Editors_Corner

The way things stand, May 5, 2016 will go down as the darkest day in the history of the cigar business. This is the day the U.S. Food and Drug Administration (FDA) announced sweeping regulations on the premium cigar industry. One question I’ve been asked is “What do you think will happen?”

I hesitated putting together such a piece right away. However, with enough thoughts collected, I present this mid-month special edition of Editor’s Corner.

Disclaimers

One reason I have hesitated about putting out such a piece is because there has been a lot of misinformation on this subject. I worried that an opinion piece could be construed as fact. At Cigar Coop and Stogie Geeks, we have tried to provide an educational and informative point of view on what the FDA regulations mean for the industry. It’s been a slow process as we validate information, but hopefully we are on the right track.

This brings me to this disclaimer. This is an EDITORIAL PIECE. There is some level of speculation and interpretation in terms of what the regulations mean to the industry. Our philosophy is we don’t report on rumors and teasers, however, it does not preclude us from writing an editorial to document opinion. There are substantiating facts included in this piece, but in the end it’s still my opinion. The goal is to help the reader understand why something happened, what could happen next, and get people thinking on the subject.

The cigar industry is one of the most passionate ones in any sector.  I personally consider these regulations to be draconian and prohibitionist in nature. At the same time, this is not a piece that is meant to inflame or incite.

Finally this should not be construed as a legal roadmap for compliance, nor any sort of legal document. Again, it is strictly one person’s opinion.

References

If you are not familiar with the FDA Regulations and some of its history, I recommend you check out these reference items we recapped. This will help you understand this editorial better.

The Editorial: Ten Thoughts

I’ve selected ten thoughts I’ve had since the final FDA Regulations were announced. These are in no particular order.

1. What Happened to Option 2?

Very simply, I believe the exemption for premium cigars (i.e. “Option 2”) was never in play.

 

Back when the Deeming Document was released, there were two Options. Option 1 was full regulation of premium cigars. Option 2 proposed an exemption for premium cigars.

From looking at the response to the comments in the final document, I feel confident concluding that Option 2 was never really considered. If the Deeming Document only had one option, there would have not only been on-going pressure from the cigar industry, but also members of Congress and other government agencies under the Executive branch.  Perhaps putting Option 2 as a choice allowed the FDA to take the time to develop these regulations and mitigate some of these outside pressures.

The most controversial item of Option 2 was the ten dollar minimum. That was subject to much debate over the past two years since the Deeming Document was created. Now with Option 1 selected, and the way the proposed exemption is written in the Appropriations Bill, HR  662, and S 441, the ten dollar minimum concept appears dead.

2. The Worst Case Scenario

I believe by making the regulations a worst case scenario, the FDA put itself in a position with more negotiating power with any potential challenges to the regulations.

 

The FDA has been very public on its intent to regulate premium cigars for quite some time. The resulting regulations have been considered to be the worst case scenario for much of the cigar industry.

As I stated above, the regulations issued were meant to be a prohibitionist move by the FDA. However, I believe the FDA expected a counter-response from the premium cigar business no matter what it decided. By selecting this worst case scenario, it puts the FDA in a position of negotiating power and leverage should a Congressional and/or Court challenge come.

While it’s tough to say there is a “silver lining”, the fact that these regulations will cripple the premium cigar industry are going to give this decision more visibility – especially with members of Congress. My guess is that it was unlikely if Option 2  (with the ten dollar minimum ) was selected, it would not have garnered much support outside the business to challenge it.

3. The Sprint to the 2016 IPCPR Trade Show and What Products Stick Around

I believe this year’s trade show will see companies put out a lot of new releases and then worry about later which ones to apply for FDA approval.

 

With the August 8, 2016 deadline for when FDA approval is required to market a new product, cigar companies are going to face a crossroads type of decision: Do they release and market a product before August 8th or after?

The Sprint

Cigars introduced between February 15, 2007 and August 8, 2016 have two years to apply for FDA approval, and may stay on the market another year while awaiting FDA approval.  For many companies, there is little advantage to wait until after August 8th if there is a product is pretty much ready. I envision a large number of  companies announcing product at or before the 2016 IPCPR Trade Show which opens July 24th in Las Vegas.

A typical IPCPR cycle sees a company announce a product it will launch at the 2016 IPCPR Trade Show. The trade show itself showcases that product to retailers, who then can typically order the product. Depending on when product and packaging is ready, shipping happens either shortly or several months after the trade show.

I expect this cycle to greatly close prior to the show. In fact given the short window, many cigars might actually ship before the trade show. It will be interesting to see what is actually ready to be shipped. While some cigars will be aged and ready to go, some no doubt will be not be ready. It’s also possible that cigars may ship in bundles simply because the final packaging is not available.

Post Sprint

Since many companies, in particular the smaller ones will bring the product to market before the August 8th date, I expect them to use the two year window to decide what they keep on the market. Cigars (and specifically vitolas) that sell well would be better candidates for FDA approval.

The process for how a cigar is approved might be a key factor to determining what stays on the market. A cigar must prove it is Substantially Equivalent (SE) to an approved or grandfathered product, otherwise it must go through a Pre-Market Tobacco Appication (PMTA). Since SE is less costly than PMTA, it is anticipated cigar companies will go the SE route, thus these might be the cigars that stick around.

4. The Future of the IPCPR Trade Show-2017 and Beyond

I believe there is still very much a future for the IPCPR Trade Show.

 

Despite regulatory challenges and reports of declining attendance in recent years, I believe the IPCPR Trade Show will not fade into the sunset, however it might change somewhat. This might no longer be the show where there are several hundred new product releases. Go back 15 years ago, there weren’t hundreds of products being released at the old RTDA.

What may be a challenge is getting companies to invest in going to the trade show – especially those who will not have new product. Many smaller companies have already been public on the costs involved with going to the show.

As for samples not being allowed, I am not 100 percent sure this is applicable to a private trade show. This is probably something the IPCPR and cigar industry lawyers need to assesses

Even if free samples are banned, I believe cigars will still be able to be distributed. Provided someone or some organization has a tobacco license to do so, I believe manufacturers can contribute samples to a central point and then they can be itemized and charged separately to the admission fee.

If a ban on free samples does hit IPCPR, I am curious to see the reaction of those people who continually say online media only goes to IPCPR for free samples.

5. The Future Landscape of the Cigar Business

I believe the landscape of what cigar companies are around will change. We will see three dynamics at play: Acquisition, Consolidation, and “Royalty Arrangement” deals.

 

The threat to the boutique, small production cigar companies is very real. The potential costs with regulation compliance threaten the very existence of these companies. At the same time, it puts bigger cigar companies in a position to get stronger Do I see a reduction in boutiques? Yes, Do I see them completely gone? No

I see three scenarios on what will happen with the landscape of cigar companies. I will not speculate nor name names.

a) Acquisitions

I think its safe to say some boutique companies will be the target of the larger companies. In some cases the boutique company owner may sell and cash his / her check and leave the business. Others may become short-term “consultants” once the acquisition is complete; while still others may join the larger company.

b) Consolidation of Larger Companies

In my opinion, this is part of the natural progression of any industry.This is a similar concept for what we defined above for “Acquisitions”, but done at a larger scale with the larger companies. Here we can see consolidation of more of there vertically integrated companies.

c) Royalty Arrangements

It is quite possible that a large company can cover the compliance costs for a smaller./ boutique cigar company. In turn, the smaller / boutique company would pay a royalty to the larger company. It’s quite possible the larger company may control distribution as well.  This sort of creates a franchise model where boutiques become independent franchises to a larger tobacco company.

6. Pending Legislation and Litigation

I cannot predict whether Pending Legislation of Litigation will halt or overturn the FDA’s decision.

 

The good news is the fight is on. The bad news is there might not be enough to halt the FDA regulations from going into full effect on August 8th.

In terms of pending legislation and the lawsuits, this is very hard to predict. It’s doubtful the Appropriations Bill will advance before the August 8th date. There will be a continuing effort to gain support through co-sponsors HR  662, and S 441 for a premium cigar exemption. These two bills have not made it to a vote for the past two sessions of Congress. With the “Worst Case Scenario” of regulation it’s certainly possible legislation may gain some traction. Unfortunately if I just don’t think this will happen before August 8th.

Lawsuits are another story. At press time, only the vape industry has filed a lawsuit. However a lawsuit is not enough as it really only helps the cigar industry if an injunction is filed.  This probably will require an emergency injunction from the courts as well. It’s very difficult to determine what will happen before August 8th.

Petitions are good, but should supplement the legislative and judiciary efforts. They are not going to be effective by jost posting a link on Facebook. A grass roots effort must be taken at a person to person level for it to gain any traction. This involves phone callers and reaching out directly to consumers. I’m concerned the recent increase in the threshold to 100,000 for the White House Petition could set us up for failure if the threshold is not reached.

Bottom line, we still must fight hard if we stand a chance to overturn the regulations.

7. Europe and Asia

I believe Europe and Asia provide many opportunities for cigar companies – big and small. These could become the new havens for limited and small batch releases.

 

The pending regulations pose a huge problem bringing a new product into the U.S. market post August 8th, 2016. However, this doesn’t preclude a company from bringing it to market in Europe or Asia.

Many companies were already in planning for 2017 mode. There are also companies that may have inventory they want to release. The challenge the smaller companies finding the right distributor(s) to work with.

While there are regulations in these regions, it’s still quite possible Europe and Asia can become the new home for limited and small batch releases in the post FDA regulation era. Of course much will depend on if U.S. customs cracks down on imports.

8. Bringing Back Old 2007 Products

I believe we will see a push on products that are grandfathered return to prominence  However, I don’t think this will be as widespread as people think.

 

There has been a lot of talk about bringing back old products that qualify as grandfathered products. This certainly is an option – particularly for those companies that were marketing products on February 15, 2007.

As we discussed in our piece “Understanding the Grandfather Date for FDA Regulation of Premium Cigars“, the Actual Grandfather Date is Key. Currently, that is the February 15th date. While the product could have been introduced prior to February 15th, it still must have been marketed on the February 15th date – i.e. it could not have been withdrawn from the market before that date. If this is the case, a marketing authorization still must be obtained by the FDA.

There is no doubt that if there are products that were marketed on the Grandfather date, but are no longer there, there will be a push for them to return. However the product will still have to go through “Substantial Equivalence” and prove it is the same product. Therefore, I don’t see as many products in this category as one might think.

Of course if the Grandfather date is moved, it opens up a whole new dynamic as it would see more products qualify for exemption.

9. Cigar Events Aren’t Going Away

I believe cigar events will not die because of lack of samples.

 

Because the FDA has now put a ban on samples, there is some question on the future of cigar events.  I disagree 100 percent here.

Getting free cigars at events has been something becoming less and less common over recent years. I’ve seen a decrease in events where you walk in and are handed a cigar at the door. Some manufacturers have moved away from “buy 4 get one free” model to “buy a box” and you can buy this special event cigar.

This past December I attended a cigar dinner. The dinner included a four course meal and three cigars. What I found interesting – I was charged separate for the dinner and for the cigars. The dinner charge went to the restaurant while the cigar charge went to the retail tobacconist. When this happened, it immediately raised a flag that this could be the new model should the FDA ban samples.

Some herfs might be affected. Those run by retail establishments (i.e Smoke Inn’s Great Smoke, Cutters Cigar Emporium’s Southern Cigar Festival) should be able to continue. Namely the cigars can be priced separately – much like the cigar dinner. There is some question about herfs from non-retail establishments (namely those who do not have a tobacco license)

Cigar Events have so many other options. Giving away Swag is always an option (although this may now be considered marketing material and subject to warning labels).  However there are always non-cigar items that can be given away. Options include non tobacco product swag, free food, gift cards to (non cigar) retail establishments. Plus there always is a draw of still seeing and interacting with your favorite cigar personality.

If the FDA goes after discounting cigars, that is something that potentially affect the events more seriously down the road.  In the meantime, while the events will change they aren’t going away. Hopefully if anything this will be a wake-up call to improve many of them.

10. The Future of Cigar Coop and Stogie Geeks

This statement is firm:  Cigar Coop and Stogie Geeks are here to stay.

 

I am very confident of the future of our media brands. The reason is because I believe we have the most diversified portfolio of cigar content in the cigar media. As result, I can say that Cigar Coop will remain a 365 day a year operation. Meanwhile our programming with Stogie Geeks, Stogie Geeks Shorts, and Stogie Geeks News will continue. We have a couple of surprises and twists coming as well that will strengthen our position as a media outlet.

The elimination of free samples will no doubt add to our costs. I discussed this last year when I explained “Economics of a Cigar Media Brand”. However,we have always made a significant investment in cigar purchases and will continue to do so in the new world order of FDA regulations.

It could very much lead to the annual Cigar of the Year Countdown for Cigar Coop to no longer being limited to new frontmarks. That is still to be determined, but rest assured, the Countdown isn’t going anywhere.

As it stands now, it will seriously reduce our IPCPR coverage. If the European InterTabac takes over as the new mecca for launching new releases, most definitely we can see a shift to covering that show.

There are other three areas that I can see impacts: Cigar News, Pre-Release reviews. and Boutique Coverage.

For cigar news it is similar to our IPCPR coverage dilemma – namely the slowdown of new products in the United States will be felt by us. However, as we said above, I can see the focus on the European and Asian markets picking up. Depending on the demand and interest in will determine how much we will cover. Over the past year, we reduced our news coverage of shop exclusives simply because we never saw the ROI in chasing this stuff down versus the interest in our audience. While it would be a sad thing for a retail shop to no longer be able to have a shop exclusive, in a lot of ways it would make life simpler.

Of course, the news coverage of the FDA won’t be going away any time soon.

Pre-Release reviews are something we did, but not something we focused on. The preference on Cigar Coop has always been on the post-release assessments.  Therefore, I don’t see a big impact to us here.

We have always strived to balance covering the large companies with the boutique companies. I do see some scenarios for boutiques staying around, but there will be less of them.

Final Thoughts

May 5, 2016 has a day that changed the cigar industry. The next significant date will be August 8, 2016 when the the initial regulations come into play. As I stated in Item 6 above, it’s a tall order to see a move from the legislative end before the August 8th date. Making a prediction on if or when the courts come into play would simply be guess work. There are other regulations coming into play that I didn’t get into here – namely warning labels and age restrictions. We also know this is the first round of regulations and things such as flavored cigars and walk-in humidors could be the target of the next round.

We do know this week (from press time), we have heard that the three major organizations: Cigar Association of America (CAA), Cigar Rights of America (CRA), and the International Premium Cigar and Pipe Retailers (IPCPR) have meetings this week. The output of these meetings will dictate the road ahead on what the response is from the cigar industry. The fight is not over, but its going to be a big mountain to climb. I envision something will change between now and August 8th, and hopefully for the better. Time will tell on what that will be.

As we mentioned in Item 10, we at Cigar Coop and Stogie Geeks will have to adjust to co-exist in this new world order while supporting the fight. As long as there are cigars to smoke, we will be there to review cigars, to talk about cigars, interview industry people, and connect them with the conduits of life.