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June/July,
2001

L.A. Shop Just Says:
'YES'

Tobacco retailing has taken a beating in California, with numerous casualties and many battered survivors. Why would anyone choose to enter this downcast market? Ask the new owners of Toluca Lake Tobacco Co., who saw an opportunity to capitalize on California's smoking restrictions.

by Joseph Finora

Every change brings opportunity - even legal changes that threaten to wipe out businesses. But who would have thought that with the state of California enacting the toughest anti-tobacco legislation ever, that a revitalized shop would thrive once again?

The Toluca Lake Tobacco Company is thriving where others either fear to tread or were knocked out of the box by narrow-minded and costly restrictions. Today, passersby in this suburban village in the shadows of Los Angeles see patrons enjoying a smoke in leather chairs while watching a news or sporting event on a big-screen television - in the store's front window. Many think the image is too good to pass up and stroll in, buy a smoke and maybe one day join the club - a throwback to days gone by. That's the basic marketing plan of Caesar Milch and Harley Tobin, two friends who seized an opportunity when others were bailing out and have no desire to let go.

"This is a social business," says Milch, a lawyer who works as a legal consultant in the morning hours, before the shop opens. Tobin, who is in the glass and mirror business, also works mornings before heading to the store. "The former owner was very personable," says Milch and with Tobin is building on that legacy. "He left the infrastructure in place and had a good inventory. We've gutted the place. Some of the old clientele has stayed. This had always been a good store." Taking over in December 2000, they were able to maintain the original lease and with the help of a bank loan, add physical improvements.

The aim of the pair's remodeling has been to try to create a place where patrons are encouraged to stay, relax, and briefly forget about the fast-paced world that's all around them. While the business was "nearly turn-key" when they purchased it according to Milch, the two nevertheless overhauled the store, adding ceiling fans, wall-to-wall carpeting, improved air conditioning and filtration systems, 75 private lockers, a private back room and a 36" television. A friend helped with the design as they also brought in period antiques and special architectural effects, such as an 18-feet antique-style red oak bar, complete with columns, two pool tables and a dart board. It's all topped off by a walk-in humidor. Their smoking jackets, from plaid to paisley, have come from local movie prop houses. The 25-watt light bulbs give an amber glow that the owners feel is inviting from the outside - evoking feelings of days that no longer exist. In a word, the shop's goal is "socialization."

"We've made this a cozy place. People drive by and think this is where they'd like to be." It's also worth pointing out that the Toluca Lake shop sits next to a bar and in California, people cannot smoke in bars so they often enter the store to light up and continue their socializing because it's legal to smoke in the shop.

The store opens around 11:30 a.m. and around lunch hour the first customers enter, many from the nearby motion picture studios such as Disney, Universal and Warner Brothers, which are within a one-mile radius of the shop. But truck drivers and women also patronize Toluca Lake.

California's infamous proposition 10 increased tobacco tax 65 percent, based on the wholesale cost of cigars and Other Tobacco Products (OTPs) - snuff, handrolled and pipe tobacco. At the time, the tax was proportionate to the cigarette tax. A "sunset provision" later rolled the tax back to 54.89 percent but then adding the 8 percent sales tax the customer must pay brings it back to nearly 65 percent. Except for the sales tax, the tobacco tax applies to wholesale prices and must be paid within 30 days of delivery.

"The implementation of Proposition 10 killed the cigar boom in California," laments Milch. "Many of the independents couldn't pay the bill. They sold their inventory at a discount and went out of business. Not only did this hurt tobacco companies but it hurt the state's sales and payroll taxes. It had far-reaching ramifications."

Toluca Lake was able to weather the storm, convincing Milch and Tobin that it was better to revitalize an existing store than to start from scratch at a new location. Some distributors recognized this as well: La Perla Habana and the Fuentes all welcomed the new owners by converting their distribution agreements with the new owners - helping to ease the transition.

But a smooth transition wasn't guaranteed from all distributors, Milch recalls one major foreign-owned conglomerate that swamped them in paperwork and ordering requirements to the point where they ended the agreement. They now directly buy this manufacturer's cigars from an East Coast distributor, as they want. "It's dangerous to be tied to one brand," notes Milch.

At Toluca Lake, name brand cigars sell well because they are "recognized for their quality but it's tough for new stuff," says Milch. "People are no longer buying bad cigars and they must be reasonably priced. The days of selling 'just any cigar' are over."

Face-to-face customer feedback plays a large role in Toluca Lake's inventory selection. "Our customers are the eyes and ears of the store." New brands are often introduced to the store via customers who bring them in after trying them elsewhere. A few existing customers will try them and if the response is positive and a good deal can be stuck with a distributor, they may find themselves on Toluca Lake's shelves. If not, they may go back with the customer who brought them. "Very few customers are totally brand loyal. They'll switch when supplies are short. We keep a variety in stock to maximize on this. Things are constantly moving in and out of the store. Customers like the chance to try something new and this helps us to get to know them."

The average customer walks out of Toluca Lake after paying a $16-17 bill. Sales are split 50-50 between cash and credit cards - all major cards are accepted. A good robusto retails from $5.75 to $6 but some Nicaraguan blends sell for $2.80. They've also had some success in "bundles, seconds and apprentice-rolled products." Any unsatisfactory merchandise is replaced immediately upon request without question.

The store also stocks some 25 pipe tobaccos, including several blends made on the premise. Pipes entered the inventory after customers began asking for them. Pipe choices now range from the low- to the high-end. Lighters are handled in similar fashion. They range from disposables to jet Blazers. Toluca Lake stocks new and pre-owned DuPonts and Dunhills. Estate lighters are purchased and refurbished, as the partners noticed customers regularly upgrade their DuPont lighters.

Other stocked accessories include pipe cleaners, cutters and custom-made humidors but cigars are the dominant item. "We try to avoid merchandise returns," says Milch. "If a cigar goes bad, a customer will blame the cigar, not the humidor. But we've seen no abuse of our no-questions-asked return policy."

Women comprise about 10 percent of Toluca Lake's customer base. Many enter the store while patronizing the bar next door. They'll often stay, buy a soft beverage, water or maybe a gift for a male friend.

Location is important in this business. "It's always good to be next to a bar," says Milch who notes that the bar also has an Automatic Teller Machine, meaning there's a large supply of $20 bills on hand. "We always need to be stocked up on change."

Toluca Lake is situated in an upper-middle class suburban area in a small village square setting. The eight-block area is home to a variety of small retail businesses, including a Starbucks, an Irish pub, several banks, and a supermarket - its largest neighbor. Many residents can be seen walking through the neighborhood in the evenings, which at one time, was home to several highly regarded jazz clubs.

The nearby movie studios kept a bevy of musicians on hand and in the evenings they performed in the surrounding clubs, many of which are no longer in existence. But Toluca Lake is also trying to bring the neighborhood's jazz legends back. Two nights per week, a three- to five-piece jazz ensemble performs at the shop. "On these nights, it is the customers who dictate what time we close," laughs Milch, who adds that often food is ordered in to the store for the customers. Patrons can bring an alcoholic beverage into the store or keep one in their locker. The store cannot sell, serve, or decant them.

While sales at Toluca Lake are not disclosed, Milch admits they are "going in the right direction." Both he and Tobin expect to begin drawing a salary sooner than they anticipated. "We set a low target so we overshot it. We've avoided debt and the bank has helped."

As for the outlook of the business, Milch credits the boom for introducing a new generation of customers to cigars. "Many of them will eventually come back to cigars," he says. "If taxes don't go crazy you can make a go of it. It's not brand loyalty that keeps customers coming back, it's tobacconist loyalty.


SMOKESHOP - June/July 2000