Fundamentals of CC supply and demand

[RDB]

The 24:24 update thread is full of good insight into medium term supply and pricing pressures. I thought it might be interesting to discuss a slightly different issue here, which is longer term supply and demand for Cuban cigars.

One question is: how much could the supply of quality cigars out of Cuba be increased on a sustainable basis? For example, is there plenty of good land that is not cultivated yet? Could yields be significantly increased without dropping quality? Or are we more in a world like the supply of wine from named vineyards, where the area is limited and the yield has to be kept low? Rob speaks about supply constraints at lots of stages in the process. If they were all improved by a realistic factor, roughy where would that get us to?  

On the demand side, I've seen estimates of about 3% annual growth in the market, but really don't know if that is accurate and I think it's for all cigars not just Cubans. So what roughly do we think we're looking at? I don't see any anecdotal signs of growth being driven by the UK, that's for sure (I'm a total weirdo here for smoking cigars), or Europe more generally. Whilst cuban cigars are a luxury good and that is a hugely growing market, they feel more vulnerable to me than many other categories (because of the health issues and the fact that smoke gets to other people). Is China still a major growth market, and more broadly where is the growth coming from?

Someone here will know about this stuff...

[El Presidente]

2 hours ago, RDB said:

 

One question is: how much could the supply of quality cigars out of Cuba be increased on a sustainable basis? For example, is there plenty of good land that is not cultivated yet?

 

The major constraint is pure incompetence. That sums up most aspects of Cuba's problems. Maybe throw in corruption. 

There is plenty of land. From the abysmal treatment of farmers to lax QC standards it is a complete CF. They can increase production with an injection of JV capital but the structural ineficiencies will not be changed. 

2 hours ago, RDB said:

On the demand side, I've seen estimates of about 3% annual growth in the market, but really don't know if that is accurate and I think it's for all cigars not just Cubans. So what roughly do we think we're looking at? I don't see any anecdotal signs of growth being driven by the UK, that's for sure (I'm a total weirdo here for smoking cigars), or Europe more generally. Whilst cuban cigars are a luxury good and that is a hugely growing market, they feel more vulnerable to me than many other categories (because of the health issues and the fact that smoke gets to other people). Is China still a major growth market, and more broadly where is the growth coming from?

Demand is huge. 

The largest middle class the world has ever witnessed is rising in Asia. Middle east and Eastern Europe are still booming.  The US Premium cigar market continues to grow.

Actors, rappers, sports stars fire up cigars in media every other day. 

The Cuban cigar industry is quite a small global player in pure volume terms. It is huge however in premium positioning. Keep in mind Rocky Patel produces 20-25% of total Cuban hand rolled production.....and he is but one NC player. 

 

[Nino]

6 hours ago, El Presidente said:

The major constraint is pure incompetence. That sums up most aspects of Cuba's problems. Maybe throw in corruption. 

There is plenty of land. From the abysmal treatment of farmers to lax QC standards it is a complete CF. They can increase production with an injection of JV capital but the structural ineficiencies will not be changed. 

 

^^^^^This !!

Plus throw in the "back door", "black bag" ( Cuban for "help yourself at the job place" ) culture and many other "wide open avenues" of getting away with cigars and boxes for a laugh and a dime ...

8 hours ago, RDB said:

If they were all improved by a realistic factor, roughy where would that get us to?  

The only realistic factor would be ... a decent new revolution. It would get us cigar smokers to heaven but buy a rocking chair waiting for it, it will take ages 🙂

[99call]

Interesting thread.   The majority of people think the market is bullet proof,  but the market needs smokers.   If there are more speculators, flippers and hoarders than smokers then the market becomes constipated. 

If the market completely moves out of the grasp of normal people that want to smoke cigars,  all you are left with are flippers and the mega rich.....and as large as that market is.......I do think the stubbing out of the normal cigar enthusiast, will bring the whole thing crashing back to earth. 

 

[djrey]

13 minutes ago, 99call said:

Interesting thread.   The majority of people think the market is bullet proof,  but the market needs smokers.   If there are more speculators, flippers and hoarders than smokers then the market becomes constipated. 

If the market completely moves out of the grasp of normal people that want to smoke cigars,  all you are left with are flippers and the mega rich.....and as large as that market is.......I do think the stubbing out of the normal cigar enthusiast, will bring the whole thing crashing back to earth. 

 

Totally agree. While things look pretty bad for some of us smokers now the market will not survive only on the small percent who consistently shells out the money for Cohiba etc. The market relies heavily on your average joe smoker who will not be able to continue to afford the inflated prices. 

[El Presidente]

1 hour ago, djrey said:

 The market relies heavily on your average joe smoker who will not be able to continue to afford the inflated prices. 

I probably look at it through a different set of eyes but your "average joe" hasn't smoked Cohiba as a regular cigar for years. 

RASS/REG/Quintero Favoritos, JP's,  plenty of better "value" options. 

HSA has a problem with cohiba but only in the smaller formats. It is hard to demand rockstar prices for cigars that don't look the part. 

Siglo III/IV/V/VI CORO/ESPL/Lancero no problem. 

 

 

[99call]

4 minutes ago, El Presidente said:

HSA has a problem with cohiba but only in the smaller formats. It is hard to demand rockstar prices for cigars that don't look the part. 

How many of these cigars are being bought to smoke though?   when you have two sets of flippers that at some point turn to each other and go how much for my 5yr old Siglo VI?.  To some extent the amount of time flippers are wanting to put stock to sleep, masks the build up.    China has a mass of very rich people that will consume ridiculously expensive luxuries..............do they have enough?.............or does that flipper go "aaaahhh..... shit this is a little harder than I thought"

[El Presidente]

Just now, 99call said:

How many of these cigars are being bought to smoke though?   when you have two sets of flippers that at some point turn to each other and go how much for my 5yr old Siglo VI?.  To some extent the amount of time flippers are wanting to put stock to sleep, masks the build up.    China has a mass of very rich people that will consume ridiculously expensive luxuries..............do they have enough?.............or does that flipper go "aaaahhh..... shit this is a little harder than I thought"

Money is relative!

The average Chinese cigar smoker isn't buying to flip. If you think so, you are mistaken. That market has barely been touched. 

Flipping is selling scarcity. They are doing very nicely right now but secondary markets will go up and down (you would think). `

The world is currently awash in money. Luxury goods are "in". 

Cuban Cigar production however has gone backward ......and they have little ability to "ramp up " volumes because their own system is a broken mess. 

I see a big movement to NC's from disgruntled CC smokers.  If HSA raised their prices another 10% and lost 30% of their cutomers.......they would still make the same money.  That is what concerns me. The lack of demand doesn't. 

 

 

[RDB]

Maybe this market is like fine wine in the sense that the very top end stuff is genuinely limited in supply, and there is plenty of demand to support continued price rises for that specific segment. That would suggest a growing disparity between the pricing of trophy cigars and the rest. Seems to me that Cohiba has seen the really big price rises (Robustos from 400 > 600 in a couple of years), while some stuff hasn't moved much (Monte 4, PSD4 etc).    

[99call]

1 hour ago, El Presidente said:

I see a big movement to NC's from disgruntled CC smokers

Rob, do you see any enthusiasm for the NC market to ditch ligero driven cigars, to try and win over CC smokers.  A bit like the reverse engineering of the Nudies project

 

1 hour ago, El Presidente said:

The average Chinese cigar smoker isn't buying to flip. If you think so, you are mistaken

Sorry, I wasn't suggesting they were the flippers, rather other markets wanting to flip to China at the right price. 

[El Presidente]

1 hour ago, 99call said:

Rob, do you see any enthusiasm for the NC market to ditch ligero driven cigars, to try and win over CC smokers.  A bit like the reverse engineering of the Nudies project

Absolutely but the swing away from ligero driven sticks has been going on for years now. 

Europe and Asia is a big focus to the major players and they are blending accordingly. 

 

[LLC]

I might be wrong but I think the biggest flippers we’re buying direct in Cuba and taking them to their home country to flip. The stories I’ve heard from the key people in stores there seem to back that up. Of course that hasn’t been happening since the pandemic. 

[El Presidente]

Just now, 99call said:

Sorry, I wasn't suggesting they were the flippers, rather other markets wanting to flip to China at the right price. 

I feel sorry for the way Chinese buyers are portrayed. They pay top dollar but they also know what they want and it is primarily Cohiba and a little top end Monte. they have no interest in paying top dollar for Sancho/Rafael G/Punch/RA/Dips etc. An 06 50 cab of Punch SS2 went for $5k on BR yesterday. Seller and buyers happy, what was sold was scarcity. Chinese nowhere to be seen but they will no doubt be blamed 

The CC market is far more multi faceted than people realise.  

 

[El Presidente]

3 minutes ago, LLC said:

I might be wrong but I think the biggest flippers we’re buying direct in Cuba and taking them to their home country to flip. The stories I’ve heard from the key people in stores there seem to back that up. Of course that hasn’t been happening since the pandemic. 

That was a huge business and will recommence later this year. 

[LLC]

1 minute ago, El Presidente said:

That was a huge business and will recommence later this year. 

Sad but true. 

[99call]

1 hour ago, El Presidente said:

I feel sorry for the way Chinese buyers are portrayed. They pay top dollar but they also know what they want and it is primarily Cohiba and a little top end Monte. they have no interest in paying top dollar for Sancho/Rafael G/Punch/RA/Dips etc. An 06 50 cab of Punch SS2 went for $5k on BR yesterday. Seller and buyers happy, what was sold was scarcity. Chinese nowhere to be seen but they will no doubt be blamed 

The CC market is far more multi faceted than people realise.  

 

Sorry Rob, I was not suggesting any sense of stereotype of the buyer.  Rather a stereotype of the Flipper, and the idea in their head of who will be the end buyer.    For what it's worth I love the fact that Chinese markets have been buying up European wine collections, and by the sounds of it, actually enjoying them. Life is not about dusty trinkets, rather enjoyment and shared experiences.    A dusty bottle,  is just a dusty bottle.

 

1 hour ago, LLC said:

Sad but true. 

Good on them,   we'd all like to cut out the middle man if we could

[El Presidente]

Just now, 99call said:

Sorry Rob, I was not suggesting any sense of stereotype of the buyer.  Rather a stereotype of the Flipper, and who have an idea in their head of who will be the end buyer.    

No need to apologise.....it's a good discussion 

Old grape juice or dried up leaves.  We are a weird mob 

 

[Chas.Alpha]

1 hour ago, El Presidente said:

That was a huge business and will recommence later this year. 

Had I known about that I would have likely loaded up on the "La Isla" when I was there last. Instead, I just bought one as a souvenir. On a side note, speaking of the Chinese interest in CC's, my posse and I would use the lounge at the old Partagas factory as a 1st day meet up, since we were coming from different places and flights. Last time, we were pretty much alone in the place when a bus full of Chinese tourists pulled up. I do not speak Chinese, but there was one word that was perfectly clear: "COHIBA! COHIBA!" One of them had picked up a cab of something, maybe RASS, and his friend said "Boo boo boo, Cohiba!" I couldn't help but grin... 🙂

 

49 minutes ago, El Presidente said:

No need to apologise.....it's a good discussion 

Old grape juice or dried up leaves.  We are a weird mob 

 

This is the best discussion I've seen since I joined FOH!😀

[LLC]

4 hours ago, 99call said:

 

 

Good on them,   we'd all like to cut out the middle man if we could

Before COVID I’d go multiple times a year and load up but not to sell; for me to enjoy or share with friends. 

[RDB]

Another way of thinking about prices is to try and forget you know what things actually cost, and especially forget what they used to cost, and simply ask what you would be prepared to pay. On that basis, how many people are prepared to pay USD25 for a Cohiba Robusto? Answer: please form an orderly queue here. That's USD625 for the box.

I've always thought that Cuban cigars are among the world's 'best value' luxuries. A really good PSD4, a fine Monte2, the right RyJ Ex4... these are among the most complex and satisfying sensory experiences available anywhere, at any price. People will routinely spend as much on a single mixed drink made from very average ingredients, or a glass of boring wine. There's no way you can drink the world's finest wines or whiskies, or eat in the very best restaurants, for anything like the price of a great smoke.

[Enduin]

1 hour ago, RDB said:

Another way of thinking about prices is to try and forget you know what things actually cost, and especially forget what they used to cost, and simply ask what you would be prepared to pay. On that basis, how many people are prepared to pay USD25 for a Cohiba Robusto? Answer: please form an orderly queue here. That's USD625 for the box.

I've always thought that Cuban cigars are among the world's 'best value' luxuries. A really good PSD4, a fine Monte2, the right RyJ Ex4... these are among the most complex and satisfying sensory experiences available anywhere, at any price. People will routinely spend as much on a single mixed drink made from very average ingredients, or a glass of boring wine. There's no way you can drink the world's finest wines or whiskies, or eat in the very best restaurants, for anything like the price of a great smoke.

There is definitely a solid rationale behind the "what is it worth to me" approach to purchases, but there is also a major problem that comes with this strategy.

Let's say that, like someone else described in another price-related thread, you are a single guy with no kids and therefore you don't have many expenses and cigars are one of your main enjoyments in life. You might not be rich but you have a decent job so if a box of (enter your favorite cigar) jumps from $300 to $600 you can afford it and it's worth it to you so you buy it. But what happens when everybody else thinks the same way? $600 becomes the new normal.

But here's the thing: there are very few vendors like our host who keep pricing reasonable; most vendors always try to squeeze as much money out of the market as possible. Someone will want to test the waters with $1200. And, again, you think "it's getting expensive but I like cigars and I can afford it" so you buy at $1200. And surely enough other people buy that $1200 becomes the new normal. Since there's always someone who is richer than you, and there are a LOT of people with a LOT of money in the world right now, it's only a matter of time before everyone who is not a 1%er is priced out of their favorite cigars because there are enough rich people who feel like it's worth it to them at any price.

Ultimately, like most things in the world, it's a matter of Individual VS Community: the interest of the individual in the short term is best served by spending whatever he can afford on what he likes. The interest of the Community in the short term is best served by resisting any price increases so that the most people have access to and can enjoy things. The interest of both the Individual and the Community in the long term, however, tend to collide: by accepting only reasonable and inevitable price increases and rejecting price gouging, a balance can be found between getting some enjoyment out of things and not getting priced out of everything we like.

[RDB]

The good news is that we don't all have to pay what the most price-insensitive person is willing to pay. That's the joy of 'consumer surplus': the market price is set by aggregate demand and supply. Those of us who would pay more, but don't have to, get good value.

I'm always fascinated by watching what sells out vs what is still available on 24:24. There are clearly things that Rob could sell for more, but god bless him he doesn't. That certainly creates goodwill on my part. There are other things which don't: quite a few things today are still available. I'm guessing Rob's business model involves not holding too much stock, and unlike many he only advertises what he actually has to sell. So I think we have a good indicator here of the true market clearing prices. 

[Enduin]

My point is that if there are enough "price-insensitive" people compared to the supply, that choice you talk about might no longer exist in the future.

[Bijan]

20 hours ago, El Presidente said:

An 06 50 cab of Punch SS2 went for $5k on BR yesterday. Seller and buyers happy, what was sold was scarcity. Chinese nowhere to be seen but they will no doubt be blamed 

It was a '96 50 cab, they were discontinued in 02.

I bid pretty hard on them but not sure I'd have been happy if I had won