Theory on Cuban pricing

[El Presidente]

I was talking to someone who I respect immensely within the Cuban industry yesterday who espoused his theory on the direction of Cuban pricing. I think it made some sense. Frighteningly so for consumers and retailers. 

 

"Cuba is now permanently hamstrung in terms of production numbers and have moved to a completely new model. Retailer shelves globally are largely empty, distributors have no reserves and Havana is shipping as fast as they are receiving.  I suspect that they will continue to move the needle on pricing until the point is reached  that stock begins to remain on retailer shelves. It is only at that point that they will know definitively that pricing equilibrium will have been reached"

 

 

[cgoodrich]

As much as I hate to agree it makes sense. The question is will they get to a point where they’ve gone too far and they can’t move product?

[Bigkahuna]

At face value HSA has only copied the exact same business model as Fuente has been extremely successful with. Opus 25th sell for 10k a box, opus steffano ricci sell for 4500$ for 10 cigars and a case, opus bulova etc etc. regular production opus sells at authorized retailers for 2-4x msrp. And they sell in hours. The main Fubar in this is Fuente can adequately supply their markets while HSA cannot. 
 

Once HSA has established that this is the price and their are no returns the market will adjust and if anything I suspect will cause the price to increase even more. Go and order a new Maserati MC20, Corvette z06 and see how many people are vying for the same allocation. They will literally pay 50k over msrp no questions asked. The same principle applies here. Supply may or may not increase but pricing will hold. Stocks won’t increase as newer influencer style smokers continue to buy everything which will lead to increases in pricing which will lead to more manufactured exclusivity. Create false exclusivity and boom instant profits. 

 

29 minutes ago, cgoodrich said:

As much as I hate to agree it makes sense. The question is will they get to a point where they’ve gone too far and they can’t move product?

That number would have to be insanely high. People continue to pay 10,20,30k over sticker to get an average cookie cutter car and 50-100k over sticker for an exclusive model. Paying 300-1000 more for a box of cigars pales in comparison. Again if Fuente can sell out of 400$ per stick Opus 25ths (which are meh at best) then HSA can sell DCs all day every day at 100 a piece. This is just the beginning

[Islandboy]

A bit ironic that this approach is about as capitalistic as it gets. Everything was chugging along just fine with supply mostly meeting demand, when all of a sudden production and thus supply, plummeted. Then they took note of the consumer frenzy that followed, and they watched a secondary market on a very limited supply explode, and probably thought, why aren’t we charging that much?

[BrightonCorgi]

If the prices remain so high or possibly climb; they will lose business with some retailers not wanting to spend so much to fill the shelves.  It's big ask when competing products cost less for both the store and consumer.  3x as much to make the shelf full for less than the same percent of buyers before the price hike. 

 

[Islandboy]

5 minutes ago, Bigkahuna said:

That number would have to be insanely high. People continue to pay 10,20,30k over sticker to get an average cookie cutter car and 50-100k over sticker for an exclusive model. Paying 300-1000 more for a box of cigars pales in comparison. Again if Fuente can sell out of 400$ per stick Opus 25ths (which are meh at best) then HSA can sell DCs all day every day at 100 a piece. This is just the beginning

I agree this is the beginning...of a new era in the mystique of Cuban cigars. Seems like the cigar industry, Habanos included, spent the last several decades building their base of consumers by making cigars more accessible and interesting to the average Joe. This is obviously a sharp turn in the other direction, and will make Cuban cigars quite exclusive.

[BoliDan]

That's week one in microeconomics. Supply took a huge hit, need to adjust demand. Buckle up.

[NSXCIGAR]

37 minutes ago, BrightonCorgi said:

If the prices remain so high or possibly climb; they will lose business with some retailers not wanting to spend so much to fill the shelves.

They're losing business with 40% production. That's unavoidable at this point (so to speak). If production is cut by 60%, raise prices 60%. Perfectly reasonable and rational however raising prices and cutting production has never resulted in increased profits. It can only make a bad situation a little less so which is where they are right now. 

I've always said if production remains this low then most of this pricing is probably appropriate although I think they may have missed the mark on Cohiba and really missed on Trinidad. If production ever increases however prices will have to follow suit. Until then most of these increases are rational and understandable.

I will say that the other factor of course is how much of the market are they willing to lose to NCs. While there is a pure supply and demand calculation there I think they have to be careful how much they push the lower half of consumers who are very price conscious permanently into NCs. For example I think the pricing on staples like D4 and Monte 4 is just too high for many Spanish, French and German smokers. There are a lot of alternatives in that space that are 50% cheaper and some percentage of these people will never come back to NCs. 

So at this point I think the general price hikes are justified and they've stumbled on quite a few both on the lower end and higher end. But if and when production returns to normal prices must follow. 

[AlohaStyle]

15 minutes ago, NSXCIGAR said:

They're losing business with 40% production. That's unavoidable at this point (so to speak). If production is cut by 60%, raise prices 60%. Perfectly reasonable and rational however raising prices and cutting production has never resulted in increased profits. It can only make a bad situation a little less so which is where they are right now. 

I've always said if production remains this low then most of this pricing is probably appropriate although I think they may have missed the mark on Cohiba and really missed on Trinidad. If production ever increases however prices will have to follow suit. Until then most of these increases are rational and understandable.

I will say that the other factor of course is how much of the market are they willing to lose to NCs. While there is a pure supply and demand calculation there I think they have to be careful how much they push the lower half of consumers who are very price conscious permanently into NCs. For example I think the pricing on staples like D4 and Monte 4 is just too high for many Spanish, French and German smokers. There are a lot of alternatives in that space that are 50% cheaper and some percentage of these people will never come back to NCs. 

So at this point I think the general price hikes are justified and they've stumbled on quite a few both on the lower end and higher end. But if and when production returns to normal prices must follow. 

Not so sure Cohiba and Trinidad has missed the mark...  2 days in a row I saw here of Cohiba selling at the new prices, sold out.  Same with Trinidad Esmeraldas today.  And this forum is made up of mainly regular Joe buyers... 

[MrBirdman]

If people remain under the impression that prices will continue their steep rise it will add artificial pressure to continue buying at higher prices. Classic recipe for an asset bubble. 

That said, I’ve always maintained that the Cubans seem resigned to lower production and are trying to adjust prices accordingly. 

[NSXCIGAR]

35 minutes ago, AlohaStyle said:

Not so sure Cohiba and Trinidad has missed the mark...  2 days in a row I saw here of Cohiba selling at the new prices, sold out.  Same with Trinidad Esmeraldas today.  And this forum is made up of mainly regular Joe buyers... 

How many boxes sold? 

I see vendors all over the place that can't unload at the same prices. Try making a living selling Exquisitos at $500.

Also, Rob's prices on Trini are the best in the world at the moment. $500 Reyes and $800 Esmeralda aren't going to sell. 

[Tstew75]

I don't see this theory shaking out. There's very little chance they will continue to raise pricing after the increases of the past 2-3 years. My guess is they'll slowly build production up & find some equilibrium. Anything else is F'n nuts & could be virtual suicide IMO

[El Presidente]

24 minutes ago, NSXCIGAR said:

How many boxes sold? 

I see vendors all over the place that can't unload at the same prices. Try making a living selling Exquisitos at $500.

Also, Rob's prices on Trini are the best in the world at the moment. $500 Reyes and $800 Esmeralda aren't going to sell. 

I practice cigar equanimity.

Have given up guessing and hoping for HSA change. 

We sell whatever we have daily. 2424 is the cigar daily global fishmarket.  Turn up, sell out (or not), move on to tomorrow. 

[NSXCIGAR]

1 hour ago, Tstew75 said:

I don't see this theory shaking out. There's very little chance they will continue to raise pricing after the increases of the past 2-3 years. My guess is they'll slowly build production up & find some equilibrium. Anything else is F'n nuts & could be virtual suicide IMO

I think the theory is that prices will come down when production, i.e. inventory increases. How can prices go higher at 40% production? At least we know the ceiling for the foreseeable future. 

There is a semblance of equilibrium now but again, we're at 40% production. And there have been signs for weeks that Cohiba is hitting the wall. The fact that Siglo VI appears to be everywhere in Cuba is a sign it's not being requested by distributors at the asking price. CoRo has been dropping 10% a month. Any more production and it will only drop further. 

[Fugu]

6 hours ago, El Presidente said:

I suspect that they will continue to move the needle on pricing until the point is reached  that stock begins to remain on retailer shelves. It is only at that point that they will know definitively that pricing equilibrium will have been reached"

This appears only too logical, and I guess that’s indeed what they have in mind. But if you follow it through to its consequential end - at worldwide harmonised retail prices, ‘shelves’ will empty, respectively fill up again, at vastly different rates around the globe. There isn’t one global “equilibrium“. Means then, certain domestic markets will be dead set dead,  were it not for “online” and “cigar tourism”.... The final end to - the last of their kind - B&M?

This isn’t wheat futures (or is it?). Difficult situation where there is a very diverse “smoking culture” in different countries / markets. But my guess is - they don’t care.

[SCgarman]

7 hours ago, AlohaStyle said:

Not so sure Cohiba and Trinidad has missed the mark...  2 days in a row I saw here of Cohiba selling at the new prices, sold out.  Same with Trinidad Esmeraldas today.  And this forum is made up of mainly regular Joe buyers... 

Regular Joes did not drop $2500/box on those Cohibas.

[PuroDiario]

It makes sense, and while not great for many of the global CC consumers it is clearly a product with global demand, and that the level of that demand was severely misspriced both on absolute terms and also relative to supply availability. Sprinkle macro economic pressures on top of the local economic challenges and there you go. 

They also have a point on their portfolio being vast in terms of vitolas, brands and prices. Requires some habit changes, when we grew accustomed to smoking large premium formats at “doable” prices and now those doable prices will be Monte 4s and Vegueros, but it is what it is I am afraid and price increases leave a high watermark below which becomes genuinely difficult to revert to. 
 

perhaps in an eventual economic opening to foreign capital, etc. with the right investment production may rise but obviously that will formally open the gates to the US market and Cuban tobacco blends with other origins and so forth which will further put the nail in the coffin. 
 

my view is to stock up regardless of price on which ever each likes smoking…
 

 

[djrey]

It will be interesting to see what happens as supply begins to ramp back up over time. But as of now, people still line up daily to buy $300 Monte 4. The consumer has shown their hand and what they are willing to spend. Not much reason to ever bring down prices. At this point I wouldn't be surprised if they hold back future supply on purpose to keep the prices up. They can simply model the diamond industry if they need inspiration. 

[RDB]

I suspect current prices will hold, and probably rise further before too long. But I am always suspicious of ‘everything has changed’ and especially ‘the normal rules no longer apply to this market and the only way is up to the sky’. 
 

I suspect that we will see more polarisation, with the top end Cubans becoming more expensive relative to the middle and lower tier. That’s because the truly rich, who don’t care if a Siglo VI is USD50,100 or 500 are probably not very interested in smoking Partagas Shorts or Monte no.4s. 

If that’s right then the big question is: what do those consumers count as ‘luxury’? Unless it becomes all the staple regular production, then affluent (as opposed to rich) folk will continue being able to smoke Cuban cigars.

I also don’t believe that production is forever crippled. There are even stronger reasons now for volumes to rise: the profit is so much greater.

Ultimately, there are plenty of alternatives to Cuban cigars for most people. Burgundy wine is a good example. The top end is now strictly for those who can pay USD500+ a bottle. But there are both good wines from Burgundy at 1/10th of that, and many more other good wines around the world than there were 20 years ago.

[Blakes]

1 hour ago, SCgarman said:

Regular Joes did not drop $2500/box on those Cohibas.

I'm still struggling making sense of $500 on a Box of Monte 2's.

I also think the QC problems will come into play down the road. The "Cuba being Cuba" line no longer holds at these prices like it did with the old pricing.
I'm already seeing people less forgiving in regards to poor construction/ quality cigars at these prices, and understandably so. 

I vaguely remember reading about the Cuban Davidoff fiasco in the 90's, it's not unimaginable that this may repeat itself with a large proportion of retailers and consumers simply giving up on CC's altogether. 

[Tstew75]

8 hours ago, NSXCIGAR said:

I think the theory is that prices will come down when production, i.e. inventory increases. How can prices go higher at 40% production? At least we know the ceiling for the foreseeable future. 

There is a semblance of equilibrium now but again, we're at 40% production. And there have been signs for weeks that Cohiba is hitting the wall. The fact that Siglo VI appears to be everywhere in Cuba is a sign it's not being requested by distributors at the asking price. CoRo has been dropping 10% a month. Any more production and it will only drop further. 

Facts

[LordAnubis]

If I was a business. And I saw that i could half the amount of pesky whiny good for nothing workers, I too would keep less staff, make less product, raise prices and keep revenue close to the target. 50% less operating cost. With 15% less revenue. Is still a greater profit margin on investment. 
 

If you earn 100k a year for 40 hours a week, and I told you you could earn 90k a year working 20 hours a week. You’d be crazy not to jump on that opportunity. 
 

Kudos to Habanos I say. Planned, fumbled, asleep at the wheel, call it what you want but I think it’s a master stroke for the business. 

[Tstew75]

16 minutes ago, LordAnubis said:

If I was a business. And I saw that i could half the amount of pesky whiny good for nothing workers, I too would keep less staff, make less product, raise prices and keep revenue close to the target. 50% less operating cost. With 15% less revenue. Is still a greater profit margin on investment. 
 

If you earn 100k a year for 40 hours a week, and I told you you could earn 90k a year working 20 hours a week. You’d be crazy not to jump on that opportunity. 
 

Kudos to Habanos I say. Planned, fumbled, asleep at the wheel, call it what you want but I think it’s a master stroke for the business. 

That is until those 'increases' on many of your products are rejected by the market & your revenue plummets. It's a house of cards.

[Corylax18]

I thought we had all agreed on this like 6 weeks ago? I don't see any evidence that anything other than Rob's original post is the plan. The funny thing is, there is no cigar shortage. In fact, its the exact opposite. There are literally more cigars being produced today then ever before and the numbers are growing daily. NC producers have rolled and imported more cigars to the US than ever before each of the last three years. There are more cuban cigars rolling out the backdoor than ever before, by at least an order of magnitude. At prices very close to or identical to what they've been for years. I get that demand is high as well, but supply has been increasing quickly and steadily across most of the cigar market for more than 5 years now. 

We see a short, large burst in interest for a few years (coinciding with an extended bull run) and all of a sudden regular old cigars are ultra rare, exclusive luxury products worth hundreds of dollars each. Pull your head out. They're bundles of fermented leaves, that's it. Its going to be interesting to see what happens to the extra 50%+ of capacity that NC companies have added in the last 5 years or so. The market is cyclical (both the cigar market and the larger market in general). We'll see how many .75 point interest rate increases it takes, but demand for $50 and $100 dollar cigars will fade, its just a matter of when. 

 

[rp99pts]

Quit paying these ridiculous prices and they will eventually come down.   Anyone paying $2500 for a box of Esplendidos needs to have their heads examined....