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An Interview with General Cigar

An interview with The Cullmans of General Cigar holdings Inc. and Lennart Sunden, president and CEO of Swedish match
From the Print Edition:
Gene Hackman, Sep/Oct 00

(continued from page 1)

The cigar market in the United States has seen an unusual flurry of merger and acquisition activity. Within the past year, the two largest premium cigar companies, Consolidated Cigar Corp. and General Cigar Holdings Inc., have become part of major foreign companies. In the case of General Cigar, the transaction was in the form of an acquisition by Sweden's tobacco giant, Swedish Match. The existing management of chairman Edgar M. Cullman and president and chief executive officer Edgar M. Cullman Jr. are continuing to operate the company day to day.

Swedish Match, based in Stockholm, is one of the largest tobacco firms in the world. Although the company sold its cigarette manufacturing concern last year, it has built up its presence in machine-made and premium cigars, and established a strong position in other tobacco products, such as chewing tobacco. Lennart Sunden, Swedish Match's president and chief executive officer, engineered the purchase of General Cigar's machine-made cigar business in April 1999, which included brands such as Garcia y Vega, White Owl and Tiparillo.

This past May, Sunden oversaw the completion of Swedish Match's investment in General Cigar, which amounted to purchasing 64 percent of General Cigar's publicly held stock. The Cullmans retain about a 36 percent ownership stake. The transaction effectively returned General Cigar to the status of a private company. In a recent interview with Cigar Aficionado executive editor Gordon Mott in New York City, the Cullmans and Sunden discussed the reasoning behind the new partnership and what it means for American cigar smokers.

Cigar Aficionado: Lennart, in the past 18 months, Swedish Match has bought General Cigar's machine-made cigar business as well as [El Credito, makers of] La Gloria Cubana and a controlling interest in General Cigar's premium cigar business. If my calculations are right, it's a minimum of $400 million in cash and a total investment of more than $500 million. Why? Sunden: We have been in the cigar business for a long time in other parts of the world. We are the largest player in Europe and we have a substantial presence elsewhere. We felt that we should have a strong presence in the U.S. We are here in other tobacco businesses such as chewing tobacco and moist snuff, where we also are growing our position. Our interest is to build a position for tobacco niche products, what we call "the other tobacco products"--noncigarette products, which include cigars and pipe tobacco. We are going to build that position globally. We have to be present in the United States with these product categories. General Cigar is, in our view, the strongest company in premium cigars and has a very, very strong set of brands, some of which can be used internationally, including the largest premium cigar brand in the world, Macanudo. We see strong interest from other parts of the world in that brand. In those places, we can add market presence and market strength to the existing General Cigar business.

CA: You were rumored to be seeking other big cigar companies in the United States prior to this deal. Were you surprised when it became clear that the Cullmans were interested in letting you acquire control of the premium cigar business? Sunden: This relationship has developed over time. We came to a mutual understanding that this was good for both businesses to join forces. The mass-market machine-made cigars that we bought from General Cigar was the start of the relationship. Gradually, we came to the understanding that it would be good to combine [our companies] and for us to participate here in the United States and be able, with General Cigar's brand platform, to develop our position in other parts of the world.
Edgar M. Cullman Jr.:
If I might just quickly add that one of the things, from our point of view, that made this an easier decision, apart from the business strategy, is that our relationship really has been extraordinary. My father talks about it a lot, but sometimes there is an intangible element that goes into making these kinds of decisions and goes well beyond the dollars. This is a group of people represented by Swedish Match who really are extraordinary, good business people who also are people of the highest integrity; and this was very important for us.

CA: Apart from the personal links, isn't this a good business deal, too?
Sunden:
I think it's a strong position that we can further develop and, looking at it from a financial point of view, I think the numbers make sense. We try to generate value for ourselves and our shareholders, meaning that we should also have earnings enhancement after financial costs and amortization. I think we will be able to do that.

CA: What structure are you planning for Swedish Match's premium cigar holdings in the United States? You have La Gloria Cubana and General Cigar. Do you see them continuing to function entirely separately in the future?
Sunden:
We are at the stage now where we are investigating the opportunities to further develop our position here and we will not exclude any alternatives at this point in time. The mass-market business goes very well together with our chewing tobacco and moist snuff and the [Djeep and Cricket brand cigarette] lighter sales that we have. It goes through the same channels, and on the premium side we are in the process of looking at that right now. I cannot really comment any further on that at this point in time.
Cullman Jr.: It's a little sensitive because we're on the cusp of some decisions. We're looking at the structure very seriously. There are a lot of issues, not the least of which is [El Credito founder] Ernesto Perez-Carrillo's position. We also have to look at it from the consumer's point of view. There are a lot of benefits to working together on this but there are also the unique qualities of La Gloria Cubana as a brand and La Hoja Selecta. The big brand is La Gloria. What we don't want to do is in any way have the consumer feel that somehow something's changed. This is a very sensitive industry. It's full of family businesses and personal involvement in these businesses. So, we're going to go slow on this. We'll do what is best for the brands and best for the business.

CA: Apart from issues of production, aren't the sales and marketing areas likely to be combined so they can be more efficient?
Sunden:
At this point, we are looking at those possible advantages. That's what we can say today. [Laughter]

CA: You also still have the Montague brand in the U.S. marketplace. Is that still part of the Swedish Match strategy in the United States?
Sunden: It is still part of it. It's a unique cigar, as you know, with the origin in Indonesia and with the high ratings that it has achieved. But it is a very rare bird in the American cigar world. Much less so in Europe, where the tradition with Indonesian tobacco is much stronger. But we will continue to have that. It's just a different kind of cigar.

CA: As a result of this acquisition, Swedish Match has positioned itself globally against Altadis [the tobacco behemoth that was created when Spain's Tabacalera S.A. merged with France's Seita]. In terms of the U.S. market, you have ownership rights to former Cuban brands at least as important as those of Altadis. On the other hand, Altadis has apparent future control overseas for some of these brands, if not outright ownership. You do not at this point. Are there any discussion or strategy sessions under way about how you're going to deal with this situation when the Cuban embargo ends?
Sunden:
Yes. We are looking at several scenarios here and we have a plan for that, but we cannot disclose that here. We are working quite hard on it.

CA: Would you not say that the existing situation puts you at a disadvantage compared to where Altadis is today?
Sunden:
No, I don't think so. It's highly speculative, what is going to happen. And the ownership of the Cuban brands is highly dependent on the kind of development that will take place in Cuba. If it would be like the German [reunification]--the former owners would get the rights back. Then, it's basically the people that we are partners with, General Cigar, which has acquired the brand rights [from the original Cuban owners]. So then you know where the right is for the worldwide brands. If Cuba evolves in a different way than Germany did, of course nobody knows what will happen. In any scenario, the situation goes back basically to a discussion of which base year should you look at: [Cuba's] prerevolutionary years or some period in-between? Who owns the brands today? There is a debate depending on the kind of viewpoint you take.
Cullman Jr.:
From our point of view, we've always believed that Cuban cigars are not the be-all and the end-all. In other words, I think [Cuban cigars are] obviously very competitive outside the United States. Non-Cuban cigars are just beginning to scratch the surface there. But I believe that the incredibly explosive interest in cigars in the United States occurred partially because there was such a variety of product available. A Dominican cigar is completely different than a Honduran cigar. For instance, who had ever heard of Costa Rica as a place to make cigars? And they're darned good cigars that are coming from there. The international market does not have access to all these cigars. The only cigars they have are Cuban cigars, which, you know, are good or not good, depending upon your point of view. Our objective is to show the world that there are wonderful cigars made in different parts of the world. Just like the wine industry, you don't only have to have a French wine to enjoy drinking wine; you shouldn't only have to have a Cuban cigar to enjoy a good premium cigar.

CA: I'd like to go back to La Gloria Cubana for a minute. How do you view the brand in context of the portfolio that you have? Sunden: It's a very valuable part of the total number of brands where we are involved, meaning General Cigar's brands and the brands of El Credito Company: La Gloria Cubana, La Hoja Selecta and El Rico Habano. They are major assets that we are working with Ernesto on.

CA: That includes more marketing plans? Will we see La Gloria Cubana and [La Hoja] being a bigger brand presence in the marketplace?
Sunden: Yes, there will be new products coming out.

CA: Mr. Perez-Carrillo has a reputation as being a very good tobacco man. Will he be involved in any way in the overall brand development for the whole portfolio?
Cullman Jr.:
You mean for the portfolio of brands at El Credito or General Cigar?

CA: Outside of El Credito.
Sunden:
All the people from the various cigar companies that now come together here already are working together, and Mr. Perez-Carrillo is an important member of that group. How we are going to do that in the future is a topic for internal discussions. But we certainly all appreciate his cigars. And they are a valuable asset. I cannot really comment any further right now. He knows how to make a good cigar.

CA: One of the most attractive elements in this partnership must be the worldwide marketing expertise that Swedish Match can bring to bear on Macanudo. How do you see that brand expanding over the next few years?
Sunden:
I believe we will be able to put more effort behind that and put more resources behind it, because Swedish Match has an international cigar presence that is more widespread and has larger sales than General Cigar had on its own. We will put resources behind that. For instance, we are going to put in place as president of General Cigar International, one of the senior people from Swedish Match. He will come here and work in that position.
Cullman Jr.:
This is a very senior executive at Swedish Match who is very willing to take some risks because he's moving from a much larger position to one that needs to be developed. But from a strategic point of view from both Swedish Match and General Cigar, this is where we see our greatest opportunity, and that's in the international market. With a seasoned executive, with somebody with his experience and great knowledge of the Swedish Match organization, we hope to take full advantage of that from a premium cigar point of view. He is well respected within the Swedish Match organization, well respected within the European cigar community. He's not as well known in the United States; but this is an amazing part of the things that have occurred between the two companies. His name is Frans [Vogels]. We liked him a lot before they even made the determination that he is the right guy for the job. I hope it really will put a supercharge under our abilities in this sphere.
Sunden:
Our intention is, of course, to have General Cigar be the leading vehicle for the development of the cigar business worldwide. And, therefore, we put a very skilled person together with General Cigar, reporting to us.

CA: At this point, do you have any initial analysis of where General Cigar International might find the most potential? Sunden: That is only in the preliminary stages. We know most of the markets in the world. I think there is room for growth for an international brand, actually the world's largest premium brand, Macanudo. There is room to grow in Europe. There is room to grow in Asia-Pacific. And in some other parts of the world as well. In many cases, it is already a well-known brand. For all people who like cigars who go to the U.S., they see the brand here and it's a very strong asset.

CA: In Europe you've always done quite well. Is that right?
Cullman Jr.:
With the exception of France and Spain. That's a real opportunity. Those are big consumption areas, big countries for premium cigars and for Cuban cigars. For us, it's just really beginning in other countries. It represents less than 5 percent of our total business. The opportunity is everywhere. We know Macanudo has a much larger name recognition than sales.
Sunden:
People know it's a great brand in the U.S., even if it's not sold [in Europe] very much. It's not being marketed that much in some areas. It's a very interesting opportunity.

CA: How long have you been in the cigar business and how long have you worked for Swedish Match?
Sunden:
I joined Swedish Match two years ago. Before that, I was not in the cigar business. I've always been in consumer products. I worked 20 years for [Swedish vacuum cleaner manufacturer] Electrolux. I ran a vacuum cleaning business for five years before I came here. They are, you can say, fast-moving consumers, durables. They are like fast-moving consumer products, high in advertising, quick moves, fairly high activity on the market.

CA: And what brought you to the cigar business?
Sunden:
Well, basically, I saw great opportunities to further develop Swedish Match from where it was, and lead it into the direction in which we are going now, into a niche tobacco product company with the leading global position in that category. You know, we went through a number of changes. We sold our cigarette business for $600 million, and that has given us the opportunity to further develop our position in other tobacco product categories where we already had a relatively strong position. But now we're going into products where we can be the No. 1 or No. 2.

Cullman Jr.: It really is under your management, your administration at Swedish Match, that this emphasis on other tobacco products has come about. So, I think it's got your signature on it.
Sunden:
Cigarettes were an important part of our business before. It was about one-third of our profit. But we sold that and we started to grow in the other areas.

CA: And that's just within the past two years?
Sunden:
Yes.

CA: Are you still acquiring businesses in this country?
Sunden: Well, you should never say no. We are looking at opportunities in our core areas all around the world. Of course, there is a time for a business to consolidate and take good care of what has been brought in and make a good unit. But, we are always looking for good opportunities and also for organic growth to support that.

CA: What were Swedish Match's total revenues before the sale of the cigarette business and what are they today?
Sunden:
Two years ago it was about 8 billion Swedish kroner, which was around U.S. $1 billion at that time. And now, it's probably heading for nearly 11 billion [Swedish kroner, roughly $1.243 billion] this year.

CA: So revenues have gone up since you shed your cigarette business?
Sunden:
Yes. [Editor's note: At this point, Sunden had to leave the interview to take a flight back to Europe. The interview continued with the Cullmans.]

CA: Why did you sell 64 percent of your company to Swedish Match?
Edgar M. Cullman:
I've got to explain, we didn't give up 64 percent. That's the most important thing for you to understand. They came to Edgar and me. We had several conversations. Originally they were interested in the whole business. We said we wouldn't sell it. Then they asked about the mass-market business and they bought the mass-market business. They turned out to be people of such high integrity, and whatever problems we had, we resolved. That is very unusual. We felt very good about them. Then they said, "What if we were to buy your premium business?" We said, "No." They came back about two months later and said, "Well, what if we bought all your public shares [held by other shareholders]?" We were really not interested in having one person [or company control all those shares]. But they kept discussing it with us. They really wanted to have an interest in the premium business. So we said, "Look, we'll do this as long as we can manage the business, because we know the business." They came back and said that they didn't know the premium cigar business in the United States, but that they believed in the future here and they'd like to support that. So we thought maybe we could work a deal.

They helped us buy out the public shareholders, gave the family some liquidity, and we thereby reduced our interest in General Cigar from 40 percent to 36 percent. That's what we finally worked out. They felt so comfortable with us and we felt so comfortable with them, we made an arrangement that as long as the Cullman family had at least 15 percent of the total company [General Cigar Holdings Inc.]--of which we have 36 percent now--we'd run the business. We have four directors of seven on the board. On all operating issues we are the deciding factor, except if we're going to sell the business or something like that. Then [Swedish Match] would have a say. In other words, they have the veto power on the important issues such as buying another company or issuing stock or borrowing money. That's what we have agreed to.

CA: What are the advantages to your business of this partnership?
Cullman Jr.:
We alluded to it before in terms of the international focus. That's the No. 1 benefit, without question. And that's the challenge we have. Certainly, the opportunity is in front of us. We don't want to oversell it, but I think that is our No. 1 opportunity. I think also we were looking at how are we going to help our shareholders. At the time that [the deal with Swedish Match] was occurring, our stock was selling at $6 to $7 a share. The prospect of seeing that change in any dramatic fashion, despite whatever earnings we might be able to put forward, just seemed slim. We needed to find a partner that would help us reward our shareholders and that would be a strategic partner for us internationally. Quite frankly, I think that the whole cigar industry is clearly much more global and the globalization of the cigar industry has been there, so we felt we needed to find a partner that was very interested in supporting the cigar industry. We needed a partner with real means and that shared our vision for cigars.
Cullman:
They are in it for profits, so are we. But they also understood how to build a business. And that was an important consideration. We felt our shareholders had been patient with us and that we believed in [the company's] future, but we couldn't justify the price where our stock was and what they were willing to pay for it. And, therefore, we made the decision. But we're staying in the business. Both Edgar and I and David [Danziger, executive vice-president of General Cigar Holdings] are devoted to this business.

CA: That's one of the questions of your loyal consumers out there. What does your committment mean for them?
Cullman Jr.:
I think the most important thing is that we've always felt that the premium cigar business is a personal business. It's a business of people who are dedicated to their craft, to the quality of the product. And we're very concerned that this change doesn't alter that. It's very important that we stay and make it very clear that this business is of paramount importance to us in the future. The future of our business, whether we get together with El Credito in any form, Ernesto is going to be part of that concept. He is as much associated with his brand as my father and I are with our brands. I think the consumer enjoys that. From a consumer point of view, and certainly our customers' point of view, we want to make sure that we maintain that personal relationship.
Cullman: We have a personal relationship with not only our sales group, but also at our factory and our tobacco people. That's really what makes us maybe different from some of the other cigar companies. I think that people recognize that I care very much about quality and very much about how the cigar is made--the tobaccos that go into it, the look of the cigar and the look of the packaging. All of that is something that Edgar and I pay a lot of attention to. It's in us to do that. We want to spend more time doing that.

CA: Where is the business today? Do you feel like the toughest times are over? Are we entering a period of a little more tranquility with some stable growth?
Cullman:
I don't see it as tranquil. The tumultuous days of the renaissance are certainly over in terms of high demand and scarce resources and scarce supply. I think it's much more competitive now. It's much more of a share game than it's ever been. It's going back to what it was before the renaissance. There are many more closeouts and discontinued items all over the place. So I think the numbers of cigars that are being consumed are pretty much the same as they have been in the last couple of years, but they're at different price levels. The challenge for us, because we're in the brand business, is to maintain the integrity and importance of those brands to the consumer. And it's incumbent upon us to reinforce that there's a benefit to our brands and, therefore, you've got to continue to provide the best products and good marketing, good packaging, and great support to the trade. So, it's changed, but I do not see it relaxing; in fact, I see it as being more competitive.

CA: You purchased Villazon nearly four years ago. Do you feel at this point that the integration of Villazon into the General Cigar structure is complete? Are you satisfied with that part of the business, too?
Cullman: It was a big challenge to us in terms of people, because, as I said, the premium cigar business is a personal business. Villazon was Dan Blumenthal and Frank Llaneza. What was very important to us was to try to maintain that integrity and to let them do what they do. It's over three and a half years now since we closed on the deal and Frank Llaneza is still with us. Danny Blumenthal is basically retired. But, we have maintained the integrity of Villazon. Our customers still understand what Villazon is and they order from Villazon, but the business is basically part of General Cigar. It isn't like somebody wanted somebody lost here. Hopefully, all of us won. We are taking the benefits of synergy, if there are any, as it relates to tobacco purchasing and all of that; but, from a consumer and customer point of view, we're still keeping them pretty separate.

CA: You've introduced Macanudo Robust and Macanudo Maduro in the past few years. They've been well received in the marketplace. Do you have plans for future line extensions? Is this it for Macanudo at this point?
Cullman Jr.: I would never rule out any other extensions. But they're not that obvious to us at this point. I think Robust and Maduro had a place in the marketplace. Robust is obviously a reaction to heavier, more full-bodied cigars and Maduro just was always there and why not take advantage of the interest in maduro cigars. As you know, we did Serie S--shaped cigars for Partagas. I don't know necessarily that a Serie S style line would go with Macanudo, although we've had some shapes within our [Macanudo] line. What I think may be interesting is to take that brand and see what else could be done outside of the United States. We're restricted, as you well know, to take some of our brands outside of the United States. Macanudo is one of the few brands that can be sold in almost every country in the world. So there may be opportunities to take Macanudo other places, maybe a Macanudo made in some other country, to another dimension outside the United States. Honduras, for example. But, there's nothing on the drawing boards at this point. That's still to be determined.
Cullman: We have a lot to do to develop Robust and Maduro. We're just starting. If people like it, we have to make sure they understand what it is.

CA: But isn't it a big advantage heading out into the international marketplace to have those three types?
Cullman:
Yes, it is. It makes a big difference. So we're looking forward to expanding Macanudo. I think a lot of people haven't smoked it; we want more people to smoke it. We need to find a way to do that.

CA: Just in general, with the slowdown in the cigar market, are your inventories built up to a point that you're comfortable with, both in terms of quality and quantity? And doesn't that speak well for the consumer at this point? Isn't the golden period of cigars coming?
Cullman:
I don't know what you mean by that. I mean we've always aged our cigars. Our inventory is now in balance. We have more tobacco than we might like to have, but tobacco doesn't deteriorate, it improves. What's happened over the years, in our opinion, is that Cuba started using tobacco [directly] from the field to [make] cigars. It can't work that way. If you smoke some of our cigars, ones that have been aged, they taste pretty damned good. That's what makes the difference. Aged tobacco. We're lucky we're in the position that we can hold that tobacco and use it as we need it.
Cullman Jr.:
I think that the challenge for the industry is to make good cigars. I think that during the renaissance of cigars, almost anything that you wrapped and claimed was a cigar could sell. It turned off a lot of people. And so, we don't have the same interest in cigars [from consumers as we had during the boom]. We've got to find a way to get that back and I think the best way to bring them back is with a good product so that they're rewarded when they come in and try it. We were talking about a lot of cigar smokers being on the periphery who wouldn't necessarily consider themselves cigar smokers today but are very interested in continuing to partake, especially at events of certain sorts. That's a great time for them to realize that, "Oh, you know, this tastes good. I'd forgotten how good this tastes. Maybe I should be smoking more of them." That's our challenge and the best way to meet that challenge is with good product.

CA: With the advent of the big cigar conglomerates, it's getting harder for boutique brands to survive. Larger companies with the better resources are going to have an advantage over the smaller guy. How do you keep the integrity of what creates a real cigar, a great cigar, which is that personal touch, the individual involvement?
Cullman: I think that's what we've been able to achieve in making the number of cigars that we do, to make sure we have that. There is an advantage to having a small cigar boutique. A man can then see what they're putting in the cigar, make sure it's coming out the way he wants it for every cigar. That's what we're trying to do with our cigars. As if we were a small company. We spend so much time to make sure the cigar looks right and tastes right.
Cullman Jr.:
I think the key will be in the development of new brands and it can be done even within a large company. I think we've got terrific people, and if Ernesto joins our team, he's going to be one of the people that develops new brands. I think he really likes to do that and there's always something new to be determined. Let's run the clock forward a few years. Cuban tobacco is now available. My view is that Cuba will keep its cigars. Cuban tobacco really will be much more accepted in a blended product than in a full-bodied Cuban cigar. And that to me is where, again, excitement can be rendered. If you've got more opportunity to blend with these kinds of tobaccos, you can develop new tastes and different brands. So that's what will keep this industry fresh.

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