International pricing policy by Habanos SA

[ha_banos]

2 hours ago, JohnnyO said:

In Havana, trucks are showing up at factories and pacas are being loaded up. No finished product. Asian drivers. No explanation to the workers. Mid to upper management is selling out the country getting ready for their Nicaragua trip. Just a small sample of what is happening to the world inventory. BTW, the article reminds me a lot of William Jefferson's Globalization plan. Everyone get gefickt except him. John

Paca? What's this please?

[benfica_77]

2 hours ago, JohnnyO said:

In Havana, trucks are showing up at factories and pacas are being loaded up. No finished product. Asian drivers. No explanation to the workers. Mid to upper management is selling out the country getting ready for their Nicaragua trip. Just a small sample of what is happening to the world inventory. BTW, the article reminds me a lot of William Jefferson's Globalization plan. Everyone get gefickt except him. John

John always appreciate your insight. Your posts are always full of on the ground knowledge. Thanks for sharing. 

[NSXCIGAR]

1 hour ago, Bijan said:

They could conceivably dictate national pricing to a distributor and threaten to cut them off if they don't follow through.

The only way they could is to eliminate the gray market and I don't see how that's possible. They would have to control and account for every box given to a distributor. I can't imagine the difficulty in controlling a situation where PCC is selling their cigars to, say, Singapore for $20 more than HK which they would have to do to make both countries uniform in price. With a gray market the retailers in the low-duty country (Singapore in this example) would bypass PCC and get their cigars on the gray market.

HSA can't raise their prices to PCC as the price differences between countries would remain the same. It has to be the distributor pricing differently for each country in order to compensate for the duties in each country. 

HSA would be telling the distributor to sit on product that can't or won't sell to particular countries. They better build a new warehouse for all the Romeo tubos they won't be able to offload on the gray market anymore. 

I don't see the distributors going along with that. At that point, the distributor is nothing but an HSA office. They would walk before allowing that. If HSA wants to start distributing their own cigars let them. 

[Çnote]

1 hour ago, Bijan said:

They could conceivably dictate national pricing to a distributor and threaten to cut them off if they don't follow through.

 

[KCCubano]

54 minutes ago, ha_banos said:

Paca? What's this please?

A Paca is a large rodent from South America! Good to know they now have some skin in this game.

[Çnote]

40 minutes ago, NSXCIGAR said:

If HSA wants to start distributing their own cigars let them. 

I would not be surprised if that's part of the long term plan. Seems right out of the LVMH playbook.

[Bijan]

1 hour ago, NSXCIGAR said:

HSA can't raise their prices to PCC as the price differences between countries would remain the same. It has to be the distributor pricing differently for each country in order to compensate for the duties in each country. 

They don't need to eliminate the grey market completely and they don't need to track each and every box.

They just take less of a laissez faire approach to the grey market.

They allocate the boxes to different markets within PCC's area and price accordingly.

That is if a box goes to China PCC pays a certain price if it goes to Australia PCC gets another rate.

They don't need to do it at the box level, if PCC sells 60% China, 20% Australia, 20% HK or something they apply that to figure out how much they owe.

This is common in other products, one country might get and sell a product at half the price as the country next door and one distributor might be able to sell to both. (It's better to sell at a discount in one market rather than lose out on that market altogether but you don't want ot cut margins in a market that will bear a higher price, this is very normal and the source of grey markets).

Sure there will be incentive to sell on the grey market, but the cat and mouse game between producer and distributor will put a ceiling on it and prices will effectively be higher in one country that the neighbor.

In this case it is exactly the same logic except, the wholesale price being different is intended to make the retail price closer, rather than different. It seems backwards but this is standard business practice.

 

Again you say distributors cut off serials. Habanos could go at it harder. They could put serials on the bands, or they could put a letter or coloured dot to indicate the intended country on the band, on mark serials indelibly on the box or in the box. If they want to go mental they could put the coloured dot under the band, in such a way so that it couldn't be removed without destroying the band.

I'm not saying they'll do any of this but grey markets are not unique to cigars. I'm sure there are more sensible ways than what I've described above to fight it, but those are some examples.

[MrBirdman]

2 hours ago, Bijan said:

i don't think It's impossible. It's not a constitutional issue, it's a business decision. If Habanos wants to dictate terms to distributors they can do it.

The issue isn’t whether Habanos could want or try to do this, but whether they could actually follow through. The hypothetical offered above by @NSXCIGAR well illustrates how dysfunctional such a plan would be. 

If Habanos was a global corporation that controlled distribution and retail sales for most/all of its products - like, say, Louis Vuitton - then this kind of pricing system could work. The Vuitton stores in country A  and B might have nominally different acquisition costs for VAT purposes, but they aren’t independent competitors and all “play for the same team.” Therefore a Vuitton store in King of Prussia might have quadruple the margins of one in Hong Kong, but they still won’t undersell to that market.

Now imagine PCC and Baqar Mohebi start getting Habanos for much cheaper than Altadis to account for tax variation. Habanos can’t just prevent Altadis from buying cigars from them by saying “you will not buy cigars from other distributors.” Why not? They already do say that, and it still happens. Not a lot perhaps, but enough that I’ve bought several boxes distributed by PCC with Spanish health labels. 

And the same problem would then manifest again at the retail level, at least for distributors covering more than one tax jurisdiction. Habanos can tell distributors whatever they want, but unless HSA audits their books every year they can’t really enforce anything. 

How are wholesale prices even set? Will Habanos distributors’ prices at that required for boxes sold to retailers in super high tax country A even if the distributor also sells to other countries with lower taxes? 

In short, HSA may be planning a major price hike. But this homogenization claim is either untrue or so half-baked it’ll collapse before it gets going. The Cuban cigar industry is obviously on shaky ground, and if production remains at half its pre-COVID level long-term then they’ll no doubt be able to sustain higher prices (though not without limit). If they hike Cuba prices 150% then so be it - few consumers directly get their cigars that way, and unless I’m missing something it’ll only noticeably harm resellers and cigar tourists. If grey market sellers are now buying boxes there, they certainly aren’t passing on any of the savings. 

[Bijan]

17 minutes ago, MrBirdman said:

Now imagine PCC and Baqar Mohebi start getting Habanos for much cheaper than Altadis to account for tax variation. Habanos can’t just prevent Altadis from buying cigars from them by saying “you will not buy cigars from other distributors.” Why not? They already do say that, and it still happens. Not a lot perhaps, but enough that I’ve bought several boxes distributed by PCC with Spanish health labels.

Sales may get so lopsided that Habanos can track grey market sales more closely and punish those involved. In the current environment with current supply Habanos could categorically refuse to sell to a distributor or raise rates punitively across the board.

There are businesses where producers nominally have distributors but they make tiny amounts as the end customers, except for some hand holding/logistics from the distributor, deal with the producer, that is except in a few troublesome markets where politics are such that you can't operate from a distance.

All that to say is the relationship between producer and distributor depends on how hard the product is to move and sell.

I too bought those Spanish labeled not sold by Spanish retailer boxes. Prices, supply and demand, availability, none of that now is anywhere where it was 2-3 years ago. Habanos may have tolerated that since time immemorial, and not tried to crack down on that then, but may be motivated to crack down on that now.

[porkchop]

Interesting thread. Seems like the American/grey market was low for a long time and due to a convergence of circumstances those sticks are now allocating elsewhere to maximize return. Regions that were pumping the American/grey market will no longer be able to undercut official retail. 

[Bijan]

57 minutes ago, MrBirdman said:

Cuba prices 150% then so be it - few consumers directly get their cigars that way, and unless I’m missing something it’ll only noticeably harm resellers and cigar tourists. If grey market sellers are now buying boxes there, they certainly aren’t passing on any of the savings. 

First a lot of people complain about Chinese demand, maybe too much. But the stories were of planeloads of Chinese tourists in Cuba buying as much Cohiba as was available.

Second yes it looks like some retailers have started selling Cuba muled cigars, see recent Reddit, etc, on boxes with Cuban health labels. Sure the grey market guys doing that are not passing on the savings, but Habanos cares about the grey market guys making the profit instead of them, not the effect on the end customer (the fact that retail prices are constant is not the end goal, just a means to ensure Habanos maximises profit on limited sales).

[NSXCIGAR]

23 minutes ago, Bijan said:

They don't need to eliminate the grey market completely and they don't need to track each and every box.

They just take less of a laissez faire approach to the grey market.

They allocate the boxes to different markets within PCC's area and price accordingly.

That is if a box goes to China PCC pays a certain price if it goes to Australia PCC gets another rate.

The reason the gray market exists is because there always has been surplus stock. The distributor asks for more product than they can sell within their region or in the case of Romeo tubos, they're forced to buy certain things they know they absolutely cannot sell in their region. Distributors aren't going to take product they can't move. If prices rise by 200% it will reduce demand even more. That's not a problem today but soon things will be back to 2019-2020 levels and HSA will find they are swimming in Cohiba that not even the distributors want to take if prices rise to that level.

For this to work HSA has to eliminate the gray market. Why would Singapore retailers, for example, pay $30/stick when they could get it on the gray market for $10? HSA would have to account for every box to insure it goes only to authorized retailers at the decided price, otherwise a gray market forms which all the low-duty countries that HSA wants to hike prices on will bypass their distributors. Then the gray market grows as they realize the low-duty countries aren't buying direct anymore. 

Also, what about instances where duties aren't paid in a high-duty area? Obviously Rob works direct with PCC but the cigars are in a bonded warehouse. If I'm not mistaken the duties get paid and reimbursed. Then you'd have to have the distributor charging different vendors different prices depending on if they're exporting or retailing. It just seems like an impossible mess.

[Bijan]

2 minutes ago, NSXCIGAR said:

The reason the gray market exists is because there always has been surplus stock.

Yes, you are right that the current situation may be temporary and if Habanos moves to hurt distributors they will be hanging themselves in the future. But I don't know if they're thinking 1-2 years out right now. And who knows if things will swing back or get more ridiculous.

3 minutes ago, NSXCIGAR said:

It just seems like an impossible mess.

Yeah I think it's agreed the current situation is a CF 😂

Also we can agree that Habanos doesn't always have the best long term business vision.

We all remember the cigar boom when they decided to double or triple cigar production and collapsed their industry.

[NSXCIGAR]

4 minutes ago, Bijan said:

First a lot of people complain about Chinese demand, maybe too much. But the stories were of planeloads of Chinese tourists in Cuba buying as much Cohiba as was available.

I think that's just because there wasn't Cohiba anywhere else. The only thing I saw the Asians buying in Cuba were RyJ Linea Oro, Monte Grand Piramides, SC 20th. Now there's no Cohiba in Cuba either. If the Asians are getting it through PCC, well, that's PCC's choice. But presumably PCC is charging everyone the same so why would they shut out other retailers? They make the same per mastercase whether it goes to China or Rob. 

[Bijan]

Again when I was in university you could pay $100 for a calculus textbook, or get it used for $50, or buy a grey market Indian print for $30, or buy a photocopied copy for $20.

The publisher's went after everything except used books, and even used books they changed the problems and issued new editions to make that less desirable.

In the end it didn't stop any of that, but it meant most people bought new textbooks.

 

1 hour ago, NSXCIGAR said:

They make the same per mastercase whether it goes to China or Rob

First the Chinese bought Cohiba in Cuba or whatever in Cuba for the same reason everyone else does, the prices are or were the cheapest in the world.

Second let's say a box is $400 in Cuba, $600 from Rob, $800 in China.

If they can raise Cuba prices, even if it's not to China level (and sadly Rob prices too) they make more more profit. Sure they make the same profit now, but they could clearly make more.

[NSXCIGAR]

2 minutes ago, Bijan said:

Yes, you are right that the current situation may be temporary and if Habanos moves to hurt distributors they will be hanging themselves in the future. But I don't know if they're thinking 1-2 years out right now. And who knows if things will swing back or get more ridiculous.

Yes, it is also contingent on supply remaining low as well as eliminating the gray market. If there was a surplus for the last 25 years imagine the surplus when production inevitably increases and prices supposedly double. HSA will be amazed at how much Cohiba will pile up.

The world market is not going to pay $45 for a Monte 2. Canada isn't having it--neither will anyone else. 

[Bijan]

2 minutes ago, NSXCIGAR said:

The world market is not going to pay $45 for a Monte 2. Canada isn't having it--neither will anyone else. 

You're probably right on that regardless of supply.

The craziest pricing is going to happen on Cohiba and those other cigars you said the Chinese tourists are hoovering up.

Even if there's no production at all for all eternity going forward (Cuba vanishes off the face of the earth, god forbid), no one is going to pay Behike prices for super partagas.

[NSXCIGAR]

4 minutes ago, Bijan said:

$400 in Cuba, $600 from Rob, $800 in China.

I don't think prices are that high in China. It's not a particularly high-duty area. I suspect most of the Chinese are sent there by the elites as the general limits for tourists are fairly standard (50 cigars or so). These Chinese are loading up with dozens of boxes each. I suspect they're getting special allowances to import for specific parties and are being paid for it. 

[Bijan]

3 minutes ago, NSXCIGAR said:

I don't think prices are that high in China.

I don't know cigars specifically, but I think their cigarette taxation is about 40% retail price, vs 60-70% average worldwide.

So let's say it's 40% on cigars, that's low by worldwide standard but the prices I gave could be reasonable for Cuba duty free, vs internet retail duty free and China 40%.

[Çnote]

Thanks for solving all this while I'm working!

[Orion21isback]

Glad I bought roughly 250 boxes from 2010-2018 and curtailed due to space restrictions….

Everything has gone up in price dramatically in the last year or so. Cuba being Cuba sucks for current buyers, but like Rob said we shall see. 

[NSXCIGAR]

58 minutes ago, Bijan said:

I don't know cigars specifically, but I think their cigarette taxation is about 40% retail price, vs 60-70% average worldwide.

So let's say it's 40% on cigars, that's low by worldwide standard but the prices I gave could be reasonable for Cuba duty free, vs internet retail duty free and China 40%.

I don't think it's the same as cigarettes but it's definitely cheaper in Cuba as is the case everywhere. The issue is what "Chinese tourist" has the capital to buy dozens of boxes? I was told a few weeks ago a three Asians came in to the RyJ store and dropped $75,000. 

I'm pretty sure these are financed operations and they're going after hard to find product, not necessarily looking for deals. And I just checked--the limit for duty-free import to China is 100 cigars per person, so clearly there are exceptions being made, and that comes from the elite. 

At least we're not the Cook Islands--I just saw their duty rate: 983%!

[Bijan]

7 minutes ago, NSXCIGAR said:

I was told a few weeks ago a three Asians came in to the RyJ store and dropped $75,000. 

Well my point was even with a 2 or 4 box limit per person Habanos is leaving money on the table if Cuban store shelves are being stripped bare.

I mean if 3 guys are hoovering up $75,000 worth of cigars on discount then that's way more incentive.

Edit: generally Cuba wants lower prices on island to help stimulate tourism, but when one guy empties a store (vs one in 10 tourists even buying any cigars) that's not driving any tourism, that's just supplying cheap cigars to flippers.

[MrBirdman]

2 minutes ago, NSXCIGAR said:

the limit for duty-free import to China is 100 cigars per person, so clearly there are exceptions being made, and that comes from the elite. 

Either that or organized crime. 

[NSXCIGAR]

1 hour ago, Bijan said:

Well my point was even with a 2 or 4 box limit per person Habanos is leaving money on the table if Cuban store shelves are being stripped bare.

I mean if 3 guys are hoovering up $75,000 worth of cigars on discount then that's way more incentive.

Edit: generally Cuba wants lower prices on island to help stimulate tourism, but when one guy empties a store (vs one in 10 tourists even buying any cigars) that's not driving any tourism, that's just supplying cheap cigars to flippers.

I don't think the distributors get higher prices than on the island. For example there's no way distributors are paying $300 for Monte 2. Cuba may actually make more money selling on the island and get the tourism to boot. 

Again, I don't think the Chinese are flipping. I think they are mules for the elites. The lower cost is a bonus but it probably is negated by the tourist expenses and the compensation. I honestly believe this is just a hunt for scarce product. And who says they're not paying duties on it in China? It may actually be more expensive to get it in Cuba, but often Cuba is the only place some high-end things can be found. It doesn't matter how much money you have if PCC don't got no Esplendidos. 

1 hour ago, MrBirdman said:

Either that or organized crime. 

The Chinese elite are organized crime, so yes, it is. 

 

2 hours ago, Bijan said:

Even if there's no production at all for all eternity going forward (Cuba vanishes off the face of the earth, god forbid), no one is going to pay Behike prices for super partagas.

Yes, and I alluded to this. The distributors are not going to go along with a 200% price hike if they're forced to take Party Habaneros and Romeo tubos, especially if they try and kill the gray market--the only place they can offload that crap.

We forget from 2000-2020 Esplendidos and Lanceros were available whenever we wanted them, meaning distributors were dumping them on the gray market, meaning they couldn't sell them in their region. If you think having a Cohiba glut is a problem wait until you have a million boxes of Partagas de Luxe and Punch Coronations to contend with and no gray market to dump them to.