An Insider''s View on Cigars in Asia Pacific

Source from:  Tobacco Asia  02/27/2014

With the Asia Pacific region (APAC) showing the cigar market's biggest growth in terms of value over the last five years, Tobacco Asia talks to regional expert Eric Piras to get his views on the current state of play.

Eric, who is based in Hong Kong, has nearly 20 years' experience in this region's cigar industry. Previously the regional director for The Pacific Cigar Company, the exclusive distributor for Habanos in Asia-Pacific and Canada, in 1999 he joined Altadis (later acquired by Imperial Tobacco Group) and travels the globe setting up and strengthening distribution channels.

We spoke to Eric ahead of his appearance as a speaker at the joint exhibition ProToBex Asia and Inter Tabac Asia, which will be held in Bali, in February. The exhibition is co-organised by October Multimedia, the publisher of this magazine.

TA: What is the overall position of consumption patterns around Asia?

EP: In Asia Pacific the main markets are Greater China, including Hong Kong and Macao, Japan, Malaysia, Singapore, Taiwan and Australia. Those markets drive cigar consumption patterns, trends and retail pricing.

Would you say consumption is growing in the region?

Led by China, this part of the world has shown consistent double digit volume growth year-on-year since 2005. The market doubled in size to reach 545 million units in 2010, up from 271 million units in 2005.

Although some countries in the region have no sizeable market for cigars, where markets do exist, growth has been seen across the board, for the most part achieving double-digit CAGRs as disposable incomes rise.

Some 76% of this success has come from China. And this is almost entirely in cigars excluding cigarillos, for which, unusually, there is no market. India is showing a similar pattern with a preference for cigars rather than cigarillos.

Japan has the second biggest value and volume growth contributor to the region, but this is based on the opposite scenario to China, as its market is almost entirely confined to cigarillos. Japan has the biggest slice of the cigarillo market, with Taiwan a distant second.

What factors are driving the increase in cigar consumption?

Besides the fact that the APAC region, and China in particular, seem to be more economically safe than the EU, we also see the growing middle-class looking at luxury brands and western products. Naturally this includes an interest in cigars.

Although cigars do not offer a direct substitute for the cigarette smoker, there is a role for cigarillos in this respect, being similar in terms of size and taste. This similarity is one of the key reasons for their growth within the cigar market, along with price benefits and advantages over cigarettes in areas such as flavour and single stick purchases.

What are the current cigar consumption patterns in Indonesia, Malaysia and the Philippines?

Indonesia and Philippines are not fully representative markets in the Asia Pacific region [APAC] for cigars, whether premium or machine made [MMC]. The main issue in Indonesia is the high import tax that leads to illicit trade.

In the Philippines, the situation is similar to Indonesia, with the added factor that the local brands manufactured in the country, both premium and MMC, are very competitive price-wise compared with imported brands. Overall volume in the domestic market for both countries is quite small.

Of these three countries, in my opinion Malaysia is the most interesting, as it has a good retail network with tobacco specialists. As well as being able to offer a wider product variety, these specialists are better able to give advice to customers.

What types of cigar do these specialists bring to the market?

For the premium range, the Malaysian domestic market is dominated by Habanos brands, up to 70% to 80% market share. This figure is representative of the Habanos global market share, if you exclude the USA.

However, thanks to the large number of independent tobacco specialists, consumers are also offered a large selection of cigars from other terroirs. For example, VegaFina and Don Diego from the Dominican Republic, the new Davidoff from Nicaragua, and Macanudo from the US.

For the machine made range, you also find a large selection, from the Cohiba Mini and Club to the Hav-A-Tampa Jewels, Phillies flavoured as well as the European brands AGIO and others.

How do anti-smoking regulations affect cigar consumption in these countries?

In most Asian markets, excluding the People's Republic of China [PRC], the restrictions led by anti-smoking regulations and high taxes affect tobacco consumption, hence tremendously affecting cigar consumption.

But, in a difficult tobacco market environment, continuously challenged by the persistent economic crises and harder regulatory environment, there are still examples of brands that are willing to bet on growth and build value within the premium cigar category.

VegaFina is one of the best recent examples. It has begun expanding to new markets worldwide, confirming its commitment to being a successful global brand within the premium cigar industry.

Are cigar smokers in these countries mainly local or expatriate residents?

The mix of local and expatriates consumers has changed significantly in recent years. The main reason is the developing taste and higher income of local consumers, as well as the reduction of high-level expatriate packages in Asia-Pacific region. Also more and more high executive managers are local, but educated abroad, where they acquired a taste for nice wines and cigars, among other things. So, actually, cigar smokers in the region are now in the majority locals.

Are cigar bars popular and increasing?

Yes, despite the fact that the weather helps outdoor smoking, in most of the countries of the South Asian region, we see a growing number of cigar divans and cigar bars. And they are becoming more and more popular. As these are cigar smoking destinations, it is good news for aficionados, who can now find dedicated spaces.

What types of products/brands are particularly popular and are they mainly supplied by local manufacturers or foreign?

Habanos brands are the most popular in the premium brands. You will find a large portfolio of Cohiba, Montecristo, Romeo y Julieta and Partagas in handmade as well as machine made.

The Pacific Cigar Company recently launched the Cohiba White Mini and Club. This is a new version of the traditional yellow pack Cohiba Mini and Club, but a milder blend aimed at younger adult smokers and women.

In the last few years, VegaFina has become very popular, as has Casa de Garcia. In the premium market, large ring gage and short length are currently in demand, as they can be enjoyed in a time of 20 to 30 minutes. In terms of taste, at the premium end, consumers favor medium strength, and for machine-made, the most popular size is Club.

Which local companies are the main players in these sectors and how are they performing?

The Asia Pacific cigar market is partly shared by two main distributing companies: The Pacific Cigar Company [PCC], the exclusive distributor of Habanos, also distributes VegaFina and Flor De Copan, which are the global brands of Imperial Tobacco Premium Cigar Division. PCC have 28 tobacco specialist shops in the region, excluding Indonesia and PR China.

Bluebell Company is the exclusive distributor of Davidoff Group, which retails in 23 tobacco specialist shops regionally, excluding Indonesia, Australia and PR China. These two companies have a large presence in the regional retail markets with the largest number of shops, and both are performing well.

There are also other players like Tag Ventures in Malaysia, which owns 14 tobacco specialist shops in Malaysia and is expanding into Cambodia, where it will open its first shop in 2014. Its Whisky Tango Foxtrot outlet in KL caters to cigar and whisky aficionados.

How are export markets performing for local manufacturers and growers?

First you do not have a lot of local cigars manufacturers. In China, the manufacturing of Chinese-style cigars will play a key role in the future development of the country's tobacco industry.

Outside of China the main manufactures are in the Philippines and Indonesia. I believe their business is growing. I do not have much information on those local manufacturers and growers, but according to cigar industry insight it seems that Indonesian and Philippines growers are enjoying a good time. Raw material pricing for cigars in all categories is growing in double digits each year.

What are the opportunities for further growth in these markets?

Opportunity for growth, in my opinion, comes in two aspects: China and regional tobacco specialist retail development.

China offers a challenging context, but is among the brightest prospects for the cigar market thanks to its consistent economic growth. China is the focus of the industry in the region and Imperial Tobacco Premium Cigar Division is strategically placed. The cigar cooperation project I initiated in 2008 is on a steady path and is establishing ITG as a favored partner for the State Tobacco Monopoly Administration, both for our cigar and cigarette businesses. Enditem