The Fallout from Habanos s.a cut backs.

[El Presidente]

Hard times are a falling on Habanos s.a.

30% of rollers have now been cut or cut back in their work. Some have been let go (mostly apprentices) while others sent home on half pay for up to three months. That is three months on $8-$10 a month.

In my opinion this is short sighted. These well trained rollers know one thing.....rolling cigars. They have families and commitments and need to work.

The big winners are the "Chinchales"....home based fake producers (some more advanced than others).

At these Chinchales a roller can earn $2 a day. They are unlikley to ever go back to the factories. In effect HSA and Tabacuba are losing a wealth of experience but not simply losing it....handing it to a virus which causes it so much continued pain.

There is a hint of desperation in the air. A cutback in rollers means a cut back in production. Exactly how much should become apparent in the next couple of months but I know it is significant.

One wonders how Imperial is feeling after its mammoth investment in Altadis?

Stay tuned

[jeromeroselli]

Rob,

Are you saying a rollers full monthly pay is $16-$20???

[El Presidente]

Rob,

Are you saying a rollers full monthly pay is $16-$20???

Pay is scaled on roller grading and experience. On average ....yes.

[anacostiakat]

Crap. How depressing.

[Ginseng]

Pay is scaled on roller grading and experience. On average ....yes.

Well that's pretty bad. How about we start an "Adopt-a-Roller" program? I can see the advertising copy now: "For a mere $10 a month, you can sponsor a beginning torcedor. For $20, you can help a journeyman keep rolling and feed his family. Invest just $50 a month and every quarter, you'll get an update letter and a bundle of custom-rolled from your grateful grade-9."

What do you think? Sign me up today!

Wilkey

[El Presidente]

Well that's pretty bad. How about we start an "Adopt-a-Roller" program? I can see the advertising copy now: "For a mere $10 a month, you can sponsor a beginning torcedor. For $20, you can help a journeyman keep rolling and feed his family. Invest just $50 a month and every quarter, you'll get an update letter and a bundle of custom-rolled from your grateful grade-9."

What do you think? Sign me up today!

Wilkey

Great Plan Wilkey!!!!..........except for the 2-4 years I would do in a Cuban Prison next time I landed in Havana

[Ginseng]

LOL! No risk, no reward, I guess. Still, likely better conditions than a North Korean Rehabilitation Labor Camp.

Wilkey

[stargazer14]

I am having a hard time believing that income, especially with the cost increase last month

(I know a LOT more goes into making the cigars than the roller, but come on!)

I didnt realize things were that bad.

How does a guy like Pepin in Miami compensate for that difference?

Where is all that profit going?

Maybe if Cuba LOWERED prices instead of raising....

[neal875]

Hard times are a falling on Habanos s.a.

30% of rollers have now been cut or cut back in their work. Some have been let go (mostly apprentices) while others sent home on half pay for up to three months. That is three months on $8-$10 a month.

In my opinion this is short sighted. These well trained rollers know one thing.....rolling cigars. They have families and commitments and need to work.

The big winners are the "Chinchales"....home based fake producers (some more advanced than others).

At these Chinchales a roller can earn $2 a day. They are unlikley to ever go back to the factories. In effect HSA and Tabacuba are losing a wealth of eperience but not simply losing it....handing it to a virus which causes it so much continued pain.

There is a hint of desperation in the air. A cutback in rollers means a cut back in production. Exactly how much should become apparent in the next couple of months but I know it is significant.

One wonders how Imperial is feeling after its mammoth investment in Altadis?

Stay tuned

Rob:

Not to state the obvious, but isn't this the same Habanos that made the business decision to continually raise prices in the worst economic environment in decades? Was it arrogance, ignorance or stupidity? This combined with the elimination of smaller, lower priced SKUs can now be found on the economic 'What Never To Do With Your Brand' list. Rob, I know you have spoken out on this for some time to little or no avail. Unfortunately, Habanos will now join the many giant entities worldwide whose businesses have dropped double-digits recently. Hopefully management will be able to guide the company through the storm and keep things true to the great history of the brand. I know we all hope for that.

[ironpeddler]

Rob,

Are you and your fellow retailers realizing a similar percentage drop in business to warrant this?

[sharks]

Hard times are a falling on Habanos s.a.

Prez is this mainly caused due to the economic climate or are there more internal issues going on?

The recent price increase has reduced my purchasing options even though they were quite small

but I dare say it all adds up in the end.

Sharks

[El Presidente]

The layoffs commenced in January of this year before the price increases. I was in Havana February and some level 9 rollers I knew had been laid off (sent home for 3 months) from Upmann. Their layoffs have been exended.

It was one of the reasons I could not understand the rush for a global HSA price increase in the second quarter. Keep in mind it is a JV between a Govt wanting hard currency and Multinational wanting a return. There would have been plenty of intense meetings.

Domestically here at Czars we were up 15% (year on year) in the first quarter. The second quarter looks to be on line with that. That is the lowest rate of growth since our inception in 1998 but given the current climate I am happy to take growth. Internationally it is a mixed bag. Some retailers are down 30%, others less, some are holding their volume while fewer still are growing it.

There is plenty of stock in the market and plenty in HSA warehouses. I suspect that is a major reason why they are scaling back production. Overall it could work for them in some ways as the wrapper crop last year was low (various reasons). There is nothing wrong with a lower production year as long as there is still plenty of stock available and they are utilizing the best of last years wrapper in this years production.

[mm12]

How do the economics of Cuban Cigars work? It seems to me that since what Habanos S.A. pays the rollers represents such a small percentage of the retail value of a box of cigars, layoffs seem like a poor way of cutting costs. There must be something really screwed up in the system if they're selling boxes of cigars for say $200 on average, and they feel they have to layoff rollers making $20/month.

Even if there are issues of over-supply, I think it would be prudent for them to just keep rolling whatever amount they can given the amount of quality leaf available, stick everything in warehouses, and begin to sell cigars with more age on them. There's at least a decent chance of the U.S. embargo ending within the next 5 years IMO, and a lot of potential problems could be avoided by keeping a large of cigars reserved in the warehouses.

[Colt45]

As others have already stated...........

How can they continue to raise prices???? Are the "brain trusts" really that demented? All they have to do is look around at what's happened to

businesses world wide - it can't be any clearer. Eff the "specialties", eff the collectors (okay that bit's just thinking out loud)

Produce a great product that is consistent and people can afford to buy. I've said it before, I'll say it again - I really hope competition opens

up for the production of Cuban cigars. If it were ever to happen, I wouldn't be surprised to see H.S.A. blown out of the water.

P.S. Is Imperial involved with Land Rover?..........

P.P.S. When I say HSA, my thought is the corporate entity only.

[El Presidente]

Keep in mind there is a 500 Million Euro investment in this business. There is also a hell of alot of infrastructure.

Assuming Cigars are much like anything else out of a $ value of a box of cigars goes 1/3 producer 1/3 distributor 1/3 retailer.

Not defending HSA here. Just trying to put some perspective to the issues.

We should note also that even if HSA WANTED to pay higher wages and benefits, under the current Castro regime they would not be permitted to do so.

[jeromeroselli]

Pay is scaled on roller grading and experience. On average ....yes.

I don't understand how anyone could survive on that type of income no matter where in the world you are.

Wow.

[KB24]

Question?

Are the cigars rolled by the "Chinchales" or in the "Chinchales"(not sure if they are a person or place) rolled with Cuban tobacco? If so, do they use the bottom of the barrel tobacco? Just curious.

-Patrick

[El Presidente]

The use Cuban Tobacco but normally do not have access to the better Vuelta Abajo tobacco. If you tear apart the average "street cigar" it is predominantly Volado. Over the years I have met people involved in the trade. They are in the main decent people just trying to make a living (for themselves and their family) in a place where every day is a battle of survival. They were receiving tobacco from Remedios (province of Villa Clara). Decent cigars along the lines of Guantanamera meets Vegueros.

[cigargirl85]

This makes about as much sense to me as car manufacturers laying off skilled workers just because current demand has fallen. When the economy improves, demand for cigars (and cars) will increase once more and the makers of both will be in no position to satisfy demand because the employees they sacked will be working in some other industry. That's my ten cents anyway, assuming that these rollers are being let go due to a fall in demand for CCs?

Jen

[SethG]

How do the economics of Cuban Cigars work? It seems to me that since what Habanos S.A. pays the rollers represents such a small percentage of the retail value of a box of cigars, layoffs seem like a poor way of cutting costs. There must be something really screwed up in the system if they're selling boxes of cigars for say $200 on average, and they feel they have to layoff rollers making $20/month.

Even if there are issues of over-supply, I think it would be prudent for them to just keep rolling whatever amount they can given the amount of quality leaf available, stick everything in warehouses, and begin to sell cigars with more age on them. There's at least a decent chance of the U.S. embargo ending within the next 5 years IMO, and a lot of potential problems could be avoided by keeping a large of cigars reserved in the warehouses.

They don't pay them anything, it's all funny money since it's a closed financial system, what you pay goes 100% to the government, hence the term "hard currency".

Who knows what they are thinking but rolling quality has gone way down anyway, here's a trick, pull out a box of cigars and weigh them individually, I've seen differences in the 10 gram's range. That's nuts, it's basically a robusto rolled into or out of a Siglo VI size cigar. Talk about waste.

Cigars are plugging again, get one that gets tight at the end and just stop the smoke on the spot and cut it open, bet you find that they slapped in some short filler in the neck where the role got loose. Lazy but they do it all the time again, I've gotten plugged RyJ's and Montecristo Salomones. Sticks like that used to be confined to special rollers, now you've got a lot of lazy torcedors getting in the supply stream.

Here's an idea, if you have too much supply then slow down the rolling and do a little more QC and see what happens. And how about actually delivering on promised cigars? Like all the 09's?

Truth is Cuba is really in a bad place right now, the spigot from Chavez isn't flowing so much any more, the people just bounced the Chavista in Honduras and Cuba needs hard currency. Sorry to say it but they need to get customer focused and fast.

[cigarros]

Maybe if Cuba LOWERED prices instead of raising....

Not think so.. They will raising prices. Damn!

[ironpeddler]

The layoffs commenced in January of this year before the price increases.

Internationally it is a mixed bag. Some retailers are down 30%, others less, some are holding their volume while fewer still are growing it.

The layoffs probably were decided upon after they received the year end sales figures that were finally announced in February. The interesting part is that they had a 3% drop in sales and little to no change in profits from 2007 to 2008. With 2009 looking quite dim, it seems their marketing strategy is to cut overhead by 30%, raise prices on the product, and realize a higher profit per box....which is already supported by last years figures. What should follow is limited availability to help support the higher prices....which is what will happen with the reduced work force putting out less cigars in the next 2 or 3 quarters, depending how sales go and inventories are reduced in the distributor's warehouses.

A successful business outline that is already working for NC manufacturers, in small quantity releases, could come into play. The Fuente family started this over 10 years ago with Opus & Anejo. Pump up the publicity to establish rarity, make a decent (doesn't have to be fantastic) cigar with controlled costs, set a high retail, limit it's availability to keep the prices high and BINGO...higher profits with less production! With every new "limited release" comes a story, "my Father's birthday" or "my parents anniversary" or the birth of a child. Marketing. There are "rare" Fuente cigar selling at Casa Fuente in Vegas for $120US. But people love a story and buy them. Litto Gomez (LFD) has bought into this marketing philosophy with his "Limited Release" cigars lately, "the factory put the wrong wrapper leaf on this cigar" (sic) and "there is only 400 boxes available!" So has Don Pepin Garcia. Pete Johnson with Tatuaje, his whole company was created & built around this marketing plan. From it's initial roll out they were using phrases for tobacco (in advertising) like "small crops" and "rare wrapper leaf" and so on to raise brand awareness and fuel buying. The bottom line being, a cigar that costs pennies is being sold for larger than normal profits. And this marketing approach seems to still work in a down economy.

HSA bought into this small batch approach when they started the Regional Release and Limited Edition cigar programs. Each year these type of cigars are going up in numbers...less cigars, higher prices, low overhead, more profit. This expansion to small quantity releases is not coincidental. And how many of them are really fantastic cigars? You'd think all of them would be. It seemed for a while the better tobacco was going to these more expensive cigars and the regular production was hurting a bit...thank God they injected a little life back into these every day cigars a few years ago. Many companies get intoxicated with their "specialty", high profit products and start to forget about the staple items that got them to where they are in the first place. But now it looks like the CC market will be taken to a version of this approach in it's entirety.

It's safe to say that they were flying by the seat of their pants and watching other manufactures around them and taking hints from the successful ones....but now with Imperial Tobacco Group, they have the backing of a high powered marketing machine driving their future.

It may take a while, but I have a feeling the whole CC game will be changing....I hope I'm wrong.

[Van55]

It is my understanding that growing, blending and rolling are all under the aegis of Cubatabaco(which is an entity of the Cuban government), while Habanos s.a. is responsible for marketing, sale and distribution. It is Cubatabaco that is responsible for the wages and hours of the rollers.

Please correct me if this understanding is wrong.

[bigfunkyg]

I wonder how much of this (or if any) of this has to do with the possibility of the embargo ending? I have often discussed with a few individuals what would happen should that take place. The economics of that problem are very intreuging for a few reasons. Obviously the production of cigars is somewhat limited and despite what some people think. I don't think CC's would double or triple in price. The supply would still likly outstrip demand and that price point.

Regardless, these problems not at all dissimilar that many large corporations (especially those dealing with retail sectors) during these economic times. Many compaines will try to lower overhead at the risk of reduced quality in hopes that the customer will be only mildly irritated but no so much to stop buying or buy from somewhere else. Quality will return to previous levels once the economy turns around and their labours can be trained properly again.

Just out of curiousity are financial statements of Habanos S.A. publically avaliable?

bigfunkyg

[Punch Joe]

It is my understanding that growing, blending and rolling are all under the aegis of Cubatabaco(which is an entity of the Cuban government), while Habanos s.a. is responsible for marketing, sale and distribution. It is Cubatabaco that is responsible for the wages and hours of the rollers.

Please correct me if this understanding is wrong.

Correction

TABACUBA BUSINESS GROUP (run by the govnt) is the entity in charge of the wages of:

1 Pre-industrial workers. meaning growers, sorters, leaf technicians, quality control technicians, ...etc

2 Researchers at the Tobacco Institute

3 Rollers and else (Moistening, grading, stripping, QC, ..etc

4 administrative personnel at the Tabacuba business goup

5 through another entity called CATEC they manage pay salaries to the factory guides. Catec belongs to Ministry of Agriculture.

CUBATABACO remains as the holder of some brands such as Quai d´Orsay, Fonseca, Diplomáticos and a few more. The rest are under Habanos s.a. (run by the government) Cubatabaco also is responsible for selecting the right people for the right job as an employment agency only aimed at the tobacco joint ventures. Example: BrasCuba the cigarette manufacturer company that requires a lot of labour force every year. Founded in 1996, it´s the result of the merger of brazilian Souza Cruz (subsidiary of British American Tobacco and Cubatabaco)

Habanos s.a. (50 % share Imperial Tobacco) in charge of comercialization of CC the world over. Another joint venture resulting from the merger of Tabacalera and Seita (ALTADIS) the former spanish and french tobacco monopolies, recently acquired by IMPERIAL TOBACCO. (UK)

Hope I have covered all the points you have raised.