The Two Billion Cigar Baron
Altadis U.S.A. Chief Theo Folz celebrates a unique perspective developed over four decades in the cigar business.
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Tyson vs. King, Jan/Feb 04
Forty years ago,Theo W. Folz had a vision. Only 20 at the time, he was in Marked Tree, Arkansas, pitching a 17-year-old girl on Wearever cookware. "I'll never forget it," he says. "It was a farmer's house, he was in bib overalls, her mother was nursing her newborn. They had tar paper walls. And I was sitting there convincing her to buy a $500 set of pots and pans. And I drove back to Memphis that night, and I said to myself, 'What am I doing here? Those people need $500 to eat.' So that was my last day selling pots and pans."
Instead of selling pots and pans, Folz headed back home to work with his father, a longtime cigar man. Those humble beginnings, however, didn't portend Folz's rise to become one of the most powerful men in the industry, the chief executive officer of the largest cigar company in the United States, Altadis U.S.A. Inc. The Fort Lauderdale, Florida, company, a unit of Europe's Altadis S.A., makes more than 2 billion cigars a year, from tiny machine-made Dutch Treats that sell for less than a dime all the way up to $20 handmade Montecristos.
Folz has played a central role in the sea change in the cigar business as it has consolidated globally over the past four decades. He has bought and sold companies with billionaire Ronald O. Perelman, dealt with European tobacco monopolies and helped establish the U.S. rights to many Cuban cigar brand names. Altadis U.S.A. has 6,500 employees spread across the United States, the Dominican Republic, Honduras and Puerto Rico. Annual revenues are close to $600 million.
But to hear him tell it, Folz wasn't the man one would expect to climb to the top of the cigar world. "I'm just really a country boy from Memphis that sold cigars all his life," says Folz, a tall, large man with a thick head of hair and the build of a football player. With his deep, baritone voice, he pronounces the word cigar with the emphasis on the first half of the word, old-school style. "I'm not well educated and I'm not a fancy guy. I've just been very lucky that I've had some good bosses, and I've had great people working with me."
To be sure, his early days were unremarkable. "I went to the University of Tennessee in 1961, and I still have an educational record there that's unsurpassed -- I had the lowest quality point average ever at the university, 11 Fs and a D," says Folz in his typical self-deprecating style.
His father, however, was an overachiever, a cigar industry superstar. A specialist in the shoe leather express, Monte Folz covered an immense territory, 19 states at one point. "My father -- not 'cause he's my father -- was the greatest salesman I've ever known," says Folz. After abandoning his job with the pots and pans, Theo took a part-time job on February 1, 1964, with Bayuk Cigar Co., his father's employer and the maker of Phillies. The cigar industry would soon soar on the heels of the first surgeon general's report on smoking, which had smokers across America swapping cigarettes for cigars, tipped ones in particular. Theo was hired to do the grunt work for a venture that would put Phillies in 59 A&P supermarkets in the South.
On a Sunday, Folz drove 400 miles to begin the job. He was supposed to fill the display racks with the cigars that had been shipped to the stores. But there was a problem. "I went out to three A&P stores, and none of them had the cigars," he says. "The stores didn't know a thing about it." The deal had been killed. "So my first day in the cigar business I'm in Mobile, Alabama, with nothing to do. It was not an auspicious beginning."
Folz thought his budding career was over, but the next week his father took him under his wing. Theo worked at Monte's side, sometimes clashing with his father. "Of course, I was 20 years old and I knew everything, and I said, 'Dad, you're absolutely wrong about that. We have brands to sell,'" recalls Folz. "And he said to me something I never forgot. He said, 'Those brands don't mean anything. They might not be around all your life. You've only got one thing to sell, son, and that's yourself.'"
The boom of '64 was short-lived, to be followed by a period of continual decline, which the industry countered with cost-cutting moves. Cigar consumption had soared from 7.2 billion units to 9 billion in 1964. "Then from 1964, that artificial high, to 1993, the overall units in the industry declined 5 percent a year compounded. Some years were better than others, but annual cigar consumption went from 9 billion to 2.1 billion," says Folz. Until the mid-1990s, less than 5 percent, or about 100 million cigars, were handmade. All the rest were made by machine.
Companies were loath to raise prices, fearing consumer backlash. When Folz entered the business, most of Bayuk's cigars sold for 5 to 15 cents. "They used to say in this business, you raise the price of a cigar a penny, you close a factory," says Folz. Companies changed the product to hold the line on prices. Long filler became cheaper short filler, and natural tobacco wrappers and binders were replaced in many instances by a new creation called homogenized tobacco, which is made by mixing ground tobacco with proprietary additives and extruding it from a machine in a sheet, similar to a piece of paper. The companies also made their cigars smaller, trimming a unit of ring gauge here, a sixteenth of an inch off the foot there, to save even more money. "The industry as a group, as the unit sales went down, did cost savings in order to try to maintain profits," says Folz. "So the quality of the products went down systematically."
Folz says that he didn't work hard in his first years in the business -- an 18-month stint in the French Quarter of New Orleans left him in debt, and he jokes that on his departure "all the barmaids flew the flag at half-mast." That was to be the exception to his career. "I eventually made up for all those years of not working," he says. "I've worked pretty hard the last 30 years."
He learned from his father well enough that in 1976 he was promoted to assistant vice president of field sales and given an office at the company's new headquarters in Fort Lauderdale. It was the former executive washroom. Worse than his work space was the job assigned him on day one in Florida. "Tony Regensburg [executive vice president of Bayuk] comes into my office and closes the door and says, 'Welcome, you're Bayuk's new hatchet man,'" says Folz. He was given a list of 50 people to fire, but he was reluctant to make the moves without doing his own research. "I didn't want to accept somebody else's judgment on who to let go and who to keep, so the next six months I went out and worked with almost every salesperson, every district manager, so I could make my own judgments." Eventually, Folz cut the sales force from 100 down to 33.
"We hadn't been making any money," says Folz. "In my opinion, there's no reason to be in business if you don't make money. And I take pride in the fact that I honestly believe since 1979, since I've been in charge of the P&L of cigar companies, we've always made money, and I don't think any other large cigar company has ever made a better return on assets, or larger percentage on sales for profit, than we have."
Beginning in 1981, Bayuk's aging owners started selling their brands piecemeal. In March of 1982, General Cigar Co. purchased the company's Garcia y Vega brand and related assets. In June of that year, Folz went off on his own and joined with Havatampa Inc. to buy the Phillies brand and related assets in a $5 million leveraged buyout. At that point Bayuk exited the cigar business.
Folz reserves a warm space in his heart for Bayuk, and specifically for its president and CEO, Archie Mishkin. "My main mentor after my father. This guy was the second most important guy in my life," says Folz, "and one of the smartest guys I've known. He's the one who gave me the opportunity to progress into management.
"I always used to say that Bayuk was the Chrysler of the cigar business. Chrysler brought many, many technologies to cars, but they could never make a profit out of them. Bayuk Cigars brought a lot of things to the industry like advertising on television, five-packs, racks, lots of creativity, but never really made lots of money." The Phillies deal would be the first of many acquisitions that Folz engineered. But he would soon be working for a man who would radically change his lifestyle.
DEALING WITH A BILLIONAIRE
Before leaving Bayuk in 1982, Folz took a call from Ronald Perelman, who owned the world's largest licorice extraction company, MAFCO Holdings Inc., and was a keen cigar smoker. At the time, Folz didn't recognize the name, but today Perelman is a staple of both the business and gossip pages, known as the billionaire investor who acquired beauty giant Revlon and married celebrity Ellen Barkin.
Perelman told Folz that he was buying Consolidated Cigar Co. from Gulf + Western. Consolidated was the maker of Dutch Masters, and it dwarfed Bayuk. Perelman had heard about Folz by talking to people in the cigar business, and he wanted to meet Folz in New York. While walking to lunch in Manhattan, Perelman offered Folz the job as head of Consolidated.
"I was stunned," says Folz. He turned down Perelman, citing obligations to Bayuk. Perelman was insistent. "It seemed like the more I told him no, the more he wanted me," says Folz.
Perelman didn't get Consolidated, or Folz, but in 1984 he called on Folz again. Just prior to the meeting, Folz heard the hot rumor in the business -- Perelman was again a suitor for Consolidated, which was owned by a management group. When Folz met Perelman, the former Bayuk executive was direct. "I said, 'I am not going to go work for Consolidated Cigar.' His face dropped. He said, 'How do you know about that?' I said, 'Ronald, there's no secrets in this business.'"
Perelman bought Consolidated for $118 million in July 1984. By August 1 Folz, finally swayed by the Perelman pitch, was in charge.
"They weren't making any money to speak of, but they were big," says Folz. "I just didn't have any real desire to go to New York, and I knew Consolidated had lots of problems. To tell you the truth, if I had known how bad they were, I doubt if I'd have come. We were not financially bankrupt, but we were functionally bankrupt. There was a very poor esprit de corps. Very poor products. Very little direction. But we ended up finding who the good people were, getting rid of the ones that didn't want to work. And turned it into what I think is the best cigar company in the world today."
Moving to Consolidated not only put Folz at the helm of America's biggest cigar company, it introduced him to the premium end of the cigar business. His 1984 walk through the company's plant in La Romana, Dominican Republic, was his first time in a handmade cigar factory. "I've never seen anybody go through a handmade cigar factory and not come out amazed -- even a nonsmoker," says Folz.
|Folz's father and first mentor in the cigar business, Monte, makes a sales call on Katz Drug Store, in Memphis, Tennessee, in 1966.|
Still, Folz focused on machine-made cigars. "In those days, mass-market was like 93 percent of our sales," says Folz. One of his early moves was addressing quality issues at the company's Puerto Rico factory. He grilled the plant manager on his high reject rate. The manager explained the problem: his boss allowed him only the precise amount of filler tobacco that the machines were supposed to require to make a good cigar, but the machines were ancient and often slightly out of adjustment, which caused some of the cigars to be filled improperly. Folz authorized an additional 5 percent of tobacco -- a considerable cost in a tight-margin business -- and the reject rates declined.
Consistency is key in the cigar business, whether it be in mass-market cigars made by machine or premium cigars crafted by hand. Folz, an avid fisherman, has a buddy with whom he fishes in the Bahamas who won't smoke the free handmades that Folz brings. "I try to bring him cigars. No matter what I bring him it doesn't matter, 'cause he likes Swisher Sweets," says Folz, talking about one of the competition's cigars. "And I think the secret of holding him as a Swisher Sweet customer or a Phillies Cheroot customer is we try to make the same cigar Friday that we make on Monday. It's not that easy when you deal with products that grow in the ground, and they vary from crop to crop."
Folz looks upon each cigar as a never-ending evaluation by consumers. "If there's 25 in a box, there's 25 tests there. So I think we're in one of the toughest businesses in the world," he says.
Focusing on detail and knowing the business -- including that of his competitors -- has served Folz well. In 1986, he took a call from Charlie Mullen, the president of American Cigar Co., which he had tried to buy, unsuccessfully, in 1984. "He said, 'Theo, do you have any money?'" Folz was able to close on the deal in 17 days for $13.7 million. "We didn't do any due diligence. The due diligence was five pieces of paper. We didn't visit any factories, we didn't check any tobacco, we didn't meet with any of their people, we bought it." It gave Consolidated the prominent Antonio y Cleopatra brand, which added a couple hundred million cigars to Consolidated's annual production. "It didn't matter what we paid for it, as long as we had that brand," says Folz. The deal also included La Corona and Roi-Tan. That same year, he acquired Milton Sherman Tobacco Co. and the pipe tobacco brands of Iwan Ries & Co.
"We've always been a net buyer of businesses," says Folz. He regrets missing one, Villazon & Co., and its renowned cigarmaker, Frank Llaneza. The maker of Punch and Hoyo de Monterrey was acquired by General Cigar in 1997. "The one acquisition that I should have made, that slipped through my fingers, was Villazon. Because not only would you get a great business, but you would get one of the greatest cigarmakers in my lifetime."
In 1988, Folz even bought Consolidated from Perelman, who was looking to exit the business. When Perelman couldn't find a buyer willing to take the entire company, Folz and his management group of Jim Colucci, George Gershel, Richard L. DiMeola, Gary Ellis and Denis McQuillen took an equity stake in a $138 million leveraged buyout from Perelman. Within two and a half months of the buyout, Folz had closed on three more deals: the pipe tobacco business of Century Tobacco, the premium Royal Jamaica brand and the U.S. distribution rights to Mexico's largest cigar brand, Te-Amo. He also moved the headquarters from New York City to Fort Lauderdale, saving $2 million a year because of cheaper office space and better productivity.
Buyout firms acquire companies to sell them -- that's how they make a profit -- so by late 1992 Folz was again making the rounds, looking for a new buyer. He was scheduled for a relationship-building meeting with a buyer in New York, when he found two hours of extra time in his schedule. He paid Perelman a visit. They chatted and things went well, and then Folz left for his meeting, which didn't go well. By the time he got back to his hotel, there were messages to call Perelman.
"Ronald made up his mind to buy the company in two hours and 14 minutes," says Folz. The deal was closed in March 1993, with Perelman reacquiring Consolidated for $188 million. "Theo did a fabulous job in the two years that he ran it for the LBO fund, and it was worth more when we bought it back than it was when we sold it," said Perelman in a 1995 Cigar Aficionado interview.
Perelman's timing was fortuitous: cigar sales were just beginning to gather steam. Consolidated's revenues increased from $125.9 million in 1993 to $158.2 million in 1995, with net income skyrocketing from $2.8 million to $13.9 million. By 1995, Consolidated was making a billion cigars a year, 44 million of them premium.
In 1996, Perelman moved to take Consolidated public. It was up to Folz and his chief financial officer Gary Ellis to hit the road and sell the company to investors. "It was the most exciting experience of my life. We left Fort Lauderdale at 3 o'clock on a Sunday afternoon on one of Mr. Perelman's Gulfstream jets," says Folz. "Our goal was to sell 5 million shares of stock with an indicated price of $17 to $19 a share. At the end of our road show, we had orders for 55 million shares. And we raised the price to $23."
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 ," 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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