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News: Small Cigar Brands Face Potential 2017 FDA Death Spiral

4 Jan 2017

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Cigar companies have a big problem. Nearly every business decision they make is impacted by FDA regulations, but the full details of those regulations haven’t yet been determined.

The 499-page deeming regulation finalized last spring officially took effect August 8. While that document provides an outline for the agency’s intentions, it leaves out many important compliance details. Even where guidance documents have been issued, the standards laid out in those documents are not legally binding (i.e., they can be changed at any time). And many other critical questions have not been addressed at all.

The resulting unpredictable cost of compliance is a serious issue for all cigar makers. The burden hits smaller brands the hardest, however, because they are least able to cope with such uncertainty. While FDA user fees are distributed proportionally according to each company’s market share, the unknown cost of successfully applying for FDA approval for a particular tobacco product will effectively be the same whether the company sells a few hundred units per year, or hundreds of thousands of units.

In a recent discussion of the ongoing process of complying with the FDA, Skip Martin of RoMa Craft Tobac described the problem cigar makers big and small face: “What we don’t know is how much that [Substantial Equivalence approval] process will cost us. We don’t know the details of what a substantial equivalence process will look like because there has never been one approved for a cigar ever.”

Even as the FDA delays many deadlines, small companies face tough choices. With product registration deadlines fast approaching, companies have to decide how much to invest in such registrations. Assuming the worst and providing numerous highly detailed registrations may maximize the likelihood of the registrations being approved. But it also increases the costs.

While the cost of gaining FDA approval—most likely through the Substantial Equivalence (SE) pathway, or by being a grandfathered pre-2007 product—is the biggest future hurdle, even the documentation needed for registration carries substantial costs, especially for a small company. Something seemingly as simple as who qualifies as a domestic manufacturer is unclear under the FDA regulations. Cigars may be rolled abroad, but what packaging changes within the United States qualify a brand as a domestic manufacturer?

That is an open question. The answer holds serious implications for the future business prospects of a company.

In the same conversation about the FDA process, attorney Frank Herrera, who represents dozens of cigar companies, gave a most lawyerly answer about whether or not you should register: “If you think you might be [required to register now], do it, list it.” In terms of maximizing the odds of complying with the FDA, Herrera is, of course, correct. For a small company operating on thin profit margins already, though, these costs could be prohibitive, or at least partially unnecessary.

Compliance with the FDA isn’t the only hurdle cigar makers and importers face. Retailers are liable if they sell a non-compliant product. This means retailers—especially large online and catalog sellers—are making buying decisions based on who appears likely (or not) to comply with all FDA regulations. Reports are already surfacing that retailers are cutting back on purchases of cigars they doubt will be on the market in two years.

So even before any deadlines pass, small cigar makers face a dilemma: Not spending money now on FDA compliance to show retailers you are likely to be on the market in two or three years means lost sales today, and those sales today may be the difference between having the funds or not to successfully pursue Substantial Equivalence in the future.

Meanwhile, with it totally unknown exactly how much a successful SE application will cost, continuing to sink money today into a process that ultimately may be cost prohibitive could itself be a fatal business decision. If a cigar maker runs the numbers and decides the volume of sales of product don’t warrant the currently unknown cost of investing in FDA approval, they risk that product being seen by retailers as a “zombie cigar” (destined to be killed off soon by the FDA).

When it comes to complying with costly regulations, larger companies with deep pockets are always better able to deal with the uncertainty. For boutique brands sold in smaller quantities, those costs represent a much higher percentage of their operating costs. As deadlines approach this year, smaller companies face impossible decisions with the fate of their businesses at stake.

Patrick S

photo credit: Stogie Guys

News: Voters in North Dakota, Missouri, and Colorado Reject Tobacco Tax Hikes

9 Nov 2016

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Yesterday, voters in four states considered ballot measures to hike state tobacco taxes, including on handmade cigars. Voters in North Dakota, Colorado, and Missouri appear rejected the proposed tax hikes, while it  California tax increase is passed.

Below are the latest results, which will be updated as votes are tallied. Here are the final percentages for each vote:

North Dakota Measure 4 (Results: 62% Against)

North Dakota’s Initiated Measure 4 would increase the tax on cigarettes 400% from 44 cents per pack to $2.20. All other tobacco products, including cigars, e-cigarettes, and vaping products, would see state taxes double from 28% of the wholesale purchase price to 56%.

Colorado Amendment 72 (Results: 54% Against)

In Colorado, anti-tobacco forces are trying to alter the state constitution to include triple taxes on tobacco products. The amendment would increase the tobacco tax by $1.75 per pack of 20 cigarettes, from 84 cents to $2.59, and jack up taxes on other tobacco products, including cigars, by 22% of the wholesale list price (on top of the existing 40% tax already in effect).

Missouri Proposition A (Results: 55% Against)

Missouri’s Proposition A would more than double taxes on cigarettes from 17 cents per pack to 40 cents, with the increase being phased in through 2021. Taxes on other tobacco products, including cigars, would increase by 5% of the manufacturer’s invoice price to 15%. Missouri voters are also rejecting Amendment 3, which would hike tobacco taxes 400% from 17 cents to 77 cents, with extra fees being applied to companies not subject to the master agreement settlement with the state.

California Proposition 56 (Results: 63% In Favor)

Anti-tobacco forces in California proposed to increase cigarette taxes $2 per pack, from 87 cents to $2.87. Other tobacco products, a tax category that includes cigars, would face a corresponding 230% increase in a state that already has record-high taxes.

The presidential result and Republican control of the House and (likely) Senate also have important implications for cigar smokers when it comes to FDA regulation, taxes, trade, and Cuban policy. More on that in the coming days.

Patrick S

photo credit: Flickr

News: Four States Have Tobacco Tax Hikes on the Ballot on Election Day

2 Nov 2016

With Election Day less than one week away, all eyes are on the presidential race and, to a lesser extent, which party will control the House and Senate next year. But voters in four states will also be weighing in on ballot questions that, if passed, would hike tax rates on tobacco products, including cigars.

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California Proposition 56

Anti-tobacco zealots hope to increase cigarette taxes $2 per pack, from $.87 to $2.87. Other tobaco products (OTP), a tax category that includes cigars, would face a corresponding 230% increase. Critics say the tobacco tax hike “lines the pockets of special interests, but fails to address pressing needs facing California families, like fixing schools, roads, water storage, and violent crime.”

North Dakota Measure 4

North Dakota’s Initiated Measure 4 would increase the tax on cigarettes 400% from 44 cents per pack to $2.20. All other tobacco products, including cigars, e-cigarettes, and vaping products, would see state taxes double from 28% of the wholesale purchase price to 56%. Although proponents say the money will be spent on smoking cessation, opponents point out that the measure contains “nine pages of print that only detail four sentences as to how and where this money will be spent,” leading to wide discretion for bureaucrats and politicians to potentially spend the money on pet projects.

Colorado Amendment 72

In Colorado, anti-tobacco forces are trying to alter the state constitution to include triple taxes on tobacco products. The amendment would increase the tobacco tax by $1.75 per pack of 20 cigarettes, from 84 cents to $2.59, and jack up taxes on other tobacco products, including cigars, by 22% of the wholesale list price, on top of the existing 40% tax already in effect. Those against the amendment note that the tax would disproportionately impact low-income people, and that because the revenue would be earmarked in the constitutional ammendment, it couldn’t be directed to government programs where it might be put to better use.

Missouri Proposition A

Missouri’s Proposition A would more than double taxes on cigarettes from 17 cents per pack to 40 cents, with the increase being phased in through 2021. Taxes on OTP, including cigars, would increase by 5% of the manufacturer’s invoice price to 15%. In part because the proposition would automatically repeal the additional taxes if a measure to increase any tax or fee on cigarettes or other tobacco products is certified to appear on any local or statewide ballot, many of the anti-tobacco forces that usually back higher taxes on tobacco actually oppose Proposition A as an impediment to even higher taxes later.

Missouri voters will also vote on Amendment 3, which would hike tobacco taxes 400% from 17 cents to 77 cents, with extra fees being applied to companies not subject to the master agreement settlement with the state. Because it does not impact cigar taxes, many cigar-oriented trade groups, like the International Premium Cigar and Pipe Retailers Association (IPCPR), don’t take a position on Amendment 3. Under Missouri law, if both Amendment 3 and Proposition A pass, the one that passes with the higher percentage takes effect.

As you’d expect, groups like Cigar Rights of America (CRA) and the IPCPR oppose all four ballot questions that would add additional taxes to cigars, which (between state and federal taxes) are already taxed at record-high levels. Opponents of such tobacco taxes point out that they are highly regressive (by impacting those who can least afford them the most) while threatening to put cigar shops out of business, and that if additional revenue is needed a fairer approach would be a broad-based, more evenly-distributed tax instead of one that hits an already targeted minority.

Cigar smokers in California, North Dakota, Colorado, and Missouri should exercise their right to vote NO on Tuesday to prevent further punitive taxes on cigars.

Patrick S

photo credit: Stogie Guys

News: FDA Cigar Regulations Already Disrupting Handmade Cigar Industry

20 Jul 2016

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Food and Drug Administration (FDA) regulations covering the cigar industry don’t take effect until August, but the impact on cigars is already apparent. The regulations, which have already prompted two lawsuits against the agency (a long-planned lawsuit by the CRA, IPCPR, and CAA was filed last week), threaten to stifle the introduction of new cigars, plus the continued sale of any cigar introduced after February 15, 2007.

With the annual IPCPR Trade Show set to start next week, cigar makers are already announcing new cigars at a record pace, with plenty more expected next week. The reason is clear, as cigars introduced after August 8 will have to wait for FDA pre-approval before being marketed or sold in the United States, while those on the market before that date can be sold for two years without needing pre-approval.

Exact details of the pre-approval process are still unknown, which only fuels the urgency of getting new products to market. Most industry sources hope cigars will be approved as “substantially equivalent” to a product on the market prior to the February 2007 date, but even that standard may be difficult and costly to establish.

According to the FDA’s final rule, the agency estimates it will take 300 hours for each Substantial Equivalence (SE) report, which works out to two months of time for one full-time employee. Industry sources believe the cost of each SE report would likely be even greater than the FDA’s estimate, possibly $100,000 or more.

Those estimates are per SE report, and the FDA requires pre-approval for every tobacco product. This would likely include every new cigar size and packaging combination. For example, if a cigar is sold in 10-count and 20-count boxes, each would need a separate approval. Presumably, so would samplers created by the manufacturer, and potentially even samplers created and sold by retailers.

Needless to say, those costs are prohibitive for small cigar brands for whom a large volume vitola may only sell tens of thousands of units in a year. By introducing lines now ahead of the August 8 deadline, those small manufacturers buy themselves 18 months before they have to decide whether to submit them to the FDA for approval.

By then, cigar makers will have a better picture of the costs and requirements of achieving FDA approval, so they can decide if seeking approval makes economic sense, or if they will be forced to withdraw cigars from the market by August 2018 (after which cigars introduced after February 2007 can no longer be sold unless they have begun seeking FDA approval).

Unfortunately, this means many of the new cigars being rushed out before the deadline are living on borrowed time. While the results of the lawsuits could change the FDA regulations, such lawsuits are always difficult to win. In the meantime, while there will be a lot of excitement over the next two weeks as numerous cigars are announced, the devastating effects of FDA regulation on the handmade cigar market are already showing.

Patrick S

photo credit: Stogie Guys

News: Small Players in Cigar Industry Vow to Keep Going

18 May 2016

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Uncertainty. Apprehension. Determination.

These seem to sum up the feelings of some of the smaller players in the cigar world. Small players whose business will be greatly impacted by the U.S. Food and Drug Administration’s new tobacco regulations. In statements both on and off the record, those who create and market boutique cigar expressed both anger and resolve to StogieGuys.com.

“You have to play the hand the best you can with what you have,” said Jeff Haugen, co-owner of Crux Cigars. “We’re going to have to adapt.”

While some were reluctant to openly discuss the potential impact or their plans, others were blunt.

“It’s a mess,” said Sandra Cobas, owner of the highly regarded cigar manufacturer El Titan de Bronze, located in Miami’s Little Havana since 1997. Cobas is confident she’ll be able to remain in business, but “it won’t be the same.”

Particularly troubling for her is the Feb. 15, 2007, grandfather date on which cigars had to be on the market to qualify for an exemption from regulation. While El Titan’s four lines should qualify, many of the smokes she produces for other brands will not. And that means her current level of eight to twelve employees will almost certainly shrink. “These are working people,” she said. “It’s very upsetting. Very upsetting.”

The economic impact will be widespread, she added, ticking off those impacted, from tobacco growers to box makers, cigar band lithographers to glue manufacturers.

“How about in Estelí? How about in the Dominican?” where cigar-making has boomed in recent years, she said. “They think they’ve got an immigration problem now? They don’t know what they’ll have.”

Mel Shah realizes his MBombay cigars will also face the full thrust of the regulations because they came to market only a couple years ago. Just what the FDA’s approval process will be, or how much it will cost, however, remains uncertain.

“Everything that we hear right now… it’s all speculation,” said Shah. “They’re going to charge this, they’re not going to charge this. The whole nine yards. There is nothing… in black and white as to how much it’s going to cost us. Once we have that, then it will be a more definitive strategy.”

Shah’s position as owner of both a cigar brand and a cigar shop (Fame Wine & Cigar Lounge in Palm Springs, California) provides a well-rounded perspective.

As a measure of what lies ahead, he noted that about 70 percent of the cigars on retailers’ shelves these days were introduced after 2007.

The FDA regulations, scheduled to go into effect this summer, offer a small window for cigars that aren’t grandfathered. Those on the market before Aug. 8 can remain on sale until Aug. 8, 2018, before having to apply for approval.

That’s led to conjecture that brand owners will rush cigars to market in order to take advantage. But Haugen, and others, said that’s not their plan.

“We’re certainly not going to knee-jerk any reactions of which way we’re going to move,” Haugen said, noting that all Crux lines are post-2007. “I’m not interested in just jamming a bunch of brands out there to get something going.”

One point of agreement was that, while it’s too soon to know the full impact, they will survive.

Most, in fact, echoed the sentiment of Ernesto Perez Carrillo in his response to the FDA: “We are here to stay.”

George E

photo credit: Stogie Guys

News: FDA Misleading Public About Cigars and Youth

11 May 2016

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There is no getting around the fact that the final FDA rule released last week is a nightmare for premium handmade cigars.

Although premium cigars represent just 2.1% percent of all cigars smoked in the United States (according to the FDA, 300 million of the 14 billion total cigars sold), the vibrant creativity that has come to represent this small handmade portion of the cigar market will be hit with the overwhelming burden of complying with rules that require FDA approval for every cigar not on the market before February 15, 2007.

Within each brand, every size of that blend that was introduced after that date will have to apply for FDA approval, or be off the market, by August 2018. So literally thousands of blends would have to apply, something no one (including the FDA) expects to happen.

In its public statements regarding the rule and within the 499-page rule itself, the FDA repeatedly alludes to the need to regulate cigars to protect children. But a closer look shows the facts don’t support the claim. In fact, at least one of the statements the FDA told the public about this is demonstrably false.

FDA Misstates Current Law

In its press announcement of the new rule, the FDA made the following statement: “Before today, there was no federal law prohibiting retailers from selling e-cigarettes, hookah tobacco, or cigars to people under age 18.”

This claim struck me as odd, at least in respect to cigars, so I asked an FDA spokesman for clarification. Despite multiple emails back and forth, I never got a substantive answer to my question: Does the FDA know of anywhere in the U.S. where the sale of cigars to minors (under 18) was not already illegal?

At one point in the exchange, I was referred to the “CDC [Center for Disease Control] or a group like the Campaign for Tobacco-Free Kids,” which seemed strange given that the FDA had just designated itself the chief regulator of cigars.

Despite that, I asked both groups that the FDA referred me to. The Campaign for Tobacco-Free Kids confirmed that every state prohibits sales to minors (and that Alabama currently also prohibits sales to those age 19). The CDC spokesman made it even more clear that the FDA was wrong in its announcement that prior to these rules federal law did not prohibit sales of cigars to minors.

The CDC spokesman wrote the following back to me: “In response to your question about selling tobacco products to persons under the age of 18. The federal minimum age of sale for tobacco products is 18. States are free to make it higher, but not lower.”

In other words, the federal agency that the FDA referred me to directly contradicted the statement put out by the FDA. Of course, by then the FDA’s misstatement had already been repeated in numerous news accounts of the new regulation.

FDA Cites 29-Year-Old Adults as Evidence of Youth Usage

But the FDA’s deception on this issue doesn’t end there. Within the rules, especially in the justification for not exempting premium cigars, the FDA repeatedly conflates underage use of cigars with choices made by adults.

The final FDA rule repeatedly uses the phrase “youth and young adult(s),” 56 times to be exact, within the rule. So I asked the FDA how they defined young adults and “what would be the oldest a person could be and still be considered a ‘young adult’ by the FDA?”

I was told “young adults” and other references to age groups depended on the specific studies being cited. A look at those studies show that some used 25 while others used 29 as the upper limit for “young adults.”

So while the FDA is using the age-old justification that their rules are necessary “for the children,” the fact is they are citing studies about the choices made by 29-year-old adults, men and women who could have legally served in the U.S. military for over a decade, to do it.

New Rule Really About Restricting the Choices of Adults

At other times, the FDA drops the pretense of the regulations being about youth access all together. At one point in the rule (page 178), the FDA states that it agrees with the proposition that if premium cigars are exempt from the rule, “the current population of premium cigar users would be left unprotected, potentially decreasing the likelihood that they would quit.”

Further, in the FDA’s announcement, a quote from Health and Human Services Secretary Sylvia Burwell specifically states that the aim of the rule goes far beyond children: “Today’s announcement is an important step in the fight for a tobacco-free generation.” So if anyone had any doubts that the FDA wants to totally eliminate tobacco, that statement by a cabinet-level appointee should erase them.

The irony is, even if the new rules were actually designed just to restrict use by minors, the grandfather date set by the legislation that empowered the FDA to regulate cigars means that, barring a sweeping act from Congress, there will always be pre-2007, non-FDA regulated tobacco products out there for lawbreaking minors to find ways to illegally acquire. Better enforcement of laws already on the books might fix that, but the regulations announced last week won’t.

Meanwhile, thousands of premium handmade cigars will be wiped off the market in just over two years, serving no purpose except to restrict the choices available to the adults who choose to enjoy them.

Patrick S

photo credit: Stogie Guys

Breaking News: The FDA Just Issued the Final Rule Regulating Handmade Cigars, and It’s as Bad as We Feared

5 May 2016

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Today the Food and Drug Administration (FDA) announced the final rule regulating cigars. We will have more coverage in tomorrow’s Friday Sampler and in the coming weeks but, for now, here are some key points about the impact of the 499-page rule on handmade cigars.

The FDA Rejected Pleas for an Exemption for Premium Cigars

In its initial proposed rule, the FDA offered two options for regulating cigars: option one (which covers all cigars), and option two (which exempts handmade cigars over $10). In its final rule, the FDA rejected option two, meaning a $12 handmade premium cigar will be treated exactly the same under the rule as “little cigars” that are manufactured on the same machines that produce cigarettes.

Date for Grandfathered Products Remains Unchanged

While the so-called Family Smoking Prevention and Tobacco Control Act (FSPTC)—the bill giving the FDA the power to regulate cigars—didn’t pass until June 2009, the legislation sets February 15, 2007 as the cutoff date for tobacco products to be grandfathered in as exempt from needing FDA approval before being sold or marketed in the United States. There were hopes that the FDA would modify that date, but they did not. As a result, products introduced past that date will be subjected to the FDA approval process. Cigars currently on the market will be treated differently from those introduced after the regulation officially takes effect.

Regulations Take Effect August 8

While the text of the rule was released today, it will not be officially published to the Federal Register until May 10, at which point a 60-day clock will start until the regulation officially goes into effect. Cigars introduced after August 8 will have to get FDA pre-approval before being marketed or distributed. Non-grandfathered (post-February 15, 2007) cigars on the market before August 8 can be sold until August 8, 2018, after which they must apply for FDA approval to remain on the market. Notably, the 2016 IPCPR Trade Show is set to take place in Las Vegas at the end of July, meaning it will effectively be the last chance cigar makers have to introduce new cigars before the August 8 date for pre-approval is required.

FDA Approval Process Still Murky

The need for FDA approval of new cigars is the biggest reason why industry experts predict the rule will devastate the handmade cigar industry, including 30,000 Americans who work in the industry and over 300,000 employees abroad. While subjecting all cigars to a pre-approval process where they must prove the new product is “substantially equivalent” to a grandfathered or approved product, the exact standards the FDA will use to make this determination, or exactly what scientific data would need to be included with the application, is far from clear. The FDA also doesn’t seem to address if it has the capacity to deal with new applications in a timely manner.

Rule Enacts Sample Ban, Mandated Warning Labels

Starting on August 8, distribution of samples will be prohibited, meaning cigar shop events where attendees get to try a new product free of charge will be prohibited. Full implementation of warning labels on cigars has also been mandated, with warnings “to appear on at least 30 percent of the two principal display panels of the package, and at least 20 percent of the area of advertisements.”

FDA Intends to Ban Flavored Cigars Next

In the finalized rule, the FDA states the following regarding demands by anti-tobacco lobbyists that it include a ban on flavored tobacco products: “To address concerns with the growing flavored cigar market and its impact on youth and young adult initiation with tobacco products, FDA is announcing here that it intends to issue in the future a proposed product standard that would prohibit characterizing flavors in all cigars, including cigarillos and little cigars.” To date the exact definition of a flavored cigar is unknown, and depending on the definition such a ban could include many premium handmade cigars not commonly identified as flavored.

Legal Challenges Are Inevitable

Barring an Act of Congress, only a federal court case can stop enforcement of this rule. Legal actions to executive orders generally come in the form of either a facial challenge to the rule, or an as applied challenge. A facial challenge could ask for an injunction to stop implementation of part of the rule or the entire rule, although the standard for getting one is very high. An “as applied” legal challenge would allege that the FDA violated either a federal law or the Constitution in how it applied the regulations to a specific party. With such a major expected impact, multiple federal lawsuits are likely.

The entire text of the 499-page rule can be found here.

Patrick S

photo credits: Stogie Guys