As far as Lew's concerned, direct-mail customers are a whole different breed than those who walk into his, or anyone else's, retail stores. His doesn't consider them competition to his own shops, and neither should others. "They're different consumers. People who buy in stores are reluctant to buy by mail. People who buy by mail are too lazy to go into stores. They're different people."

So where did all the customers go, then?

"There's so many stores now that in order for them to regain the type of sales that they would like, they have to fight a battle with the other stores that are in their immediate geographic area and find out who the survivor is."

Rothman foresees numerous changes emerging on the retail side, and clearly sees a number of the newer retail outlet categories as either doomed or emerging a much more streamlined factor in terms of competition to traditional stores.

"The traditional smoke shops will survive. They survived 20 years of downturn in the industry, they can certainly survive in an industry where sales are expanding between 10 and 20 percent a year," says Rothman. What will go by the wayside is the sale of cigars as a tertiary item, he contends.

Outlets like liquor stores, which invested heavily in humidors and merchandise to stock it - mostly no-name brands - may have realized some profits in cigars last year, but will fight an uphill battle in the long run. Overhandled merchandise, lack of staff knowledge, and improper storage conditions continue to deter serious cigar sales. "Sooner or later," says Rothman, "they're going to realize, 'I'm not in the cigar business. This is a perishable product.'"

Mostly likely, cigars will return to an add-on sale. "Liquor stores should be like diners. You go in and they have one or two kinds of cigars. And that's it," he thinks. "If you happen to need a cigar, but you don't have one on you, you'll buy what is available."

Rothman is even less worried about the emerging class of discount tobacco outlets, the cigarette superstores, as a viable competitor for premium cigar sales. "The economics of these cigarette stores are that you have one employee that runs the store," he explains. "You can't be behind the counter and in the walk-in humidor at the same time. Given the cost of cigars as opposed to their selling price, the pilferage rate will put them out of business."

The Truth on Margins
Years ago, Rothman said that eventually, discounters in the United States would be those stores that sold cigars at full price, and that everyone else would be selling them at prices in excess of full price. "During the cigar boom, that's what happened," he notes.

For many newer retailers, inflated margins were literally the only ones they had ever known. Established shops knew better, but enjoyed the trend regardless while it lasted.

"Cigars are a consumable product. If you keep a customer happy, he could buy from you for 25 years. It's not like a chess set." Unfortunately, keystone prices became the norm, not the exception, in a market never designed for such high margins across the board.

"During the cigar boom, those profits started to skyrocket, and most retailers were unhappy unless they doubled their money on it," says Rothman. "Even if they bought it at the wrong price, secondhand, they still doubled their money on them. They just put it out at a price that was higher than suggested retail."

Consumers, unaware and unconcerned about the unorthodox route their cigars may have traveled to reach their living room humidor, simply saw the escalating price tags, noticed the discrepancies, and cried, "gougers!" Rothman was sympathetic to the retailer's dilemma.

"I don't believe that there was very much gouging at all," he stresses, attributing consumer confusion about high retail prices to multiple markups. "A store that had no access to a supply of cigars, and couldn't get on direct with a manufacturer, had to go into other cigar stores and buy cigars at retail prices. They would take it back to their store and sell it for an advanced price. Consumers considered that to be gouging. It wasn't gouging, it was either, 'this is what they charge or they don't sell cigars.'"

Where Rothman loses sympathy is expectations of across-the-board keystone pricing. "The normal margin of profit on a cigar is about 32 percent if you're selling individually, and about 25 percent if you're sell it by the box. That would be historic margins."

"Keystone does not fit a consumable product. If you have the hottest selling brand of coffee, you're still not going to sell it at keystone, because supermarkets are used to making only three or four percent on coffee. You buy a pound a coffee for $5, they make 20 cents. But, you buy the same pound of coffee two or three times a week." It's as if Lew can't make the point often enough. "This is a consumable product!"

"The last few years, profit margins were an anomaly," he repeats.

Shrinking Margins: Adapt or Die
When cigars became fashionable, many stores shifted their merchandise mix to reflect the trend. Newer stores that opened in recent years were rarely full line shops to begin with, often shunning any non-cigar merchandise such as pipes and tobaccos, much less other standard giftware. Shrinking margins on cigars will likely prompt retailers to reassess their merchandise lines yet again.

"A lot of smoke shops ditched a lot of the products that they had. Before the boom, for a smoke shop to survive, they were selling sunglasses, and flasks, and walking canes, and statues, and collector plates, and beer mugs - all kinds of stuff. It looked more like a gift shop than a smoke shop," reminds Rothman. Space that was used for gifts previously was converted into cigars during the boom. "Now that everything is turning around, they have to go back the other way again," say Rothman.

Indeed, most smoke shops that survived throughout the 1970s and 1980s and are still here today had to widen their merchandise selection. "I had a Case knife department, and this lighter display," Rothman theorizes of the typical store of yesterday. "There were a lot of different parts of the store. Each one was a small profit center, and they put it all together, they made some nice money." Increasingly, this will again become a necessity for stores seeking to boost sagging profits; it won't come from inflated cigar prices.

Continued...

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