Multiple roads

In tough times, leaf merchants are trying unconventional business models, with varying levels of success.

By George Gay

At the end of 2013, I contributed a story to Tobacco Reporter about “independent leaf dealers” that was a follow-up to a piece that had been written by somebody else at the beginning of the year. I don’t remember much about those stories, but on the other hand, I don’t need to look back at them to recall that neither the other writer nor I even got close to the point where we could be confident of how the term “independent leaf dealer” might be defined.

Asked again to write on the same subject, I’m now in a better position than I was because I chanced upon MXTobacco during Tobacco Reporter’s TABEXPO exhibition, which was held in London in October last year. MXTobacco is an independent leaf dealer if there ever was one because it supplies directly to the end user only tobacco grown on the farm of the company’s owner, Massimo Mantovanelli.

Mantovanelli produces flue-cured Virginia on a farm near Verona, Italy, where his family has been growing tobacco for three generations. In fact, to say that he produces flue-cured is to tell only a part of the story. He produces flue-cured, cures it, packs it, promotes it and sells it—he is an independent leaf grower and an independent leaf dealer.

Like other Italian tobacco growers, he used to produce his tobacco under contract to multinational tobacco companies, but that all changed three years ago when he decided on a new business model. Speaking during the London exhibition on a stand festooned with his own tobacco, Mantovanelli told me that he had changed the way he operated because he had wanted to expand his horizons and widen his customer base—to create a bigger network of customers.

And he had been confident that he would be successful on his own. “We have a particular soil and climate in our area,” he said. “It is well-located for tobacco cultivation. We know our product, we believe in our product, so we thought we would put a face to it.”

In part, he put a face to his tobacco by attending tobacco industry shows, and it worked. “We are happy,” he told me. “We have had good results. At the beginning it was a bit hard, but now it is getting better each year.”

I asked Mantovanelli quite what he meant by having good results: Did he mean that he could sell his tobacco at a good price? And his reply was interesting, partly because the direction he took the answer indicated, I think, why he has been successful. “Yes, for a price that we consider good for the product we are supplying,” he said. “Tobacco is like wine. It’s not a standard product. It’s a natural product so it is difficult to say what is the right price for that product.”

He then picked a pen from a container on the table where we were sitting and said that a pen in London was the same as a pen in the U.S., Russia or wherever, but tobacco was natural and the final product was different depending on where you grew it. “You have to have the right soil, the right climate, and you have to follow the entire process in the best way: fertilization, watering, curing, storage. There are different processes, and if every one is done in the right way, the final product is the best.”

He must be doing things in the right way because the prices he is getting for his tobacco are better than those he used to get when he operated under contract. And this is perhaps not surprising because Mantovanelli is a specialist. He grows 150–200 tons of flue-cured Virginia tobacco on his farm each year, but only flue-cured—no other types of tobacco and no other crops.

He is also an enthusiast. I hadn’t met him before October, but I imagine that he was always passionate about growing tobacco. And now he is passionate, too, about selling it—about traveling to meet and learn from his customers and to have them visit his farm. As his brochure says, “We invite you to our farm to smell the aroma, feel the softness and taste our product.”

His customers are small manufacturers, many of whom produce shisha. He has sold his tobacco, in leaf or strip form, to Jordan, Turkey, Israel, Romania and even to the U.S. Sometimes he arranges transport and sometimes the customer does, but all of his tobacco is packed in C48 cases: 200 kilograms in the case of strips and 120–130 kilograms in the case of leaf. And each consignment is accompanied by pictures of the packed tobacco as it made its way through the various processes, from curing to packing.

Different business models

What Mantovanelli is offering is, if not a unique service, then certainly a very unusual one, and one that clearly appeals to a certain type of manufacturer. There is a direct relationship between the producer and the manufacturer, which can be certain about the origin of what it is buying. Certainly the model seems to work. Mantovanelli is able to employ 15–16 people for six months of the year and to make a good living.

But it would be wrong to become too starry-eyed about such a way of doing things. Mantovanelli is not an ordinary farmer, and most farmers would not have the conditions, the operations or the entrepreneurial skills to do what he has done. And it is just as well that they don’t. It would cause an environmental disaster if each and every tobacco farmer started flying around the world to visit each and every customer. What Mantovanelli’s story seems to say is that the leaf tobacco business is best served by a range of business models.

For instance, while the Mantovanelli model does away with the specialist dealer, there is another model that does away with the manufacturer. John Wallace, the principal of Leaf Only, told me that a part of his business involved selling up to 10 pounds of leaf tobacco to individual end users for a wide variety of purposes: “from native ceremonial traditions to at-home cigar rolling.” Although such sales represented only a very small fraction of the tobacco market, he said, they were becoming more common as end users looked to craft their own products.

Otherwise, to make a business out of selling tobacco to manufacturers, leaf dealers, it would seem, need to be flexible. Either they need to be flexible in the sense that they can align with whatever direction the major manufacturers are traveling in, which probably means being major players in their own field and possibly means forfeiting a part of their independence, or flexible in the sense that they can provide niche products.

A good example of the latter was provided by Frederick de Cramer, of Sunel in Turkey, whose organic oriental tobacco is much in demand. As de Cramer said, oriental is something of a niche product, and organic oriental is a niche within a niche. Turkey is expected this year to grow more than 3,000 tons of oriental, of which Sunel’s farmers are contracted to contribute 2,000 tons. And the outlook is for further growth, which is good for the growers and Sunel because while organic certification requires a lot of additional effort from seedbed to packing, the returns are better than they are with non-organic tobacco.

Wallace, who sources nearly all of his tobacco in the U.S., is also experiencing a growing demand for organic tobacco.

Tough times

Of course, there is a danger here if someone or some organization starts to question what the smoker reads into the term organic, as happened many years ago in the EU and as has been repeated in the U.S. more recently. But this possibly doesn’t matter hugely because niche products tend to be ephemeral. After a while they either fall by the wayside or are absorbed into the mainstream. The point is that they provide a good return while they remain in demand and niche.

This is important because, generally speaking, oriental tobacco has not been enjoying a boom in recent years. In fact, part of what de Cramer had to say was almost alarming. As with big-leaf types of tobacco, there had been a drop in demand for oriental during the past two years, he said, and it was possible that, because of the level of downturn, it would become necessary for further consolidation among oriental dealers in Turkey. Tobacco consumption trends in American-blend markets indicated there was little likelihood that demand for oriental would pick up, and the aim at the moment was simply to try to stabilize the situation. But even this might not be easy because of what has been happening to the grower base. De Cramer said that the drop in demand had meant that dealers had not been able to pay growers what they should have been paid, given that costs kept going up. “We lost last year 10 percent of our farmers; this year again over 10 percent,” he said. “If we are going to lose 10 percent of our farmers every year, this is a catastrophe. We have to try to stop that trend.”

And it is not only prices that are a problem for the tobacco industry. There are a number of other crops that Turkish farmers can grow from which they can earn a better return than they can from tobacco, and there is the continuing migration from the villages to the cities, especially of young people.

The consequence of all this is that this year Turkey’s oriental crop is likely to be short and, while prices should be higher, dealers, who in recent years have invested heavily in new processing facilities and methods, and who have been experimenting with farm mechanization systems, will not be seeing the sorts of returns that they might have reasonably expected to receive. Attempts at farm mechanization have been frustrating, and while a new curing method is showing promise, it will succeed only if manufacturers are ready to accept tobacco that looks different to that of the past. And even then it will take four to five years for it to become widely taken up by farmers.

Rainer Busch, of NewCo, also said that the recent past had not been easy. The past three years, during which there had been a global oversupply of tobacco, had made life difficult for independent leaf merchants, he said, because cigarette manufacturers had tended to give priority to the bigger, traditional multinationals.

Rick Smith, of Independent Leaf Tobacco Co., was also in agreement that recent times had been tough. Small dealers, he said, were holding on by a thread, because they were being hammered by the same issues as were affecting the bigger operators but were less able to withstand those pressures. Because of the big leaf inventories available, clients had squeezed margins to breaking point. Too much tobacco was being offered by too many players. There had been overproduction, and consumption was slipping in those countries where it had been possible to make money in the past.

But Wallace was more optimistic and described the past couple of years as a period of growth, though he pointed out that this might be because his company did not fit the traditional definition of a tobacco merchant. Additionally, he thought the growth that he had seen could perhaps be put down to the fact that his company was relatively young, and the fact that his offering fit well with the growing interest in “natural” tobacco products.

And Pieter Sikkel, of Alliance One, had at least one positive take on the last couple of years. “It wasn’t that long ago that manufacturers were vertically integrating their supply chains and directly contracting with growers to procure some of their leaf supply,” he said. “Over the course of the past two years, we have started to see some of those vertical integration strategies reverse as the efficiency and cost savings of leveraging compliant leaf merchants’ capabilities are presenting opportunities for manufacturers to reduce cost, improve quality and source a compliant sustainable product.”

Shifting preferences

Asked about whether he had noticed any shifts in where leaf tobacco was being sourced, Smith said that he thought price had become the only driver in this respect, while Busch said only that he thought cigarette manufacturers were worried about future suppliers and the sustainability of their suppliers. Sikkel, meanwhile, said that it was important when considering shifts in where leaf tobacco was sourced to keep in mind the impact of the economy and social responsibility. “The consumer of today demands socially responsible and sustainably sourced products, and the tobacco consumer is no different,” he said. “Current and future tobacco leaf sourcing areas must be sustainable, or they will not be part of the future supply chain of tobacco. However, the economy also plays a role. In 2014, many people said Brazil would steadily decline as a future supply source due to the high relative dollar cost of tobacco. Now, Brazil is seeing renewed demand—the effect of the devaluation of the exchange rate no doubt has played a significant part. On the other hand, the strong dollar is affecting leaf export demand for the United States, which had been growing its exports in recent years. While short-term factors, such as the U.S. dollar strength or weakness, may change annual demand, we can expect to see long-term shifts in sourcing that are based on the need for sustainable, compliant, less complex leaf supply chains.”

Meanwhile, asked about whether he had noticed any changes in attitudes in source countries—more or less confidence in the future, or more or less enthusiasm for growing tobacco perhaps—Sikkel said tobacco was a key crop in many countries. It provided an important source of income to farmers, states and countries in some of the poorest regions of the world. “It is a vehicle for sustainable development of local communities, and it provides government revenues that are used to build roads and schools and other vital infrastructure,” he said. “It is not easily replaceable as a cash crop—if it were, growers would already have done it.” Wallace, however, said he had definitely noticed a decline in enthusiasm for growing tobacco. For some it was about crop failure and insurance. For others, it was about supply, demand and price. And for others it was about regulatory agencies making the hard work of raising tobacco that much harder. In answer to the same question, Busch said that it was his opinion that traditional supplier countries producing aromatic tobaccos were most enthusiastic about continuing to grow the crop. But Smith said he thought that just about everywhere the mentality had become one of “hold on,” better times are sure to come. “I guess we are all optimists or we couldn’t be in this business,” he added.

Finally, asked whether he had noticed any shifts in demand for the various types and varieties of leaf tobacco, or in the way leaf tobacco was delivered to the end user, Busch said that lower-quality tobaccos, especially filler types or low-stalk leaf and tobaccos with off taste, were of little interest and difficult to sell at any price. And there had been an increase of partial shipments and just-in-time deliveries. But Smith said there had been a slight uptick in demand for air-cured tobacco for the low-end cigar and roll-your-own markets.