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Swisher International Group Inc. Switches Gears

With three factories in two countries and a growing roster of brands, Swisher's investment in handmade cigars definitely isn't too little. But is it too late?
Brendan Vaughan
From the Print Edition:
Gina Gershon, Sep/Oct 98

(continued from page 3)

About two hours into the meeting, Mann's secretary delivered a fax. In New York, General Cigar Holdings Inc., the maker of Macanudo and Partagas, had just announced plans to acquire Villazon & Co., owner of the non-Cuban Punch and Hoyo de Monterrey brands. General, already a powerhouse, would now boast a dazzling roster of premium brands. At a moment in industry history that didn't want for signs of the times, this news resonated. General paid an estimated $70 million in cash and stock.

Though Mann and Ryan say the announcement didn't affect their plans, it must have been a bittersweet reminder of just how hot the premium market was--and that they hadn't taken full advantage. "We already had a pretty strong sense of urgency about getting into the premium market," Ryan recalls. "Like everyone at the time, we were struggling to get more cigars. The Villazon deal was just another indication of the size and strength of the market."

A few months after the talks began, Quesada and a Swisher contingent flew to the Canary Islands for a meeting with representatives of Central Industrial de Tabaqueros Associados Tabacos de Canarios S.A. (CITA), the manufacturer of Casa Buena, which Swisher distributes, and Swisher's machine-made King Edward brand for Europe. Would CITA be interested in becoming a third partner in the joint venture? It would. Construction of the factory, called Compañia Tabacos de Exportación S.A. (COTABEX), began in February 1997. The first cigar was rolled there in October.

For Swisher, Cotabex was just one element of a three-part campaign to become a major premium cigarmaker. At about the same time that Cotabex started rolling cigars, Swisher cut the ribbon on a wholly owned, 78,000-square-foot factory in El Paraiso, Honduras. A few months later, it purchased 50 percent of Puros de Villa González, a tobacco processing and cigar-rolling plant in Villa González, Dominican Republic. As of September 1997, Swisher had zero capacity for premium cigar making. Today, with all three factories combined, it can make as many as 50 million premium cigars a year.

That's a lot of hand-rolled smokes for a 137-year-old company whose name conjures up images of mass-produced Swisher Sweets, not of verdant tobacco fields and bustling rolling rooms. Led by its Swisher Sweets and King Edward brands, Swisher has a 26 percent share of America's "large" (premium-sized) machine-made cigar market and a 46 percent share of the "little" (cigarette-sized) machine-made segment. A public company since December 1996, it earned $39.3 million on sales of $275.6 million in 1997. Though cigars represented 74 percent of total sales--the rest came from smokeless tobacco brands such as Silver Creek and Chattanooga Chew--premium cigars represented just 13 percent of total cigar sales. The meat of Swisher's business comes out of its Jacksonville factory, the largest in the world. It churns out about 7.6 million machine-made cigars a day.

With its emphasis on machine production and mass marketing, Swisher had been ill-positioned for the premium cigar boom--and slow to respond. Even now, though its commitment can't be questioned, some in the industry still believe Swisher just doesn't "get" the premium side of the business.

Swisher executives hear the whispers. "We're viewed as an old-line cigar company, if you will," concedes Mann, a blunt, affable 56 year old who favors Swisher Sweets little cigars. "In a lot of ways a 'fine old company.' But what we want to be known as is the most innovative cigar company in the United States."

T he gold rush atmosphere that infused the grimy Dominican city of Santiago and its environs in 1996 and 1997 is fading, but signs linger. Driving down Salvador Estrella Sahdalla, a major thoroughfare, we pass a used car lot. No one's shopping for wheels, but a group of men appear to be haggling over something. "Look closely," urges the driver, Marco José Antuña, general manager of Puros de Villa González. "That's tobacco." Sure enough, large green tobacco leaves hang from the rafters of an empty pavilion near the back of the lot.

It's a few minutes past 8 on a balmy Thursday morning in late March, and Antuña is taking the 20-minute drive from Santiago proper to Villa González, an adjacent town of about 36,000. Like virtually all Dominican cigarmakers, Antuña owns a four-wheel drive, in this case a brown-and-white 1998 Mitsubishi Montero. After a few miles of dense traffic on Salvador Estrella Sahdalla, he veers to the north onto a small road that winds through lush Caribbean countryside and tiny villages of abject poverty. This is the heart of the Cibao Valley, Dominican tobacco country. The Septemtrional Mountains rise up softly to the immediate north; the Central Mountains are distant but visible to the south. Tobacco plants are ubiquitous, but the harvest is nearly over. A few sorry little leaves remain on some plants, but most are picked clean and the curing barns that dot the fields are abundant with filler leaves just beginning to dry and brown.

An industrial engineering graduate, Antuña, 36, began his career in the computer industry--assembling workstations, building networks and developing software for clients in his native Dominican Republic. At 25 he married Raquel Peña, daughter of Puros de Villa González president Leocadio Peña, whom everyone calls Don Leo. Leocadio, 65, began working with tobacco when he was 12. He founded Puros de Villa González in 1961, and for years was a tobacco processor and exporter. When the premium cigar market heated up in 1995, Peña began rolling cigars.

In the spring of 1996, Antuña joined his father-in-law's nascent cigar business, leaving the management of his computer operation in the hands of a partner. As general manager of the factory, Antuña has seen the number of rollers grow to 200 and production increase to 9 to 10 million cigars a year. Now that Swisher owns half of the company, about 70 to 80 percent of Puros's production is devoted to Swisher brands such as Santiago Silk, Siglo 21 and Don Julio. The factory also produces Don Leo and Manifiesto, which it owns jointly with Swisher, and Napa, La Diva, Cusano and Carrington for other companies.

Antuña hangs a sharp left into the Puros compound, which consists of six squat, beige buildings; a seventh is under construction. A yellow school bus with the factory name stenciled on the side is parked near the entrance. Every morning at 7, the bus rolls in, filled with workers from outlying areas, and every evening at 5 it takes them home.

At its peak period of activity (in April and May, when the tobacco is deveined after it has been sorted, bulked and fermented), Puros employs about 600 workers. In late March there are about 400. Half are rolling; the other half are sorting tobacco in dank, cavernous rooms about half the size of a football field.

In the rolling room, a low wall runs down the center, dividing the rollers into two distinct groups. Those on the right wear yellow uniforms over their street clothes. "The ones with the yellow jackets are the master rollers--they get paid better," Antuña explains. "The others are good rollers, but they look over to the other side and try to become master rollers, too."

On this day, most of the master torcedores are making Bering Hallmark cigars. This is a new Dominican version of Bering, Swisher's flagship Honduran brand. It was introduced in June for about $3 to $5 a cigar.

"We're real excited about this new brand," says Swisher's Ryan, showing a mockup of an ad featuring Senior PGA pro Bobby Duval, who's endorsing the cigar. "It's a little heavier than our other Dominican cigars because Bering is an old Cuban-style brand, so we wanted it to be a little more full-flavored and have a little more punch to it. The first blends that we put together we didn't think were quite along the Bering line, so we beefed it up a little."

Swisher acquired Bering in 1985 when it bought Tampa, Florida-based Corral Wodiska y Cia. At the time, the brand was made with long filler and a natural binder and wrapper. Most sizes were made by machine, though a few were handmade. In 1990, Swisher moved the production to Honduras and converted Bering to a 100-percent handmade brand. Some sizes were made under contract by Nestor Plasencia, others by Frank Llaneza at the Villazon factory.

Lack of control over the supply of Bering--there were no specific numbers attached to the contract--was a primary reason for building the El Paraiso factory, which has an annual capacity of 30 million cigars. Swisher retained Plasencia to run that factory as well, and it now produces Bering, La Primadora and La Diligencia. The company's Nicaraguan brands, Sabroso and Flor de Jalapa, are still made at Plasencia-owned factories in that country.

Back in Santiago, Manuel Quesada is awed by the cutting- edge technology that characterizes Cotabex. "Look at this--it's a key cabinet," he says with mock wonderment, before leading a tour of Cotabex's 75,000-square-foot factory. "You open this, and all the keys are color-coded. You walk into Matasa, and you know how we open doors? Kick the damn things in! Look at this: pink keys, blue keys. I mean, this is progress. This is the twenty-first century of cigar making."

At this, he lets fly a deep belly laugh and opens the door to the rolling gallery. Quesada is one of the strongest personalities in the Dominican cigar business. A tall, powerfully built man of 51, he founded Matasa (Manufactures de Tabacos S.A., his first factory) in 1974 with "one table and six cigarmakers." Even today, with an annual capacity of 15 million cigars, the ramshackle Matasa is the polar opposite of Cotabex. "This factory came from a blueprint," says Quesada. "We were able to sit down and plan and program the factory so it has a flow."

Flow it definitely has. Though the plant was making only about 26,000 cigars a day in March (a pace of 6.2 million cigars per year, well below its maximum capacity of about 35 million), Cotabex is highly efficient. Tobacco is received at a large loading dock, sent via elevator to a second-floor mezzanine for sorting, bulking and fermentation, then brought back downstairs to a large, well-ventilated rolling room.

Once the cigars are rolled, they're taken to zinc-lined rooms for fumigation, cedar-lined rooms for aging, and air-conditioned rooms for packing. The reception and executive suites could be in an office park in suburban Phoenix. There's even a personnel director with an office directly off the rolling gallery. Workers with a question or a gripe can stop by anytime.

Quesada's first project for Swisher is Optimo Classico, a premium bundle cigar that was introduced in mid-April and sells in the $2 to $3 range. Optimo, which Swisher acquired in 1986 when it bought Clearwater, Florida-based Universal Cigar Co., is a machine-made cigar that sells for about 60 to 80 cents apiece. The bundle is an attempt "to capitalize on the famous name of Optimo," says Ryan.

"Matasa's main role in this setup is to run the operation according to the wishes of the partners," Quesada says. "Julio [Fajardo, his right-hand man] and I run the factory. The expertise that CITA and Swisher bring is a different area of expertise; they bring the market area that we don't have, and CITA brings Europe, which we don't have. So we've sort of gathered the three strong points of each and put them together to create Cotabex. And we hope we'll benefit from the joint work of all three."

Swisher's Jacksonville corporate headquarters and plant occupy about 750,000 square feet. The factory itself is an impressive monument to the science of manufacturing. About 1,000 workers toil here, performing what amounts to support roles for the hundreds of highly automated machines that purr and whine ceaselessly.

Surrounding the compound are somnolent streets lined with exquisite old houses in the latter stages of decay. Save for the Swisher plant, the atmosphere borders on antebellum. "This isn't Florida yet," notes Mann, who grew up in Mountain Lakes, New Jersey. "It's south Georgia. Florida doesn't start for a few miles south of Jacksonville."

Settling into Mann's office to talk about Swisher's future and past, Mann's the only officer wearing a tie, and that's for an anticipated photo shoot. The executive suites are almost as casual as the factory floor.

Founded in 1861 by a Newark, Ohio, merchant named David Swisher, Swisher is one of the oldest cigar companies in America. There are several versions of how it wound up in Jacksonville, but the most common tale has the then-mayor befriending Carl Swisher, David's grandson, as he was passing through Jacksonville and "selling" him the city with a weekend of heavy entertaining. Another version claims Carl was attracted by the fishing.

Whatever the reason, the company moved to Jacksonville in the early 1920s, and by the end of the decade was making 100 million cigars a year. Then called Jno. H. Swisher & Son, the manufacturer prospered as cigars enjoyed immense popularity over the next several decades.

In 1958 Swisher introduced Swisher Sweets and in 1966, the cigarmaker was acquired by American Maize-Products Co., a public company controlled by the William Ziegler III family. The company name was changed to Swisher International Inc. in 1992. In 1995, the Ziegler family sold American Maize, but immediately bought Swisher back. Under the leadership of Ziegler, still chief executive officer, the company went public as Swisher International Group Inc. in December 1996.

Today, Swisher is one of the most diverse operations in the cigar industry, with products spanning the price scale, from King Edward (23 to 26 cents a cigar) to Santiago Silk ($5.65 to $7.40). Though Swisher's diversity can be viewed as a strength in that each niche is a hedge against the others, the company wants more of the premium market. That won't be easy.

Ask any cigar industry executive about introducing a new brand in today's market, and you get a variation on one answer: No matter who you are, it's tough. Retailers have too much product on their hands. Ask Tabacalera S.A., the Spanish tobacco giant that's trying to crack the U.S. market. Ask U.S. Tobacco, the smokeless tobacco powerhouse (Skoal, Copenhagen), which cautiously launched its new Habano Primero cigar in April.

And ask Swisher. Confident as its executives are in their sales force and marketing muscle, they seem attuned to the challenges. "Retailers are backed up with inventory and they're rather reluctant to take on new product," Ryan admits. "How many will choose to stock our brands is a hard thing to forecast."

Indeed, that inventory bulge has contributed to a couple of rough quarters for Swisher in 1998. In the first quarter, earnings fell short of analysts' expectations, and in a news release issued in late May, the company predicted that second-quarter earnings would meet the same fate. Swisher admitted disappointment, but forecast "improvements in sales and earnings in the months ahead."

Mann likes to talk about the "Don Nobodies" who entered the market at the height of the cigar boom and have since disappeared. He likes to talk about how the market is morphing back to its pre-boom state--that of dueling giants. "And we welcome that kind of share battle," he says with characteristic scrappiness.


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