OK Prez... give us the insiders scoop.

[Guest rob]

Hey Prez...

In this awesome review you did: [link=http://www.friendsofhabanos.com/board_entry.php?id=62551&page=0&order=time&]Partagas Edicion Limitada Piramide 2000[/link] you made mention of a topic that has long been interesting to me - PARALLEL IMPORTING.

At your invitation, I'm asking you to give us the "no holds version of the world of Parallel importing".

I'm hoping that this thread might generate some good discussion and give us all an insiders take on what is a fairly unknown (or black/grey), yet prominent part of our hobby.

Cheers!

[El Presidente]

Hi Rob.

Until 2002 when I entered into an exclusive agreement with PCC Hong Kong I was an exclusive Parallel importer into Australia so I know the trade well.

In our case, Alexanders (which were taken over by Swedish Match) were the authorised dealers for Cuban cigars in Australia for the best part of 140 years. When you hold such a monopoly for such a period of time you will upset some people in your market. I set out to exploit that.

I was in between jobs in 1997. I resigned as a negotiator for a Singaporean based multinational company of whom I was their corporate banker from 1989-1995. The CEO is a great mate of mine to this day but wiith a young son (2 years of age) I needed to find more time in Australia to spend time with my young family.

We were finalizing a polystaple fibre contract in Melbourne for factories in Indonesia when we were having Siglo III's at Crown Casino (Melbourne)

If I remember correctly we paid $45 AUD each for the Siglo III and I remarked to my CEO that their must be a margin in Cuban Cigars. Keep in mind that my dad always smoked one R&J CHurchill every Sunday afternoon and i joined him from the time I was 18.

My CEO commented that he was sure he was a Habanos sa distributor somewhere in the world and that he would investigate and shoot me a price sheet.

Needless to say a few days later the pricesheets arrived and I worked the numbers. I ordered 8 boxes for myself and friends and the supplier replied by e-mail......not to bother.

I increased my order to 50 boxes and all arrived perfectly. I sat down with my CEO and put a plan forward for a 50/50 business. I thought we could do $50,000 a month and I could stay home and be a great dad :-)

Our suppliers were HSA distributors for a market. Authenticity was beyond repute. I was a green horn.

The bigger I got locally the more Swedish Match set out to crush me. To this day I have never bought a cigar from Swedish Match.

I received an e-mail one day from a US client who asked me to ship to the US. I never had considered it previously. I did one shipment and bedlam broke loose.

Within three months I couldn't meet demand (now $100,000 per month). My HSA distributor couldn't meet my numbers.I was being flooded with other grey market suppliers (whom I didn't know) to meet demand.

I went to Havana/London/ Geneva and quickly worked out that one fake box would cruel me.

I decided to grow organically. Slowly.Know my supplier.

Don't get me wrong I was tempted. 50% of HSA was bought by Altadis in 1999. I met with the group but I was small potatoes. I persisted as an independent and was doing well in Australia. My stock was good, legitimate and I was growing. I was still a parallel improrter.

By 2001 I had estimated my turnover was 15% of the Australian market. Yet, Swedish Match had never contacted me in relation to supply. To be honest I was struggling. I needed more stock than my HSA supplier could supply. When dealing in foreign markets a HSA supplier would deal through a third party. This way nothing could be traced back to themselves. I had no problem with that...but I needed more stock. They couldn't supply.

By this stage I was tempted to dealing with suppliers out of Havana (direct), Panama, Canary Islands....but I declined out of concerns(rightly or wrongly) of autheticity. I knew one bad box would cruel my reputation.

In 2001 Abel Gonzalez Ortego took over PCC supply of Australia. The Swedish Match Monopoly had broken.PCC put in place their own distribution chain. Abel was the PCC version of Scarface....Tony Montana. He had dinner with me in Brisbane. At the end of a very fine dinner he said "I love you like a brother......but I have to crush you like an ant"

I put up a proposal. "Take 6 months to crush me...do what you need to do. If you can't, call me"

He called me six months on the dot. PCC offered to match my parallel importer prices. I entered into an exclusive supply agreement which I have to this day.

There is nothing wrong with parallel importing.

1. You need to know your source. You need to know them professionally and personally.

2. If you are a parallel improrter NEVER deal with anyone one removed from HSA.

3. There is no such thing as "vintage" or "aged" stock form a non HSA source that you can not trace lineage to.

4. If they have no Bricks and Mortar...walk.

5. If it is too good to be true......walk.

[Chaki]

Fascinating read.

Thanks Prez!

[Ken Gargett]

Keep in

» mind that my dad always smoked one R&J CHurchill every Sunday afternoon

» and i joined him from the time I was 18.

dear john grisham, how do you live with yourself? did you also write the hitler diaries?

i now have a crook neck from shaking my head so much.

by the time you retire, you'll have been dating 8 supermodels at once and be the only person to walk away alive from the diana crash. and so on...

i am in awe.

[El Presidente]

» Keep in

» » mind that my dad always smoked one R&J CHurchill every Sunday afternoon

» » and i joined him from the time I was 18.

»

»

» dear john grisham, how do you live with yourself? did you also write the

» hitler diaries?

» i now have a crook neck from shaking my head so much.

» by the time you retire, you'll have been dating 8 supermodels at once and

» be the only person to walk away alive from the diana crash. and so on...

» i am in awe.

It was only six supermodels (of which I would have given you one), I wish I came up with the Hitler Diaries and Princess Diana was a friend of mine ;-)

[Guest rob]

Amazing response Prez... a very fascinating read indeed. Thanks for the detail and honesty.

Can I ask a question - if Habanos state ([link=http://www.habanos.com/distributors.aspx?lang=en]Habanos link here[/link]) that there only authorised global distributors can distribute their product... and that those distributors are ONLY allowed to distribute to their specific markets - how the hell do parallel importers get their stock?? I see you say through 3rd parties... but it doesn't make sense that they would compromise their exclusive distribution contracts with Habanos to supply the parallel importers - for what gain?

If the importers are able to sell at 30% cheaper than those being supplied by official channels then there has to be something fishy going on.... either we're being screwed by the official distributors... or the grey market suppliers are doing something dodgy somewhere.

Also, besides taking the Parallel Importers word for it - is there any way to trace the source of their distribution?

I agree with you on the advice of only buying from importers who have a B&M... but in this world of e-commerce it is becoming increasingly difficult to find B&M's anywhere.

Thanks mate.

[El Presidente]

Pretty simple.

Lets say a company called "Venetia" has a license for say the Middle West.

Maybe there are 12 sub distributors in that region that move 1500,000 cigars a year each and who purchase from "Venetia".

Cigar Affar from Singapore contact one of these 12 Venetia Subdistributors and looks for 50,000 cigars per month. Lets call the sub distributor Ali Baba Cigars.

Ali Baba Cigars arranges the transaction through a $2 third party company called "Not Ali Baba Cigars".

All transport documentation/custom declarations are between "Not Ali Baba Cigars" and Cigar Affar in Singapore.

In the case of a bust in Singapore....."Not Ali Baba Cigars" has no affiliation with "Ali Baba Cigars" and hence "Venetia" and "Habanos s.a" could not give a hoot.

All transactions done into another Licence holders markets are done through third party companies so that they cannot be traced. In the main all communications are also done through the third party so that nothing can be traced directly back to the license distributor from where the cigars originated.

Quite juvenile but quite effective. You made a mention as for what gain?

Volume. Some parallel importers are huge and specialise in emerging markets. They go where authorized distributors cannot due to the need to follow local laws. The parallel importer does what is necessary to get the job done. Often he is suppled by sources outside of that region who have no fear of reprisals.

In some instances parallel importers are larger by volume than offical distributors within a given country.

[Guest rob]

So I guess, for every link in the chain to make a profit - they must be under-selling the cigars back at the original distributors. It's the only plausible explanation as to how Parallel Importers can sell 30% cheaper than official retailers.

If that's not the case... then that means that our local distributors (in our case PCC) are screwing us (you as the retailer and me as the customer) royally.

[El Presidente]

» So I guess, for every link in the chain to make a profit - they must be

» under-selling the cigars back at the original distributors. It's the only

» plausible explanation as to how Parallel Importers can sell 30% cheaper

» than official retailers.

»

» If that's not the case... then that means that our local distributors (in

» our case PCC) are screwing us (you as the retailer and me as the customer)

» royally.

Not really.

Purchase pricing from Habanos s.a amongst the Licence holding distributors worldwide is quite even.

for sub distributors...You move stock.... you get a better price from the distributor. You move a great deal of stock you get a much better price. Notice now how important parallel importers can be? They increase volume and volume is the tool one has to negotiate with.

The sub distributor sells to the wholesalers and retailers. It is at the subdistributor level that duties and taxes are normally paid.

In Australia that means $307 a kilo and 10% GST.

So lets say HSA wants a 30% gross return, License holder a 30% gross return, sub distributor a 30% gross return, wholesaler a 30% gross return and retailer a 30-40% gross return.

Individually none of these returns are extreme. What is happening worldwide is a shortening of the distribution channel. Sub Distributors are becoming retailers....and in some cases License holders are doing the same through third party websites. I am not talking here LCDH but rather discountonline enterprises.

All fair in love and war but the local B&M has real trouble surviving.

[thschrminm]

Rob, this is superb thread and something that not many vendors if any at all have ever talked about!!!

So a majority of the parrallel market originates from some distributor across the globe.....

Does Habanos sell directly to any parrallel importers without originating from a distributor?

If this happens, doesn't it upset the distributor for that region when it does or is it a result of the distributor not meeting their sales numbers?

Thanks Rob, some of this stuff is only rumored around and nott discussed in an open forum so this is very refreshing!!!!

You da man!!!

[Tampa1257]

One issue that has not been really mentioned is that Parallel Importers are also prone to suspect cigars. In order to shave costs and increase profits, Parallel Importers are contacted almost dialy by 3rd party go-betweens. The distribution chain following the flow all the way back to Habanos S.A. is worth an additional cost IMHO. Cheaper does not always mean better. I want to know for a fact that the Habanos that I purchase are 100% real without any doubt or question in my mind at all. Any additional costs to satisfy that peace of mind is worth it IMHO.

[smokum]

Well said Tampa...I would never take a risk for authenticity.

[Colt45]

» In the case of a bust in Singapore....."Not Ali Baba Cigars" has no

» affiliation with "Ali Baba Cigars" and hence "Venetia" and "Habanos s.a"

» could not give a hoot.

Does HSA really not care? It all sounds a bit shady......

[tigger]

Great thread!

Thanks for your insights Pres!

[Ginseng]

Fascinating!

Thank you for spinning the tale for us.

Wilkey

[Taino]

HSA don't really care, why would they?

Demand for habanos is still way over what they can supply, they just sit and smile... and off course they will say in public they are really very very worried...

» » In the case of a bust in Singapore....."Not Ali Baba Cigars" has no

» » affiliation with "Ali Baba Cigars" and hence "Venetia" and "Habanos

» s.a"

» » could not give a hoot.

»

» Does HSA really not care? It all sounds a bit shady......

[Colt45]

» HSA don't really care, why would they?

Perhaps to protect the image they portray, or their credibility, or to assure the quality of their product, or.............

maybe they don't really care.

[smokum]

» » HSA don't really care, why would they?

Perhaps they just turn a blind eye as long as they are selling all their cigars. Don't ask,Don't tell.

[El Presidente]

» » HSA don't really care, why would they?

»

» Perhaps to protect the image they portray, or their credibility, or to

» assure the quality of their product, or.............

»

» maybe they don't really care.

» » HSA don't really care, why would they?

»

» Perhaps to protect the image they portray, or their credibility, or to

» assure the quality of their product, or.............

»

» maybe they don't really care.

Pre 2000 they did not care about Parallel importing. Prior the arrival of Altadis $500 Million dollar investment, they cared about hard currency...the more the better. Cuba was broke. Habanos s.a was broke.

Mid 2003 Habanos s.a commenced buying back 50% of the License holders license. There were now "partnerships" in regional distribution. This is ongoing.

Now parallel importing became personal. Habanos s.a wanted to know who was shipping into a territory where they held 50% of the distribution license. There have been plenty of busts over the past few years. Whereas previously a Habanos License Holder for a backwater who posts record growth was congratulated, now there is a little more scrutiny as to where the sales growth came from.

There was also advanced discussion -[of Warranty Stickers numbers coded to detail the region where that box of cigars was sent. Half of the License Holders around of the world fainted

This will come into place but unlikely before US embargo lifted.

When I discuss parallel importing I normally talk about it in relation to legitimate stock.

Fake Habanos generally originates from central america, cuba and a little in Asia.

In the main these are professional operations. They have a two fold strategy of :

1. Establishing direct distribution channels (selling to stores, bars, clubs, street touts, cruise liner, US vacation destinations.

2. Passing off the stock as authentic and selling to end tier retailers.

End tier retailers are those who send to the public. They are always in need for more stock at cheaper prices. By going outside of the normal distributor channel you can make an extra 20%-40%.

Initial dealings between the parties is small scale. New supplier sends majority legitimate cigars as a trial (called blending). To be honest the retailer knows not all is 100% but is prepared to believe what he is being told. The retailer also continues to purchase some cigars from authorized distributor so that he can claim his stock is supplied by the official Habanos s.a chain.

In the end the retailer carries a mix of authentic and fake Habanos.

So Parallel importing takes several forms. You can have legitimate Parallel imported cigars, you can have fakes and you can have a mixture of the two.

Some world renowned retailers have been caught selling fakes (generally Limited Editions). When pressed they have admitted that they purchased the cigars outside of the normal distribution channel.

There has never been a confirmed case of a distributor receiving fakes. This is often a line used by retailers being caught out......" I spoke to our HSA distributor and they had a few boxes of fakes in a shipment...they are looking into it but I am pissed off".

Crap ;-)

[havanaclub7]

» There has never been a confirmed case of a distributor receiving fakes.

» This is often a line used by retailers being caught out......" I spoke to

» our HSA distributor and they had a few boxes of fakes in a shipment...they

» are looking into it but I am pissed off".

»

» Crap ;-)

Very interesting, Prez. On another cigar board, there were reports of a large cigar retailer in another country selling fake EL Cohiba Sublimes. Based on the bands alone, they were obvious fakes. What's interesting is that the distributor refused to call out the vendor for selling the obvious fakes. And the vendor, as you illustrate, blamed the distributor.

I'm so glad I don't have to worry about such troubles!

[El Presidente]

» Based on the bands alone, they were obvious fakes. What's interesting is

» that the distributor refused to call out the vendor for selling the

» obvious fakes. And the vendor, as you illustrate, blamed the distributor.

»

I don't know the story but I have been around long enough to know that there would be a hell of a story in there somewhere

[Miami101]

Wow

Prez this is a good story....thanks for posting it.

[havanaclub7]

» » Based on the bands alone, they were obvious fakes. What's interesting

» is

» » that the distributor refused to call out the vendor for selling the

» » obvious fakes. And the vendor, as you illustrate, blamed the

» distributor.

» »

»

» I don't know the story but I have been around long enough to know that

» there would be a hell of a story in there somewhere

What's even more interesting, Prez, was that the distributor replaced the cigars for the customer who got burned (though the customer did NOT get Cohiba Sublimes!).

Like I said, I'm just glad that's not a problem I have to worry about. That said, I'm a little nervous about what will happen in the CC market when the embargo is lifted. On the one hand, I think I should buy stock in Altadis (or the company that supposedly acquired Altadis). On the other hand, I think there could be a huge quality and supply crisis that could damage the "brand."

[Guest rob]

I was initially a little worried - but I'm glad I started this thread now... it's like reading the goings on between a mafia family and the politicians they pay off.

Prez, you stated that it would be important to be able to trace back the Parallel Importers stock back to HSA... how does a customer do that? Just by taking their word?

I mean, at the end of the day any unethical importer is just going to say "trust me" and lie.

On the issue of fakes mixed in with real stock... surely the local "OFFICIAL" distributor for teh region would have grounds to take legal action against the import of fakes.

For instance, if there was a parallel importer selling fakes (knowingly or unknowingly) then I would assume that a company like PCC would have grounds to sue - Especially because the product is typically sold cheaper ethan their real stock.

Have there been (and are there still) cases in Australia that you know of where this has happened? What were the results?

[El Presidente]

» Prez, you stated that it would be important to be able to trace back the

» Parallel Importers stock back to HSA... how does a customer do that? Just

» by taking their word?

» I mean, at the end of the day any unethical importer is just going to say

» "trust me" and lie.

Pretty much

» On the issue of fakes mixed in with real stock... surely the local

» "OFFICIAL" distributor for teh region would have grounds to take legal

» action against the import of fakes.

» For instance, if there was a parallel importer selling fakes (knowingly or

» unknowingly) then I would assume that a company like PCC would have grounds

» to sue - Especially because the product is typically sold cheaper ethan

» their real stock.

»

» Have there been (and are there still) cases in Australia that you know of

» where this has happened? What were the results?

If you do a search for "Cigar Affair" http://www.friendsofhabanos.com/board_entr...id=54222#p54222 you will come up with a case where Habanos s.a took a Singaporean company to court for distribution of fakes. It took near 3 years and $400,000 to gain a conviction. Jail time was minimal as was the fine.

It is not a straight line process. Habanos s.a had to prove not just that the cigars were fake but that the vendor "knew" they were fake.

Parallel importing is not illegal. Fake cigars are. When a judge is confronted by two boxes of Monte 4 ....one fake one not he is amazed at the similarities. The expert witnesses of HSA will attest to the differences between the boxes/cigars but to a judge they are borderline. The Defendant runs the line "Our supplier told us they were real...I believed them. I did not set out to defraud".

Start to see the problem with enforcement.

Habanos s.a is really looking at finding out who is supplying fakes to the retailer. Remember, any pirate worth his salt is operating a $2 front company through a warehouse in a Asia, Central America or a Free Trade Zone in Europe. In most cases, orders may be taken by "Pirate Cigars Universal" but the invoice/shipping is done by a third party company "Rajistan Incorporated" with offices in say Manilla and the bank account is in Hong Kong...under a different name again.

It is hard to enforce Rob. It costs serious money and time with a less that 50/50 chance of judicial success.