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Saturday, May 30, 2009

What's Ailing Cigar Retailing

What's Ailing Cigar Retailing
by Bob McDuffee

 Modern cigar retailers face a number of challenges to survive or prosper in this age of restrictive smoking polices, increasing taxes and declining economic circumstances. As you would expect, none of them look forward to raising prices and losing customers. However, amidst the predictable angst is another, perhaps more sinister, sign of trouble for our beloved neighborhood tobacconist. In recent months I have spoken with both traditional neighborhood retailers and Internet retailers about the challenges they face in attempting to prosper or survive. What I have discovered is that the threats to retailers come both from poor policy decisions by manufacturers and from within the retailing industry itself.

     Traditionally, cigar manufacturers have relied on neighborhood retailers to provide promotional support for the facings through direct customer contact and service. In return for the loyalty of a retailer, manufacturers would offer special purchases, floor planning (financing) of stock and in-store event support. As the economy has nose dived and smokers have been openly vilified, the pressure on neighborhood retailers has caused a crisis in retailing. Retailers are failing at an ever increasing rate as a result of these economic and social pressures but to make the matter even more difficult, they are now being undercut by some of the very organizations they serve, the manufacturers.

     Manufacturers and, to some lesser degree, distributors have traditionally exercised a form of self policing that prevented larger retailers from gaining an unfair advantage over the smaller retailers by implementing price protection policies that limited any one retailer’s ability to heavily discount the product. My research has revealed that today these limits may no longer be enforced against large volume retailers, particularly those selling on the Internet. In fact some manufacturers are now turning their backs on the small retailers in favor of the massive volume resellers that populate much of the Internet. In my discussions with retailers, I have learned of a technique used by some large retailers to secure huge discounts and access to restricted lines of cigars. As it was explained to me, a retailer (either Internet based or traditional storefront) will order large quantities of cigars that exceed the volume of their operation. Then the excess inventory will be sold “out the back door” to other retailers that may not be authorized for that line or that will move the cigars quickly by offering substantial discounts to consumers that exceed the manufacturers limit. The manufacturer provides terms of 60 to 90 days for payment thereby financing these questionable trade practices. The original retailer receives a small percentage of the sales price for their part in the trans-shipment of the product and the lucky recipient of the illicit merchandise then sells at a heavy discount making up in volume and very low overhead costs for the slim margins. With no store front or sales force to support, these retailers are able to realize significant profits. This practice hurts the neighborhood retailer by undermining the street value of the discounted cigars and it hurts smaller manufacturers that cannot offer the flexible payment plans available from the much larger manufacturers.

     In other conversations with boutique (small volume) manufacturers, I have been told of cases where a smaller manufacturer is offered the opportunity to sell a large volume of their product to a large Internet retailer only to see the product later sold at substantial discount so it can be cleared out of inventory quickly. This has long term consequences for the small manufacturer by again, undermining the street value and perhaps the reputation of the cigar as a premium product. It can also result in a shortage of the small manufacturer’s product in traditional retail channels. My conversations with retailers has also indicated that although manufacturers are aware of these practices, many simply ignore them in order to continue doing volume business with the offending retailer.

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