plus Expo 2020 Rival PCA 2020?

Prediction: TPE 2020 will be noticeably better than prior TPE shows for the cigar industry but it will continue to not be a legitimate competitor to PCA.

Again, the pandemic took away the opportunity to truly answer this question by not giving us a PCA 2020, but we have to consider this through the lens of what the world looked like in the final months of 2019 and January 2020. I had a seemingly endless number of conversations about TPE 2020, all of which seemed to contain some speculation about 2020 being the year that TPE overtakes PCA, or at least gives it a really good run for its money. Even with a very good event—which happened and which the entire TPE staff deserves a ton of credit for—TPE didn’t overtake PCA as the cigar industry’s trade show.

The 2020 Tobacco Plus Expo certainly opened some people’s eyes to the possibilities that it could deliver going forward. A number of companies commented that it gave them a venue to open new accounts and strengthen existing accounts in a typically slower time of the year, all while doing so with lower booth costs and seemingly less out of pocket on the whole. It was also a stage for new releases, something that just a few years ago would have been unthinkable outside of a company using it to cover for some kind of delay. TPE also made it easy for many companies to put their toe in the water of being an exhibitor, offering a spot in one of several shared spaces for a very approachable amount of money.

The bulk of companies I spoke with following the show seemed ready to either dive into getting their own booth in 2021, or if nothing less returning in the same format. I can’t recall any company who said they were an outright no based on their experience. But I also can’t recall any of those companies saying they wouldn’t be at the PCA trade show because of TPE. Some may had been thinking about a reallocation of funds, but no one was ready to commit to an either-or situation.

TPE still has some work to do to bring in more premium cigar exhibitors and retail buyers, and it’s critical to note that cigars occupied only about a quarter of the floor space, possibly even less when doing a more granular analysis. As I said several times in my recap, TPE 2020 is still not the cigar show, but it seemed to be an attractive complement to PCA from a vendor and retailer standpoint. I’d also agree that it’s still not a legitimate competitor to PCA, but I’d also ask if that is what it needs to be. Could the better situation be one where the two events are complementary? The six-month break in between them seems pretty ideal, and anything that brings the industry together event seems like a win.

Grade: A.

5. Does the Wholesale Discount Structure Change in 2020?

Prediction: I think that some of the largest companies, i.e. the top five or six companies by volume, are going to start cutting down on both the number of sales and changing the MSRP structure in 2020.

In a year with a number of major stories and storylines, this is one that is a tough one to answer.

There have been some changes to the practices of having sales and discounting, though untangling them from pandemic-related supply issues is a challenge. It’s tough to run a sale on a product you likely don’t have enough of to sell in the first place due to limited production capabilities of the factories in light of the pandemic.

That said, the MSRP structure didn’t seem to change much if at all, or if it did it was so far down the list that it hardly registered a response.

Grade: Incomplete, largely due to the unforeseen complications from the pandemic. The MSRP structure did not change, so that prediction missed the mark.

6. Will Imperial Sell Its Cigar Division in 2020?

Prediction: Yes, but there will be a new ceo and a new investment bank in charge of the sale process.

It seemed to be one of the sure things of 2020, even in a year when there were few sure things. But at the end of October, Imperial Brands, plc announced that it had closed on the sale of its premium cigar division for €1.225 billion ($1.43 billion).

And yes, there was a new ceo in place, Stefan Bomhard, who was appointed to the position in early February.

As for the sale, it was split into two—technically, at least three—separate transactions: Gemstone Investment Holding Ltd purchased the company’s U.S.-based businesses—namely Altadis U.S.A., Casa de Montecristo and JR Cigar—for €185 million ($216.3 million). Instant Alliance Limited, formerly Allied Cigar Corporation S.L., will pay €1.04 billion ($1.22 billion) for the rest of the premium cigar assets which includes a 50 percent stake in Habanos S.A., various stakes in local Cuban cigar distributors, the VegaFina brand and two cigar factories in Honduras and the Dominican Republic, though the latter won’t be sold until a later date.

Grade: A-, as no new investment bank was in charge of the sale process.

7. Who Buys Nat Sherman International?

Prediction: It’s anyone’s guess, but I’ll be optimistic and say that J.C. Newman buys all of Nat Sherman International.

Sadly, this prediction didn’t come to be, as I would have liked to see the Newmans become the owners of the Nat Sherman portfolio, which also has its roots in a family business model.

The news came in early August that Nat Sherman would simply be shutting down, and that the famous Nat Sherman Townhouse in New York City would be closing its doors for good in the coming weeks. Definitely a sad day for numerous cigar smokers in a year that has seemingly had more than its share of sad days.

The real question that I’d love to know the answer to is how serious the bidding ever got in 2020. I don’t know if the pandemic affected things, but it seems like the chatter around the sale was pretty sparse.

Could the Nat Sherman brands be acquired at some point in the future? It’s definitely a possibility. But as Charlie noted in his wonderful editorial, the Nat Sherman name had been largely removed from premium cigars, and there seems to be a strong likelihood that the Nat Sherman name wouldn’t be returning to cigars, either via Altria or as part of a sale of the portfolio. For now, it remains in the hands of Altria.

Grade: F.

8. What does Nicaragua look like in 2020?

Prediction: I think Puro Sabor will be fine, but I think the downturn within some factories will be noticeable. I also suspect that the layoffs are going to continue through much of 2020.

First and foremost, Puro Sabor was fine, in fact it was well beyond fine from my recollections of what feels like an event that is way too far in the rearview mirror. If you missed them the first time or simply want to revisit them, Charlie Minato and I attended Puro Sabor and recapped it day-by-day here.

Of course, it would be just a few weeks after returning that the pandemic would set in, limiting travel and ushering in all sorts of other effects.

As for the downturn, there were definitely some slowdowns and layoffs happening as 2020 got underway and even through the first quarter, though again things got a bit complicated once the pandemic set in. There were some lost weeks due to shutdowns, and even if Nicaragua was one of the least affected countries, they still had to make some of that time up, and often with a reduced work force due to worker capacity restraints and stricter health checks and controls.

If nothing less, the future seems to still hold some rebalancing of the workforce of Nicaraguan cigar factories, so this may be an accurate prediction but with a delayed payoff.

Grade: A on the Puro Sabor part, A through Q1 on the factory downturns, and Incomplete from Q2 on due to the pandemic. 

9. Does the May 2020 Substantial Equivalence Deadline Hold?

Prediction: No, substantial equivalence applications will be due later than May 12, 2020.

If there was an audible sigh of relief and some celebratory exclamations not long after, they came on Aug. 14 when Judge Amit P. Mehta of the U.S. District Court for the District of Columbia agreed to a plan proposed by FDA to delay its premarket approval process—i.e. substantial equivalence—for premium cigars until after it reviews whether it should treat cigars differently.

This came after an April announcement that the deadline would be delayed from May 12 until Sept. 9, due to—say it with me—the pandemic.

Grade: A+.

10. Will this Fabled Relief from FDA Happen in 2020?

Prediction: The White House/FDA will give the cigar industry some relief in 2020, but it won’t be a full exemption.

There are some semantics to be dealt with in this prediction, as well as a bit of making some connections between entities that haven’t been made explicitly. But what we do know is that the Department of Justice—a federal executive department—made filings with two courts saying that FDA is going to look back over whether or not it should be regulating premium cigars. Because FDA is in legal proceedings, they needed the courts to sign off on such a plan.

It came with some harsh words from Judge Amit P. Mehta, whose frustration stemmed from FDA waiting until the last moments to change its plans, effectively pulling the rug out from under him as rulings seemed imminent.

The White House—as an executive agency—seems to have played a role in this whole thing, at least according to those on the cigar industry’s side. It came after intense lobbying of the White House by the cigar associations, and there were reports that the White House told the associations that help was on the way.

Where in the White House that assist might have come from remains a mystery, but if you’re willing to make some connections between the agencies and believe what the cigar associations have said, then yes, the White House deserves some credit.

Regardless, the end result is that the cigar industry got some relief from FDA in 2020, and what it did get wasn’t a full exemption.

Grade: A.