Cuba Industry Update

[El Presidente]

Cuban Cigar Industry Comment.

Over the next couple of days I will delve into various aspects of our trip to Havana. To start with, I would like to focus on industry news which will give you an accurate perspective as to what Habanos s.a is thinking and a good indication as to where it is going. The information has been gleamed from meetings with various habanos s.a people both on and off the record.

Habanso s.a sold $370,000,000 in 2006 which was an 8% increase in turnover compared to 2005. Gross number of cigars is unofficially 162 million which is a 3 % increase over 2005. There is talk of 2007 production at 170 million units although I have not met anyone who is actually confident of attaining that level.

What is becoming obvious (to all the world) is Habanos fine tuning the production lineup to increase average dollar value and profitability of its cigars across the field. This will continue so prepare yourself for the continued elimination of cigars the market has rejected (their terminology) and the introduction of cigars the market wants....which is demonstrated by sales and sales alone.

One of the most disconcerting issues I found was the loss of due respect for tradition and the even stronger focus on sales and sales numbers. I don't think there is any doubt that Altadis have won the internal fight for directional control. This battle has gone on for the best part of six years between the Cubans and Spanish sides of Habanos s.a. The Spanish can all but claim victory as far as I can tell because the fight from the Cuban side appears to be disappearing.

The release of the Cohiba Maduro 5 caps off a remarkable series of wins for Habanos which started a few years back with the Cohiba Siglo VI. Sales for the Edicion Limitada have been excellent. The Regional Releases have been an unparralelled success. They currently feel they are on top of their game. Packaging redesigns, Vitola introduction and eliminations.....all fine tuning. There is little sentimentality.

Habanos s.a however has one major fear. Worldwide anti-tobacco legislation. They intend to counteract this through the release of smaller cigars. Not necessarily a bad idea (as smaller can also mean thinner) but they appear to be completely devoid of any real plan. They are thrilled will the effectiveness of worldwide retailers such as Wolters/ourselves and others and FOH is viewed as both a marketing masterpiece and a poisoned challice......they do not quite trust something that they cannot control. The concept of negative cigar reviews and criticism scare the crap out of them.

Don't hold your breath for the introduction of Thinner ring guage cigars. They don't sell and have not sold for a long time. I can make a request for special release as long as I underwrite the project. The "Heritage Release" program I brought up in October has some real legs. I would give it a 50/50 chance of coming into reality over the coming years particularly if the Regional Releases go off the boil in 2007/2008.

Some odds and ends:

* More plastic moulds being introduced. Simply producing better cigars and the roller hesitation to their use is being broken down.

* No difference between cabinet and dress box blends

* Maduro wrappers for Cohiba Maduro 5 being fermented longer. Production numbers for Cohiba Maduro No 5 are limited to aged Maduro wrapper available.

* Hamlet, Ramses, Guillermo and every other top roller I spoke to claimed 2006 as being the best tobacco they have worked with in the past 6 years.

* Habanos s.a has 35% of the Worldwide Premium Cigar Market by Volume and 55% by $ value. The US sells between 220 million and 250 million premium cigars a year.

On this last point, Habanos s.a believes the demand for Cuban cigars in the US would be 50 million sticks a year. This is about a third of current Habanos s.a production. No matter what they say publicly, if I were an overseas Habanos distributor.....I would be purchasing plenty of supplies of a soothing rectum cream now. You are going to need it.

Expect a 30% jump in prices during this period of market adjustment.

[Wiley]

ugh

[Colt45]

Welcome back - thanks for the good news, sunshine.

I understand it's preliminary, but if it holds true, I'll miss my Havanas.

[El Presidente]

» Welcome back - thanks for the good news, sunshine.

» I understand it's preliminary, but if it holds true, I'll miss my Havanas.

Good to be back Ross :-)

Mate, I won't sugar coat it. I call it as I see it. I don't agree with the direction they are taking at least not in the diminuition in the importance of heritage.

The good news is that just below the surface of the top 5 of Habanos s.a. there are a host of good, young, intelligent people who appreciate the realities of modern economics which include the value of a brands heritage and the worth of an existing Habanos zealot.

My argument has been all along....you are worried about Anti Smoking Legislation but you are prepared to alienate the Habanos smoker who you depend on. While they can point to increased turnover by $ and quantity voulume, there is little ground to support my opinion. However....one slip in sales and watch the finger pointing.

[Ginseng]

» Cuban Cigar Industry Comment.

»

» Over the next couple of days I will delve into various aspects of our trip

» to Havana. To start with, I would like to focus on industry news which will

» give you an accurate perspective as to what Habanos s.a is thinking and a

» good indication as to where it is going. The information has been gleamed

» from meetings with various habanos s.a people both on and off the record.

»

»

» Habanso s.a sold $370,000,000 in 2006 which was an 8% increase in turnover

» compared to 2005. Gross number of cigars is unofficially 162 million which

» is a 3 % increase over 2005. There is talk of 2007 production at 170

» million units although I have not met anyone who is actually confident of

» attaining that level.

»

» What is becoming obvious (to all the world) is Habanos fine tuning the

» production lineup to increase average dollar value and profitability of

» its cigars across the field. This will continue so prepare yourself for

» the continued elimination of cigars the market has rejected (their

» terminology) and the introduction of cigars the market wants....which is

» demonstrated by sales and sales alone.

»

» One of the most disconcerting issues I found was the loss of due respect

» for tradition and the even stronger focus on sales and sales numbers. I

» don't think there is any doubt that Altadis have won the internal fight

» for directional control. This battle has gone on for the best part of six

» years between the Cubans and Spanish sides of Habanos s.a. The Spanish can

» all but claim victory as far as I can tell because the fight from the Cuban

» side appears to be disappearing.

»

» The release of the Cohiba Maduro 5 caps off a remarkable series of wins

» for Habanos which started a few years back with the Cohiba Siglo VI. Sales

» for the Edicion Limitada have been excellent. The Regional Releases have

» been an unparralelled success. They currently feel they are on top of

» their game. Packaging redesigns, Vitola introduction and

» eliminations.....all fine tuning. There is little sentimentality.

»

» Habanos s.a however has one major fear. Worldwide anti-tobacco

» legislation. They intend to counteract this through the release of smaller

» cigars. Not necessarily a bad idea (as smaller can also mean thinner) but

» they appear to be completely devoid of any real plan. They are thrilled

» will the effectiveness of worldwide retailers such as Wolthers/ourselves

» and others and FOH is viewed as both a marketing masterpiece and a

» poisoned challice......they do not quite trust something that they cannot

» control. The concept of negative cigar reviews and criticism scare the

» crap out of them.

»

» Don't hold your breath for the introduction of Thinner ring guage cigars.

» They don't sell and have not sold for a long time. I can make a request

» for special release as long as I underwrite the project. The "Heritage

» Release" program I brought up in October has some real legs. I would give

» it a 50/50 chance of coming into reality over the coming years

» particularly if the Regional Releases go off the boil in 2007/2008.

»

» Some odds and ends:

»

» * More plastic moulds being introduced. Simply producing better cigars and

» the roller hesitation to their use is being broken down.

» * No difference between cabinet and dress box blends

» * Maduro wrappers for Cohiba Maduro 5 being fermented longer. Production

» numbers for Cohiba Maduro No 5 are limited to aged Maduro wrapper

» available.

» * Hamlet, Ramses, Guillermo and every other top roller I spoke to claimed

» 2006 as being the best tobacco they have worked with in the past 6 years.

»

» * Habanos s.a has 35% of the Worldwide Premium Cigar Market by Volume and

» 55% by $ value. The US sells between 220 million and 250 million premium

» cigars a year.

»

» On this last point, Habanos s.a believes the demand for Cuban cigars in

» the US would be 50 million sticks a year. This is about a third of current

» Habanos s.a production. No matter what they say publicly, if I were an

» overseas Habanos distributor.....I would be purchasing plenty of supplies

» of a soothing rectum cream now. You are going to need it.

»

» Expect a 30% jump in prices during this period of market adjustment.

Fascinating. Frightening, exhilirating, frustrating, and satisfying all in one. Thank you, Rob!

Wilkey

[stonerpc]

What I can't understand is they discontinue many good cigars and keep Guantanamera? This is a brand that mostly is bought by people new to habanos and is a horrible representaion of there many other fine cigars - in other words just a bad first impression. They can't see this?:-(

[Mike33]

Thanks for the report Rob!

Some good news, a lot of bad. I guess this means we should all start loading up on smaller ring gauge cigars. Any specials coming up with some of the smaller ring gauges ;-)?

[phxkev]

Good to know the concept of capitalism is alive and well in Communist Cuba.

[DrAlejandro]

» Good to know the concept of capitalism is alive and well in Communist Cuba.

LOL thats exactly what I was thinking... ironic to say the least

[Tampa1257]

So my predictions for several years is becoming fact. I have said for years now to forget the Fad's and buy heavily on the regular thin ring gauge production Habanos or everyone would see them go by the way side. Sad, truly sad!

The only way to even consider helping is to buy heavily those cigars that you have always loved as a daily smoke and totally forget about buying the luxury EL's and RE's.

This is the time to go back to the basics folks, totally back to the basic's! Shear sales figures are the only thing that will save a vitola these days, as Habanos doesn't give a rat's arse about anything but the bottom dollar!

[Wiley]

I went out and smoked a beautiful Montecristo Especial No 1 in protest... and it was far better that any 52 gauge donkey-appendage-sized special money maker that they're so keen on spewing out.

This is just my humble opinion of course, lol! :-P

[jqmunro]

» What I can't understand is they discontinue many good cigars and keep

» Guantanamera? This is a brand that mostly is bought by people new to

» habanos and is a horrible representaion of there many other fine cigars -

» in other words just a bad first impression. They can't see this?:-(

Think of them as a Tobacco filter.... All the crappy tobacco is used on them, and the better stuff gets filtered down to us

[El Presidente]

I believe it will turn around.

I am happy to fund a 60,0000 run of thin gauged cigars (PL Charlota?) as proof positive of demand. You bastards had just better buy some

[marco polo]

Thanks for the info !

[jqmunro]

» I believe it will turn around.

»

» I am happy to fund a 60,0000 run of thin gauged cigars (PL Charlota?) as

» proof positive of demand. You bastards had just better buy some

I'll buy a couple boxes if the price is reasonable

[Bernard]

Rob, great post. Tough news but at least you are not afraid of telling the truth. My response is a different angle - will Habanos's approach not open the door to the producers of great quality Cigars from other countries, who can produce at much lower prices? Cuban Cigars may be the best around but there does come a price point when people look elsewhere.

[naga5]

» I believe it will turn around.

»

» I am happy to fund a 60,0000 run of thin gauged cigars (PL Charlota?) as

» proof positive of demand. You bastards had just better buy some

of course we will, rob!

thanks for not pulling punches, if you pardon the pun.

the news is what it is, but i am disappointed in the upcoming demise of thinner gauge cigars.

rick

[Matthew]

Excellent information, Rob. As always, thank you for sharing.

[ThreeD]

And this is why I enjoy this site very much. Rob, thank you for the information, it is very informative.

[JeepCop]

Thanks for the low-down Rob. It'll definitely be interesting to see how things unfold.

[Colt45]

» My response is a different angle - will Habanos's approach not open

» the door to the producers of great quality Cigars from other countries, who

» can produce at much lower prices? Cuban Cigars may be the best around but

» there does come a price point when people look elsewhere.

Habanos S.A, by their own admission, have chosen to market their product as a

luxury item. Yet, in my opinion, they still fall behind a large number of NC producers

when it comes to overall quality of construction and consistency.

There are a number of NC producers who have gone upmarket as well, but at the

very least, for the money spent, you normally get a consistently high quality product.

But it does irk me that H.S.A touts luxury, yet the quality does not always match

the sales pitch.

Rob's initial reports are a bit troublesome, and may get me to reach into the NC

humidor to revisit some past staples.

And as for Rob not sugar coating it, and calling it as he sees it, I would want, nor

expect anything less.

[jqmunro]

» » My response is a different angle - will Habanos's approach not open

» » the door to the producers of great quality Cigars from other countries,

» who

» » can produce at much lower prices? Cuban Cigars may be the best around

» but

» » there does come a price point when people look elsewhere.

»

» Habanos S.A, by their own admission, have chosen to market their product

» as a

» luxury item. Yet, in my opinion, they still fall behind a large number of

» NC producers

» when it comes to overall quality of construction and consistency.

» There are a number of NC producers who have gone upmarket as well, but at

» the

» very least, for the money spent, you normally get a consistently high

» quality product.

» But it does irk me that H.S.A touts luxury, yet the quality does not

» always match

» the sales pitch.

» Rob's initial reports are a bit troublesome, and may get me to reach into

» the NC

» humidor to revisit some past staples.

» And as for Rob not sugar coating it, and calling it as he sees it, I would

» want, nor

» expect anything less.

Well said, Colt. Not only are there super-premium NC's of consistent quality, there are a number of good NC cigars that are not only consistent but are very well priced!

[El Presidente]

» the door to the producers of great quality Cigars from other countries, who

» can produce at much lower prices? Cuban Cigars may be the best around but

» there does come a price point when people look elsewhere.

Keep in mind Bernard that a corporation can afford to lift prices 10%, lose 30% of its customers and still make the same profit.

Lets look post embargo. Imagine a 30% price increase based on a 33% immediate increase in demand for stock. People may smoke less but one suspects that they will lose few zealots.

I can tell you as a store retailer (as opposed to a net retailer), about 50% of my instore local clients would not even notice a 30% increase in price. Price is irrelevant. I would say another 35% would notice but would pay and come to accept the new pricepoint. The remaining 15% would either change their purchasing habit or for a small percentage, stop. Again I am talking Bricks and Mortar.

[wp2]

» these days, as Habanos doesn't give a rat's arse about anything but the bottom dollar!

Unfortunately true Tampa! I agree that we can influence somewhat with our demand for certain vitolas.

Thank you Rob, for the info update.

[Mark Twain]

» » the door to the producers of great quality Cigars from other countries,

» who

» » can produce at much lower prices? Cuban Cigars may be the best around

» but

» » there does come a price point when people look elsewhere.

»

» Keep in mind Bernard that a corporation can afford to lift prices 10%,

» lose 30% of its customers and still make the same profit.

»

» Lets look post embargo. Imagine a 30% price increase based on a 33%

» immediate increase in demand for stock. People may smoke less but one

» suspects that they will lose few zealots.

»

» I can tell you as a store retailer (as opposed to a net retailer), about

» 50% of my instore local clients would not even notice a 30% increase in

» price. Price is irrelevant. I would say another 35% would notice but would

» pay and come to accept the new pricepoint. The remaining 15% would either

» change their purchasing habit or for a small percentage, stop. Again I am

» talking Bricks and Mortar.

I think that the many state taxes that we have in the U.S. would deter a lot of post-embargo sales. Like you say, a 30% markup isn't too terrible, but combine that with a 30%-40% state tax and people will notice very quickly the difference between Cuban and Non-Cuban brands when they enter a B&M.

I'm down with any thin-gauge release you want to back.