The Stogie Guys

Yesterday, the House Appropriations Committee took an important first step toward fixing one of the most outrageous aspects of the proposed rules to regulate cigars under the Food and Drug Administration (FDA).

The appropriations bill passed the Committee yesterday for next year’s funding of the FDA, included a funding rider to stop the FDA from retroactively regulating cigars and other tobacco products introduced since February 2007. Under the legislative fix, the new date existing products would be grandfathered in as exempt from the costly and difficult FDA pre-approval process would change from February 15, 2007 to the date (likely later this year) when the proposed regulations are finalized.

While cigars introduced after the FDA’s cigar regulations go into effect would still be subject to FDA approval before being marketed or sold—a process that likely would take months or years and could cost an estimated $400,000 per each new cigar blend and size—the change would be a significant improvement from the current situation. Absent any change, under current law, most or every cigar introduced since February 15, 2007 would be subject to the FDA pre-approval process, with the likely impact of permanently making illegal most cigars introduced in the past eight years.

The key language in the appropriations bill still has a long way to go before becoming law. Having successfully passed the House Committee, including surviving an amendment vote 23-26 to strip the FDA regulation date change out of the bill, the bill now goes to the House floor for passage.

If it passes the House, the next step would be a companion bill from the Senate Appropriations Committee. There, Kansas Senator Moran, a co-sponsor of the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act, is chairman of the subcommittee with oversight over the FDA and could be key to ensuring the language eliminating the February 2007 date is included in the Senate bill.

If such language passes out of the full Senate Appropriations Committee, next step would be the full Senate, after which the bill would go to President Obama’s desk to be signed into law or vetoed.

Analysis

With the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act seemingly stalled for the immediate future, this is a significant and serious attempt to address the devastating impact of the proposed FDA regulations. Still, it faces  major challenges, not the least of which is the fact that the proposed FDA regulations could become finalized any day now—before any appropriations bills are passed.

According to an agenda issued last year, the deadline for the FDA regulations was June 2015, and in Senate testimony in March FDA Commissioner Margaret Hamburg reiterated that now-passed goal. In addition to time constraints, two other issues complicate the process significantly.

First, while cigar industry representatives work to protect cigars from the damaging impact of the regulations, the elephant in the room is e-cigarettes. A large part of the agitation for these regulations by anti-tobacco activists is because the deeming rule would effectively ban e-cigarettes and vaping devices—which they view, almost certainly incorrectly, as having negative public health implications.

While, in theory, new cigars could be approved by the FDA as “substantially equivalent” to grandfathered cigars, the e-cigarette industry was almost nonexistent in February 2007, meaning approval of e-cigarettes and other vaping products would be even more difficult than the already arduous process that new cigars would face. This hardens the anti-tobacco opposition to a change in the cutoff for grandfathered tobacco products, but it also means the growing e-cigarette industry could be a key ally for cigars in pushing for a change.

The second complication has nothing to do with specific issues of tobacco regulation but is the often dysfunctional federal budget process. While the system is set up for 12 appropriations bills, frequently budget showdowns due to fiscal deadlines lead to continuing budget resolutions and omnibus spending bills that combine various appropriation bills into one large spending bill. To ease passage, appropriations riders, like the one on FDA regulation approved yesterday by the House Appropriations Committee, can get stripped out of the final bill, especially if leadership doesn’t make their inclusion a priority.

Ultimately, while this rider can alleviate some of the damage FDA regulation of cigars will cause, it doesn’t fix the larger issue: The vibrant handmade cigar industry will come to a screeching halt if new cigars are forced to go through an FDA approval process that takes months (or years) and cost hundreds of thousands of dollars. To fix this bigger problem, cigar smokers must work towards passage of the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act to remove the FDA’s authorization to regulate handmade cigars.

–Patrick S

photo credit: Best Price Cigars

Drew Estate is poised to release Undercrown Shade, a new line based on the Undercrown blend featuring a No. 1 grade shade-grown Connecticut wrapper.

Here is Drew Estate’s description of the new line, which StogieGuys.com uncovered in the recently distributed 322-page Tobacco Retailer’s Almanac, sent to members of the International Premium Cigar & Pipe Retailers Association (IPCPR):

More than just a wrapper swap, this ‘Crown was a three-year process working from the ground up using the finest blend of well-aged, long leaf tobaccos from our vast holdings in Estelí, Nicaragua. Finished with a No. 1 golden shade wrapper, the most sought-after leaf in the world, Undercrown Shade is a naturally sweet, earthy smoke with satisfying body for any time of day.

The line will be available in boxes of 25 in the same six regular production vitolas as the original Undercrown line:

Belicoso 6 x 52
Corona Doble 7 x 54
Corona 5.38 x 46
Gordito 6 x 60
Gran Toro 6 x 52
Robusto 5 x 54

References to “the most sought-after leaf in the world” and “shade” imply the blend uses a Connecticut-grown wrapper leaf, as opposed to an Ecuadorian-grown Connecticut wrapper, which Drew Estate uses on Herrera Estelí. Ecuadorian wrapper isn’t usually grown under shade netting because of the natural cloud cover that produces a similar leaf without it.

Jonathan Drew hinted on Facebook that a Connecticut shade-grown wrapper project was in the works last August when he wrote: “Historically, Drew Estate has always used the Shade Leaf from Ecuador, but this Connecticut leaf is mad juicy and getting me crazy. I mean like… well… what’s a couple thousand pounds of this juicy leaf going to taste like with a tweaked Undercrown Blend…. Oh wait, maybe a tweaked Rustica… Oh shucks, ima get all kind of flack for this post.”

La Palina Introduces Red Label

Also listed in the Tobacco Retailers Almanac is a previously unannounced La Palina Red Label. The line will comes in four sizes: Gordo (6 x 60), Toro (6 x 50), Robusto (5 x 52), and Petit Lancero (6 x 40). All are listed as shipping in boxes of 20. Although no other details are printed, a recent posting announcing the selections for Cigar Dave’s cigar of the month club reveal more details about the Dominican-made blend, which features a Ecuadorian Habano wrapper, Ecuadorian binder, and Nicaraguan and Dominican filler.

AJ Fernandez Enclave

Although no other details are revealed, we do have artwork (above) to share for the upcoming Enclave cigar by A.J. Fernendez. The ad appears in the Tobacco Retailer’s Almanac. A February article in the publication BayouLife mentioned the project, though the blend was still being tweaked at the time. More details, presumably, will be unveiled between now and the start of the IPCPR Trade Show.

–Patrick S

photo credits: Stogie Guys/Drew Estate/A.J. Fernandez

Despite the fact the FDA could rule before the end of the year that cigars introduced now cannot be sold or marketed without the FDA’s approval, cigar companies continue to churn out new cigars.

And with the annual IPCPR Trade Show less than two months out, more and more new cigars are being announced. (As we have seven out of the past eight years, StogieGuys.com will be covering the IPCPR from the show floor, which this year is in humid New Orleans in late July.)

Melillo Announces Foundation Cigar Co.

In addition to the many new cigars, two former key figures at Drew Estate are expected to announce their next phase in the cigar industry. Nicholas Melillo, who left Drew Estate roughly 13 months ago, was the first to announce his future plans.

On Tuesday Melillo, who had been executive vice president of international operations at Drew Estate before his departure, announced the formation of Foundation Cigar Company. The company, which will be headquartered in Connecticut, is preparing to introduce its first blend at the IPCPR Trade Show.

While exact details of the blend are not yet known, in a press release Melillo, who goes by “Nick R. Agua” online, said he will be making his first cigar at the TABSA (Tobaccos Valle de Jalapa) factory in Nicaragua, using Aganorsa tobacco, which is also extensively used in Drew Estate blends. The first cigars are scheduled to arrive in cigar shops in September, and reportedly will retail for around $10.

Melillo described his new partnership in a distributed statement: “I have known and been purchasing tobacco from Eduardo Fernandez and his team since 2003. It’s great to work with guys who really know their tobacco. They have welcomed me in with open arms and have given me access to their special cuartos anejamiento, or ‘aging rooms.’ I have personally selected some very special vintage tobaccos which possess some amazing flavors and complex characteristics. The variety of Nicaraguan tobaccos they have in the warehouse is incredible and some of the blends I have worked up are, well, let’s just say we are all very excited about them. The tough part in working up a few nice blends is deciding which cigar you like the best.”

Steve Saka Non-Compete Ending Soon; Announcement to Follow?

Melillo’s new cigar is certainly highly anticipated, but maybe not as much as an expected announcement from former Drew Estate president and CEO Steve Saka. During the time when Saka and Melillo were at Drew Estate, the two played a critical role in growing the company from an operation known mostly for its unorthodox infused cigars to a Nicaraguan juggernaut that made some of the most sought-after non-infused cigars, including Liga Privada.

Saka left Drew Estate in July 2013 and reportedly has a two-year non-compete agreement that will expire only a week prior to the IPCPR Trade Show. In a series of recent Facebook posts, Saka has been sharing photos from Nicaragua where he has been spending time sampling tobacco in Nicaragua, which many have interpreted as preparation for his next cigar venture.

If, as many expect, an announcement about his future plans in the cigar industry comes soon, Saka would be one of many who has “retired” from one company only to reemerge in the industry after a contractually obligated hiatus. The cycle of cigar makers gaining expertise, experience, and capital at one company only to strike out on their own later is one of the aspects of the industry that drives innovation and competition to the great benefit of consumers.

–Patrick S

photo credits: Foundation Cigar Company

February 15, 2007 could turn out to be the most important date in the history of the premium cigar industry. Why, you ask? Because every cigar introduced after that date could soon be made illegal by the Food & Drug Administration (FDA).

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.

Tobacco products introduced after that date (which comes from the text of the legislation and probably cannot be altered by the FDA, even if the agency wanted to) must receive the FDA’s approval before they can be marketed for sale. For a period from passage of the FSPTC until March 22, 2011, new tobacco products could be marketed while an application was pending but, as the FDA reiterated recently, any new product that didn’t have an application submitted by that date cannot be marketed until the FDA takes action to approve it. This would apply to cigars when they are subject to FDA regulation, despite the fact the FDA hadn’t even taken the first step towards regulating cigars in March 2011, and so no cigar applications would have been submitted.

Theoretically, new cigars should get approved as “substantially equivalent” to products that were already on the market in 2007 since the basic components of handmade cigars haven’t changed in at least a century. But the process is surprisingly complicated, likely very expensive, and includes an “Environmental Assessment” and a “Health Information Summary” along with a requirement for scientific studies about how the product would be used in comparison to the product it is being claimed as substantially equivalent to. In other words, you’d probably need deep pockets, lawyers, and scientists to have a chance.

Plus, so far the FDA hasn’t shown any ability to handle existing applications. As we observed when the Deeming Rule was first proposed, only a few dozen of the 4,000 pending applications were ruled on as of April last year, with just 17 being approved over the period of multiple years. As of now, the FDA site says it has approved only 132 products as “Substantially Equivalent” since 2011, while an untold amount remain waiting for a ruling.

The FDA did propose in its rules one option for an exemption for premium cigars with a retail price of $10 or more, but even if the agency adopts that option it would leave the vast majority of cigars (85%, according to one analysis) to be banished from the market and forced to wait for an approval that may be nearly impossible to get.

February 15, 2007 is a long time ago, so allow me to set the stage: On that date we published a Quick Smoke of the Gispert Lonsdale (remember that cigar?), and you couldn’t yet buy an Apple iPhone because the first one didn’t go on sale until later that summer.

As far as cigars go, here are just a few introduced in 2007, but after the February cutoff date: Oliva Serie V, San Cristobal, Padrón Serie 1926 80 Years, CAO America, Te-Amo World Selection Series, Santa Rosa (an Altadis cigar I forgot ever existed), Rocky Patel Sumatra Edge, Cabaiguan Guapo, La Aurora Corojo Oscuro Barrel Aged, and the Cuban Cohiba Maduro (which, if the embargo ever ends, would also be subject to the regulations).

To say the industry has changed since then would be a gross understatement, as evidenced by the fact that multiple cigars listed above are no longer being made. For most cigar smokers I talk with, the vast majority of cigars they smoke were introduced well after 2007.

Cigar rights groups are now looking to push legislation that would amend the date for new cigars to be grandfathered in. This seems extremely reasonable. After all, how can cigars have complied with a regulation two years before passage of the bill authorizing the FDA to regulate cigars, and five years before the agency took any steps towards exercising its power to regulate cigars?

The problem is that reasonable doesn’t buy you much when it comes to passing federal laws. And considering the difficulty in getting support for the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act in Congress, there isn’t much indication that there are majorities in Congress that want to treat cigars reasonably, nor that President Obama would sign such legislation if it somehow made it to his desk.

–Patrick S

photo credits: Stogie Guys

Pennsylvania holds unique influence in the premium cigar industry. Not because cigar tobacco is grown in the state; a small amount is, but not nearly as much as Connecticut. Nor is it because some cigar makers are there; there are many more based in Florida.

What makes Pennsylvania such an important state in the American cigar industry is taxes. Or, more specifically, the lack of cigar taxes.

Along with Florida, Pennsylvania is the only state with no state excise tax on cigars (PDF). But in the budget submitted by Democratic Governor Tom Wolf for fiscal year 2015-2016, cigars would be taxed at a rate of 40% of wholesale value.

This would be a huge hit to the Pennsylvania cigar industry that has grown because of the lack of cigar-specific taxes. (The companies, its employees, and owners, of course, pay plenty of other taxes to the state because of the jobs cigar retailers provide.) Many of the largest online and catalog retailers, including Cigars International (including Cigar.com and Cigarbid.com), Famous Smoke Shop (including its Cigar Auctioneer site), Holt’s, and Atlantic Cigar, have grown in the state for that reason.

While the Republican-controlled state legislature makes adoption of the proposed budget in its entirety unlikely, there is still a chance the tax, or perhaps a lower “compromise” tax, on cigars and other tobacco products could be included in the budget. That threat is significant enough that the IPCPR issued an Action Alert on the issue late last week.

Cigar smokers in the state can contact their state legislators using the IPCPR form.

Analysis

Pennsylvania’s zero tax rate on handmade cigars has made it a magnet for cigar retailers. This has in turn impacted the way cigars are sold and taxed in other states in ways that benefit both retailers and consumers.

The low prices often charged by Pennsylvania (and Florida) retailers who don’t have to pay taxes benefit consumers everywhere by creating pressure on all retailers to keep their prices as competitive as possible. Of course, buying a cigar online means losing out on the personal touch and sense of community that only a brick-and-mortar store can provide. Even so, the competition can make cigars bought in shops more affordable (they don’t want to lose your business to an online operation) even if the prices don’t line up exactly with the sometimes lower price a high-volume online operation can charge.

While local retailers may sometimes resent the competition from online discounters, the truth is they too benefit greatly from lower tax rates elsewhere. Far too often legislators turn to tobacco as an easy target for raising revenue. The simple economics of higher taxes driving purchases to untaxed retailers in other states, however, can undermine the revenue-raising potential of higher taxes on cigars.

In other words, even if you only purchase your cigars from your local cigar shops, increased tax rates in Pennsylvania will, over time, make your cigars more expensive. For that reason, all American cigar smokers should be worried about efforts to raise cigar tax rates in the Keystone State.

–Patrick S

photo credit: Flickr

On Monday, Florida Congressman Bill Posey introduced the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act of 2015 (H.R. 662). The legislation, which Posey also introduced in 2011 and 2013, would prevent the Food and Drug Administration from regulating handmade cigars.

The FDA is close to finalizing a rule that would subject cigars to FDA oversight, including a pre-approval requirement that would likely halt the introduction of new cigars. (One FDA proposal would apply all cigars to the pre-approval process, while another would exempt non-flavored cigars over $10.)

The 2011-12 version of the bill gained support from a majority of the House of Representatives, while the 2013-14 version had 145  co-sponsors. Posey’s 2015 legislation was introduced with 34 original co-sponsors, which groups like the IPCPR and CRA will seek to build on over the next two years.

Even if the bill isn’t passed and signed into law, significant Congressional support would send a strong message to the FDA that many elected officials in Congress, which has oversight and funding authority over the legislation, don’t want the FDA to to extend its authority over handmade cigars.

The following bi-partisan group of Representatives are the 34 original co-sponsors of the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act of 2015:

Rep Bilirakis, Gus M. [FL-12]
Rep Blackburn, Marsha [TN-7]
Rep Brady, Robert A. [PA-1]
Rep Buchanan, Vern [FL-16]
Rep Calvert, Ken [CA-42]
Rep Cardenas, Tony [CA-29]
Rep Castor, Kathy [FL-14]
Rep Clay, Wm. Lacy [MO-1]
Rep Cole, Tom [OK-4]
Rep Collins, Chris [NY-27]
Rep Costa, Jim [CA-16]
Rep Diaz-Balart, Mario [FL-25]
Rep Foxx, Virginia [NC-5]
Rep Graves, Sam [MO-6]
Rep Grayson, Alan [FL-9]
Rep Griffith, H. Morgan [VA-9]
Rep Harris, Andy [MD-1]
Rep Hastings, Alcee L. [FL-20]
Rep Hunter, Duncan D. [CA-50]
Rep Jolly, David W. [FL-13]
Rep Kelly, Mike [PA-3]
Rep Kinzinger, Adam [IL-16]
Rep Murphy, Patrick [FL-18]
Rep Murphy, Tim [PA-18]
Rep Pascrell, Bill, Jr. [NJ-9]
Rep Pompeo, Mike [KS-4]
Rep Rogers, Harold [KY-5]
Rep Roskam, Peter J. [IL-6]
Rep Ross, Dennis A. [FL-15]
Rep Royce, Edward R. [CA-39]
Rep Sessions, Pete [TX-32]
Rep Westmoreland, Lynn A. [GA-3]
Rep Wilson, Frederica S. [FL-24]
Rep Yoder, Kevin [KS-3]

If your Congressman is already a co-sponsor, contact them and thank them. If not, contact them and demand they become a co-sponsor. (Unsure who your representative is? Find out here.) Read an example of a letter to Congress in support of the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act here.

–Patrick S

photo credit: Best Price Cigars

Yesterday, Drew Estate and Swisher International announced an agreement had been finalized for Swisher to purchase Drew Estate. The announcement comes after over a month of intense rumors of the deal, including denials of a finalized deal by Jonathan Drew.

Swisher is the largest cigar company in the world by volume and has a massive distribution network beyond traditional cigar shops. Drew Estate runs the largest cigar factory in Nicaragua—producing around 10,000 cigars a day—and owns heralded premium cigar lines including Liga Privada, Undercrown, My Uzi Weighs a Ton, Nica Rustica and Herrera Estelí, along with premium infused cigar lines including the best-selling Acid.

The deal, which will be completed before the end of the year, includes the Nicaraguan facilities and Drew Estate’s cigar lines. Monetary terms of the deal were not disclosed. Since both companies are privately held, details (including Drew Estate’s valuation) may never be known.

According to various reports, senior management from Drew Estate—co-founders Jonathan Drew and Marvin Samel, President Michael Cellucci, and master blender Willy Herrera—will all stay on, at least in the near term.

Jonathan Drew issued the following statement: “We began under the Manhattan Bridge Overpass in Brooklyn with a laser focus on ‘The Rebirth of Cigars.’ Friends, retailers, and consumers connected with our passion and authenticity, supporting us at each stage of our growth. We are eternally grateful to all of those who have helped build Drew Estate, and look forward to advancing the Drew Estate legacy with a great partner.” Other executives praised the agreement in a press release published on Drew Estate’s website.

Analysis

When a business is bought by larger company it’s natural for fans to be worried. Still, there are plenty of reasons for Drew Estate fans to think, despite the uncertainty of the shakeup, this may be a good thing for Drew Estate and the cigars its fans enjoy.

Drew Estate hasn’t hidden the fact that it had taken on significant debt to expand to its current size, including from other cigar companies. At least one such loan was tied to $5 million seized by the ATF as part of a settlement over back taxes reportedly owed by House of Oxford, a cigar distributor run by Alex Goldman, who was put in charge of Swisher’s premium cigar division. (Nothing illegitimate was alleged to have been done by Drew Estate and the case has now settled.) Goldman was also instrumental in having Drew Estate make Nirvana for Swisher’s Royal Gold premium cigar venture, a line that will presumably be merged into Drew Estate’s operations.

The agreement for Swisher to buy Drew Estate will presumably end any outstanding debts and allow Drew Estate to continue expansion with Swisher’s significant resources. Drew Estate can now refocus on making its cigars and innovating, something it has done remarkably well over the past few years.

It’s also worth noting 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 certainly knows this, which means it is likely to invest the funds necessary to promote Drew Estate’s brands no matter the impact of FDA regulations.

Finally, you can’t talk Drew Estate without Jonathan Drew. Anyone who has spent time with Jonathan knows he has a deep passion for cigars and his customers. While sometimes he may seem to be burdened by the business of cigars, there is no doubt he brings a unique energy and the spirit of innovation.

Drew and his partners built Drew Estate from a cigar kiosk in the World Trade Center to one of the largest cigar companies in the world, which is a remarkable feat. And Jonathan feels this deal is good for Drew Estate, which is his legacy.

Unless evidence presents itself to show otherwise, this deal is good not only for Drew Estate’s owners, but also for its customers.

–Patrick S

photo credit: Drew Estate