Cigars

Industry Snapshot

Cigars represented a $3.4 billion business in the late 2000s, according to the Centers for Disease Control and Prevention. Although the industry had experienced a decline from its boom in the 1990s, sales rose 9.2 percent in 2007, and by 2008, the Substance Abuse and Mental Health Services Administration (SAMHSA) reported that 13.3 million Americans over the age of 12 were cigar smokers

The volatile cigar industry experienced dramatic growth in the 1990s due to increasing acceptance of cigar smoking among the "Generation X" population, a resurgence in "cigar evenings," and the popularity of the Internet, where cigars are sold in record numbers. The magazine Cigar Aficionado, introduced in 1992, is generally credited with the upturn in the cigar industry. No longer a passion for older men alone, changing demographics found "twenty-somethings," both men and women, participating in cigar evenings and joining the 35- to 65-year-old traditionalists in the purchase of premium cigars. Celebrities also helped add to the allure, adorning the cover of Cigar Aficionado and showing up frequently at soirees flourishing "stogies."

Following the surge of cigar use in the 1990s, however, by the early 2000s the industry had cooled and sales had flattened. The "Cigar Boom" of 1997, when imports peaked at 400 million, gave way to numbers in the 200 million range in the early 2000s. In 2004, the numbers began flirting with the 300 million mark again, with 286 million premium cigars. In 2005, sales jumped by about 15 percent in the United States, with nearly $3 billion in retail sales. In 2004, the Fair and Equitable Tobacco Reform Act (FETRA) was passed, which mandated industry assessments over the next 10 years. Under FETRA, the U.S. government planned to buy out tobacco quota owners and growers. The buyout, administered by the U.S. Department of Agriculture, was funded by quarterly assessments, up to a maximum of $10.14 billion, from different classes of tobacco products manufacturers. The burden on the cigar industry between 2004 and 2014 was estimated to be $282 million, although the Secretary of Agriculture was authorized to adjust the initial allocation for each product class to reflect shifts in the share of the gross domestic volume for tobacco products represented by each class.

Other legislation that affected the industry was the Family Smoking and Tobacco Control Act, passed in June 2009. The bill placed the entire tobacco industry under the regulation of the Food and Drug Administration and included restrictions on such factors as ingredients, labeling, and advertising.

In 2008 272 establishments operated in this category which included cigars and cigarillos (Spanish for "little cigars"). Florida reported the highest number of companies in the business, followed by California and Texas. Industry-wide employment was approximately 11,262, with large companies such as Altria and Reynolds America accounting for large percentage of the employees.

Organization and Structure

The Cigar Association of America, established in 1937 to serve the industry, consists of regular members who are the cigar makers headquartered in the United States and associate members, including foreign cigar manufacturers, importers, leaf dealers, and other suppliers. The organization's principle activities involve maintaining cigar industry statistics, public relations efforts, and lobbying federal and state governments on issues important to the industry, especially taxation of their products. In the mid-2000s, its members represented 96 percent of cigars manufactured, imported, or sold in the United States.

Background and Development

Like other tobacco products, the sale of cigars dropped off as Americans became increasingly concerned about the effects of tobacco smoking on health and fitness. In the mid-1970s, volume was more than 5.5 billion, and at the industry's peak in 1964, unit sales reached 9 billion cigars. The volume of cigar sales fell about 5 percent per year beginning in 1976, dropping to 2.2 billion units sold in 1991.

While the upswing in the cigar market was strong at the end of the twentieth century, consumption still did not match the record highs of the mid-1960s. Cigar smokers traded quantity for quality. They smoked fewer cigars, and when they did smoke, they usually smoked high quality cigars. Declines in volume were offset by increases in prices and a growing market for premium cigars. Sales in dollars rose to about $700 million in the early 1990s. In 1995, imports of premium cigars increased to 176.3 million units, up from 1994's level of 132.4 million. The following year, imports increased to $294 million.

Changes in distribution systems also helped the industry, as more discount stores and supermarkets began to carry a wider variety of cigars, especially the higher-priced cigars. The Internet also played an increasing role in cigar sales, with companies like J.R. Cigars, a leading online cigar store that, in late 1996, struggled to fill orders because it was difficult to match demand. Formerly part of a "big three" in the discount cigar mail-order business along with Mike's Cigars and Famous Smoke Shop, J.R. Cigars orders are primarily placed online.

Laws prohibiting smoking in public places; increased taxes on tobacco products; and medical findings that cigars cause mouth, throat, and pancreatic cancer had an impact on the U.S. cigar industry. The American Lung Association reported that while cigar smokers have a reduced chance of getting lung cancer when compared to cigarette smokers, since most cigar smokers do not actually inhale, they have a greater risk of acquiring lung and heart disease as opposed to nonsmokers. Cigar manufacturers battled these obstacles by increasing promotional activities with wholesalers and by introducing new products in various sizes. Their efforts worked as cigar smoking continued to be popular, even among high school students--about 14 percent were cigar smokers in 2008, according to the Centers for Disease Control and Prevention (CDC).

The sale of both authentic and counterfeit Cuban cigars in the United States has been a pressing issue for the industry throughout its history. The Cigar Association of America tried to halt the sale of these illegal products, estimating that they cost U.S. cigar makers $28 million a year. It estimated that approximately 6 million Cuban cigars were smuggled into the United States every year. The sale of Cuban cigars has been illegal in the U.S. since 1962, when President Kennedy signed the Cuban trade embargo. Habanos, a Cuban cigar seller, has been under contract with China to distribute hand-rolled premium Havanas via franchise shops to the country's tightly controlled market. After China, the United States was the only large, unconquered market for Cuban cigars.

Despite increased public smoking bans and higher taxes, U.S. cigar consumption increased to more than 5 billion cigars in 2006 from 4.88 billion cigars in 2005, while output jumped to 4.14 billion cigars in 2006 from 3.67 billion cigars in 2005. Black-market smuggling, Internet transactions, and purchase of domestic operations by foreign interests caused total dollar sales within the industry to remain sketchy. The U.S. cigar industry had a 15 percent increase in 2005 with retail sales of nearly $3 billion.

Current Conditions

One of the trends in the industry in the late 2000s was the popularity and variety growth of flavored cigars. Hank Bischoff of Habana Cuba Cigar Company told Tobacco Retailer in early 2009, "Flavored cigars now span a range of quality, price points, flavors, etc., unlike previously seen. These companies would not have entered this market had it not been ripe for growth." HBI Group's Joshua Kesselman stated that sales of one of their new flavored cigarillos rose 120 percent in 2008. The market for flavored cigars consisted of a younger age group--those age 20 to 40, approximately--and women. Some of the flavors being offered by cigar makers included grape, vanilla, cherry, peach, and honey-sweet.

The premium cigar segment of the industry was also relatively strong in the late 2000s. After selling a record 418 million premium cigars in 1997, the industry saw sales in this segment plunge and only slowly creep back up, hitting 337 million in 2007. According to Forbes, "Manufacturers have responded not so much by cutting prices as by raising quality, producing exceptional smokes that justify their cost." In 2008, Macanudo, produced in the Dominican Republic, was the United States' best-selling premium cigar.

In early 2009, the industry mourned the passing of legislation that included a 700 percent increase in cigar taxes. Funds from the increased taxes were to be used in part to fund the State Children's Health Insurance Program (SCHIP), which proposed to extend health insurance to 11 million children nationwide. So-called "little cigars" as well as low-end cigars were the hardest hit by the tax increase, and many industry participants worried the act would deal a heavy blow to the industry.

Industry Leaders

One of the industry leaders in the late 2000s was Altadis U.S.A. of Fort Lauderdale, Florida. Altadis U.S.A. marketed premium handmade cigars as well as several machine-made brands and had sales of $37.0 million in 2008. Its parent company, Altadis S.A. in Madrid, Spain, was the world's largest cigar company, holding nearly 25 percent of the world market with some 3.2 billion units in the mid-2000s. The company was sold to Britain's Imperial Tobacco Group in February 2008.

Swisher International of Darien, Connecticut, was founded in 1861 and was the largest cigar exporter in the United States in the late 2000s, shipping billions of cigars annually to 60 countries. The company produced mass-market cigars, such as Swisher Sweets and King Edward, as well as premium names such as Bering and La Primadora. Sales for the company reached $89.8 million in 2008. The company employed 1,600.

Altria Company, the largest cigarette maker in the world and owner of Philip Morris USA, added cigars to its offerings when it purchased John Middleton Inc. for $2.9 billion in 2008. John Middleton was the maker of Black & Mild, one of the most popular brands of cigars in the United States. Total sales for Altria, with cigars accounting for a small percentage, were almost $16 billion in 2008, and the company employed 10,400 workers.

Workforce

While cigars were once handmade products, technology has taken over in most companies. In Miami, however, Cuban and Central American immigrants in a half dozen small cigar factories continue to make hand-rolled cigars. With a decline of qualified cigar rollers, cigar rolling is becoming a lost craft.

Hand-rolling a cigar is a complicated, slow process. The tobacco reaches the factory where it is baled so it can age for 18 months to 2 years. The tobacco is then blended and rolled by a master blender. After bunching, pressing, and wrapping, cigars are individually inspected before being sent to the aging room where they remain for 21 to 180 days.