Scandinavian Tobacco Group: Added Figures
“Maybe it's like becoming one with the cigar. You lose yourself in it; everything fades away: your worries, your problems, your thoughts. They fade into the smoke, and the cigar and you are at peace.” - Raul Julia
Scandinavian Tobacco Group held its Annual General Meeting on April 4th. As expected, little new information was provided since last month’s piece covering FY’23 results. Simply, the company remains steadfastly committed to returning substantial capital to shareholders as it grows the size and scope of its portfolio of premium products and related earnings. Nonetheless, there are a few points worth reexamining to more fully frame the opportunities ahead of this uniquely positioned company.
US Premium Cigar Import Figures
In my comprehensive analysis covering Scandinavian Tobacco Group, I offered a unique chart capturing the recently spiking US import volumes of premium cigars. As to whether or not the trend would continue, I posited:
The obvious question is: Is the recent spike in imported volumes simply a repeat of 1997? I don’t believe it is—not exactly. The boom of the 90s overestimated demand, creating an excess supply that was not wanted nor needed, leading to a precipitous fall. Presently, while the windfall of discretionary income courtesy of the U.S. government is no longer here, the change in consumption patterns persists, and although return-to-office has picked up, remote work continues to become more widespread, further increasing smoking occasions.
Q1’23 showed import volumes down 8.8% y/y. However, the remainder of the year remained resilient, and despite a certain degree of post-COVID unwind, total import volumes for the year were up +0.67%. There remains a structural decline rate, in which case volumes do not perfectly capture consumer offtake and consumption. Nonetheless, it appears that 2023 has shown that the post-COVID demand environment remains markedly more positive than expected. This has not been perfectly reflected in STG’s financials, as input inflation, various logistics challenges, and competitive pricing have weighed on margins. Stepping back, it is essential to appreciate that throughout the longer cigar cycles, significant pricing power has been recognized. While currently aiding STG’s results to a lesser degree, there should be considerable room to improve in the coming years provided demand remains robust.
The Cohiba Experience at the Ritz
On August 11th of last year, the Ritz-Carlton Bacara held a grand opening for “Cohiba Experience at Bacara,” a Cohiba cigar lounge on the rooftop of the beautiful 5-star hotel in Santa Barba, California. The lounge offers a stunning view of the property, handcrafted cocktails, and, of course, handcrafted cigars. On its face, the lounge appears as merely another retail outlet. But it’s so much more. The lounge offers a connection, introducing high-end consumers to a whole new world, and reinforces Cohiba’s premium position by pairing it with a world-renowned hospitality brand. This is in addition to other STG establishments, such as Club Macanudo, with locations in New York, Kuala Lumpur, Copenhagen, Jakarta, Taipei, and Bossier City.
With the international expansion of handmade cigars acting as a central growth driver for STG, it is without question that we will see similar new openings in the coming years. Alongside potential Club Macanudo openings, I find it most likely that STG will aim to open Silencio-branded lounges in select markets. These types of establishments provide additional food for thought. How many tobacco product categories can have standalone locations to cater to clientele? What other product can command that same status or association? As STG’s CEO, Niels Frederiksen, noted last year, 85-90% of cigars are consumers in North American, Europe, Australia, and New Zealand. It takes little to imagine the possible long-term economic impact of establishing similar affinity through the rest of the world as economies mature and adult consumers grow their discretionary income.
XQS
STG’s modern oral nicotine pouch, XQS, continues to impress. Distribution has gradually expanded in Scandinavia, and while anecdotal evidence continues to suggest the pouches lack in duration, they more than make up for it with flavor intensity and uniqueness. Reviews often speak of fresh, familiar flavors with nuanced twists. Alongside duration, the primary criticism is a lower moisture content relative to leading Scandinavian variants, leading to a less favorable mouthfeel.
Alec Bradley on Top Cigars
Cigar Aficionado’s Top 25 Cigars of 2023 list included the usual suspects: Fuente, Padrón, Patel, Partagás, Romeo y Julieta, Oliva, and Cohiba (Habanos v). The illustrious Davidoff missed the cut. Habanos made the list with four names. However, there are some interesting, contrasting data points. New World varieties scored 0.24 points higher than Cubans on average, while the listed Cubans sport sticker prices ~4x higher than the New World names. For the third time in the last four years, Alec Bradley saw its name in the top quartile. As STG invests in its pipeline of blends, one wonders what the international opportunity looks like for this brand.
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Ownership Disclaimer
I own positions in Scandinavian Tobacco Group and other tobacco companies such as Altria, Philip Morris International, British American Tobacco, and Imperial Brands. I also own positions in Haypp Group, a major online retailer of reduced-risk nicotine products.
Disclaimer
This publication’s content is for entertainment and educational purposes only. I am not a licensed investment professional. Nothing produced under the Invariant brand should be thought of as investment advice. Do your own research. All content is subject to interpretation.
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Devin, I count three STG cigars amongst Cigar Aficionado’s top 25: Partagas (#6), Alec Bradley (#8), and Cohiba (#16). Is my count correct? Given that STG is one of the biggest (if not the biggest?) manufacturer of handmade cigars, does this indicate that the market is very fragmented?