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The FDA Drops Its Hammer

It was just about a month ago that I sat down and wrote THIS Editorial on this exact site trying to provide an overview of where we stand in regards to the FDA’s looming regulation of our beloved industry.  Well those regulations are no longer looming.  The FDA released a 499 Page Document which included details on how they intend to regulate the premium cigar industry.

We have seen a lot of reaction to the regulations.  There is an ongoing petition to have the regulations prevented.  We have also seen a lot of questions.  Unfortunately, it seems there are just as many questions now as there was before the regulations were announced.  The biggest one yet to be answered is “What will it cost a cigar manufacturer to submit a line for FDA testing?”  I am not sure if this answer will ever be released to the public.  It may just be told to the cigar manufacturers upon submission.  I have not heard anything near official in regards to a number, but the rumors have been anywhere in the $10k to $250k range per SKU.

So what does this mean to the consumer?  At the end of the day, it is my belief that the only direct impact from these initial regulations to the consumer will be higher prices.  Increased manufacturing costs and increase packaging costs will just be added to the bottom line and MSRP on each product.  Essentially, manufacturers add the additional costs into the wholesale price that they sell to retailers.  The retailers will then price cigars as normal at the higher MSRP set by the manufacturer.

But what about all of the “Sky is Falling” scenarios that everybody is talking about?  Well, it’s very unfortunate.  No industry wants regulation.  It changes the business dramatically.  But these FDA regulations (at least as they stand right now) will not kill the cigar industry.  I will be sad to see any companies not survive.  It remains to be seen if any companies will fold due to the regulations and cost of testing.  If they do, that would be highly unfortunate.  Some of my favorite cigars are produced by smaller companies like Tierra Volcan and RoMa Craft and I would hate to see these regulations damage companies with good people and a strong passion for what they do.  But the strong will indeed survive.

As of right now, it is estimated that about 40% to 60% of the inventory in most cigar shops are stocked with cigars that have been out since the 2007 date, meaning those cigars will remain untouched and will still be able to appear on the shelves for you to buy.  That is a significant portion of premium cigars that will not be effected by the FDA regulations.  There will be change, however.  I don’t expect many limited edition cigars and small batch released like the AVO Classic Covers or Dunhill Seleccion Supremaa to hit the market after this year due to testing costs.  There have been a bunch of different new cigar companies bringing products to the market the last 5 years.  That trend will also die down.

I talked to a brand manager of a very large traditional cigar company (who asked to remain anonymous) about the FDA regulations and some interesting points were made.  I insisted that his company will be fine and its no big deal to them.  He agreed that they would be fine, but interjected with some concerns.  He stated that even though they sell their traditional products in very high volumes, almost 60% of their revenues last year came from products released in the last 4 years.  So even the veteran companies have skin in the game.

It will come down to evaluation of each line.  For the bigger companies, if a newer line is selling at a successful rate, (CAO Flathead, Montecristo Espada, and Davidoff Winston Churchill as examples) it may be worth submitting the product for testing.  If sales numbers are low on a line, in may not be worth investing the time, money, and efforts in keeping the line alive.

How bad will it be?  The guys at Halfwheel are doing a tremendous job breaking down the FDA Regulations and specifically their “costs” section breaking down what the costs of testing may be.  The numbers appear to be very feasible to a majority of cigar manufacturers.  Not ideal, but feasible.  And the price increases that consumers will see will not be as dramatic as was once thought.  There will be change.  We may not be able to get free cigars from manufacturers or retail stores during events.  We don’t even know the effect it will have on donating cigars to organizations like Cigars for Warriors.  Lines will disappear.  Cigar prices will increase a bit.  Cigar packaging will look a lot different.  But at the end of the day, we can all be sitting in our favorite cigar lounge, puffing on a premium cigar, and discussing how frustrating the changes are, which is not as bad as many of us had thought it could be.

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