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Davidoff's No. 1

Cigar Aficionado interviews Davidoff's director general Ernst Schneider.
Marvin R. Shanken
From the Print Edition:
Rush Limbaugh, Spring 94

(continued from page 1)

C.A.: But at the same time, there is a certain segment of the market--I would like to say the more sophisticated or connoisseur segment of the market-- that has always enjoyed Havanas and will continue to enjoy them. There are also Americans who may smoke a Cuban cigar and say, "too strong, not for me," and Europeans who will say, "too light, not for me [about Dominican cigars]. I smoke Havanas!"
Schneider: It depends on your personal taste. It depends on my personal taste. What I can analyze, however, is the general trend in markets, and this is the reason why we go in this direction. For example, my grandfather smoked Stupend, a Swiss product, and today this product is finished. So, the times are changing, and the tastes can change --but we still believe that Havana tobacco is the best for cigars.

C.A.: What you're saying is that under the proper conditions, you would welcome the opportunity to reestablish a brand of Davidoff made from Cuban tobacco.
Schneider: Naturally, naturally.

C.A.: One other aspect of Davidoff's past Cuban cigar line was the Chateau series. It was a brilliant public-relations and marketing effort. Do you see the day when you will have a line of Chateau cigars again?
Schneider: They are all our friends. The proprietors of the five grands crus wine estates are all Zino's and my friends, and I am sure when the day comes, there will be the possibility when we can create again the same quality and cigars.

C.A.: Would that be in Dominican or Havana then?
Schneider: That's not decided. It depends on the situation.

C.A.: You mean the château owners would have to decide on that?
Schneider: Yes.

C.A.: Please answer this question; I am dying to know. Do you have inventories or do any of your subsidiaries have inventories of Davidoff Havanas?
Schneider: Well, you know that we have an agreement with Cubatabaco that since the first of January [of 1993] that the Davidoff Havana cigars should not be sold. They are falsifications from a legal point of view, and when somebody is selling Davidoff Havana cigars today, we can go to court and confiscate them.

C.A.: I understand you can't sell them today, but I'm asking whether you have any stocks left.
Schneider: We tried to sell as many as possible before the year-end of 1992. But we took back some from certain retailers to help them. So we have a small stock.

C.A.: Small? How small?
Schneider: A small stock. Small enough so that it is enough for you and me to smoke (laughs).

C.A.: That doesn't sound large enough to me. I had a vision of a huge warehouse with millions of cigars.
Schneider: No, no. There are not large stocks.

C.A.: Let's talk about a topic of great emotion: the U.S. embargo against Cuba. It affects you indirectly as a businessman with your new generation of Davidoff cigars. What percentage of your business is in the United States versus the rest of the world? How does the embargo or lifting of it affect your future plans in the United States?
Schneider: I feel that it will be very positive when the embargo is lifted because there are two points in my view. One is that what is forbidden is more interesting, and many people are smoking Havana cigars in the States to say "I have a Havana cigar." The day when the Havana cigar is free to be bought in the United States, this idea you can forget. The other point is that naturally when the Havana cigar becomes open to the American market, you will have a big turnover in the beginning, and then it will go down, and you will have to build up the market from the bottom. But it won't influence my market.

C.A.: At our recent cigar seminar in New York, the panel of industry experts believed that the embargo will not be lifted for the next five, six, seven years, and, then it would take another five to 10 years to rebuild stocks of aged cigars that would be like the cigars of old. So we are talking about 10 to 15 years before the United States could enjoy a volume of properly aged Cuban cigars. It is a long time.
Schneider: It is a long time. But I am more optimistic. I feel that when there is normalization with Cuban and American relations, you will really be able to do business like you should be able to; in four years' time, you can get good results in producing cigars there. Naturally, then you would need to add years to mature the cigars. But you should be able to get in that time what you need and what you like.

C.A.: If the embargo is lifted, what do you think the range of world demand for Havana cigars would be, after an initial period of boom?
Schneider: I already said that you have to build up the market from the bottom. Don't forget that before the embargo, the United States imported about 25 million to 28 million cigars; so this is a figure, and when you have to build up from the bottom of the market again, it will take time. Also, the American consumer is used to lighter cigars; that's clear.

C.A.: How would you estimate the global market? Do you think it would be 120 million?
Schneider: No.

C.A.: Would it be less?
Schneider: Less.

C.A.: Let's move to a more sensitive subject. When one thinks of Davidoff, there is always an issue of price. First, there's the American who looks at your price in relation to other premium brands like Macanudo and Partagas, which are $2, $3, or $4 each. Then there is the more obvious conflict in a market like London where a Havana Davidoff sells for about $15 and a Dominican Davidoff for about $10. Some people may think that the price/value relationship for your new cigars has been altered. What do you say to that?
Schneider: That's very simple. You know that in Havana, you have cigars from $2 up to $20. That's exactly the same situation with those from the Dominican Republic. Why? I said the main points to be successful include price and quality. When you know how many operations you have to do to make a cigar; what you have to do to find the best tobacco, the best leaves, the best binders; you have to stock for three years' time at least; what you have to do to make the best blends. And when you make the final cigars, tell me which pleasure that goes on for one hour or one-and-a-half hours costs less than my cigar?

C.A.: I think that position has less resistance in America than it does in Europe and particularly in the United Kingdom.
Schneider: You want to know why? The U.S. business is being killed by discounters.

C.A.: I haven't seen that.
Schneider: But some retailers in the United States explain that a premium cigar shouldn't cost more than $2.

C.A.: Let's go back. When you looked at your pricing strategy in Europe, what did you do?
Schneider: It's 25 percent less than the Havana Davidoff price.

C.A.: Is it?
Schneider: Yes.

C.A.: If it's 25 percent less, then it's a moot point. I thought that you basically took the Havanas off the shelves and replaced them with your new cigars without lowering the prices.
Schneider: No, not at all.

C.A.: Then why are prices so high and about the same as the average Havana? Is this a question of the tax structure?
Schneider: No. There are other reasons.

C.A.: What is the total production of Davidoff cigars in the Dominican Republic today?
Schneider: We are now at about 5 million, and our goal is 10 million in the next three years.

C.A.: And of the 5 million, what percentage goes to the United States?
Schneider: About 25 percent.

C.A.: So about a million, a million and a quarter, and the balance to the rest of the world?
Schneider: Yes.

C.A.: I assume the business in America is growing rapidly?
Schneider: It's growing rapidly.

C.A.: And business in Europe?
Schneider: Also.

C.A.: Which are your best markets in Europe?
Schneider: France, Switzerland and Spain.

C.A.: And are those three markets growing?
Schneider: Yes, all of them.

C.A.: Spain. Interesting. Why Spain?
Schneider: Because you have the same situation with cigarettes. At one time, they smoked only black cigarettes, and today, they also smoke light cigarettes. This development is in all markets. And it's the same for cigars.

C.A.: And the United Kingdom. What's happening there?
Schneider: We have some problems with the distributor.

C.A.: I was under the impression that Germany is doing very well.
Schneider: Germany is doing very well, too. Germany is in fourth place.

C.A.: In looking at the Davidoff name, obviously you have diversified and expanded.
Schneider: The diversification we made was by force. It was not my idea, but in Spain there were wine and ice-cream bars under the name Davidoff. In Italy, there were T-shirts. In Holland, someone sold a Davidoff vodka. Hong Kong, they had shoes. And so on. I can show you in our office, all these products. I decided now we have to stop. Then I cleaned up the whole world market, which cost me a fortune. We had 32 lawsuits to clean the market. The cost was about 3.5 million Swiss francs. So, then I started selling products under the name Davidoff in the most important categories; otherwise, you lose your protection after five years' time if you don't sell a product. So, you see I was forced to do it. But today the name Davidoff has notoriety all over the world; so when somebody goes to take my name, I can certainly stop him with success. So we are not forced to enlarge the diversification. I go very slowly, but we do it today in a professional way and on license.

C.A.: What percentage of your Davidoff business is cigars and tobacco compared with other products?
Schneider: It is difficult to compare. When you speak of turn-over, we make in the cigar business with all our brand names--Zino, Davidoff and Griffin's--about 150 million Swiss-francs turnover, and in the diversification, we make about 250 million Swiss francs.

C.A.: Which is the biggest of your nontobacco products?
Schneider: It's the cosmetic line.

C.A.: The cosmetic line, which is relatively new?
Schneider: Cool Water will be No. 1 worldwide this year in men's cologne.


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