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The Two Billion Cigar Baron

Altadis U.S.A. Chief Theo Folz celebrates a unique perspective developed over four decades in the cigar business.
David Savona
From the Print Edition:
Tyson vs. King, Jan/Feb 04

(continued from page 1)

The buying and selling of Consolidated Cigar would prove to be a seemingly never-ending experience for Folz. In 1999, Perelman, who controlled the company with a 67 percent equity interest, sold it to French tobacco giant SEITA for $733 million. SEITA would later merge with Spain's Tabacalera S.A., creating Altadis S.A., and Consolidated was renamed Altadis U.S.A.

Folz was heavily involved in each step of the process, meeting with officials from SEITA, as well as rival bidder Swedish Match AB. The two European companies had equal bids for Consolidated, but in the end Folz chose SEITA, feeling it made better business sense.

Before he worked on the SEITA deal, however, Folz would find himself managing Consolidated through the cigar boom, and would later take a much greater role in the premium cigar business.

 

THIRTY-SEVEN MILLION BACK ORDERS

The cigar boom of the mid-1990s was unlike anything that Folz had seen before. The mid-'60s boom had been short, and the cigars that were sold were among the least expensive in the industry. The boom that began in 1993 had legs, lasting until 1997, and the cigars that were in greatest demand were expensive. Folz, like other established cigarmakers, found himself unable to supply the market.

"One of the things I said at the time that worried me was that we had the opportunity of a lifetime as an industry to get trial, people trying cigars that never smoked them before. It was unaffordable to generate this type of trial through advertising and promotion. And I was worried that the quality of some of the cigars that people were smoking then would turn them off from being lifetime cigar smokers," says Folz. "I think it definitely happened. And I'll also tell you in hindsight -- maybe I was too stupid at the time -- but in hindsight I'm not proud of every cigar that Consolidated Cigar made during that time."

Tabacalera de Garcia Ltd., the handmade cigar factory in La Romana, Dominican Republic, where H. Upmanns and Montecristos are rolled, ran virtually nonstop in the boom. "At one time we had our factory in La Romana working two shifts with 5,400 employees, and they were rolling handmade cigars at an annualized rate of 85 million cigars," says Folz. (The factory never worked a full year at that rate.) "We were working back-to-back ten-hour shifts, which is unprecedented in the handmade business. Which was probably another mistake, 'cause we didn't get as good a quality on the second shift as we got on the first shift. But we don't do any of that anymore."

Investors pressured his company to fill orders, but there were limits on tobacco, on craftsmanship. "It was just brutal," says Folz. "At one point we had 37 million handmade cigars on back order."

The boom increased the cost of tobacco, and Consolidated had to buy enormous amounts of leaf to keep working. "A few years ago, we had well over $100 million in tobacco inventory," says Folz. "If you want to make quality cigars, you gotta carry inventory." The company is still using tobacco from that period.

In 1997, premium cigar imports to the United States exceeded more than 500 million cigars. Even as the imports climbed, however, cigar companies missed the signs that supply was outstripping demand. Folz, still more focused on mass-market cigars, also missed the end. "I was looking at our financials, and I saw that we had huge returns of premium cigars in January [1998]," he says. "Then I went back and looked at all our financials through '97, our monthly reports, and I had missed it, and Dick DiMeola had missed it, and everybody that worked here missed it. The returns had started in June, July of '97. So the bottom fell out, and boy, we all struggled."

Cigar sales were slowing. Later, Folz had to combine two similar companies as part of the creation of Altadis. Spain's Tabacalera owned Havatampa Inc., France's SEITA had Consolidated. Each had premium cigar factories that weren't operating at full capacity.

"We closed five factories on that deal: Jamaica, the Consolidated factory in Danlí [Honduras], the Tabacalera factory in Danlí, the Tabacalera factory in Nicaragua, and the Tabacalera factory in Santiago, Dominican Republic," says Folz. "I've closed more cigar factories than any man walking the face of the earth. I'm not proud of it."

The cuts were painful, but necessary. Folz compares them to a patient given a choice by his doctor of losing his leg or eventually dying.

Consolidated has roared back and is now thriving. "2000 was the best year in the history of the company. 2001 was better than 2000. 2002 was better than 2001. And unless the end of the world comes in the next three months," Folz said in September, "2003 is going to be significantly better than 2002. So I think that's a testimony to our people."

"Our company, I believe, is the only company, certainly in the U.S., possibly in the world, that is a major player in every sub-category of the cigar business. I'm talking about every price point and every type of cigar," says Folz. "We are highly confident we're the most profitable cigar company in the world." "In the last 19 years, the management team that leads Consolidated has seen the sales increase by more than six times, and the earnings increase more than 13 times," says Folz.

The picture looks even brighter going forward because of the links to parent company Altadis S.A., the world's largest cigar company, which claims nearly 25 percent of the world market for cigars, some 3.2 billion units. Altadis S.A. also makes cigarettes, including the Gauloises brand, and has a large distribution business not limited to tobacco products. Tabacalera and SEITA, the companies that merged to become Altadis S.A., have long had close ties to Cuba, but that relationship has grown even closer since Altadis S.A. acquired a 50 percent interest in Habanos S.A. in 2000. Habanos is the company that distributes all of Cuba's cigars worldwide. In October, 2003, Altadis S.A. acquired a controlling interest in the largest cigar retailer in the United States, 800-JR-Cigar Inc.

"We at Altadis S.A. have made a huge investment in the U.S., and we have our investment in the hands of a great CEO with great skills and an outstanding capacity at managing people," says Folz's boss, Altadis S.A. chief operating officer Antonio Vázquez. "I, personally, have been dealing with Theo for a long time now, and I cannot feel better."

Folz, at center, gives much credit to his team at Altadis U.S.A. including (left to right) Denis McQuillen, Jim Colucci, Gary Ellis, and George Gershel.
Premium cigars have much to do with Altadis U.S.A.'s positive performance. "The premium cigar business, in my lifetime, has become very, very important. It's certainly important at our company," says Folz. "The largest number of employees working for the company work in the premium area." Altadis U.S.A. now offers premium cigars to suit a variety of taste preferences, including those of the most seasoned aficionados.

"At our company we were making nothing but middle-of-the-road tastes," says Folz. "Since 1998, we have looked hard at enhancing the flavor of some of our cigars, or coming out with line extensions under certain brands that are full of flavor." The Montecristo brand is but one example. Once available only in a mild form, the cigar now has several stronger line extensions, such as the Serie VII, which has Peruvian and Nicaraguan tobacco in the blend.

Folz has profited from the lessons of the boom. "Today, we have back orders and they're more manageable," he says. Montecristos are on back order, as are some Romeo y Julietas, and sometimes the Onyx Reserve brand. "We're doing everything we can to fill the back orders, but without sacrificing one tenth of one percent of quality and consistency. Because I learned my lesson. I'd rather be short on Montecristo in the yellow box than have all we need if I can't deliver them at the same quality that we want 'em to be."

Folz's performance has won him the respect of his peers.

"Ours is a relatively small industry and we all get to know each other pretty well. Theo is a people person who genuinely cares for his fellow man. I respect him as a friend, a competitor, and a leader of our industry," says Timothy Mann, president of competitor Swisher International Group Inc.

"Theo's a great guy," says Clinton Price Sr., president and CEO of John Middleton Inc., the third-largest maker of mass-market cigars in the U.S. "He's very honest, extremely bright, he's a great guy for the industry -- and a tough competitor. He's known for being in the business so many years, and he has the brains and the smarts to use that history to the benefit of the industry." Folz served as chairman of the Cigar Association of America for 14 years, from 1986 to 2000.

The last four decades have brought Folz a long way from driving to A&Ps and sitting in a windowless office. He now has the corner office at company headquarters in Fort Lauderdale, a room decorated with memorabilia from those 40 years, including old cigar boxes, photos of trophies -- both from the business world and his fishing boat -- and a black-and-white photo of his father, smiling proudly in front of a full display of 5-cent Phillies. Following in the big footsteps of his dad, Folz has filled them just fine.

"I think the cigar business is like the circus," says Folz. "Once you get in it, it's in your blood. It's hard to get out."

Color photos by Gary John Norman

Black and white photo courtesy of Altadis U.S.A.


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