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Commentary: Are Proposed FDA Regulations Pushing Industry Consolidation?

7 Oct 2014

Damocles-Westall

Finalized FDA rules for regulating cigars are many months away, but they still hang over the industry like the Sword of Damocles.

It’s safe to say that looming FDA regulation is encouraging industry consolidation. The risk involved in developing new cigar lines is no longer just that consumers won’t buy enough of your cigars at a price where you can turn a profit.

The bigger risk now is the government might render your product illegal, or at least subject it to an incredibly burdensome, lengthy, and expensive approval process. So if you don’t want to bet the house on the FDA rules not being overly burdensome, now is the time to sell.

Surely impending regulation isn’t the only reason the Toraño and Leccia Tobacco lines were acquired by General Cigar, but it had to have been a factor. I’ve heard Toraño has had success with its value-oriented lines Brigade and Loyal. These are the lines most likely to be hit by FDA rules, even if they include a more reasonable price exemption than originally proposed.

Sam Leccia was critical in developing innovative cigars like Nub and Cain for Oliva, before splitting with the company in a legal spat that went ugly. His new cigars included Leccia Black, which was one of the first cigars to sport fire-cured tobacco. The problem is, under an FDA approval regime, innovation is a risk that would make potential approvals more difficult. (Whether the use of fire-cured tobacco would count as a characterizing flavor under proposed FDA rules is an open question.) And the less money you have for scientists, lawyers, and lobbyists to push a new product through the approval process, the bigger the risk it is.

Which brings us back to General Cigar and other large companies (Altadis USA, Davidoff) who might be buyers. While they all oppose FDA regulation and would likely feel its bottom-line effects, large companies are nearly always better able to adapt to government regulation than their smaller competitors. (Sadly, this is why cigarette giant Phillip Morris broke from the rest of the industry to back FDA tobacco regulations to begin with.)

With the rumor mill churning about other possible consolidations, it’s fair to ask if this is positive or negative for the industry. While initial reactions to a smaller company being bought by a larger one are usually negative, I’d argue on a whole the results have been good.

Perhaps counter-intuitively, cigar industry consolidation has often led to more competition. Large companies have every reason to continue and maintain popular brands they shell out big bucks for. While frequently the seller would use the proceeds to launch a new, smaller, and more niche company (think Ernesto Perez-Carrillo or Christian Eiroa) as their non-compete agreement runs out.

What’s worrisome to me is not that more small companies may be bought by larger ones. Rather, the concern is the talent being bought out may not choose to reinvest in the cigar industry because of FDA rules that favor big companies.

Patrick S

photo credit: Wikipedia

Drew Estate

5 Responses to “Commentary: Are Proposed FDA Regulations Pushing Industry Consolidation?”

  1. Rava Tuesday, October 7, 2014 at 9:54 am #

    The rumors about Drew Estate make a lot o sense when added to this article. With all their flavored (sorry "infused') cigars, they have more to risk than any other premium cigar company.

    • Marcus Tuesday, October 7, 2014 at 10:39 am #

      For what it's worth, Jonathan Drew has vehemently denied the rumors of DE getting swallowed up by Swisher. But we'll see. There's usually some fact to rumors…

  2. George E. Tuesday, October 7, 2014 at 10:33 pm #

    I'm afraid that if premium hand-made cigars don't get an exemption without an unreasonable price restriction, that Sword of Damocles is going to be be like a hot knife through butter, devastating the entire industry in a few short years.

Trackbacks and Pingbacks

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    […] that while FDA regulations are a looming threat to the entire handmade cigar industry, they are especially a threat to Drew Estate whose infused/flavored lines will likely be hit hardest by FDA regulations on […]

  2. News: Swisher Seals Deal to Buy Drew Estate - Estate Planning & Wills - Wednesday, October 22, 2014

    […] that while FDA regulations are a looming threat to the entire handmade cigar industry, they are especially a threat to Drew Estate, whose infused/flavored lines will likely be hit hardest by FDA regulations. Swisher […]