Ten Questions for 2020

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Welcome to the 10th version of Ten Questions.

In December 2009, I decided to write an editorial that previewed some of the big topics for the following year. It started at my old blog, TheCigarFeed, and has carried its way over here. It now includes predictions and we have a Graded segment where Patrick Lagreid revisits and grades the predictions a year later.

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Typically when I do this article, I easily think of five questions and eventually limp my way into figuring out the last three. Not in 2020. 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. I could write thousands of words on just about any of these questions, and unlike many years where the predictions are easy, this year the answers are tough, in so many different ways.

This industry is at so many crossroads and turning points. Some are self-inflicted, others are external. Some are legislative, some are business-related. Nearly every single one of the topics below will set the stage for not just 2020, but for many years to come.

The people in this industry generally like to complain. They like to complain about each other, the companies they work for, the ones they did, the ones they don’t, the FDA. If you gave the cigar industry a 78-degree sunny day and someone will find a way to complain about it, or tell you about how much better the weather was 20 years ago, kid.

This article might as well be the epitome of that and the weather looks rough.

I implore this industry—the one that I’ve spent nearly every day of the last 10 years writing about—to get its shit together. We need adults in the room; we need people that can look forward; and we need to do it quickly, probably quicker than it will take you to read this article.

These aren’t in order of importance.

1. Will the Import Numbers Recover in 2020?

For years, the number of premium cigars imported to the U.S. has been increasing, but not now. In 2018, nine out of 12 months beat the import numbers for 2017; one month was a virtual tie.

In 2019, eight out of the first nine months have been lower than 2018. (The government hasn’t published data past September 2019.) Of greater concern are the gaps between the quarters so far:

  • Q1 2019 — Decrease of 487,000 cigars
  • Q2 2019 — Decrease of 9.2 million cigars
  • Q3 2019 — Decrease of 11.64 million cigars

Note: The Cigar Association of America (CAA) takes the same data and applies some sort of formula to create data that it says represents cigar data in a more accurate manner. I asked for an explanation behind this but didn’t get it. This data shows cigars that are imported to the U.S. at a wholesale price of 23 cents or greater.

For years the import numbers have increased without much evidence that consumption is increasing and because the imports were increasing no one asked if consumption was really increasing. In 2016, I predicted that this day would come and I explained in greater detail why this problem was quietly building.

The short version is that because the average price of cigars has dramatically increased—not just the annual price increases but just as important, the average price of new cigars—retailers have been able to keep revenues up even if they were selling less cigars. This led to them buying more inventory, which then raises questions about a bubble.

I predicted the bubble would burst because manufacturers would have to get rid of cigars due to FDA compliance. That hasn’t been the case, yet; instead, the bubble is bursting because retailers are finally realizing they have too much inventory.

Until there are obvious signs of consumption increasing—more stores, busier stores or an uptick in sales from online/catalog retailers—the cigar industry really needs to produce fewer cigars. It hurts, but if the industry isn’t responsible and continues to align production with consumption, we’ll just continue the boom/bust cycle.

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.

2. Can STG’s Stock Rebound?

One of the biggest single drivers of the declining imports is related to Scandinavian Tobacco Group (STG).

The company owns General Cigar Co., Cigars International, Thompson Cigar and other non-cigarette tobacco businesses, making it the biggest player in the premium cigar space, particularly in the U.S.

Some of that is related to basic consolidation. STG bought Thompson, likely the third or fourth largest retailer, in early 2018 and began the integration this year.

STG’s cost-cutting measures ramped up in 2019 thanks to plans from Boston Consulting Group. Late last year, Cigars International—far and away the largest retailer before the Thompson acquisition—began informing manufacturers that it would be cutting back inventory levels and also became increasingly aggressive in seeking out better pricing.

Those cost-cutting efforts are somewhat normal in the world of corporations, but its importance has increased due to STG’s stock, which began struggling in early 2018.

Niels Frederiksen, STG’s ceo, has been vocal that he doesn’t believe it’s fair that STG is expected to deliver the performance of a cigarette company because it doesn’t sell cigarettes. Recently, STG has shown signs of recovering, it’s actually up 4.9 percent compared to this time last year, but it’s still below IPO levels and roughly a third down compared to where it was in February 2018. What’s probably more frustrating for Frederiksen is that STG isn’t showing any glaring issues, the Q3 2019 results actually led to slightly improved guidance for the year.

For the rest of the industry, it’s all a weird issue. STG is the big bad wolf. It’s both the largest competitor in the form of General Cigar Co., and for many, the largest single client in the form of Cigars International.

At least for the time being, the cigar industry needs STG to be as healthy as possible and it certainly needs its stock price to be as high as it can be.

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

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

I could do a whole editorial just about this.

As I write this, the outlook of the PCA Convention & Trade Show, formerly IPCPR, is very much up in the air.

Some of the largest companies in the industry are still not committed to attending PCA 2020. There have been numerous meetings, but for most of the companies, the decisions have not been made.

The reasons those companies are threatening to pull out aren’t really about CigarCon, the planned and then canceled consumer day for the 2020 trade show. Rather, the manufacturers want more power over both the trade show and the money that it generates.

Currently, a small group of brick-and-mortar retailers—the PCA executive committee—more or less controls those funds. This would be less of an issue if the trade show wasn’t funded largely by manufacturers, and disproportionately by the biggest manufacturers. As you can image, there are a lot more secondary issues, all intertwined.

All of this would be a lot easier in a world in which the trade show was heading in the right direction financially, but it’s probably not. We don’t know the financials of the 2019 trade show but it seems almost certain that it’s less profitable due to a number of reasons.

Enter CigarCon.

If you want to know more about CigarCon, read this. The very short version for this article is that the cigar industry—both retailers and manufacturers—have long envisioned a world of generating more revenue by adding a day where consumers would have access to the trade show floor.

That was supposed to happen in 2020, but it was canceled less than two months after a messy rollout this summer. Instead, the PCA promised to create a committee to look at the issue going forward. To its credit, that appears to have happened, which is more than I would have thought.

But the question isn’t about CigarCon, it’s about whether the biggest names are in Vegas this summer and to what extent.

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

4. Will Tobacco Plus Expo 2020 Rival PCA 2020?

While the PCA trade show might be at a low point, Tobacco Plus Expo (TPE) has seemingly never been more popular, particularly for cigars.

TPE—like the international trade show, Intertabac—is not a cigar-focused trade show. Its biggest, albeit not majority, sector is related to vaping products, followed by CBD and marijuana-related products, then cigars, and then cigarettes, smokeless tobacco, roll-your-own, etc.

That being said, TPE has been making serious in-roads in trying to expand its premium cigar segment, no more so than for 2020. The big changes for cigars started in 2019 when the trade show invested in trying to get more cigar-related people to attend. Some of this was just basic outreach—i.e., contacting people—but other efforts include: a specific vendor area for smaller cigar companies; an expanded award show focused on cigars; and most notably, paying the travel costs for select retailers. TPE also hired Dawn Conger, the person who handled operations for the IPCPR trade show for years, which undoubtedly helped the cause.

As someone that’s been to TPE for the last three years, I can tell you that the changes are obvious but it’s not rivaling IPCPR. Unlike the PCA trade show where I need every second on the trade show floor I can get, I didn’t fly into Las Vegas until the morning of the first day of TPE, spent one afternoon in the Oliva booth watching Borussia Dortmund lose a soccer game and left early the final day of the trade show.

While TPE is much better than it was in 2017, it’s a far cry from PCA and it concerns me when people—particularly those who haven’t attended it—are talking about it as a true alternative.

I’m all for a serious rival to the PCA Trade Show—competition makes things better—and I think there are a lot of things TPE does better. But, there are a number of challenges I see for TPE, including:

  1. It’s the Wrong Time of Year for a Lot of Retailers — Q1 is the slowest time of year for cigars: holiday hangover, taxes, the cold, etc. Furthermore, for many retailers—particularly the sort of second-tier retailers that usually make or break a trade show—the cashflow just isn’t there in January to place big orders.
  2. The Size — While I think the PCA trade show needs to reduce its footprint, the whole TPE show floor is dramatically smaller than the PCA Trade Show. If half the retailers that were at IPCPR 2019 showed up to TPE 2020, there would be major issues, like a fire marshall.
  3. Kretek — TPE is owned by Kretek International, a large tobacco distributor that owns Ventura Cigar Co., Tobacco Business magazine and others. Kretek is a large client for many of the cigar companies, but it’s also a competitor. Ventura competes directly, but even more so, Kretek sells other cigar companies’ products to retailers. I’m just not sure how willing the cigar industry would be to have a competitor be in charge of its most important trade show.

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.

5. Does the Wholesale Discount Structure Change in 2020?

There will be a group of curmudgeon retailers who will get upset at me for saying this, but the basic pricing model in the cigar industry goes: a retailer will take the wholesale price plus any wholesale taxes, i.e. not sales tax, and then double it to create a shelf price.

Not every retailer does that and not every brand sets MSRPs at double the wholesale price, a practice known as keystone markup.

The problem is that a lot of retailers aren’t buying cigars at the wholesale price. Some of that’s well known: attend the IPCPR/PCA trade show, get a big discount; attend the TAA Meeting & Convention, get a bigger discount; host an event, get a discount; etc.

That’s all probably okay, except that there’s a growing number of companies that are offering flash sales, or random holiday-related sales, or really just hey, I need to move this type of sales.

It’s created a very inefficient scenario for the manufacturer-retailer-consumer relationship:

  1. Due to declining volume, the manufacturer increases prices
  2. The retailer passes that price increase onto the consumer
  3. To help counter even more declining volume, the manufacturer discounts its goods
  4. The retailer buys the goods at a discounted price

In many industries—though not all of them—the retailer would then pass at least some of that discount onto the consumer. Not in the cigar industry, particularly at the brick-and-mortar level.

Outside of event specials, clearance bins or membership discounts, the consumer rarely ever receives a discount. The manufacturer’s overall profits probably stay the same, but the retailers are making more money.

And a lot of them need it to survive.

We write more stories about manufacturers increasing their prices than anyone and I’ve yet to see a comment from any consumer blaming anyone other than the manufacturers or FDA. The truth is most retailers are making more money selling a cigar than ever before and a lot of them are making more than what the traditional margin structure says they should.

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.

6. Will Imperial Sell Its Cigar Division in 2020?

In April, Imperial Brands, plc—the British multinational tobacco company—announced that it was planning on selling its premium cigar businesses, including:

  • Its 50 percent stake in Habanos S.A.
  • Altadis U.S.A.
  • Casa de Montecristo
  • JR Cigar
  • Tabacalera de García* & Flor de Copan

*It seems likely that Tabacalera de García would be physically split between the premium and mass market cigar production buildings.

In August, the company said that it would have an announcement regarding the sale in 12 weeks, which would have been early November.

In early November, we reported that Huabao International, a Chinese company with flavored tobacco and cigarette interests, was buying the premium cigar divisions from Imperial. We never named the price but my understanding is that would be near the middle of the $1.3-2 billion estimate from Jefferies.

We reported it right before Imperial announced its annual earnings, hearing that the deal was very close to being done and thinking that Imperial would love to announce it during earnings.

A couple of days before Thanksgiving—a few weeks after Imperial didn’t announce anything at its earnings—I spent the hours between 3-5 a.m. on the phone with various sources; people who aren’t in the cigar business but people who had been good sources of information on this particular subject.

And at some point around 4:30 a.m. I realized I never wanted to talk about Imperial’s sale or Huabao ever again.

The problem is that there’s not a scenario where all of what these people told me could be true. Some said that Huabao’s offer was pulled, others said it was rejected by Imperial beforehand, some blamed Cuba, others said there were more bidders; others said the deal was imminent, but what no one said and what seemed very apparent to me was that the deal was probably dead.

I haven’t heard many rumblings about Imperial trying to rework the deal with anyone else. There haven’t been any other reports since late November except for this one from El Economistawhich seems like a rehashing of my article plus naming another alleged bidder that was rejected.

I suspect that Imperial has temporarily moved on to a more pressing task, finding a new CEO. Once that’s done, Imperial will probably reorganize some other things and then resume the sale process and it wouldn’t entirely surprise me if Huabao ends up buying it when all is said and done, but it would surprise me if the deal isn’t currently very derailed.

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

7. Who Buys Nat Sherman International?

In October, Altria—the cigarette conglomerate that owns the U.S. rights to Marlboro, Copenhagen, Skoal, Black & Mild, Juul and others—announced that it was looking to sell Nat Sherman International, the premium cigar division of Nat Sherman.

That sale would include the Nat Sherman cigar brand, the company’s retail store in Manhattan, the pipe tobacco brand and Nat Sherman cigar and pipe accessories.

I’m sure that all of the normal players that are interested in acquisitions—STG; J. Cortès, owner of Oliva; Davidoff and others—will take a look, but it’s tough to predict who ends up with Nat Sherman.

That gets particularly complicated because sources told halfwheel that Altria is willing to sell the business in pieces, meaning that one company could end buying the branded division—i.e. the cigars, pipe tobacco and accessories—and another could buy the retail division.

I haven’t heard any rumblings about anyone making serious inquiries, but if there is a company I’d like to see buy Nat Sherman it’s J.C. Newman.

Like Nat Sherman, Newman is another storied American brand. It’s still family-owned and unlike most other candidates, I think the Nat Sherman cigar portfolio would fit in well with Newman’s identify, specifically the promotion of American nostalgia. Importantly, Newman wouldn’t be scared by selling sweet tip cigars like Nat Sherman Host, which make up a substantial piece of the Nat Sherman branded business.

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

8. What does Nicaragua look like in 2020?

This is a two-parter.

A. Puro Sabor 2020

In the spring of 2018, Nicaragua experienced widespread civil unrest due to protests and counter-protests that started due to a change in the country’s pension system and expanded to a referendum on the country’s president, Daniel Ortega.

While the epicenter of the violence was in the south—away from Nicaragua’s cigar industry, which is primarily in the north—it led to issues with shipping, at least one day of widespread factory closures and the suspension of many of the cigar tourism operations in Nicaragua, including the 2019 Nicaraguan Cigar Festival, Puro Sabor.

Next month, Puro Sabor returns to Nicaragua. I, like many, am curious to see what that looks like and if there’s a noticeable difference from the last time the event was held.

B. Layoffs

Far more importantly, Nicaragua has been the most impacted country when it comes to the aforementioned cuts in U.S. imports. Most factories, particularly the large factories, did not have a good 2019. Many of them began cutting back both hours and the number of employees in the second half of this year.

Nicaragua’s growth in the cigar world has been unrivaled in the last decade, but the same is true about the decline in 2019.

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.

9. Does the May 2020 Substantial Equivalence Deadline Hold?

Earlier this year, a federal court in Maryland ruled against the U.S. Food & Drug Administration (FDA) in a lawsuit brought against the agency by health groups and doctors. The plaintiffs argued that FDA was not living up to its legal mission by delaying the implementation of its tobacco regulations, something that the groups argued fell outside the congressional intent of the law that gave FDA the authority.

The judge not only ruled against FDA but also moved up the deadline for when substantial equivalence, one of the main pieces of the government’s regulations of cigars, from Aug. 8, 2021 to May 12, 2020.

There have been two different appeals of this decision: one from the cigar industry and another from FDA itself.

This article is already long enough, so I’ll get straight to the key points: a. FDA is going to really fight against the decision for rules that have nothing to do with cigars; b. this type of abrupt change is a crucial argument in the broader lawsuit by the cigar industry; c. the delay—like the packaging deadline delay—might not happen until some manufacturers have already submitted applications.

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

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

Last month, the chatter started again.

People that are normally good sources on FDA started talking about how there was hope that the cigar industry might get some relief from the Trump Administration in regards to cigar regulation. Most of my sources, who I’m guessing are just repeating a singular source in the White House, said the relief could happen this month, which seems unlikely given what time it is.

The details of that relief aren’t entirely clear. It should also be pointed out that even if it definitely seems like it’s going to happen, it could always not happen.

From what I can tell, this wouldn’t be an exemption, but rather modified regulations. What that entails is anyone’s guess, but it probably will go over a bit better than when Altria suggested modified regulations last year.

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

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Charlie Minato
About the author

I am an editor and co-founder of halfwheel.com/Rueda Media, LLC. I previously co-founded and published TheCigarFeed, one of the two predecessors of halfwheel. I handle the editing of our written content, the majority of the technical aspects of the site and work with the rest of our staff on content management, business development and more. I’ve lived in most corners of the country and now entering my second stint in Dallas, Texas. I enjoy boxing, headphones, the Le Mans 24-hour, wearing sweatshirts year-round and gyros. echte liebe.

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