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Edgar Cullman Jr.

CEO, General Cigar Company

(continued from page 4)

Cullman: Machine-made cigars starting in early '94. So '94 and '95 were very big years across the board. What we're finding is things are settling out a little differently now. And what we are still finding is that our Garcia y Vega business has grown nicely, about 30 percent this year.

CA: Is that your biggest brand?

Cullman: It's our biggest brand in terms of dollars, but it's not in terms of units, because it's a higher-priced cigar.

CA: Without getting specific then, you've experienced a nice increase in machine-made cigars, too. Is that right?

Cullman: A nice increase. Remember, we have also raised prices at each level along the way. We've been much more aggressive as an industry than we have in the past. Price increases used to come few and far between in the cigar industry.

CA: In terms of tomorrow. You are the president of Culbro. Culbro is General Cigar. I would be interested to know what the future strategy of General Cigar is given your new responsibility and given the current climate of the premium handmade cigar market in America.

Cullman: I think that General Cigar's strategic direction is pretty well set to take full advantage of what is going on within the cigar industry, particularly with greater emphasis on the premium end. We have transformed the management of General Cigar significantly and will continue to do so. All with the eye to strengthen our abilities to take advantage of what's going on today. We want to have a stronger and stronger marketing effort. We want to be able to produce more cigars, at higher quality. We also want to be in the forefront in the marketing area for cigars. As you know last year, we introduced a whole line of sportswear. We also produced the Partagas 150. This year we are going to do more of the same. We'll have another line of sportswear. I told you about the vintage Macanudo line. We'll also be introducing a whole line of accessories at the RTDA that will be part of what is known as the "Macanudo Collection" with cutters, ashtrays and humidors. Each with a unique design that we've developed from our market studies and found out what were the pros and cons of each of those products. We've tried to develop a better mousetrap and we have.

CA: What price level would these be? High priced, or...

Cullman: Oh, very high priced. These are significant items. But not off the charts. It's all going to be affordable, but they're going to be expensive.

CA: You mentioned the change in management at General Cigar. It would seem that it started when you hired Austin McNamara more than two years ago, and that General Cigar's creativity, market presence, new product launches and almost a consumer-driven tenacity began to increase dramatically at that time. What is Austin's background?

Cullman: He wasn't in the cigar business. Sometimes you're lucky and sometimes you're not, but in this case I think we've been lucky. We recruited a new president of General Cigar a couple of years ago when David Burgh said he wanted to retire. We created a transition team, in essence, that allowed a transition to take place. The plan was for Austin to spend almost a year being head of marketing and sales and ultimately to step in for David the following year, which basically occurred. Austin came from a very interesting background, including his upbringing. He worked with his father in a McDonald's franchise and really understood what it was like to serve a customer.

CA: They understood the Big Mac.

Cullman: That's right; little did he know he was going to be in another Mac.

CA: Yes. [laughter]

Cullman: He worked for an ad agency, a Saatchi & Saatchi subsidiary, and then he worked for Proctor & Gamble and then he worked for Chiquita. But not in the banana business. In their food business. And in all cases, he's learned the consumer business: he's learned sales, distribution and intermediaries; he learned, of course, the marketing end. All of which combines in somebody who's got a tremendous personal drive. He's got a very strong personality with very, very good training. He's very methodical in the way he approaches these problems. He's very consumer-oriented. He likes to go out and test his ideas and his thoughts. So he has brought in, with our blessing, of course, a whole new management team. And the transition will continue as time goes on. That is the real direction for General Cigar, to be a first-rate marketing company. We will use cigars as our base, but cigars aren't the only thing, even though it will remain the principal thing.

CA: It's a new season for Culbro and there's much talk of shedding some of the past businesses, which are being sold or divested in different ways. There is the launch of Club Macanudo [in New York City] and the apparent interest in the luxury consumer business. What I would like to do is find out about this new corporate strategy and then learn more about how Club Macanudo fits in and what is the plan for Club Macanudo.

Cullman: As my father started talking to me about making the transition from himself to me, it became apparent that I had to develop a strategy for Culbro that was mine, not just his. It started back in 1993, and began with my interest in trying to take advantage of what was going on in the cigar business. Cigar Aficionado put another light on the concept of cigars as a key to a lifestyle and the notion that cigar smokers shared many other common interests. It was an intriguing idea for me, because it meant that there was a way for us to develop parts and services that would appeal not just to cigar smokers but maybe to other people who are similar to cigar smokers.

What we first did was develop Club Macanudo as a concept. By 1995 we started looking for a place and we actually opened in May '96. But the underlying concept here started with looking at General Cigar. We started to draw concentric circles and, as we got further and further away from the cigar business, we said to Austin that there was a line "where you can't cross. You have to stay within this line for the cigar business. That's your responsibility." As we looked at other opportunities, such as Club Macanudo, we said, "That can't be your responsibility, that has to be something we want to develop separately, because it would be distracting to the cigar company." General Cigar could not both keep up with the demand of the cigar business and also develop a whole new line of business. So the first step out for Culbro was really Club Macanudo.

We also made a decision at the beginning of this year to sell our packaging business. We have an agreement in principle with a potential buyer. The course is set for us to shed the businesses that do not fit this strategic view, which is quite simple: we want to concentrate on the cigar business and concentrate on the affluent market both for products and services that play off of the cigar industry. Not every product that we would be looking at and company that we would be looking at would necessarily mean that every one of our consumers would be a cigar smoker or vice versa, that every cigar smoker would be a consumer of the product. But this is how we want to develop this approach. We're seeing a tremendous resurgence of branded luxury products, which are the cornerstone of the consumer products business. For a period of time, brands were "out" because there was an awful lot of discounting going on, an awful lot of generic products being sold, etc. All that is well and good, but I think if you keep after the branded business, and you offer quality, you'll be ahead of the game.

CA: Can you be specific in terms of what you plan to do in addressing or penetrating the affluent market?

Cullman: I think it's a little too early to talk about it, because I haven't made up my mind exactly where it's going to lead.

CA: But, specifically, you now have Club Macanudo, which is beautiful. Have you determined whether or not it's going to be a single-unit flagship, or is it something that you plan to take to other cities around the country, around the world, or is that still in the analysis stage?

Cullman: As we speak, we are looking at sites in other cities in the United States. It's something we take very seriously, because I feel that the demand that we've seen at Club Macanudo is significant enough to warrant us to go look elsewhere. I think that after we have established two or three of these Club Macanudos around other parts of the country, we will seriously consider a franchise concept. I'm really not interested per se in running cigar bars. What I am interested in is in maintaining the brand.

CA: Will these likely be the obvious cities like Los Angeles and Chicago, which are major premium cigar markets?

Cullman: Absolutely. Obviously.

CA: Will future Club Macanudos be larger?

Cullman: Well, the first thing to look at is where in each of these markets we might end up. We all know Chicago is a big city or Los Angeles or Miami or Washington; they're all big cities and each has an area of the city that might be appropriate. I happen to know New York pretty well. The area we are in has proven to be a very, very successful location. You must have seen the article in The [New York] Times a couple of weeks ago about the resurgence of Madison Avenue and all of the boutiques along Madison Avenue. That's all in our neighborhood on 63rd Street between Madison and Park, so the most difficult decision is to narrow it down to a location that fits. We've also learned a great deal from Club Macanudo, so we will be able to take advantage of what we've learned. If we can, we will try to make it bigger. But it is big enough to generate good incomes for anyone ultimately who wants to franchise. And you are right, I'd like to take this around the world. I think there is a unique opportunity to create a cigar bar in major cities where cigar smoking actually is not that big. Take Tokyo as an example. I think it would be dynamite in Tokyo because there would be people who would flock there.

CA: There's been a lot said and written about the shortage of large-leaf tobacco for the bigger sizes of cigars. Is that still a problem? Will it continue to be a problem for the next few years or could consumers begin to find the larger size cigars which they really can't get today?

Cullman: Most retailers are selling more cigars today, at a larger ring gauge, and in larger sizes then they have ever sold before. So while you're saying you can't get them, there are many more that have been on the market.

CA: But in the leading brands, it's tough to come by.

Cullman: Well, we're making more of this cigar, Partagas No. 10, than we've ever made. We're making more of the Prince Philip than we've ever made.

CA: Yes, but as a consumer, when I go into a store, your shelf is empty.

Cullman: It's just that the demand is outstripping us. So, I don't know how to change that.

CA: Well, as an example, how many Partagas No. 10s are you making today versus three years ago?

Cullman: Probably double what we made three years ago.

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