EAR: How did we get to where we are.

[El Presidente]

Part of an email yesterday. 

" so in short Rob, how in hades did we get to where we are today? I now know my days of $180 Montecristo 4 are not coming back. Your polls last week are depressing as hell, I feel as if..."

 

I am getting this type of email/PM regularly so let me post part of my reply. My opinion only. 

 

_____________________________________________________________________________________________________

 

"Tabacuba (production and infrastructure)  was failing. There was no recovery in sight. 

HSA did the maths early.  They had a lemon. Could they make Lemonade?

Covid drained retailer, distributor, Habanos stores of cigars. Demand up 30-40%

HSA waited until all of mother Hubbards Cupboards were empty and then they played their card. 

"Scarcity is paramount for luxury brands because at the root of the very notion of luxury, supply must never outgrow demand.

Whether in reality or in perception, demand is always highly disproportionate to supply. Maintaining this equilibrium is for the executive like the magic wand to the wizard"

I will give them some credit. Increasing prices (to the level they did) with retailer/distributor/habanos warehouses full wouldn't have worked.  Covid provided the blank whiteboard required to redesign the entire industry ala Rolex/Hermes/Burberry. 

HSA has no control over Tabacuba. HSA is the marketing arm only. However, what some very smart bastard at HSA has done is turn their biggest weakness into their biggest strength. Tabacuba's inherrant instability/incompetence underpins continued scarcity and the new positioning/pricing model. 

Collateral damage is plenty. You can see it in the polls last week. You can also see that there is more than enough continued demand to underpin their strategy.  "

 

 

.

 

 

 

[Corylax18]

42 minutes ago, El Presidente said:

Tabacuba's inherrant instability/incompetence underpins continued scarcity and the new positioning/pricing model. 

Switch "TabaCuba" for damn near any company on the planet in the last few years and its the same B.S. The world was designed to work one way, it doesn't work that way any more. Most businesses still haven't gotten their act together and the consumer has paid for it. 

Look at cars/trucks, it was the Chinese fault that they couldn't get enough chips, so Ford doubled the price of F150s. Now dealerships around the country are sitting on hundreds of millions of dollars worth of vehicles that they can't sell now, at any price. Interest rates went up, the free money went away and dealerships paid more wholesale for these vehicles than they're worth on the retail market. The used car industry is in even worse shape. 

That's just one example, but you can substitute just about any industry I'm aware of. 

This stuff is all cyclical, it always has been and always will be. The higher you go, the farther you fall. 

[El Presidente]

19 minutes ago, Corylax18 said:

Switch "TabaCuba" for damn near any company on the planet in the last few years and its the same B.S. The world was designed to work one way, it doesn't work that way any more. Most businesses still haven't gotten their act together and the consumer has paid for it. 

Look at cars/trucks, it was the Chinese fault that they couldn't get enough chips, so Ford doubled the price of F150s. Now dealerships around the country are sitting on hundreds of millions of dollars worth of vehicles that they cant sell now, at any price. Interest rates went up, the free money went away and dealerships paid more wholesale for these vehicles than they're worth on the retail market. The used car industry is in even worse shape. 

That's just one example, but you can substitute just about any industry I'm aware of. 

This stuff is all cyclical, it always has been and always will be. The higher you go, the farther you fall. 

 

I could be wrong but I don't believe one could compare Ford to Hermes/Rolex.  Luxury car brand...maybe Porche ( historically no discounts/shitty 3 year warranty and hop on the back of the 2 year waiting line). 

Luxury good strategy has scarcity built into the pricing model. 

The fascinating thing on HSA execution is the transition to a 100% luxury product model. 

Was it a fluke? maybe...even likely. Will they ever want to go back? No. They have shifted to a whole new product pricing paradigm in under 12 months.  They now just have to manage the scarcity and focus tabacuba on getting the QC right. 

Even a broken clock get's it right twice a day 

[Corylax18]

11 minutes ago, El Presidente said:

 

I could be wrong but I don't believe one could compare Ford to Hermes/Rolex.  Maybe to Porche (no discounts/shitty 3 year warranty and hop on the back of the 2 year waiting line). 

Lucury good strategy has scarcity built in to the pricing model. 

The fascinating thing on HSA execution is the transition to a 100% luxury product model. 

Was it a fluke? maybe...even likely. Will they ever want to go back? No. They have shifted to a whole new product pricing paradigm in under 12 months.  They now just have to manage the scarcity and focus tabacuba on getting the QC right. 

Even a broken clock get's it right twice a day 

I used Ford as an example of when it all comes crashing down, as it eventually will for HSA/Tabacuba. You can say ford isn't a Luxury Brand, but well spec'd F150s easily break 6 figures now, you want an F250? You better be ready to part with $125,000. Porche 911's start at $114,000. If one is a "luxury good" than they both are. Ford found their price cap. Maybe HSA hasn't yet, but they will. 

I bought my 2010 F150 for $24,500, marked down from an "MSRP" of $44,000. Yes I knew the dealership groups regional finance director and he put me on to a smoking deal (and gave a great rec for my loan) but my point is, those kinds of deals used to be out there and we will see them again, soon. Trucks with $100,000 MSRPs selling for $55-$65k. I'm sure of it. It was all Faux Scarcity, for Ford and for HSA. "Sorry we're to incompetent to make more" isn't scarcity, that's just a poorly run business. 

[Arabian]

10 minutes ago, El Presidente said:

 

I could be wrong but I don't believe one could compare Ford to Hermes/Rolex.  Luxury car brand...maybe Porche ( historically no discounts/shitty 3 year warranty and hop on the back of the 2 year waiting line). 

Luxury good strategy has scarcity built into the pricing model. 

The fascinating thing on HSA execution is the transition to a 100% luxury product model. 

Was it a fluke? maybe...even likely. Will they ever want to go back? No. They have shifted to a whole new product pricing paradigm in under 12 months.  They now just have to manage the scarcity and focus tabacuba on getting the QC right. 

Even a broken clock get's it right twice a day 

I believe Ford trucks esp the high-end ones are targeted to be luxury-ish. Not luxury enough, here’s the Lincoln. Zara follows the same scarcity strategy and double or triple the price for their mediocre products. 

[PuroDiario]

2 minutes ago, Corylax18 said:

I used Ford as an example of when it all comes crashing down, as it eventually will for HSA/Tabacuba. You can say ford isn't a Luxury Brand, but well spec'd F150s easily break 6 figures now, you want an F250? You better be ready to part with $125,000. Porche 911's start at $114,000. If one is a "luxury good" than they both are. Ford found their price cap. Maybe HSA hasn't yet, but they will. 

I bought my 2010 F150 for $24,500, marked down from an "MSRP" of $44,000. Yes I knew the dealership groups regional finance director and he put me on to a smoking deal and gave a great rec for my loan) but my point is, those kinds of deals used to be out there and we will see them again, soon. Trucks with $100,000 MSRPs selling for $55-$65k. I'm sure of it. It was all Faux Scarcity, for Ford and for HSA. "Sorry we're to incompetent to make more" isn't scarcity, that's just a poorly run business. 

Ford is a utility vehicle, even your model example. Porsche is not, including your names example. It’s a diametrical opposite in terms of purchase decision drivers. You can buy a 300k F150, it is still a Ford F150. You can buy a 40k boxster, is still a Porsche. 
 

Your point on the situation of the second hand car market I don’t generally agree with it. One thing is saying they overearned through COVID, other thing is “crashing down”, there is pent up demand built in, record levels pre-orders, etc. 

Also, car prices Up was not based on faux scarcity. The global semis market supply was constrained like never seen before and chips are a key component in auto (China’s fault is somewhat an absurd comment, what do you mean? Because COVID started there?) That was paired with record levels of household savings and boredom and work from home, historical levels of wage growth in North America, etc…which drove demand up, same as w cigars. 
 

your below MSRP deal is anecdotal, just that. Driven off dealership quotas, targets, orders backlog, and whatever else making a decision to move inventory quickly. 
 

@Arabian Zara has not at all this strategy. Though it is true that in recent times they have started doing “drops” and “capsule collaborations” which indeed have proven super accretive to bottom line. 
 

cuban cigar prices are absurd, but again the average cigar in the portfolio is now priced more or less in line with marquee non Cuban brands. For the avoidance of doubt I am saying marquee non Cuban brands. If Illusione is a great cigar and has great value is not what I mean. I mean with the average Padrón, AF, Davidoff and whatever else. Arguably Cuban cigars are definitionally more scarce, more mystique to it, more historied, whatever. French Champagne is more expensive than Cava. Again on average and marquee to marquee. I can give you a few example of superior Cava or Blanc de Blancs from other origin denominations as we do with cigars. The average consumer gives zero fs about that. Either you are price conscious and buying utility or you are buying experience and brand at the end of the day. 
 

They made the right business decision, in pure economic terms (I am not saying politically, socially, for hobbyists) but at the expense of the hobby. Market has proven them right so far, unfortunately for all of us and the independent retailers - not surprisingly though. 
 

@Elpresidente Bernard Arnault said “Luxury industry is the only industry where to find luxury margins” or something like that. 

 

 

[MrBirdman]

48 minutes ago, PuroDiario said:

It’s a diametrical opposite in terms of purchase decision drivers. You can buy a 300k F150, it is still a Ford F150. You can buy a 40k boxster, is still a Porsche

You guys seem to be missing that Ford not Being a luxury brand only strengthens @Corylax18’s argument about how producers have used COVID to create a market of inflated prices justified by (increasingly artificial) scarcity. 

[El Presidente]

26 minutes ago, MrBirdman said:

You guys seem to be missing that Ford not Being a luxury brand only strengthens @Corylax18’s argument about how producers have used COVID to create a market of inflated prices justified by (increasingly artificial) scarcity. 

Brett, i am not even sure there such a thing as "artificial" scarcity? 

There is just scarcity be it inbuilt (production/resource control) or natural (lithium). 

If you don't control the neural "space" your product is positioned in, you can't control the price. Can you push control too far, absolutely. A little of that is happening in the premium watch market currently. 

If you don't control that neural "space" then you can pare back as much product as you like and you won't create scarcity, you create bankruptcy. 

 

 

[MrBirdman]

9 hours ago, El Presidente said:

There is just scarcity be it inbuilt

That’s what I mean by artificial scarcity. 

It’s not actually the main driver of inflation, to be clear. It’s just one factor at play. Even Ford has admitted they’ve learned to keep supply lean to support higher prices. The concern is that control mechanisms from the luxury world are permeating the non-luxury world and actually working (for now!). I think eventually things will go back, but the amount of market consolidation and high barriers to entry make that process tougher. 

The Cuban cigar situation is obviously different - short term it’s the best way to maximize revenue. The problems with their new model have always been the long term effects if they ever manage to restore production to near 2019 levels. 

[BoliDan]

10 minutes ago, El Presidente said:

Brett, i am not even sure there such a thing as "artificial" scarcity? 

There is just scarcity be it inbuilt (production/resource control) or natural (lithium). 

 

 

De Beers would like to have a word.

But I think you're correct when it comes to cigars. They can pander to people with more money because of demand right now, but I don't think that was or is a long-term strategy. My cigar utility has only decreased with current pricing as I don't really consider them luxury as I don't conspicuously consume them. I know what I like and buy at the price I think is fair. I know that doesn't hold true for everyone 

[Ybor]

I think the second-hand market (ie bond roberts) will be interesting to watch in the coming years as collectors look to cash out at the top of the market. Just as the Mannheim second hand car auctions serve as an early indicator of where new car prices are headed, I imagine we may see some closed auction prices drop below (the ever increasing) current MSRP in the next couple years that may indicate the ceiling for price/demand has been met.

[BrightonCorgi]

Habanos association to a luxury item like Hermes or Rolex is a poor one.  Habanos is a luxury item, but in the vain of 1er growth wine or prestige Champagne. Hermes and Rolex are bought and enjoyed forever. 

Cigars and wine are meant to be consumed.  As long as the distribution and manufacturing are right, the demand will be there. 

Has there ever been a time when the MSRP on any luxury item went down for any meaningful time?  It always cost more to replace the same.

The biggest threat to cigar as investment are societal pressure against smoking/tobacco that could push or compel enthusiasts away from any cigar association. 

[Çnote]

Making comparisons with durable goods isn't the right correlation. Cigars are a 'luxury consumable,' same as spirits and wine.

Look at:

- Latour pulling out of the BX futures campaign, in order to better control their share of the final margin to consumer. The entire futures campaign structure was started to prop up BX in times of British financial crisis.

- Burgundy domaines pushing more wine to negose and bottling less at the estate, enhancing margin due to scarcity and creating positive cash flow shortly after vintage.

- Champenose making less bottles of more expensive tete de cuvee.

- KY bourbon distillers making more bottlings of inexpensive brands, slowing creeping up the price per bottle, and adding more LTO to capture market share.

- the entire USA non-KY whiskey market, 4y aged distillate at <$50 per bottle

- rebranding NAS Scotch at higher MSRP,  lower proof, and less flavor.

COVID was a handy reset button, but anyone with their fingers in the alcohol business would know that consumers will pay more and have short memory for price, but value a one-sided relationship with a brand.

[Çnote]

19 hours ago, BrightonCorgi said:

Habanos association to a luxury item like Hermes or Rolex is a poor one.  Habanos is a luxury item, but in the vain of 1er growth wine or prestige Champagne. Hermes and Rolex are bought and enjoyed forever. 

Cigars and wine are meant to be consumed.  As long as the distribution and manufacturing are right, the demand will be there. 

 

We're on the same track

 

19 hours ago, Ybor said:

I think the second-hand market (ie bond roberts) will be interesting to watch in the coming years as collectors look to cash out at the top of the market. Just as the Mannheim second hand car auctions serve as an early indicator of where new car prices are headed, I imagine we may see some closed auction prices drop below (the ever increasing) current MSRP in the next couple years that may indicate the ceiling for price/demand has been met.

I would love to think this, but watch tomorrow's S̶o̶t̶h̶e̶b̶y̶'̶s̶ Christie's  auction on BX and Cali Cab. Prices are just going up. Big auctions this year in HK for Spirits already showed there's no slowing down for the top consumable collectibles, the new pricing from HSA just added value to anyone with a collection and the will to liquidate.

[Corylax18]

1 hour ago, El Presidente said:

Brett, i am not even sure there such a thing as "artificial" scarcity? 

There is just scarcity be it inbuilt (production/resource control) or natural (lithium). 

If you don't control the neural "space" your product is positioned in, you can't control the price. Can you push control too far, absolutely. A little of that is happening in the premium watch market currently. 

If you don't control that neural "space" then you can pare back as much product as you like and you won't create scarcity, you create bankruptcy. 

 

 

Haha "Neural Space"? So in other words, you can't successfully extract every last penny from your customer's pocket with out controlling the narrative? I thought it was called marketing, but what do I know?  Are we still talking cigars here or have we moved on to "how to run an evil empire"?

I think that statement alone speaks volumes about how we've gotten here. The pandemic hit, the sky was falling and everyone thought it was time to cash out. Well I got bad news for those people, the world is still spinning. Burning your reputation for very short term gains will turn out to be the wrong call for a lot of companies. 

How do you doubt artificial scarcity? As other have mentioned, the precious metal/stone market is a perfect example. Have you ever heard of OPEC? Read up, they have artificial scarcity perfected. 

There was never a cigar shortage in Cuba. There isn't one now. The damage from Hurricane Ian will almost certainly change that, but pretending there wasn't cigars as 3 of the largest and highest quality harvests on record finished curing is comical. I cant believe so many people fell for the Jedi Mind Tricks.(Sorry, "Neural Space Control") 

Sure, there was a shortage of boxes and difficulty getting things off the island. But both were VERY solvable problems. If anybody had actually been interested in solving them. But nobody was, or is interested in solving either problem. Instead, they've used those two problems to fool people in thinking its wise to spend 3, 4, 5 times as much per cigar. On the same damn thing. All while pushing people directly to their competitors in the meantime. 

Lets say HSA made a gross profit of 20% on the year. That's about $100 million, it will take them over a decade to pay back their initial investment at that rate and 20% is optimistic. If the new owners really thing think this is a short term play, they must be playing with someone else's money.

[NSXCIGAR]

On 4/18/2023 at 7:45 PM, Corylax18 said:

If the new owners really thing think this is a short term play, they must be playing with someone else's money.

Altadis/Imperial bought their 50% stake in HSA for $500 million in 2000. Assuming the 50% split of 20% profits that's about $1 billion over 20 years. They sold in 2021 for $1.1 billion.

If Altadis/Imperial had just put their $500 million in an index fund in 2000 they would have had over $3 billion in 2021 when they sold, or $1 billion more than they got from the HSA deal over 20 years. And been totally liquid, and not have had to deal with the Cuban BS. 

So it's a bad short term and long term play. 

[MrBirdman]

11 hours ago, Ybor said:

we may see some closed auction prices drop below (the ever increasing) current MSRP

We already have - many Cohiba are going for under MSRP on BR. I picked up some 3 year old Siglo III for at least $500 less than new (even after including the buyer’s fee). 

[GVan]

Great discussion but I have a different take.  Certainly there are supply shortages that people / companies are taking advantage of in their pricing strategies.  We can all argue about whether that is smart or criminal depending on your view of capitalism.  

But the main driver of all of this is across some places in the world is that Disposable Income has greatly expanded for some!  USA Disposable income is up 7.9% per capita from just one year ago.  If we go back just 5 short years USA disposable income is up 21.2% per capita.  Another interesting statistic is that "The Boomer" generation controls 70% of the total disposable income in the USA (whomever calculated that number???).  Chinese disposable income is up 5.1% year over year.  I found a stat that said over the past two years during COVID Chinese per capita consumption was up 12.6% (yes, I realize that these are two different measures).   I always love descriptions of per capita because it is illusionary - just imaging if this was broken down by the top 10% of income earners or the top 1% in the world???  It's the old - "figures lie and lies figure".  However one thing that I believe would be harder to argue about is that a larger percentage of people in the world now have greater Disposable Income than at any other time in history.  

Combine that with the power of the internet, global supply chain disruptions, companies having a hard time retaining talent causing more shortages and the latest consumption driver that is - FOMO - (in almost anything) and what we are seeing in Cuban cigars was inevitable.  The last point - FOMO - is actually a more amazing recent driver than anything else to me.  I still remember when investment was all about "fundamentals"; operating cashflow, long-term sales trends, evaluating good management .... !  When "Technical Investing" first started looking for "breakouts", 50 and 200 day moving averages, ...  I thought "what a bunch of baloney"!  Yet, today it seems to have supplanted all of the "fundamentals" of the past and has become the dominant discussion around stocks that really is tracking "investor behaviors" -- with FOMO as the ultimate driver now of investing as well.  Scarcity drives FOMO, FOMO drives pricing, high pricing now seems to drive more consumption ... how else do we explain TESLA having a P/E ratio of 190 at the end of 2021???

I know - the above sounds like I'm just getting old!

[BrightonCorgi]

22 minutes ago, chasy said:

Great back and forth. One dynamic with cigars is that they are consumable.

Consumable is one dynamic, perhaps the biggest dynamic unique to cigars is that global governments are trying to vanquish cigars on every legislative session.  This helps inflate the value and is unique to cigars vs other luxury items.

[Bijan]

6 hours ago, BrightonCorgi said:

Consumable is one dynamic, perhaps the biggest dynamic unique to cigars is that global governments are trying to vanquish cigars on every legislative session.  This helps inflate the value and is unique to cigars vs other luxury items.

Yes. Personally I went in big, before prices went crazy, because even absent these price increases it will be impossible to get cigars at a reasonable price in Canada, if at all in the future (it was questionable even at the time, plus plain packaging, etc. Australia much the same).

 

6 hours ago, GVan said:

Yet, today it seems to have supplanted all of the "fundamentals" of the past and has become the dominant discussion around stocks that really is tracking "investor behaviors" -- with FOMO as the ultimate driver now of investing as well.  Scarcity drives FOMO, FOMO drives pricing, high pricing now seems to drive more consumption ... how else do we explain TESLA having a P/E ratio of 190 at the end of 2021???

Tesla is really not the craziest example. Though for a period it was definitely driven by FOMO.

AMC, Gamestop, and a bunch of other bandwagon stocks that had and have no chance of being the next anything (and even much more marginal stocks) went crazy during Covid times due to FOMO.

Tesla's P/E is now 50. Which is actually not off the charts. AMD is 100, tech stock sure, but that was a relatively conservative company that turned things around from near bankruptcy, and was the top performing stock on the S&P 500 for a year or two. (Tesla also had a near bankruptcy run in 2017-2018)

[El Presidente]

6 hours ago, GVan said:

Scarcity drives FOMO, FOMO drives pricing, high pricing now seems to drive more consumption

Bingo. 

Habanos worked it out. It may have been by accident but now that the penny has dropped, 60 million cigars a year seems about right. 

At that level they will never be in a position to fully replenish retailer shelves. Distributors will take whatever they are told to take. Pricing will stay high. 

Now they have to work out how to hanlde the trinidad portfolio and the Cohiba Portfolio Siglo 1-IV + Exquisitos/Panetela 

[Duxnutz]

Personally I think HSA have cooked their eggs before they’ve hatched. Luxury brands usually have a following of loyal buyers. Habanos QC is greatly gonna test this. 

Also! So they only gonna care about Cohiba and Trinidad? People won’t buy Juan Lopez, Epicure #2s and PSD4s in any great quantity above $500-600 a box. If I was Rocky Patel or Padron I’d start heavily advertising in Spain and Europe. 
 

 

 

[Greenhorn2]

How can HSA market these cigars as a luxury product? How many people have bought Rolex watches and had to work on them just to get them to run?

[Vetteman]

How can HSA market these cigars as a luxury product? How many people have bought Rolex watches and had to work on them just to get them to run?

Or set them on fire, burn for a couple dozen hours, and have nothing of value left

[ha_banos]

Just now, Vetteman said:

Or set them on fire, burn for a couple dozen hours, and have nothing of value left

Vino!