The Friends of Habanos forums is a great collection of Cuban cigar lovers. Recently, the main man, Rob Ayala, asked this question:

Where does HSA go from here?

The following was my (lengthy) response:

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Unlike what many others have said on this tread, i’m actually impressed by what HSA has been able to do in the last couple of years.

Someone said it earlier, and this is the head of the issue — cigars of the Cuban mold are luxury items. There is no such thing as a “cheap” Cuban cigar. “Cheap” is a packet of cigarettes where each stick lasts 5 minutes and costs the consumer 20 cents (a cigarette in Malaysia costs, US$0.16). Compare that against an average “corona” from Cuba which costs US$8.50 — thats a difference of 5300%! Its even more when you factor in forex rates and purchasing power parity (PPP); in countries like Malaysia, the difference between a “cheap” cigarette and a cigar can be as much as 10,000%!

Now that we’ve established that a cigar is a luxury item, it needs to be treated as a luxury item. Let’s try to take ourselves out of the equation, because we are looking at the problem as a customer, not necessarily as the CEO of HSA. e.g. all customers want their favourite products at a cheaper price, all customers want their favourite products distributed in quantity to where they can easily get them, all customers hate it when their particular favourite cigar gets discontinued.

How do brands treat luxury items?

Forget about HSA and cigars for a moment. How does Mont Blanc treat its pens? How does the Carrat Club treat its diamonds? How does Ferrari treat its cars? They are all luxury items, in a luxury market.

Does Mont Blanc make plastic ball point pens? I’m sure thousands of people (myself included) would love to have the great Mont Blanc reliability rolled into a plastic disposable pen. Or will Ferrari ever make a cheap family car? I know i would love to drive something like that. Same Ferrari engine, just make it cheap and put a CRV body over it. I’d buy that.

Customers will buy plastic Mont Blancs or cheap CRVs with the Ferrari logo on it. Not only will they buy it, but you can say there is a definite market and demand for it. So isn’t it silly that these luxury brands ignore this market and just focus on their expensive diamond Skywalker pens or their Ferrari Diablos? Why would a business ignore potential customers?

If you can answer that question, then you will have the answer to the questions you pose to HSA. Why does HSA seem to be moving their product dome ever upwards, and scaling back on the regular product cigars, and completely eliminating certain lines? Why are Cuban cigar prices high? Why do some people think that Cuban cigar prices are “overinflated” or “not worth it” — those are exact phrases i’ve heard used pretty regularly. Why do we see the likes of Cohiba Gran Reserva, retailing at US$100 per stick? (more importantly, why do we see such high demand for these cigars? you can hardly find them anywhere nowadays, every single store in Malaysia sold out of these within the first few weeks of release, even at RM500 (US$155) a stick!!!).

Rob asked us to look at this as the CEO of HSA, not as customers who wished we were CEO of HSA. There is a remarkable difference between the two.

Having said that, this is what i would do (many of these things are already being done by HSA, so i’m not really breaking new ground).

1. Ensure that all segments of my “customer dome” are well taken care of, in a proportionate manner.

Your typical customer dome is 15% low / 70% middle / 15% high <– in relation to what they are willing and able to spend on cigars.

Segmentize my products to fit this dome, based on the availability and cost of the cigars/tobacco used to make the blends/vitolas of each segment.

Theory: Perhaps the reason why we’ve seen the demise of “popular” vitolas/blends such as Partagas Serie du Connoisseur is because the availability of the tobacco does not support the market price of the cigar i.e. the cigar became too expensive to produce due to a rarity or reallocation of the required ingredients. Pure speculation, but that’s why other brands (non-cigars) have killed off seemingly popular product lines before.

As a business, we need to realize that tobacco is a finite resource, great tobacco even rarer still. What’s the best way to make the most of what we have? That brings me to the second point.

2. Reserve my best tobacco for the 15% high segment of the customer dome, and charge them to the wazoo for it. For people who have no problems affording US$100 sticks, i don’t think it’s a problem for them to pay US$150 for the same stick.

Having said that, in order to service the more price sensitive 15% low / 70% middle segments, i’ll ensure that current trends of quality are maintained and improved to ensure that as much value for money as possible be given for the products in this segment. I don’t think customers will grumble to pay US$14 for a good Siglo IV, but each stick better be a good one.

3. The idea of regionals and custom rolls is a good one. By creating unique cigars to a particular market, you’re crafting cigars that are made to serve the palates of that region, you’re saying, “We hear what you want, and this is what we’re doing to serve you and only you.” It is a touch of class that i think the enlightened aficionado appreciates. Think McDonalds, and how their Happy Meal in India includes rice and veggie burgers while the Happy Meal in USA or UK is the more traditional cheeseburger and fries.

This may also explain why cigars from outside our region may taste strange to us; i’ve got several sticks from Spain, Canada and Pacifica that i’ll use to test this theory out — the cigar wasn’t blended for our tastes, that’s why we don’t like it therefore we claim its just a marketing gimmick with no added value.

However, i will take a good long look at the price points for these Regionals. I think these cigars should be used to service the 70% middle segment, and also as a means to entice and hook new smokers. Therefore, the price needs to reflect this strategy.

4. Leverage on the Internet and engage directly with my customers worldwide, find out what they want; maybe even produce a limited “twitter Habanos” just like the La Aurora 107. Many others have said the same, so i’ll no elaborate here.

There is a lot more i could suggest, but without knowing the actual numbers and have access to the accounts of HSA, it’s very much speculatory. Many ideas would just not make any financial sense for HSA.