Leading Dominican Cigar Companies Take Back The Retail Shelves as Newcomers Struggle
The American appeared slightly nervous as he waited for American Airlines Flight 621 to Puerta Plata, Dominican Republic. He wore jeans and a red-and-white checked button-down shirt with a London Fog raincoat as he sat in the lounge waiting to board the plane from New York. He was reading a book, Cigar Aficionado's World of Cigars, as well as a price list from a small Dominican cigar producer in Villa Gonzalez. He looked about 40 years old.
"Are you interested in cigars?" I asked.
"Yes," he said. "I am taking a trip to the Dominican Republic to see what's going on with the cigar business. I just made a lot of money on Wall Street and I was looking for somewhere else to put it. I heard there's a lot of money to be made in cigars."
He showed me a list with factory prices from an unknown manufacturer. "What do you think of these prices?" he asked. "It looks like cigars are about $1 to $1.30 apiece from the factory. That's pretty cheap considering most cigars sell for about $5 to $8 in the States to consumers."
"I wouldn't like to say," I told him. "But I will tell you one thing. Be careful. There are a lot of fly-by-night companies out there. Good luck."
Now in the airport of Puerta Plata, I see him hassling with his bags and trying to find transportation to his hotel. I'm catching a ride to Santiago with Wayne Suarez and Carlos Fuente Jr., both of Tabacalera A. Fuente y Cia., the well-established cigar manufacturer that makes Arturo Fuente, Fuente Fuente OpusX and other brands. "Where has a guy like that been for the last two or three years?" asks Suarez as he roars out of the airport parking area in his four-wheel-drive vehicle. "What rock did he crawl out from under? There have been guys like that arriving every other day here from the States to make their fortune in cigars, but it's all changing now."
The gold rush in the Dominican Republic cigar business may be coming to an end for many. Start-up companies are finding it increasingly difficult to sell their cigars in the U.S. market and to secure tobacco for production. Making it even tougher for them, well-established manufacturers are increasing production and market share at an impressive rate. Popular brands such as Macanudo, Partagas, H. Upmann, Fuente, León Jimenez, Fonseca and Davidoff are taking back the retail shelves.
It all spells bad news for many of the new cigar manufacturers on the island. "Just at the beginning of the year there were more than 140 factories in the Dominican Republic," says Hendrick Kelner, part owner of factories that produce such prestigious brands as Davidoff and Avo. "Now there are less than 100. I expect by sometime in 1998 there will only be two dozen."
"I have been to a lot of cigar shops in America recently," says Avo Uvezian, the cigar maven and founder of the brand bearing his name. "The retailers are all eliminating the newer brands and going back to the established ones. People don't want expensive cigars that aren't any good. Why do they want $8 or $10 cigars that don't taste good? They can count on the old, established brands--good cigars for $5 and $6."
Richard DiMeola, chief operating officer for Consolidated Cigar Corp., which produces such cigars as non-Cuban H. Upmann and Montecristo and Dunhill, adds, "It is going to be the shakeout period this year. It is the clear-out period. We have offers every week from people who want to make us cigars at 100,000 units a week or whatever and at cut-rate prices."
If you were just looking at the statistics for cigar exports from the Dominican Republic to the United States, you might think DiMeola or Kelner weren't in touch with their market. Cigar shipments from the Dominican Republic for the first 10 months of 1997 were up 95.8 percent from the previous year, with 214.7 million cigars. They were expected to reach about 270 million by the end of 1997. That's about double the year-end figures for 1996 and almost four times 1995's shipments.
Dominican cigar manufacturers, however, suspect that this year's phenomenal growth is primarily due to making good on back orders to customers and U.S. retailers building inventory. "I don't think the market is up 90 percent or even 65 percent," says DiMeola. "A figure like 20 or 25 percent is more realistic. Obviously people have been building inventory, and now they have to move it. Retailers are going to have to unload inventory--with the exception of major brands."
Unloading has already begun, especially with newer brands. Stories of $8 cigars now selling for $3 and $4, and "buy two and get one free" deals, are rife throughout the U.S. cigar trade. Some of these cigars could be soon selling for as little as $1 and $2. "It's amazing to see all the cigars going down in price at the moment," says Juan Sousa, whose family owns six cigar shops in south Florida and who oversees one of Fuente's cigar factories in Santiago. "Our main concern is that we must have cigars that people can afford. We don't have a lot of demand for the unknown $8 cigar. People want the $4 or $5 Fuente or something else like it."
Granted, the pressure on the new cigarmakers to drop their prices could be a boon to consumers, but many of their cigars are terrible, made from inferior tobacco and poorly rolled. "Most of these small manufacturers don't have integrity," says Carlos Fuente Jr. "Where were they before 1992? They don't know how to make cigars. We have been making cigars for generations. They will be going out of business. The consumer is beginning to know the difference between a good and bad cigar and they won't buy these cigars."
Adds Alfredo Gomez, one of the biggest cigar tobacco growers in the Dominican Republic: "So many people have come here and have gotten into the business, and they had no idea what they were doing. I had one guy that recently came to me and told me that he fermented his tobacco in three or four days by using electric heaters. He didn't know the first thing about tobacco or making cigars."
Massive plantings of tobacco last year in the Cibao Valley may have eased some of the pressure on new factories to find better tobacco. Some estimates say that the increase in tobacco acreage may be 150 percent to 200 percent. However, most of the tobacco is already spoken for--primarily by the big-name companies, including General Cigar, Tabadom/Davidoff, Fuente, Consolidated Cigar, Manufactures de Tabacos S.A. (MATASA) and La Aurora S.A.
"What more can we do?" asks Manuel Quesada, owner of MATASA, maker of cigars such as Fonseca and Romeo y Julieta. "We have to finance the tobacco and buy what we can before they harvest. [There is] a Connecticut shortage, an Ecuador shortage, a Brazil shortage, and Dominican Republic filler is extremely expensive. It's going to be difficult for everyone."
Most of the big companies vastly increased their production last year, and they are always seeking more tobacco. Consolidated, for example, runs its factory in La Romana day and night. The company expected to produce about 100 million cigars in 1997, up from 65 million in 1996. General Cigar was also doing double shifts and increased its production from an estimated 30 million to 60 million last year. Although these increases are not entirely from production in the Dominican Republic (the two companies own cigar factories in other countries), most of the growth has come from there. "We are up 100 percent," says Austin McNamara, president of General Cigar. "We are very lucky, but we have had a phenomenal year in 1997. It all looks very positive for us."
The supply of wrapper tobacco could be the Achilles' heel of such growth, however. Increased cigar production is dependent upon wrapper availability, particularly from Connecticut, Ecuador, Indonesia and the Central African Republic. Recent harvests from these regions have had big problems. The most important wrapper growing regions, Connecticut and Ecuador, were hard hit by bad weather last year. Connecticut experienced one of its worse outbreaks of blue mold in years, reducing wrapper leaf yields up to 30 percent, and constant rain in Ecuador has drastically marred the appearance of its wrapper crop. Some manufacturers were also concerned with the quality of Indonesian tobacco that was damaged by smog caused by the region's massive forest fires, while the Central African wrapper crop was outstanding in quality but still limited in quantity.
"It's going to be a difficult year for wrapper," says Fuente, who has a four-year inventory of wrapper as well as his own wrapper plantations in the Dominican Republic. "Supply and prices may be so bad that we may bypass buying wrapper altogether this year and hope for a better situation to buy in 1999."
Just what will happen to retail prices under the circumstances is anyone's guess. It all depends on what brand you are buying. Lesser-known brands may drop in price as manufacturers try to reduce their inventory and gain or maintain market share, while top brands will increase in price as their production costs continue to rise. "The new cigar producers over the last few years have really increased prices for workers, tobacco and just about everything else associated with making cigars," says Fuente. "Prices are already high enough, but they are going to increase again. Some people don't think that it matters and that they can pass on the increases in costs to the consumer, but we believe that you have to respect your customers. We have to do something."
The volatile economic situation is also having an effect on stock prices of publicly traded cigar companies. Share prices for many, particularly small ones such as Caribbean Cigar and Tamboril, already have plummeted. According to a story in Barron's in late November 1997, the situation means "trouble for high-flying cigar companies, a half dozen of which have issued shares to the public over the past year." The article emphasized many reasons why share prices may fall, including the "faddish" aspects of the industry, growing government attention to cigar smoking and health, and "cigar-makers' lofty financial goals, [which] may prove impossible to achieve." Whatever the reason, Barron's concluded, "We like a good cigar as much as the next guy, but we know when it's time to put it out."
Still, the major cigar manufacturers remain optimistic, pointing out that they were more than happy with more realistic sales growth rates, especially considering that just six or seven years ago, the industry was in a free fall. "What's wrong with 20- or 30-percent growth?" asks Guillermo León, the head of La Aurora, in Santiago. "It is much more normal growth. Plus, we are opening new markets outside of the United States all the time. If we go elsewhere, we should be able to grow as we want to. That is important. I see growth in Asia, the Middle East, Russia and Europe. Plus, we are increasing sales in duty-free shops. The cigar industry is going to have to change. We are going to have to work for our sales."
Nonetheless, fortune seekers from New York and Miami continue to arrive in the Dominican Republic in hopes of capitalizing on cigars. "All the new people come in and they don't really know what they are doing in making cigars," says Fuente's Suarez. "They get tapped by the locals. They get sold Olor tobacco for Piloto or Italian for Olor or whatever. They don't know a thing about cigars. It's like that guy who was on your plane. These guys from Wall Street come in and look for a quick buck in cigar-making. It makes you wonder how they made money in trading stocks and shares."