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August,
2008

Retailing Price Wars:
Help is on the Way

By Frank Seltzer

As online retailing continues to grow and exasperate the catalog discounting problem long facing brick and mortar cigar shops, many manufacturers are at last offering relief to level the playing field with a new generation of price-protected brands and retailer programs.

Cigar retailers are feeling the pinch. It’s not really new, but has been building slowly. Higher costs for shipping and a weakened dollar have led to price increases over the past couple of years, while smoking bans and internet sales are all cutting into retailer’s profits. Most of the cigar manufacturers are aware of the problem, and this year, many of them are responding in ways retailers are sure to like.

Taking care of retailers though is nothing new. Altadis USA and General Cigar Co. have had programs for their retailers for many years. General began offering their 5-Star program in 1999 for their top tier stores, and Altadis started giving a retail display allowance (R.D.A.) in 2000, which rebates three to five percent depending upon purchase levels. But Altadis has updated its retailer programs in addition to the R.D.A. and Bob Smalley of Tobacco Gallery in Dallas says he really loves it. He gets keystone plus on some of their products, there is a low minimum purchase for free shipping, he can order via the internet, gets another couple of points off for pre-payment, and the company puts products on sale throughout the year. Says Smalley, “ I think Altadis is working hard for the retailer.”

Two of General Cigar’s new price-protected brands - Hoyo de Monterrey Excalibur Legend and Macanudo 1968; this Macanudo is sold only through brick and mortar retail stores.
General’s head of sales and marketing, Dan Carr, says his company continues to have free shipping and is working to develop a new retailer incentive program. This year, General rolled out the new price protected Hoyo de Monterrey Excalibur Legend and Cohiba Puro Dominicana lines along with the new Macanudo 1968 which, in addition, is sold only through brick and mortar stores. General president Daniel Nunez adds, “We want to do more for the retailers since they are our foundation. We realize some of our margins that are less than keystone have impacted retailers, so we are working to give them more exclusive, keystone price-protected products.”

Tabacalera Tropical was one of the first to come out with a cigar distributed strictly through retail stores - JFR or Just For Retailers. The idea was to make a cigar exclusively for the brick and mortar stores and retail it at full keystone. The cigar had been used in rolling demos and was launched in New Orleans in 2005. The cigar was a hit and retailers loved it. For Tropical, it gave them some much-needed shelf space and the opportunity to show their other labels.

The whole cigar landscape began to change in June of 2007, when the Supreme Court ruled in Leegin Creative Leather Products vs. PSKS (one of its retailers that was dropped for discounting its merchandise in violation of a vertical minimum price agreement) that manufacturers could in fact set a minimum price for products.

The case solidified existing cigar manufacturer retailing agreements, and spawned new ones. At last year’s RTDA trade show, Drew Estate introduced the Liga Privada No. 9, which was accompanied with a contract for those retailers who elected to carry it, insuring that the cigar would not be discounted more than 10 percent. It also initially barred Internet sales, giving the retailers a protected product at full margin. Steve Saka, president of Drew Estate, said the contract was more about a maintaining a constant supply to retailers by limiting the number of accounts being opened, but price protection was a big part of it. This contract guaranteed that retailers would not be undercut, allowing them to keep full margins on the product. “I knew Liga would never be a huge brand because of our production limitations,” says Saka, “but I knew it would be a nice brand that will have steady growth for the retailers and we can fulfill their needs.”

At this year’s trade show, even more contracts were evident. Tabacalera Tropical/Casa Fernandez introduced two new lines - the Casa Fernandez and Particulares, both of which had contracts for retailers guaranteeing they will not be sold on the Internet and will be priced at or above keystone.

S.A.G. Imports’ Face to Face program for brick and mortar retailers includes the new Casa Magna and Augusto Reyes Maduro.
Brad Weinfeld of S.A.G. Imports also became a convert. “We know that much of the Fonseca brand is discounted in catalogues and on the Internet,” Weinfeld says. “That makes it rough for retailers to maintain margins, so with our new products we wanted to be certain we protect retailers.” Those new products are the Fonseca Cubano Viso Fuerte, the Casa Magna, Augusto Reyes Grand Cru, and Augusto Reyes Maduro. To that end, SAG now has “face-to-face” contracts for these four brands in which stores guarantee not to discount more than 10 percent and only sell face-to-face, i.e. not on the Internet nor in a catalog and not to trans-ship to another retailer who has not signed the contract. In return, SAG agrees to only sell the new products to retailers with signed contracts, it will aggressively market the products, will cut off sales to those who violate the contract and it has a buy back program to ensure retailers do not trans-ship. The program’s brands include an “F2F-Face to Face” sticker on the outside cellophane wrap and one on the bottom of the box to alert retailers of the product’s exclusivity. While SAG is not offering free shipping for orders under $1,000, they are working hard to keep those costs down. Adds Weinfeld, “We do offer free shipping on any back orders. If we have to make a second shipment because we are out of stock, it is not fair to the retailer to have to pay for our shortage.” To further help retailers, SAG is actually giving keystone plus on some of its new products. The Casa Magna, for example, comes in a box of 27, yet retailers only pay for 25. On refills for single sales, the Casa Magna can be shipped in bundles of 30 but at the price of 25, giving keystone plus 20 percent.

All of the manufacturers Smokeshop spoke with say they try to police their pricing, but realize they cannot do it alone. Most add that if a retailer finds someone discounting a price-protected product, they should let the manufacturer know as soon as possible so they can take action.

For Alec Bradley Cigar Co., retailer contracts also may be in their future. Alan Rubin, the company president, says he has informal agreements now to protect prices throughout his lines. Rubin wants retailers to be able to sell at full keystone. Sales manager George Sosa says he combs the Internet almost daily to see if anyone is breaking the deal. But Sosa says retailers looking at the Internet have to have some skepticism. For example, the company announced its new Tempus in March. Within a week or two Sosa found an Internet retailer allegedly selling Tempus at a 30 percent discount. Alec Bradley hadn’t sold product to that retailer, but more importantly, Tempus had not even arrived from the factory yet. “We didn’t even have the Tempus yet and here this guy was trying to sell it at a discount,” Sosa says. “Of course, it was a bait and switch.” The company had to have its lawyers send a letter to stop the ads. It teaches an important lesson to everyone.

Tobacco shops aren’t the only traditional retailers trying to adjust to the ever-changing world of online competitions - many other merchandise categories have also faced tremendous upheavals by the arrival of online discounting. But it’s encouraging to know that cigar makers recognize the competitive disadvantage the Internet has magnified in the arena of discounting, and just as importantly, the crucial need for a healthy base of brick and mortar cigar shops. When selecting which brands to carry in their humidors, retailers must carefully consider the pricing framework.


SMOKESHOP - August, 2008