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Products & trends

Cigar market | A push into the US cigar market

04 Jan 2008. In recent years, the cigar market has become very attractive for multinationals all over the world. Both Swedish Match and Imperial have increased their influence on the US cigar market with recent acquisitions. Now, Altria has announced its acquisition of cigar maker John Middleton.

At the beginning of November 2007, Altria Group announced its planned acquisition of cigar maker John Middleton, for US$ 2.9 billion in cash to counter falling cigarette sales in the US. The net cost of the acquisition of John Middleton from privately held Bradford Holdings is US$ 2.2 billion, after deducting US$ 700 million in tax benefits arising from the deal, Altria said. John Middleton’s operating revenue is projected to be US$ 360 million in 2007, generating operating income of US$ 182 million. The reasons for the deal are obvious: as cigarette sales are decreasing in mature markets, Altria has been looking into different branches of tobacco. Beside the test-marketing of different forms of smokeless tobacco, Altria now seems to be concentrating on the growing cigar business in the US. For John Middleton this continued growth has led to an increase of its operating revenue by ten per cent annually in the last four years. Total cigar volumes of the company are anticipated to be roughly 1.2 billion units in 2007.

At the same time, volumes of machine-made large cigars, which account for around half (5.3 billion in 2007) of the total US cigar market of 10.5 billion cigars, have grown by around 4 per cent per annum since 2003. As John Middleton sells large machine-made cigars, Altria has bought itself into an attractive business. Middleton’s number one brand, Black & Mild, for example, has very strong brand equity and is currently the second largest selling machine-made large cigar. With a retail market share of 23 per cent in the US, Black & Mild could also be leveraged further by extending the brand into a menthol cigarette. 

Altria now plans to boost the cigar unit’s sales with its distribution network that delivers one in every two cigarettes sold in the US. The deal is expected to close by the end of 2007, thus adding to Altria’s earnings in 2008. With this new turn of events, pressure on the other market players, such as Swedish Match and Altadis, is expected to increase. If PM USA improves marketing of John Middleton, the growth of the large machine-made cigars segment may be accelerated. All in all, the deal indicates that Altria expects the snuff and cigar segment in the US tobacco market to grow fast and become the two most important tobacco categories next to cigarettes.

 

A global review

 

According to Euromonitor, the global cigar and cigarillo market in 2006 was around 18 million sticks, which translates into a ten per cent growth. Premium cigars and cigarillos have seen robust growth; non-premium cigars, however, are stagnating. The largest markets are the US and Germany. The so-called emerging markets, such as India, Taiwan, China and Japan, however, are showing good growth as well, even if their sales are still small compared to western Europe and North America, as it takes time to develop a cigar culture. The United States and western Europe – that is Germany, France, Spain and the United Kingdom – together account for a combined 96 per cent of global demand, with western Europe accounting for 55 per cent and the US for 41 per cent of the market. 

Since the cigar market ranges from hand-made premium cigars to machine-made mass market products and the so-called little cigars or cigarillos, overall market trends are analysed in value terms rather than volume. World-wide, value growth has been higher than volume growth, with the exception of the United Kingdom which is burdened by very high taxes and retail prices. Globally, the premium cigar segment accounts for about three per cent of the sales’ volume, but 28 per cent of the value, while the mass market generates 97 per cent of the sales volume and 72 per cent of the value.

In terms of companies, the cigar market is served by only a few global players: Altadis has a market share of around 25 per cent, Swedish Match 13 per cent, Swisher 12 per cent, ST Cigar Group 11 per cent, Middleton 10 per cent and 9 per cent are occupied by Burger.

In North America, per capita consumption of cigars stands at 19 pieces, while it is 17.7 in western Europe. In comparison, per capita consumption of cigars in eastern Europe stands at 0.4, while Latin America and Asia only have a 0.9 and 0.1 per capita consumption respectively. The future will probably see a trend towards slow growth in the mature markets of the United States and western Europe.

 

A glance at the US

 

Concerning premium cigars, the US remains the biggest consumer, as 65 per cent of premium cigars are consumed in the country. 25 per cent of high-end cigars are consumed in western Europe, while the rest of the world accounts for the remaining ten per cent. In 2006, the volume of large and little cigars was over 9.8 billion, of which about 5.3 billion were large cigars and 4.5 billion little cigars (see table). Estimates for 2007 show a slightly higher volume for little cigars, with 4.8 billion and 5.4 billion for large cigars – thus demonstrating a continuing growth since 1994. The estimate for total volume in 2007 is 10.2 billion.

Of the total tobacco market without cigarettes, 15 per cent are covered by cigars, while RYO and smokeless tobacco cover 15 per cent and 70 per cent respectively. The new flavoured premium cigars enjoy more and more popularity in the US. These include cross-industry branded extensions, such as “Tia Maria” or “Kentucky Bourbon” branded flavours.

According to Swedish Match, Altadis has a 30.4 per cent value share of the North American market. Swisher is next with a 30.1 per cent value share. John Middleton has a value share of 20.9 per cent, while Swedish Match occupies a 12.6 per cent value share and Lane has a 1.6 per cent share. When it comes to volume share, Swisher is the leader with 33.8 per cent, while Altadis has 24 per cent. John Middleton, Swedish Match and Lane have 15.3, 7 and 6.2 per cent of volume share respectively.

 

The European market

 

In Europe the main cigar markets remain France, Spain, the UK and Germany. In the whole of Europe, sales fell slightly and accounted for 6.6 billion in 2006 (6.8 billion in 2005). As such, cigar consumption represents barely 0.8 per cent of the total consumption of tobacco products in the European Union. In 2006, volume in Germany was 5.5 billion, the bulk of which consisted of eco-cigarillos. The reason for this large number of cigarillos lies in the EU’s decision to tax the so-called sticks (self-assembly, ready-made rolls of tobacco, also known as “singles”) as cigarettes, so that many consumers switched to eco-cigarillos as a less costly alternative. Of the 5.5 billion, only 1.5 billion are accounted for by cigars and cigarillos, a slight decrease from 2005 (1.17 billion).

According to Euromonitor, France and Spain had a cigar volume of 1.9 billion and 1.1 billion sticks respectively. The UK had the lowest volume with 1.052 billion. In France, consumption of cigars and cigarillos declined slightly and stood at 1.8 billion, while consumption in Spain stood a little over 1 billion. In the UK, consumption stood at 640 million. Sales in Spain recovered from the slight drop in 2006; the French market saw a decline owing to new restrictions.

 

Altadis remains number one

 

Altadis remains the world’s leading cigar manufacturer with distribution in more than 120 countries. The company is currently market leader in the US, Spain and France. With its key premium brands such as Montecristo, Romeo y Julieta and H. Upmann, Altadis still remains the number one world-wide in premium cigars. Key US mass market brands for Altadis include Backwoods, Dutch Masters and Phillies. Due to its 50 per cent interest in Corporación Habanos, Altadis can offer a portfolio of Cuban cigars in Europe and the emerging markets in the Asia-Pacific region. In these markets, the Cuban brands represent a major pricing weapon.

In 2006, Altadis produced 3.281 million cigars, which generated 22 per cent of total Altadis sales and accounted for 24 per cent of operating cash flow. Economic sales equalled € 888 million. In the US, the premium and natural segment led to strong growth at constant currency. Altadis cigar volumes grew by 8.1 per cent in the US market in 2006, compared to 2005, despite stronger competition.

World-wide, Altadis’ cigar division increased its profitability significantly – its EBITDA went up by 10.8 per cent –, driven by the US market and Havana cigars. First half results of 2007, however, show a volume of 1.579 million cigars – a decrease of 6.5 per cent compared to the same period in 2006. Similarly, a decrease of 8.2 per cent was recorded in economic sales which accounted for € 413 million. Havana cigars sales grew by 6.8 per cent in dollars, with good performances in emerging markets such as Russia, Asia-Pacific and Latin America. 

All in all, Altadis, which was taken over by UK tobacco manufacturer Imperial in 2007, appears to have a promising future in the cigar market – this was the message in April 2007 when Altadis’ cigar division announced a change in its target plans. Its target EBITDA margin was increased to 37.5 per cent by 2010, compared with the existing guidance of 34.5 per cent by 2009. 

In Spain, Altadis held about 35 per cent share of the market in terms of volume in 2006. Most promising segments there were the minis and small cigars. In France, Altadis is the market leader with a share of about 30 per cent. 

 

The future of Habanos

 

After Altadis’ acquisition by Imperial, doubts about a continued relationship between Altadis and Habanos arose. The Cuban government has the option to retake control of Corporación Habanos in the event of a change in Altadis’ ownership, but if it will do so remains questionable. Furthermore, Imperial is still predominantly a cigarette company and, as such, might not interfere with Habanos’ business. In an interview in September 2007, Manuel Garcia, vice president of Habanos, said that only Habanos itself and not the acquiring company would decide on any changes which might come about due to the Altadis acquisition. 

Habanos is the leader in the premium cigar segment with a 30 per cent share world-wide and is market leader if one does not take the US market into account. Habanos owns the famous Cuban trade marks Montecristo, Cohibaand Romeo y Julieta and is the exclusive exporter of Cuban tobacco leaves and all the Havana cigar brands. In 2006, the company sold the majority of its premium cigars (65.3 per cent) in Europe. 16.5 per cent of premium cigars were sold in America, while 12.7 and 5.5 per cent were sold in Africa, the Middle East and the Asian-Pacific region respectively. Swedish Match is the world’s second largest manufacturer of cigars and cigarillos in sales’ value. Between 2003 and 2006 the company’s cigar sales have been increasing continually to almost € 372.3 million. The company is currently the number two in the world and has a leading position in the US premium segment with a market share of about 35 per cent. 60 per cent of sales were generated in the US mass and premium markets, making the US the most important cigar market. Some volume decline for the US premium cigars occurred. 

In Europe, the company holds the number two position in machine-made cigars. According to the 2007 interim report, group sales of the company for the first nine months were € 264.14 million (€ 271.25 million for the same period in 2006), while operating profit was € 57.66 million (€ 64.04 million for the first three quarters of 2006). In local currencies, sales increased by three per cent, while operating profit declined by five per cent, which is primarily attributable to a weaker performance in premium cigars. 

The company was active at the acquisition front, too. In the second quarter of 2007, Swedish Match acquired Bogaert Cigars, a privately held cigar company in Belgium; the deal was completed in June. The Bogaert Cigars’ portfolio consists of machine-made cigars and cigarillos of trade labels, such as Bogart and Hollandia, as well as private labels. Another Swedish Match acquisition was Cigars International, a US-based distributor of premium cigars specialising in mail order and Internet sales, which was acquired in September 2007. 

The global market for cigars has been growing in both sales and volume over the past several years. Especially cigarillos have seen an increasing popularity. In addition, there was a greater interest in aromatic or flavoured cigars, both in the US and in Europe. As such, any activity in the cigar and cigarillo segments all over the world seems to be a promising investment.

Hasret Gülmez