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Oct./Nov.
2001

Tobacco Shops Adjusting and
Staying Alive

What it does it take to compete and survive in today's retail cigar market? The answers, according to many retailers, are the same as they always were, but with a new twist.

by Bob Ashley

Whither the traditional smoke shop? Four years after the bloom went off the mid-1990s cigar boom, many traditional tobacconists are wrestling with flat sales, ever-increasing competition from Internet and mail order houses, and customers whose primary interest is the bottom line price of a cigar. Smoke shops that will flourish during these unsettled times are those that will concentrate on providing personalized service to accommodate their customers, according to industry executives and shop owners who attended the Retail Tobacco Dealers Association (RTDA) 69th Annual Convention and International Trade Show in Tampa, Aug. 15-18.

An undercurrent among retailers is that few seem compelled to rush to the Internet to spur sales - although to one degree or another high-volume Internet sellers have cut into their business.

"Smoke shops that thrive and survive are the ones that know what they are doing," said Bill Finck Sr., president of Finck Cigar Co., San Antonio, Texas, a manufacturer and distributor of domestic cigars. "They will be the ones that receive their customers and talk to them and recommend cigars that they should smoke. If your customer gets no personal attention, it's going to be hard for you to survive."

Consultant Richard L. DiMeola, president of DiMeola & Co. Inc., said the weeding out of weak manufacturers and smoke shops in the last couple of years has produced a cigar market with a strong future. "The market, as far as cigars are concerned, has stabilized," DiMeola said. "As the population continues to age, we are gong to get more cigar smokers."

DiMeola noted that up and down cycles in the cigar industry are not new and that 25 years ago, it wasn't the Internet that retailers were worried about, but, rather, mail order houses.

"The cigar business is healthier today than it was five years ago," DiMeola said. "We don't have fly-by-night companies anymore. They are gone. We don't have people making cigars out of a bale of tobacco that they picked up off the street somewhere."

If the smoke shop business has a solid future, pockets of concern exist, however - notably in California, which assesses the nation's highest tax on cigars and cigarettes and where smoking is prohibited in most public buildings, including bars and restaurants.

Victor Migenes, president of La Plata Cigar Co. Inc., Los Angeles, sees very little good in the future for retailers in California, many of which already have closed down in the wake of California's Proposition 10, which imposed a 65% tax on wholesale cigar sales two years ago.

Migenes, whose family has operated a cigar store in downtown Los Angeles for 53 years, intended to close the store by the end of the year and continue to wholesale La Plata and other brands.

"The California tax situation is bad, and we are feeling it," said Migenes. "My retail store is going out of business because the market has changed so much. You can't really isolate the market but that's what California is trying to do. They'd love to say, 'Here is your 65 percent, take it or leave it.' But customers can dial in on the Internet and find the same cigar that I'm trying to sell for 65% less."

Dennis Hurley, owner of The Tinder Box No. 22, Riverside, Calif., said his expectations about the tobacco business have declined. Noting that he hadn't sold a box of cigars in the month before he arrived at the RTDA trade show, "My tobacco emphasis has had to go down," Hurley said. "There is no option. I've become a stick shop. It's not what I want to be, but you have to adjust and you have to scratch. There is no option. You have to grind a little bit."

Another California shop owner, Bob Grassa of Bob's Casa del Habana, a small boutique-like store on a sidewalk in downtown La Jolla, Calif., said he will continue to do what he can to keep prices reasonable. "I don't have a big place, so I don't have to go out and sell as many cigars as a Lew Rothman," Grassa said. "Business has remained steady, but the taxes haven't helped. When I get tourists from outside California, they are not too happy with the prices they see."

Grassa is among those who are not interested in selling on the Internet. "I like to keep a personal relationship with my customers. The Internet is one less headache that I have to worry about."

Bob Beet, owner of Quik Piks and Paks, Hazleton, Pa., sympathizes with Grassa and other California smoke shop owners, but he doesn't feel the Internet has cut into his business much, nor does he see much prospect in selling his product through the Internet. "If I lived in California or some other state where taxes were high, Internet sales would hurt," Beet said, "But we don't have a big tax problem in Pennsylvania. We are fortunate."

Beet opened his store in 1996, primarily to sell cigarettes and lottery tickets. "We started with a small humidor and the market has grown every year," Beet said, adding that cigars now account for 50 percent of his sales. He doesn't feel his sales have been hurt by the Internet, but neither does he embrace establishing an Internet presence for his shop. "That doesn't make any sense to me," Beet said.

Few retailers perceive the Internet as substantially changing the smoke shop business, although most owners acknowledge they lost business to Internet sales and have no means to compete with volume Internet sellers. Even fewer feel the need to establish a major Internet presence to spur sales. Kevin Goodwin, owner of Stogies Cigar Parlor, Topeka, Kan., said the biggest threat to the survival of the traditional smoke shop is not the Internet, but the state and federal governments.

"We can go out and find customers to sell to, but the government keeps coming at us with taxes and legislation - and they will kill us," Goodwin said. "The problem that most tobacconists have with the Internet goes back to taxes and the government. If I sell in my state, I have to pay taxes, and so do my customers. If they order out of state, they don't have to pay the taxes, but guess who doesn't get the sale."

A positive aspect of the current business climate in the smoke shop industry is a change Goodwin senses in the attitude of large cigar manufactures like Altadis U.S.A., Inc.(formerly Consolidated Cigar Co.), Fort Lauderdale, Fla., and General Cigar Co., Inc., New York, N.Y., now majority-owned by European tobacco giant Swedish Match.

"They are starting to put more emphasis on the retailer," Goodwin said. Executives at Altadis and General Cigar say that traditional smokeshops are a priority, without acknowledging that they ever weren't. "We think the traditional smokeshop is important," said Mike Conder, General Cigar's vice president of sales. "There are always going to be customers who like to go into a brick and mortar store and go into the humidor to look at cigars and touch them and buy two or three different things.

"The future is very good for guys who can service that customer. That's knowing someone's name when he comes in the door and having the right mix of products displayed right and priced right. We try to aim the consumer at our products in a retail environment. We think that is where a guy really learns about cigars - picks up the feel of cigars.

"We really can't survive if tobacconists can't survive. That is where you build brands."

Jim Colucci, Altadis USA's senior vice president of marketing and sales, is of a similar mind, except that Colucci thinks that to survive, traditional smokeshops and discount stores both will become something that is closer to the other. "Over the years, we've seen the rise in the so-called C&T [cigarette and tobacco] stores," Colucci said. "In the beginning, they didn't have full walk-in humidors. Now many have evolved into a new type of tobacconist. Maybe 50 percent of their store toward the rear would lead you to believe that you are in a traditional tobacconist store, while the front part of the store is dedicated to the mass market with domestic cigars, chewing tobacco, snuff and domestic and specialty cigars.

"We are at the beginning stage where traditional tobacconists may move toward being a C&T store. One guy is going to come this way and one guy is going to go the other way, and they will meet in the middle. We are going to end up with more tobacconists, but they will be a combination of former C&T stores and former traditional tobacconists."

Eric Newman, president of J.C. Newman Cigar Co., said that retailers should be more aggressive finding outlets for their cigars away from the venue of the traditional smoke shop. "During the cigar boom, everybody got spoiled," Newman said. "The days are gone when you could stand behind your counter and wait for people to walk in.

"There is a lot of opportunity for tobacconists who are smart enough to get out from behind the counter and develop new avenues of business - calling on hotels, high-class restaurants, and clubs. It's a matter of knocking on doors and hustling."

Lola Marley, owner of the Smoking Lamp, Charleston, S.C., said she realized a long time ago that the best way to keep her customers is to make sure they receive service that they don't get elsewhere.

"I've always felt it was my role to spoil my customers," Marley said. "I fuss over them. That's what differentiates me from the discounters. I cannot compete with the Internet or mail order on price, so I compete by being able to greet my customers by name, knowing when their birthday is and asking them how their kids are."

With the Smoking Lamps' bottom line being pinched by flat sales and rising rent, Marely said she has shifted away from cigars that she can't retail for less than keystone prices. "I have had to shift my emphasis away from companies and cigar lines that aren't keystoned. I generally don't take anything less than 70 percent mark up and I'm usually looking for more. When I was selling everything I could get my hand on, and I sold on a 38% mark up, I could afford to because I was selling a million of them.

"Now, we have to be far more careful. Our customers are very price oriented. If they buy a $5 cigar, they expect it to really be more like a $7 cigar in quality."

Fran Digiorgia, owner of Cigar Outlet/USA, Fort Lauderdale, Fla., said that many retailers became complacent during the boom when just about any cigar on a humidor shelf sold.

"The cigar business is like any other business - a shoe store, a restaurant or a dry cleaner," Digiorgia said. "People are not going to come in and buy cigars just because you've got cigars.

"I chose my brands very carefully and I listen to the customer because he is the one who is going to dictate the business by what he likes and how much he spends. I work backwards. I don't listen to the manufacturers. I listen to my customers."

Like other retailers, Digiorgia isn't sold on the Internet. "Maybe I just like to do things the old fashioned way," Digiorgia said. "Why should I try to compete when I can't. "I've asked other retailers about the Internet and no one I've talked to is doing very well with it."

Tom Groncki, a former distributor and owner of Montage Tobacco Co., a smoke shop in Scranton, Pa., also is among those not interested in competing with Internet sellers. "Who needs to make $2 on a box of cigars," Groncki said. "I'd rather sit in the store and call my customers myself."


SMOKESHOP - October/November 2000