A discussion with the president of Villazon & Co., makers of Hoyo de Monterrey and Punch.
(continued from page 5)
CA: What were your thoughts as the shift in attitudes towards cigars happened?
Llaneza: I never thought it would happen. I never thought we'd ever see any improvements, because the government was so involved in the nonsmoking movement. You couldn't go to a bar or a stadium; you couldn't go anywhere where you could smoke. The creation of cigar smoking as a chic situation, which was created by the magazine, was a total surprise. But it created something that the industry needed. We never had the Arnold Schwarzeneggers or the other stars that everybody admired. We just had people telling the world that if you smoke cigars, it will kill you. We were forced to put stickers on cigar boxes telling you it was dangerous. [California law requires warning labels to be placed on cigar boxes sold in that state, so many cigar manufacturers include them on all of their boxes to save on the cost of singling out production destined for that state.] You know what it is to give a man a box of cigars worth a couple hundred dollars, and for him to see on the box something like, "If you smoke this it will kill you"? But we were still selling them. It's unbelievable.
I was one of the ones who thought having to put that warning on our boxes was going to be the kiss of death. But the opponents of the antismoking movement were a lot stronger than I imagined. After all, somebody's smoking these cigars. Now, I still can't go into a federal courthouse, I can't go downtown and I can't walk into the mall here in Tampa and smoke a cigar. I might even be sitting in a smoking area, and some nut will come over waving his arms in front of his face. But we've overcome all this opposition. I think it is amazing. Maybe it's just backlash. It's like telling someone they can't drink a Scotch or a wine, because it's illegal or you can't get it. There's not enough of it, and everybody wants it. That's what the magazine created.
CA: What was it like from the business side, where suddenly you had more orders than you could fill?
Llaneza: Well, it wasn't bad, I can tell you that. It was something that I didn't expect in my lifetime. The cigar business was good to me and my family, and I love it. You can see it. I don't need to be here anymore. Me and Tino [his partner], we come over here every day, because we start thinking, "What would we do if we didn't have a factory to come to?". We'd have to be home cutting the yard. I'm very happy about it.
CA: In 1992, when it started, you were making how many cigars?
Llaneza: We were making 60,000 cigars a day then, and it's more than doubled. That doesn't mean we might be making just 60,000 cigars a day again next year. If the big inventory that's sitting in warehouses today bounces out on the market, we might have to cut back. It's impossible to keep a person from buying a pretty-looking cigar that he can buy for almost nothing, next to a cigar that has a higher price. We don't know how that's going to affect our production. I'm seeing it now in the industry statistics. There is a drop now. And there is an increase in the cigars at the $2 category. It means there will be pressure on the big-name brands. There's no way to curb it. The only way would be if one of these warehouses caught fire.
CA: But don't you think people will stop buying those $2 cigars if they're not good?
Llaneza: I guess they will. But it's still tougher in the market today.
I don't want to mention names, but there is one company that is in its second go-round with their cigars being discounted on the market. What I've noticed is that the retailers and jobbers have humidors filled with branded cigars, and they have a lot of other cigars. How do they work it? Do they just say, "Let's get rid of these cigars," so they can get back to customers coming in and seeing only products that are competitive, high-quality products? It will get back to that.
But it's going to be tough. No one can make cigars as cheaply today as they used to because the cost of raw materials and labor has gone up. The standard of living in Honduras where we're at has quadrupled because of the industry boom. I don't think you're going to reverse that. The only possibility is some reduced or nominal prices on the tobacco itself so you can be competitive.
CA: Has the boom changed the industry in bad ways?
Llaneza: Don't be foolish. That's like telling me, when I first started, that I wouldn't know what to do with four machines in Ybor City, and Mr. Oliva said, "Make a nickel cigar." People were telling my father that his son was going to ruin the factory: "You're going to go down the tubes, you won't even be making those 3,000 or 4,000 handmade cigars anymore." But Mr. Oliva was right, and I said, Get me the tobacco and I'll start making those cigars. Hell, I was young then. I had to be the mechanic, put the scrap in the machines, working them day and night. Before you knew it, you wouldn't believe how many customers we had. It kept me in business. And that's what happened in the last few years.
CA: So, it's been good.
Llaneza: Yes, man. I can go fishing now. I can fly on General Cigar's private plane.
CA: Let's talk about that. What's happened here since General Cigar bought Villazon?
Llaneza: It was at the RTDA [Retail Tobacco Dealers of America] convention in Cincinnati in 1996. Edgar Cullman Sr. came over there, and he was gracious in his offer. He's lived up to his word. He's let us do this like we wanted to do.
CA: Could you believe it when he made the offer? For that matter, were you ready to sell?
Llaneza: I tell you, it was difficult for me. But once there was the discussion of the numbers and they kept adding up, I said, what the hell. I started looking at my age, and what might happen in the industry. I decided it was time to sell because the numbers got so high.
CA: What was the sale price?
Llaneza: The sale price was $91 million. Danny [Blumenthal] was ready. And we decided to do it.
CA: If Danny had not been involved, would you have sold?
Llaneza: I don't think so. I would have suffered like hell, and he would have said, "Look at that fool down there." But we're happy today. And as long as we're here, we're making the best of it.
CA: What's different about it? You had what amounted to a family company, and now you're part of a corporation. How is that different?
Llaneza: There're a lot of pluses and minuses. I won't go into all of it. We always ran a very conservative and as low-cost a company as we possibly could. We had to do that so we could watch over the growth of the company. We were very fortunate that we had people with me who always let me run it my way. They might have not liked it sometimes, but I went my way. I always thought that a company should have retained earnings sufficient to have enough capital so as not to use the banks. That's a heck of an attitude if you want to grow real big. But that's the attitude I always had. And it worked out fine. I kept Honduras-American Tobacco as a separate company, not showing any dividends until it had all the capital that it needed. Then, we started paying dividends. That was one of the reasons that we were able to stay in business. We didn't go to a bank to borrow any money.
Maybe that's a result of being from the old school. Today, you look at the mentality that's out there, it's different from ours. Ours was: the value of a dollar is the value of a dollar. Back years ago, you thought about spending five dollars. Today, you throw five dollars as a tip.
I would have never thought that cigar companies like Hollco-Rohr, makers of Dominican Romeo y Julietas, would sell for $50 million, and that was just a label, not even really a business. I've had people tell me, "Man you're crazy, you sold too soon." I said, Yeah, maybe I did. At the time the business was still escalating. But I think we did right. We're trying still to give input into how the business is run. Now, it's up to them to take the advice.
CA: But at this point, do you feel they want to grow your company?
Llaneza: Oh, yes. And, they want to run it separately. That's one of the things that has destroyed most of these big corporations. They come in and they take a company, and before you know it, it all becomes the same company. That's just buying market share, and you start closing installations and put people out of work. General Cigar hasn't done that. They bought this building in Tampa. I think they'll keep making cigars here, and they will surely keep making cigars in Honduras. They're doing a great thing over there for the country, and the people. Giving them a good place to work, and they put in a school. They've done a lot of good things. They are in the cigar business to stay. I don't think it's like the other big corporations, where people sit on the board and say, "Wait a minute. That thing's not making that much money. Let's sell it or spin it off, or do something with it." They are dedicated cigar people. They smoke cigars. They get all
enthusiastic when they see something pretty.
CA: And it sounds as if they are pursuing new projects with Villazon to make it bigger.
Llaneza: Yes. They want to make the best product they can. I'm convinced of that. That's one of the reasons I'm with General Cigar. I've had that opinion of Edgar Cullman Sr. for a long time. I had offers for more money. But I knew the Cullmans. I knew what Edgar had done in Connecticut. I knew his focus on the quality of his cigars; no one can surpass the quality of Macanudo.
But I'm happy where we are. Right now, I don't need anything else, except that my daughter [Villazon vice president Carol Jean Llaneza] become one of the big successes in the cigar business.
CA: What has it been like to spend 60 years in the cigar business, your entire adult life?
Llaneza: When they told me as a kid that I was going into the cigar industry, I think I cried for two days because I hated it. I didn't smoke. I was going to go to a fairly good school. All my friends were going to go to college. I was very resentful. The first thing my father did was not to bring me in as a pretty boy to sit in an office; he threw me in with bulking tobacco and like a dog I sweated, working day and night in the blending room, casing tobacco, sweeping the floors. I had to do the janitor work after people left. It was a small factory. I had all that to go through. My friends would drive up in their cars--Manuel Corral and the Arango boys--saying, "Hey, Frank!" and there was Frank with a broom. That's the honest truth. But looking back, I think it was great that I stayed. I've been happy. I love it. I enjoy more being in the tobacco end of things. The headaches here all go to Tino. That's the personnel side of it. If I'm in tobacco doing something with it, I can make my wishes known, I can see what we should do. That's what I enjoy. And I'd miss it tremendously if I couldn't do it.