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Jun
2015

The challenges of the cigar market in China

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In recent years, an interesting saying has appeared on Chinese social media ‘the highest state of life: earning Dubai wages, living in a UK house, smoking Cuban cigars, wearing a Swiss watch, driving a German car…’ Although this originated as an online joke, there is no doubt that cigars, especially Cuban cigars have become very popular in China.

As discussed in the April 2014 issue of Luxury Insight China, the Chinese cigar market is currently in a rapid development period that retailers and insiders in the industry are optimistic about. There are also many businessmen eager and ready to invest in the industry, opening tobacco stores and hoping for good profits. Although the overall trend in the cigar market is promising, it cannot be denied that the cigar sector in China is still in a stage of opening up. Considering the cultural differences between China and the West as well as government policies and regulation, there are plenty of problems to solve if the cigar market is to really take off.

The current market challenges

The immature consumer market and retailing environment

Due to the impact of socio-economic development and factors of consumer culture, the domestic cigar market still very much in its infancy. The consumer culture and consumption concept still requires a longer cultivation time. By comparison to North America or Europe where per capita annual cigar consumption is 18 to19, and although the Chinese market has attained rapid growth in recent years, the per capita consumption was only 0.24 in 2012, less than 2% of foreign consumption. The market has a long way to go!

The consumption of cigars was initially driven by foreigners, celebrities, successful businessmen and Chinese returnees, but has not yet developed a relatively stable domestic consumer groups.

From the potential consumer perspective, they have no idea about the history and culture of cigars, usually following what their friends or retailers say, and sometimes just buying cigars from anywhere overseas, behaving in an immature manner.

Illegal purchase channels

In China, the tobacco industry is a state monopoly, and is strictly regulated and controlled. A tobacco wholesaler needs to go through a very complex procedure and certification process before getting approval from the government which makes importing tobacco from overseas very difficult. Taking into consideration the import tariff of 36%, the tobacco profit of importers cannot be guaranteed which in turn reduces their interest in importing cigars. Driven by issues like these, and the small number of regular import channels, the vast majority of cigars that enter China are from some illegal channels.
Mr Yu, the manager of a wine and cigar retail company in Hangzhou is quoted as saying “The general tobacco import tariff is about 25%, while the import tariff of cigar is much higher, around 40%. With such high tariffs, if we import cigar from a regular channel, we can hardly earn any profits.”

‘The best selling cigar here is the Cohiba 2000, 10 cigars in each box, that sell at a price of 2,000 RMB. Because of the heavy import tariffs the majority of the foreign cigars in Mainland China are brought in by a ‘Daigou’ or via a tour guide. ‘We purchase these in the same way. The tour guide charges 100 RMB of each box of cigars.’

Another way of importing cigars into China is through government or customs internal relationship channels. According to Mr Huang is a cigar agent in Nanning, Guangxi province, his company sells all most every type of foreign high-end cigars such as Cohiba, Cuba and Davidoff priced from 500 RMB to 5,000 RMB per box. He explained that ‘these cigars are mainly from Hong Kong, Macau and other duty-free areas. Because we have our own channels and internal relationships, we don’t need to report to the custom or to pay the import tariffs. As a result I believe that our sales price may be the lowest in the country, and we can guarantee the quality.’

Mr Huang has been running this business for 2 years and his products are mainly used to supply 5 star hotels and high-end clubs around country. Mr Yu also stated that ‘We mainly supply domestic high-end hotels, and almost all the 5 Star hotels in Hangzhou are getting cigars from us”’

Differing distribution channels

The characteristics of cigars present a range of different requirements due to them being, multi-standard, multi-style, multi-shaped packaging, and small quantities; as well as a small volumes to a minority, personalized, place of consumption, warehousing, distribution, and supply and information systems. The issue now in China is that the current distribution system focuses on the characteristics of cigarette marketing, and businesses lack knowledge and experience of cigars, giving both the products and sales channels many problems. However, there isn’t a better way to promote cigar culture and brands. For the domestic tobacco companies, the investment cost is currently to high when compared to the profit they might attain. The must invest in humidors and stock, and the sales volumes are currently too low for them.

In this way, the market in China differs from that of western countries. Luxury hotels, entertainment venues and clubs often become the main place for selling cigars, and in particular luxury hotels. Presently most of the five-star hotels in Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou have a cigar house. The small cigar house in the Narada Grand Hotel in Hangzhou, has two humidors in which it offers just six different types of Cohiba cigar.

The average price of these cigars is 200 RMB each, and range from 160 RMB at the low end to 300 RMB at the top. The Cohiba No 5 is the best-selling cigar and is priced at 260 RMB and regularly sells out. We have found that the majority of Chinese people do not have the habit of smoking cigars so most of what we sell are consumed by foreigners who have become loyal customers’ said the salesman in the hotel.

Similarly, most of the luxury hotels in Shanghai have a cigar house or room, which is equipped to a higher level and scale than those in Hangzhou, the reason being the more international outlook of the city. Local consumers in Shanghai show greater interest in smoking cigars and the customer recognition of them is generally higher than that in Hangzhou. A further reason that Shanghai has better sales than a city like Hangzhou is because of the number of cigar clubs and clubhouses in Shanghai, which most second-tier cities cannot match. These cigar clubs and houses constitute the major retail places for cigar sales; and we cannot forget the duty-free shops in airports that are also a big boost cigar sales.

Cigar consumers

Satisfying a need for nicotine from different products such as cigarettes, cigars or pipes is not clearly understood by many Chinese men. It is widely believed that the cigar is less likely to harm the human body. However, the attraction for men in China may have nothing to do with health. The cigar has been likened to an ‘urban gentleman’s card’, and today, cigars have become a status symbol and a social necessity.

In this immature market, there are 4 main consumer groups.

Foreigners
Those foreigners based in China typically already posses the habit and desire for smoking cigars, and would be able to purchase products in a tobacconist and smoke the item anywhere they chose. The fact that they can buy cigars in five star hotels and smoke them and comfort in peace in the same place is definitely a value to this consumer group.

Business owners and executives
Successful businessmen like SME owners or executives of large corporates are one of the main consumer groups of cigars in China. Firstly because they have a certain economic and social status, and smoking cigars is the embodiment of this status. The second may be related to their level of work stress, and they consider the period when they are smoking a cigar a time to think, listen and self-question.

The business elite
These successful people are associated with cigars often due to work, and they will also have some understanding and knowledge about cigars and their culture. A cigar store represents not only a place to enjoy a smoke, but also a good place for business discussion with likeminded people.

The wealthy younger generation
Many younger people in China are curious about and willing to accept new things, and have relatively strong spending power. A cigar meets their psychological demands and pursuit of an international lifestyle.

Qualitative facts

1. Chinese consumer perception of cigars

The characteristics of the cigar

Consumers don’t know much about the history, culture or brands of cigars. The taste of the cigar has the deepest initial impression on them.

  • Strong smell
  • Pure taste
  • Fancy packaging
  • Long lasting and difficult to smoke in one session

The attraction

The taste and psychological factors are the two most important aspects that attract Chinese consumers to cigars. They believe that smoking cigar is

  • New and unique
  • Allows them to show off
  • Demonstrates status
  • Is special
  • Comfortable
  • Fun
  • Delivers good taste

*Older consumers also believe that cigars are environmentally friendly products, more natural and healthy than cigarettes and pipes.

The level of cigars

Chinese consumers mainly distinguish the level of cigars by price, and believe that sky-high price means high-end cigar.

Brand is also an important sign for consumers to differentiate cigars, especially that ‘well-known brand means high prices, ordinary brand means low price.”

The difference between hand and machine-made cigars

At present, consumers cannot really distinguish between cigars made by hand and those made by a machine, most only know that hand-rolled cigars are typically looser than those made on a machine.

Domestic verses imported cigars

Consumers consider the main differences between domestic and imported cigars to be the flavors and packaging, and of course the brand is also an important distinction

  • Packaging of imported product is fancy and elegant, whereas domestic brands always produce poor packaging
  • The taste of foreign cigars is pure and strong; domestic made product is relatively light.

The cigar originates outside of China so Chinese consumers are psychologically more receptive to imported products

  • “Like pirate and legitimate products, the domestic cigar is considered to be like a pirate and the foreign brand the original.”
  • “For the Chinese people, there is already ingrained thinking that imported is always the best.”

2. The psychological behavior of cigar smoking

When to smoke?

Consumers have no fixed occasions they consider correct for cigar smoking, so they smoke at home, in clubs, offices, bars and other entertainment venues, but principally in clubs or bars. Consumers tend to be meticulous about the smoking atmosphere as they usually smoke with their friends rather than smoking alone.

The most popular brands

Most regular consumers tend to smoke imported cigar brands, although they do not really know the specific brand name. In the main they know that good brands originate from Cuba or the Netherlands. The only brands that most can remember are Cohiba and Davidoff.

Market trends

Most consumers and observers don’t think that cigar will become a mass consumer product in China.

  • ‘These days society is advocating non-smoking as it is harmful to our health. How would cigars become a mass consumer product?’
  • ‘A cigar is too expensive to become a mass consumer item, normal people can’t afford it.’

However by contrast, a small number of consumers think that with more guidance from the market and opinion leaders (such as celebrities), cigar smoking may become a trend.

3. Current purchase behavior and habits

The purpose of buying cigars

The purposes for consumers to buy cigars in China are typically for their own pleasure or for gifting, and comparatively speaking more people buy for their own use than to give to others. There are also a very small number of consumers who are unique as they do not smoke their purchases but buy for collection only.

Cigars purchase channels

Consumers believe that the ideal place to buy is in an either exclusive store or a five star hotel where is unlikely to be sold fake cigars, they would consider tobacco stores but the fact is there are rarely cigar brands available in these places.

Cigar information

Consumers generally get information about cigars from magazines, online advertising and friends, through their personal circle tends to be the best way to educate consumers and promote brands in China. Many consumers also gather some knowledge of cigars from movies.


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