Building Your Cigar Business

cigarsDespite a demand from adult consumers, retailers are continually forced to defend their right to sell flavored cigars responsibly.

By Howard Riell, Associate Editor

Lawmakers in Washington, DC, and in all 50 states are eyeing cigars and, to a lesser degree, electronic cigars, not only as potential sources of additional revenue but, in many cases, a source of potential danger to youngsters.

C-store operators need to be aware of it and, if they haven’t already done so, man the parapets.

“Cigars, for a growing number of retailers, are too hot to handle,” said Tom Pirko, president of BEVMARK LLC, a retail consulting firm in Buellton, Calif. “There is always concern with any type of tobacco that the government will ruin a good thing, but right now, this category is strong and should remain strong for the foreseeable future.”
But like any tobacco product, the threat of government interference hovers like a black cloud over the category.

“Cigar legislation is a moving target,” said Corey Fitze, director of government relations for NACS. “Every single year we see new legislation that pops up, whether it be on mini cigars versus large cigars or the taxation of cigars.” NACS, he added, does not have an official stance on the taxation issue at present.

Retailers Focused
“In our markets of operation the major issue is always whether or not local regulations allow us to sell single-serve and flavored cigars,” said Leo Vercollone, president of VERC Enterprises, which operates 26 convenience stores in Massachusetts and southern New Hampshire. “It’s an ongoing debate that could have a significant impact on our business.”

In late September in Providence, R.I., a federal appeals court upheld restrictions prohibiting tobacco companies from using flavored tobacco and price discounts to market any type of product. In its decision, the Providence court upheld ordinances that prohibit the sale of flavored cigars, smokeless and other non-cigarette tobacco products except in certain adult facilities, as well as the use of coupons and multi-pack discounts. New York City, Maine and Maryland are the only other markets with such regulations.

What that decision portends for the surrounding region is not yet clear, but it’s a clear blow to retailers in Providence.

“Right now it’s too early to tell what the final impact will be,” Vercollone said. The worst-case scenario—the loss of the right to sell flavored cigars and multi-packs—would take 20-25% of his cigar sales, he estimated. “It wouldn’t be a big hit. I mean, if you were talking cigarettes or moist tobacco or electronic, that would be a much bigger hit, but cigars will still hurt.”

Vercollone was also quick to note that the loss of any business to government interference is something that should not be taken lightly. “Let me be clear, this is not a good thing for our industry. When one municipality is empowered others begin to feel the same way,” he said. “So any legislation will hurt.”

Pressure Mounting
Craig Williamson, president of the Cigar Association of America in Washington, D.C., confirmed that there has been “incredible” pressure in the media and from certain members of Congress in the last two months when it comes to e-cigarettes and e-cigars.

“The nature of the pressure stems from the fact that there really are no restrictions or age limits when you buy electronic tobacco, except for a couple of states now. A 14-year-old kid could go into a store and buy an e-cigarette and there is no restriction on it. Despite how responsible convenience stores have been selling tobacco, the lack of age restriction has made people nervous.”

As a result, many local regulators want to officially set an age limit of 18. “They are trying to fend off the pressure that’s coming down on them and they are doing so by asking the Food and Drug Administration (FDA) to regulate them, just as they regulate traditional cigars, cigarettes and smokeless tobacco,” Williamson said.

In New York State, Williamson noted, Assembly Bill 1179 would prohibit the sale of all flavored tobacco products and impose penalties for doing so. Traditionally, this bill is introduced every year in the House and dies in the Senate. It currently sits in the Senate Health Committee. The great fear, of course, is that children will buy flavored products.

“That is silly,” Williamson countered. “We don’t want any of our products to be sold to minors. Unfortunately if you have one bad convenience store they are all put in a bad light, which is totally wrong.”

Williamson said that the basic assumptions behind such laws are often incorrect. “A lot of people, when they write those proposed pieces of legislation, don’t understand the market. They are saying, ‘These cigars are sold next to candy.’ The truth is they are not sold next to candy; they are behind the counter. Half of our products aren’t even being sold in convenience stores,” he said. “We have a lot of premium cigar manufacturers now who are putting out nice display cases, building humidors with single cigars for sale. It’s not just popular-priced cigars; there are premium cigars out there that will be hit. Either way, it’s a blow to convenience stores.”

Fighting the Good Fight
The legislative train continues to roll in other areas. Earlier this year, Massachusetts signed into law the Transportation Finance Bill which, among other things, increased taxes on cigars from 30% to 40%. The bill was signed into law after the House and Senate voted to override the Governor’s veto of the transportation package.
“This is a large increase that ultimately hurts cigar customers and retailers,” Williamson said. “When you get a small industry, as cigars are, any time you increase the retail price by 10% you lose consumers. There is no question about that.”

Activism is clearly called for. “C-stores should continue to pay attention to the regulations that come out,” Fitze advised. “And they need to correspond with their local lawmakers to let them know how these tax increases adversely affect their businesses.”

According to Vercollone, retailers like him in Massachusetts remain fortunate because they have a sturdy mechanism in place with which to actively defend their interests. “Our regional organization, the New England Convenience Store Association (NECSA), has a very dynamic leader in Steve Ryan. He works on a grassroots level.” For the time being, he concluded, it appears the fight will continue to be fought on a state-by-state basis. “But who knows? They could come up with a federal regulation, and we’ll all have to fall in line,” he said.

Retailers need to be part of the ongoing effort, Williamson maintained, because they have power they may not even realize. “Convenience store retailers are extremely smart. They know their state legislatures and they’re active in the community,” he said. “As a result, these marketers should talk to their state legislators and say, ‘Look, in these tough times you’re trying to take more money out of my pocket. Not only do I have to have all the licensing, not only do I have to pay all my employees, not only do I have to conform to insurance regulations, but now you’re trying to take more money out of my pocket, and it’s hard for me to survive.’ They have to be the voice, because they really do make a difference. When they speak out it really is powerful.”

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