Premium Cigar Industry Research Report

[Golfman]

So here is my research report that i am handing into my Business and Strategy policy class. The assignment was to choose an industry and examine the effects of the business environment on it. The factors include the economic, social, global, legal, and demographics that affect the company. So here it is, i hope you enjoy it!

The Premium Cigar Industry

The tobacco industry is a unique industry sometimes thought of as ruthless and immoral, making profits off the pain and suffering of others. While it is true that tobacco consumption in any form carries with it certain risks there is a segment of the industry that bears with it a certain degree of respect and elegance. The premium cigar industry has been around for well over a century, but the actual creation of a cigar comes from as far back as the Aztec empire of Central America. While the industry has certainly changed over the years the product has remained relatively the same over thousands of years. It is interesting to see how the industry has grown, what environment it exists in and what forces act upon it to influence the decisions of the companies that make the final premium cigar product.
The premium cigar industry is very competitive. There are a lot of large manufacturers of cigars but there are also a lot of small cigar makers all over the world who specialize in making there own brands. They are all affected by the macro business environment they exist in. The cigar industry has to respond to an array of economic, social, legal, global and demographic factors.
The condition of the economy has a tremendous impact on the cigar industry; cigars unlike cigarettes can be classified as more of a luxury item. As seen in recent history during the economic boom of the late 90’s, cigar demand was reaching record levels and cigar prices were inflating to record prices, this was creating an over demand for cigars and subsequently product quality suffered as cigars were rushed into the market to meet the surging demand (Shanken 7). Cigar companies were using plots of land to grow tobacco that was clearly unfit for the purpose. Rollers of cigars were employed with little experience and product defects became common place. The key process of aging tobaccos to make the cigars was cut short during this period to keep up with demand, and the quality of the cigars produced suffered severely (Shanken .
The decisions of the major cigar companies to try and keep up supply ultimately hurt them. They created a supply of cigars that were inferior to what should have been out on the market and would take years to fix. Once the economy started to tail off and ultimately decline, cigar manufacturers were left with declining profits. Brands that were once prominent started to disappear and companies were forced to leave the market. The cigar industry in today’s economy is doing well by maintaining a well supplied market of premium cigars.
Technology is a very important factor to the premium cigar market. All premium cigars are hand rolled and have been that way for centuries. The biggest technological achievement that has hit the cigar industry is the invention of the humidor. A humidor is a device where temperature and humidity are controlled so that cigars can be preserved in a fresh state (Shanken 162). This invention has undoubtedly increased sales of cigar manufacturers by allowing the retailers to preserve their inventory and offer the consumer a wider selection and a fresher product. Over the years the technology in which to preserve cigars has increased significantly making it cheaper to preserve them. These cost benefits have been passed through to the consumer who over the years has enjoyed lower prices from retailers (Shanken 164). Even customers can preserve their cigars through the introduction of smaller personal humidors.
The internet has provided the cigar industry with a tremendous increase in sales. Many cigars are purchased online at retailing websites. Customers are given a tremendous array of products to choose from on these websites. Internet shopping for premium cigars has allowed many consumers to avoid hefty excise and sales taxes that they would normally be obligated to pay if buying in person. This ease of buying has allowed many people to take up the hobby, even when there is no tobacconist present in their immediate area.
During the manufacturing process recent technological innovations in storage have allowed companies to expand their production comfortably without the threat of spoilage or contamination of the tobacco. This increase in production over the past few years has allowed cigar manufacturers to comfortably age cigars longer and offer a wider more premium product to the consumer. This increase in quality has undoubtedly increased demand as more people are exposed to a better product.
The social and cultural aspect of premium cigar smoking also has a huge impact on the companies that produce cigars. The industry of cigars is driven by the consumer. The tastes of people change over time and the premium cigar industry must adapt. Recently the tastes of consumers have shifted to a bolder and stronger cigar (Shanken . This shift in tastes has forced the cigar industry to pursue stronger tobacco, such as those grown in Nicaragua and Honduras (Shanken 9).
The cultural aspect of cigars is timeless. Over the years cigars have been used by every one of all ages where the law permits. Cigars have been used as a way to unwind from the daily grind of society and as a time of reflection and contemplation. The culture of the cigar manufacturers is deeply rooted in tradition as well. Most premium cigar manufactures are family run and care deeply about the product they bring to the market. Over the past couple of years the popularity of cigars has risen significantly. This has led to a dramatic increase in cigar bars and lounges coupled with restaurants where cigar lovers may enjoy cigars and fine food. This has undoubtedly brought a lot of money and job opportunities into both the fine dining and the cigar industry (Shanken .
The legal and regulatory aspect of the premium cigar industry has perhaps the largest influence on the condition of the companies. Tobacco usage has been a heavily debated topic in today’s society, prompting the government to take action. There is no doubt cigarettes are not a healthy habit, but many seasoned premium cigar smokers will tell you that premium cigars and cigarettes cannot be compared. Cigar smokers enjoy the flavor of the tobacco and many other things about them. They are not smoking them for the nicotine content because many premium cigar smokers don’t inhale the smoke, just taste it in there mouth. The government does not see the clear distinction that cigar smoker’s see and group cigars with the other tobacco products. This means that premium cigars are subject to harsh excise taxes which raise their price significantly.
Many states have begun passing laws against smoking in public places such as restaurants, casinos, bars and nightclubs. This deterrence against smoking has made a profound impact on the companies that make them. Some states have tried to tax tobacco use so high that it would deter smoking altogether. California recently tried to enact a 300% tax increase on tobacco which would sky rocket it above any other states tobacco tax (Welch 1). Had this act passed, premium cigar retailers would have to pass along their costs of buying tobacco to their customers and in turn prices for premium cigars would become incredibly high, and force many tobacconists out of business. To the relief of many the act never passed but similar cases are happening all around the country. Cigars are more elastic when compared to cigarettes. Slight increases in price can deter many from buying premium cigars or starting the hobby altogether.
Another important legal issue that seriously affects the cigar market is the trade embargo the United States has with Cuba. Cuba’s rich soil and climate allow them to produce the finest and most sought after cigars in the world. Unfortunately it is illegal to import Cuban cigars into the United States. This embargo prevents premium cigar companies from tapping one of their richest markets. If Cuban cigars were legal in the United States, there is no doubt an increase in profits and jobs would be seen for many cigar companies.
The international aspect of cigar manufacturing does not have as profound an impact as the other factors. An important international issue is that almost all cigars are produced by foreign countries using tobacco grown in their economy. A major risk that many premium cigars companies must deal with is an unstable economy. Some of the finest areas for growing premium tobacco are located in politically unstable environments. Many cigar companies must be prepared for a sudden drop in tobacco supply due to a politically unstable situation that may erupt in the near future in one of these vacillating economies.
A major issue affecting premium cigar companies is the actual environment. Global warming has caused concern for many premium cigar companies. As temperature raises the soil reacts negatively, producing lower quality crops regardless of the amount of water added (Darwin 1050). Regions such as the Vuelta Abajo in Cuba, an area renown for its excellent tobacco, may suffer. Without great soil premium cigars cannot be made and the industry as a whole will be negatively affected. If farmers who grow tobacco are no longer able to make a living by growing tobacco they may switch to growing illegal plants such as those used to produce drugs. Rising temperatures can also lead to storage problems and increased costs to maintain stable temperatures. To produce high quality cigars the temperature has to be just right. Higher temperatures could lead to spoilage of the tobacco by way of mold or insects, this can create a shortage of supply. Higher costs will most likely be passed onto the final customer and could deter demand.
The demographics of cigar smokers are extremely diverse. Every one of all ages, race, and gender enjoy premium cigars. There is a common stereotype that premium cigar smokers tend to be richer men, but this is untrue. Many people from all classes of wealth enjoy cigars. Over the past few years more and more women have begun to enjoy cigar smoking. This expansion of women smokers has allowed cigar manufacturers and companies to tap a new market for their products.
Cigar smoking has been around for ages. It’s a hobby that many people enjoy on a daily, weekly and sometimes monthly basis. Some of the most prominent individuals in society enjoy a great cigar. The companies that are responsible for making these fine products experience a wide array of environmental factors. They are influenced heavily by society and economics, but they also have to deal with actual environmental pressures and severe government regulation. They are servicing a market that is becoming harder to make profitable. Hopefully with new innovations and greater product development the premium cigar industry will continue to thrive despite social pressure to suppress it.

Mott, Gordon. "Editors Note." Cigar Aficionado 1/9/2006: 25-26.
Shanken, Marven. Cigar Companion. Philidelphia: Running Press, 2005.
Welch M, William. "Califonia Cigarette Tax Could Skyrocket." USA Today 7/23/2006. . 2/24/2007 <http://www.usatoday.com/news/nation/2006-07-23-cigarette-tax_x.htm>.
"The Impact of Global Warming on Agriculture: A Ricardian Analysis." The American Economic Review. Ed. Darwin, Roy. Nashville: American Economic Association, 1999. 1049-1052.

[Rploaded]

Interesting........

Opening sentence is different then I would have expected.

The average premium cigar smoker has an income over 75k. So dont know about diverse in the class statements.

The biggest impact on cigars technology wise has been the new plastic molds, this offers cigar manufacturers more options and great longevity coupled with consistency........the humidor is old news and been around since day one...........

There are several other things that can be looked at in the paper but.............

Overall nice work curious to see how you will do.

Keep us informed.

R.

[dstaccone]

Originally Posted by Rploaded

Interesting........

Opening sentence is different then I would have expected.

The average premium cigar smoker has an income over 75k. So dont know about diverse in the class statements.

The biggest impact on cigars technology wise has been the new plastic molds, this offers cigar manufacturers more options and great longevity coupled with consistency........the humidor is old news and been around since day one...........

There are several other things that can be looked at in the paper but.............

Overall nice work curious to see how you will do.

Keep us informed.

R.

Is that true, cause if so I hope it is like the field of dreams scenario. If I smoke them the money will come.

Golfman, nice paper. I wish my classes allowed me to write about cigars. Maybe I will figure out how to fit one into my poli-sci major classes somewhere. Let us know how you do on it.

[par]

well written and researched.

may i add some criticism (constructive i hope):

I felt that the demographic information was glossed over a bit. Also you framed the strategic issues (global warming, political issues) in a nice context but you sidestepped geopolitics with the cuba issue and european and asian demand (will the rise of the economy in north asia be capitalized by this industry?).

I would like to see a bit more discussion on these issues and frankly a bit more game theory on what the outcome could look like (or more importanly, the questions that the execs at these companies face today).

what would you do if you are the fuente family and you think that cuba is about to undermine your market in the US with a removed embargo while you observe a rapid rise in the economy in China? What's your choices? Would you rush in to plan/buy acreage in cuba to get in on the cachet or would you try to compete using your own product? Would you use your domestic brand as a global brand or would you establish new brands catered to the tastes in asia north?

dig in a bit and i think you'll have a really interesting paper...

you already have most of the strategic issues sorted out (use walmart or starbucks in china/india as a text book example of market entry with localized content) and consider the geopolitics with the cuban issue and its effect on the industry.

my few cents (which you can ignore completely).

[hornitosmonster]

I think with the 2nd Boom looming the average imcome will come down. Cigars are getting popular with the College age kids...and for the most part they are broke.

[OpusEx]

When is this being handed in?

[Twill413]

No shoutout to club stogie in the references? Surely something you learned here went into the paper. I think we should all be a little hurt by that. Best of luck to you, I hate writing papers, so it is good to be able to pick a topic you enjoy.

[daviddunn]

Nice paper, you put a lot of work into it, and it shows.

I wish I made half of $75k a year! ;-)

[Golfman]

Thanks for your comments, i'll definitely fix it up a bit taking into your comments. I can hand it in tonight so i will have time to make some adjustments. I know some of my facts are 100% concrete but he limited me to 7 pages which i already have ran over a bit, so to include more details would probably be detrimental.

He told us to avoid specific companies and their decisions, but more so what every firm in the industry faces as decisions.