Cigar fad going up in smoke Last year's hot stock and trendy product have quickly cooled

March 29, 1998|By RICHARD PHALON

Is the premium cigar craze going the way of the Hula-Hoop and the pet rock?

Not much more than 12 months ago, the hype on the $10 cigar was thicker than smoke in a political back room. Generation-X cigar bars were cropping up everywhere.

You could hardly turn a magazine page without scoping star talent like Madonna puckering up to a Macanudo. And on Wall Street, new stock offerings by the likes of Consolidated Cigar Holdings Inc. and General Cigar Holdings Inc. were exploding through new highs.

Now, little more than a year later, cigar bars are scrambling for customers, Madonna has discovered motherhood and cigar stocks have plunged to new lows.

The speed of the downfall is one more proof of the old short-seller's law: "The life span of a fad stock is half the life of the fad itself."

Cigar stocks have been hit so hard, in fact, that to some opportunists they are beginning to look like bargains. Canadian money manger Knight, Bain, Leath & Holbrook, for example, recently more than doubled its 2 percent stake in General Cigar at prices 50 percent below last year's high of $34.

No one is calling for Dr. Jack Kevorkian yet, but the early running indicates that the stogie makers don't have a prayer of matching the halo of last year's results.

The top purveyors of premium smokes, General Cigar and Consolidated Cigar, made money hand over fist last year selling into seemingly insatiable demand.

Consolidated's profits, for one, were up 80 percent on a sales increase of 38 percent.

Those juicy profit margins, Consolidated's best ever, were achieved even though the company - like General Cigar - couldn't fill orders fast enough. Backlogged orders were so high, it looked as though Consolidated was pushing hallucinogens rather than its traditional Jamaica-wrapped H. Upmanns.

Controlled by money man and stogie meister Ronald Perelman, Consolidated went into last year with unfilled orders of 37 million cigars - eight times the levels of 12 months earlier, 10 times the levels of five years earlier. The numbers are a fever chart of how the fad took off.

There was plenty of jockeying to get in on this great burst of prosperity.

In the stock market, second-rank companies such as Swisher International Group Inc. and Holt's Cigar Holdings Inc. piled into the new-issues crowd. New competitors hustling lower-priced Don Nobodies fed on a retail market so manic that even gasoline stations began dressing up as cigar bars.

It's an old, old scenario: Expensive new capacity gets thrown into place, competition builds and then the wave recedes, leaving swollen inventories and price cutting in its wake.

Thus a well-established Jamaican brand such as 8-9-8, selling for almost $10 the cigar last spring, now goes for about $6 the pop. Newcomers like Victor Sinclair's Don Rafaels, retailing for around $7 at peak demand in June, now sells for half that price.

It's hard to see how these pressures will not eddy all the way up the price scale, cutting significantly into profit margins.

Consolidated Cigar and Swisher have conceded that first-quarter earnings will come in under Wall Street estimates, citing overblown inventories and "moderation in the growth of retail sales."

Bottom line, this is a sure sign that energy is fading out of the fad, putting premium smokes in the back seat with such other 90-day wonders as high-end tennis rackets, skis and champagne.

Health worries about cigars have not helped, but the fade-out in luxury goods is a global phenomenon.

Conspicuous consumption has evaporated so quickly in tapped-out Asian centers such as Hong Kong and Tokyo that upscale brand names like Vuitton, Hermes, Gucci and Dom Perignon have been blindsided everywhere by bloated inventories and lost pricing power.

It's by no means H. Upmann's last gasp, but look for the deluxe smoke - and many of the good things that go with it - to get a lot easier on the pocketbook.

Richard Phalon is a contributing editor at Forbes magazine.

Pub Date: 3/29/98

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