Cigar Profiles

Davidoff's No. 1

Cigar Aficionado interviews Davidoff's director general Ernst Schneider.
| By Marvin R. Shanken | From Rush Limbaugh, Spring 94
Davidoff's No. 1

Ernst Schneider, the owner of Davidoff cigars, has been the driving force over the past 20 years in turning the company into a leading consumer-products enterprise. As director general of the Max Oettinger Co., he has overseen Davidoff's growth in new markets, the shift of Davidoff's production from Cuba to the Dominican Republic and the expansion of the Davidoff name to other products such as men's cologne and accessories.

In late November in New York City, Cigar Aficionado Editor and Publisher Marvin R. Shanken sat down with Schneider for a wide-ranging interview on Davidoff's future and the company's strategy in continuing to build the brand.

Cigar Aficionado: What is your background?
Ernst Schneider: I was born in Basel, Switzerland, into a good, middle-class family with two sisters and one brother. We had an ideal family life. I made my studies during the Second World War in Basel at the University, and I was two-and-a-half years in the military service. That was in Switzerland where you have to do some military service as a youngster. I am a doctor in law, and this was my university title.

After that, I was a delegate of the Swiss Red Cross to organize medical help in Dachau, Birkenhau, for the displaced persons. This was, by far, my best experience I ever did in my life. I thought that I was very important with a doctorate in law, and when I saw all this misery in these camps and those displaced persons, I became modest and thankful for what I had. I was just happy to help.

Afterward, I was part of the political department in Bern for the Swiss diplomatic corps, and I defended the Swiss interests in Japan. At the time, I learned how cruel the Japanese were then. So, I have had two experiences in this direction, and I was personally convinced that you have to fight against all these awful situations.

C.A.: When did you get into the tobacco business?
Schneider: After that, I met my soon-to-be wife, and her father was sick. He was the proprietor of the Max Oettinger Co. This was my first step in the tobacco business. So my first job was son-in-law in the tobacco business.

C.A.: What kind of tobacco business was it?
Schneider: Oettinger was founded in 1875. The company was one of the first importers of Havana cigars, Brazilian cigars and Jamaican cigars. He was selling the cigars in France, in Germany and in Switzerland. He was dealing with mostly bar owners and tobacco shops.

C.A.: In what year did you join this company?
Schneider: That was in 1949. It was a difficult time because many of his clients had been in the war, and the company was in trouble because of a decline in business. Basically, many of these bar owners and tobacconists had disappeared in the war. So at this point, my father-in-law was deciding if the company could be restructured. And he did it.

But he pulled out of imports, and he was only a wholesaler and distributor. And then in 1949, I entered the company, and I started the import and retail business. And after six years, I had the chance to go to work as director of the Loens Co., the owner was Tobacco Vinum. And this was my best experience over the six years. I traveled all over the world, and I really learned the tobacco business from A to Z. After the six years' time, my father-in-law retired, and I took over the direction of the whole company.

Today, we have the manufacturing department; we have the import; we have the export; we have the distribution, and we have the retail business. We also have the diversification, and we have three of our own brands: Davidoff, Zino and Griffin's. This is today our strength.

C.A.: What was the date that you took over Davidoff?
Schneider: We took over Davidoff in 1970.

C.A.: Was Davidoff offered to another company before yours?
Schneider: No, Davidoff offered his shop because he was convinced he was on top of his business then, and, at 65 years old, he thought it was a good moment to sell. Many people said that I was crazy to pay such a price for one shop only, but I had an idea in my head. I said that we would internationalize the Davidoff business because the base was created, and I had developed a special concept. I always used three important points as a means to success. The first point is that quality and price have to be in order. The second point is the concept has to be in order, and the third point is that you have to make a special distribution system. With all of these together, you will have a successful luxury brand.

C.A.: You mention that people said you were crazy to pay so much for one store. What did you pay?
Schneider: Oh, I don't remember (laughs).

C.A.: Was it under or over a million?
Schneider: Over a million.

C.A.: Over a million?
Schneider: Yes.

C.A.: In a dollar equivalent?
Schneider: Yes, yes (laughs more).

C.A.: A million in those days was a lot of money-- it's a lot of money today. But it was even more money then.
Schneider: Naturally, that was the reason why people said I was crazy.

C.A.: Just some general questions. The antismoking movement has been very strong in the United States and now seems to be expanding to Europe. There are various parts of the rest of the world where there are many restrictions and a lot of talk of more restrictions. How do you see the environment today with the antismoking pressures on the cigar lover?
Schneider: You know, there was a time when, if a lady smoked tobacco, she was burned at the stake. So, our situation is not so bad. In fact, when all is forbidden, it's even a little more interesting, and I'm happy to say that we had a vote in Switzerland last Saturday and Sunday on whether the state would forbid advertising for alcohol and tobacco products. Two-thirds of the people voted against this proposed law. So, we can go on. We are all adults, and we know what we have to do. God created tobacco and the grape, among other things, so when we enjoy them in a reasonable way, there shouldn't be any problem.

C.A.: Moving a little bit closer to home: you know that Cigar Aficionado has an international readership, but, of course, the vast majority of the circulation is in the United States, and so for that reason I ask this question. Today you have Davidoff stores in New York and Los Angeles. The only other store that is more or less in your category is Dunhill. They, of course, are more diversified in terms of products, but they have about 11 stores in the United States. Do you have plans to expand your retail business in the United States?
Schneider: Well, you see that's one of the points of our concept because when we started in Europe, we started first in each country with a Davidoff pioneer shop, and from this point on, we named the best cigar shops as Davidoff dépositaires. Besides this, we go to the best restaurants and hotels to place our humidors of Davidoff cigars. This is one of our systems to control the distribution. But as soon as you are losing your distribution, you are losing your luxury brand. That's one of the reasons we are very strict in America. We will have in America probably four stores and not more. But we will also have all of our key dépositaires in other regions to help build the brand.

C.A.: Which are the two other cities?
Schneider: We would like to have something in Florida and Chicago, but don't hold me to it.

C.A.: There are a lot of questions related to the new generation of Davidoff cigars. The first really deals with the fact that you have a factory where Zino is made in Honduras, and yet you selected the Dominican Republic as the source for your new generation of Davidoff cigars. What made you decide on the Dominican Republic as opposed to a country where you already had existing facilities and production?
Schneider: Well, I said, we have the three brand names: Davidoff, Zino and Griffin's. Zino is specially from Honduras. This is another line and also another category, pricewise. Zino and I traveled to Honduras, to the Dominican Republic, to Jamaica and also to Nicaragua to have a look where we would find the best situation and the best tobacco to make our new cigars. And we found it in the Dominican Republic with our friend, Mr. Kelner, who is one of the best tobacco specialists. Also, his is a family business, and mine is a family business. So we find in a short time the right place to make our cigars. Kelner was interested in working with Zino and me, considering our experience. He was also willing to go in our direction and to make every effort to reach our goal. We can now say that today we have the most modern cigar factory in the Caribbean. When you make a luxury product like Davidoff, you have to make sure it is produced in the best factory so that it comes out perfect every time.

C.A.: Well, I've been to the factory, and I know Kelner does a great job. There's no question about it. When we spoke two years ago, you always thought that the new generation of Davidoff cigars would be milder and lighter than the earlier version, which came from Havana. I am curious to know whether or not in the past two years you have in any way rethought that idea, given the fact that the market seems to be wanting more taste and more flavor. For example, some cigar brands from the Dominican Republic are changing their blends. They're making their cigars with a little more flavor, with a little more richness--and certainly the Cuban cigars are more in that direction. Are you changing your cigars? The wrapper of Davidoff cigars seems to have already gotten a little darker. Where do you stand in terms of lightness and mildness versus today's taste?
Schneider: That's very simple. We were analyzing the world market of cigars, and you know that not only in the cigar business, but also in all other sections, there is a trend to be mild, lighter. This was the basic decision. We will go to milder and lighter products because the trend is the same all over the world. So we decided to create the new generation with three, or today, four lines. We have the line of Davidoff No. 1, 2, 3, 4, and we have a line of the thousand: 1000, 2000, 3000, 4000 and 5000. And we have the line of the Grand Cru.

The first line (those with No. 1 and so on) is the most light in style. The second is in between, and the strongest is the third. In addition, we have specialities like the Special T (a torpedo-shaped cigar) or the Special R (robusto-sized cigar), which are strong cigars. So, in each clear-cut category, you have what the consumer likes to smoke.

C.A.: I'm not sure that the consumer understands what you just explained, but I think that when he reads it in this interview, he may realize this for the first time. That is very useful to the consumer.
Schneider: Of course it is.

C.A.: Are the same cigars shipped to the United States and the European markets?
Schneider: Of course. They're exactly the same all over the world. We insist that we have the same cigars all over the world. The only difference is that--and I am being 100 percent truthful--when we have some lighter wrappers, we send those cigars to Europe and not to the States. Our cigars are not all the same color just like everybody else's.

C.A.: The last time I was in London, I noticed that the wrappers of Davidoff cigars were so much lighter. That's a curiosity because you would think it would be the opposite. The American consumer has been weaned on the milder cigar, the Macanudo if you will, and others like that--those with rather light wrappers. The European and British consumers have been weaned on the Havana, which is darker and stronger. So you would think you would send your darker wrappers to Europe and the lighter wrappers to the United States. Why does it work the opposite way in this particular case?
Schneider: Because in Europe we have no problems with lighter wrappers. The cigar smoker is willing to accept them without any problems.

C.A.: But two years ago, when you first released your cigars, they were much lighter--almost yellow in color. I was just looking at one in my humidor the other day. You must have changed even the lighter wrappers a little bit, or is that just a matter of differences in crops?
Schneider: This is just a question of the year in which the wrappers were grown.

C.A.: So it wasn't intentional.
Schneider: Not at all. Not at all.

C.A.: Is it fair to say that you are completely satisfied with the quality and taste of what is being produced in the Dominican Republic?
Schneider: We are really lucky and happy that we found such a nice and capable man. Today, we also have our own plantations, and we have total control and we can follow the production of our cigars from A to Z.

C.A.: One question that's probably on a lot of people's minds--and although nobody can really predict the future wth any certainty--under what circumstances do you think Davidoff might return to Havana?
Schneider: You see, you have your experience, and I have my experience. The older you get, you know that you can't say yes or no in every situation. All is possible. It's clear that when I say that if we go back to Havana, the situation can't be the same. We are flexible.

I can give you another answer. We told people for 22 years that the Havana cigar is the best, and we still say Havana tobacco is the best for cigars. But it is not always the best cigar, depending on the moment.

C.A.: What do you mean?
Schneider: The trend for the moment is going the other way. The market trend today is for a milder and lighter cigar. That's the reason we were doing what we are doing. On the other hand, with the current conditions in Cuba, it's not the best situation (for making cigars).

C.A.: Do you mean in terms of quality?
Schneider: I am sorry for the Cuban people because I like them. They are the sort of people that would give you their last shirt off their back if you are kind to them. I am really sorry for the Cuban people.

C.A.: I understand what you are saying, but I am still somewhat confused. I assume that your Davidoff store in Geneva and your other stores in Europe still continue to do a sizable business selling Havana cigars.
Schneider: Naturally. We are selling all Havana cigars. We never fought against Havana cigars. That's not our goal. With our own cigars, we are simply going with the trend. We are all in the same boat; so we should help each other (whether you make cigars in Havana or the Dominican Republic). All manufacturers should accept this idea.

C.A.: But it's a little confusing because what I think you're saying is that from the standpoint of building an international brand, the trend is toward lightness. So in terms of building volume business in a luxury-cigar brand, the Dominican Republic is the taste you have sought to meet that growing demand?
Schneider: That's correct.

C.A.: But at the same time, there is a certain segment of the market--I would like to say the more sophisticated or connoisseur segment of the market-- that has always enjoyed Havanas and will continue to enjoy them. There are also Americans who may smoke a Cuban cigar and say, "too strong, not for me," and Europeans who will say, "too light, not for me [about Dominican cigars]. I smoke Havanas!"
Schneider: It depends on your personal taste. It depends on my personal taste. What I can analyze, however, is the general trend in markets, and this is the reason why we go in this direction. For example, my grandfather smoked Stupend, a Swiss product, and today this product is finished. So, the times are changing, and the tastes can change --but we still believe that Havana tobacco is the best for cigars.

C.A.: What you're saying is that under the proper conditions, you would welcome the opportunity to reestablish a brand of Davidoff made from Cuban tobacco.
Schneider: Naturally, naturally.

C.A.: One other aspect of Davidoff's past Cuban cigar line was the Chateau series. It was a brilliant public-relations and marketing effort. Do you see the day when you will have a line of Chateau cigars again?
Schneider: They are all our friends. The proprietors of the five grands crus wine estates are all Zino's and my friends, and I am sure when the day comes, there will be the possibility when we can create again the same quality and cigars.

C.A.: Would that be in Dominican or Havana then?
Schneider: That's not decided. It depends on the situation.

C.A.: You mean the château owners would have to decide on that?
Schneider: Yes.

C.A.: Please answer this question; I am dying to know. Do you have inventories or do any of your subsidiaries have inventories of Davidoff Havanas?
Schneider: Well, you know that we have an agreement with Cubatabaco that since the first of January [of 1993] that the Davidoff Havana cigars should not be sold. They are falsifications from a legal point of view, and when somebody is selling Davidoff Havana cigars today, we can go to court and confiscate them.

C.A.: I understand you can't sell them today, but I'm asking whether you have any stocks left.
Schneider: We tried to sell as many as possible before the year-end of 1992. But we took back some from certain retailers to help them. So we have a small stock.

C.A.: Small? How small?
Schneider: A small stock. Small enough so that it is enough for you and me to smoke (laughs).

C.A.: That doesn't sound large enough to me. I had a vision of a huge warehouse with millions of cigars.
Schneider: No, no. There are not large stocks.

C.A.: Let's talk about a topic of great emotion: the U.S. embargo against Cuba. It affects you indirectly as a businessman with your new generation of Davidoff cigars. What percentage of your business is in the United States versus the rest of the world? How does the embargo or lifting of it affect your future plans in the United States?
Schneider: I feel that it will be very positive when the embargo is lifted because there are two points in my view. One is that what is forbidden is more interesting, and many people are smoking Havana cigars in the States to say "I have a Havana cigar." The day when the Havana cigar is free to be bought in the United States, this idea you can forget. The other point is that naturally when the Havana cigar becomes open to the American market, you will have a big turnover in the beginning, and then it will go down, and you will have to build up the market from the bottom. But it won't influence my market.

C.A.: At our recent cigar seminar in New York, the panel of industry experts believed that the embargo will not be lifted for the next five, six, seven years, and, then it would take another five to 10 years to rebuild stocks of aged cigars that would be like the cigars of old. So we are talking about 10 to 15 years before the United States could enjoy a volume of properly aged Cuban cigars. It is a long time.
Schneider: It is a long time. But I am more optimistic. I feel that when there is normalization with Cuban and American relations, you will really be able to do business like you should be able to; in four years' time, you can get good results in producing cigars there. Naturally, then you would need to add years to mature the cigars. But you should be able to get in that time what you need and what you like.

C.A.: If the embargo is lifted, what do you think the range of world demand for Havana cigars would be, after an initial period of boom?
Schneider: I already said that you have to build up the market from the bottom. Don't forget that before the embargo, the United States imported about 25 million to 28 million cigars; so this is a figure, and when you have to build up from the bottom of the market again, it will take time. Also, the American consumer is used to lighter cigars; that's clear.

C.A.: How would you estimate the global market? Do you think it would be 120 million?
Schneider: No.

C.A.: Would it be less?
Schneider: Less.

C.A.: Let's move to a more sensitive subject. When one thinks of Davidoff, there is always an issue of price. First, there's the American who looks at your price in relation to other premium brands like Macanudo and Partagas, which are $2, $3, or $4 each. Then there is the more obvious conflict in a market like London where a Havana Davidoff sells for about $15 and a Dominican Davidoff for about $10. Some people may think that the price/value relationship for your new cigars has been altered. What do you say to that?
Schneider: That's very simple. You know that in Havana, you have cigars from $2 up to $20. That's exactly the same situation with those from the Dominican Republic. Why? I said the main points to be successful include price and quality. When you know how many operations you have to do to make a cigar; what you have to do to find the best tobacco, the best leaves, the best binders; you have to stock for three years' time at least; what you have to do to make the best blends. And when you make the final cigars, tell me which pleasure that goes on for one hour or one-and-a-half hours costs less than my cigar?

C.A.: I think that position has less resistance in America than it does in Europe and particularly in the United Kingdom.
Schneider: You want to know why? The U.S. business is being killed by discounters.

C.A.: I haven't seen that.
Schneider: But some retailers in the United States explain that a premium cigar shouldn't cost more than $2.

C.A.: Let's go back. When you looked at your pricing strategy in Europe, what did you do?
Schneider: It's 25 percent less than the Havana Davidoff price.

C.A.: Is it?
Schneider: Yes.

C.A.: If it's 25 percent less, then it's a moot point. I thought that you basically took the Havanas off the shelves and replaced them with your new cigars without lowering the prices.
Schneider: No, not at all.

C.A.: Then why are prices so high and about the same as the average Havana? Is this a question of the tax structure?
Schneider: No. There are other reasons.

C.A.: What is the total production of Davidoff cigars in the Dominican Republic today?
Schneider: We are now at about 5 million, and our goal is 10 million in the next three years.

C.A.: And of the 5 million, what percentage goes to the United States?
Schneider: About 25 percent.

C.A.: So about a million, a million and a quarter, and the balance to the rest of the world?
Schneider: Yes.

C.A.: I assume the business in America is growing rapidly?
Schneider: It's growing rapidly.

C.A.: And business in Europe?
Schneider: Also.

C.A.: Which are your best markets in Europe?
Schneider: France, Switzerland and Spain.

C.A.: And are those three markets growing?
Schneider: Yes, all of them.

C.A.: Spain. Interesting. Why Spain?
Schneider: Because you have the same situation with cigarettes. At one time, they smoked only black cigarettes, and today, they also smoke light cigarettes. This development is in all markets. And it's the same for cigars.

C.A.: And the United Kingdom. What's happening there?
Schneider: We have some problems with the distributor.

C.A.: I was under the impression that Germany is doing very well.
Schneider: Germany is doing very well, too. Germany is in fourth place.

C.A.: In looking at the Davidoff name, obviously you have diversified and expanded.
Schneider: The diversification we made was by force. It was not my idea, but in Spain there were wine and ice-cream bars under the name Davidoff. In Italy, there were T-shirts. In Holland, someone sold a Davidoff vodka. Hong Kong, they had shoes. And so on. I can show you in our office, all these products. I decided now we have to stop. Then I cleaned up the whole world market, which cost me a fortune. We had 32 lawsuits to clean the market. The cost was about 3.5 million Swiss francs. So, then I started selling products under the name Davidoff in the most important categories; otherwise, you lose your protection after five years' time if you don't sell a product. So, you see I was forced to do it. But today the name Davidoff has notoriety all over the world; so when somebody goes to take my name, I can certainly stop him with success. So we are not forced to enlarge the diversification. I go very slowly, but we do it today in a professional way and on license.

C.A.: What percentage of your Davidoff business is cigars and tobacco compared with other products?
Schneider: It is difficult to compare. When you speak of turn-over, we make in the cigar business with all our brand names--Zino, Davidoff and Griffin's--about 150 million Swiss-francs turnover, and in the diversification, we make about 250 million Swiss francs.

C.A.: Which is the biggest of your nontobacco products?
Schneider: It's the cosmetic line.

C.A.: The cosmetic line, which is relatively new?
Schneider: Cool Water will be No. 1 worldwide this year in men's cologne.

C.A.: Really? What is the turnover of that?
Schneider: 220 million Swiss francs.

C.A.: At retail?
Schneider: No.

C.A.: That's your share?
Schneider: Yes.

C.A.: What's the Swiss franc?
Schneider: 1.50 to the dollar.

C.A.: So more than $100 million?
Schneider: Yes.

C.A.: When did you introduce this product?
Schneider: Four-and-a-half years ago.

C.A.: Is pricing for your cigars the same worldwide?
Schneider: No. [But] it's practically the same. The only differences are made by taxes. It's always the same basic price.

C.A.: And do you sell them duty-free?
Schneider: Duty-free is normally only 20 percent less.

C.A.: How old are you now?
Schneider: Seventy-two. I should make 100 years with a good Davidoff cigar.

C.A.: Where do you see Davidoff going in the next decade?
Schneider: We have a very effective and small management team so we can quickly decide on something. This is one of our strengths. When the big companies are writing reports, we are profiting from decisions. This is our strength.

I have a man who is in the picture about everything; so there is no problem with following up things. This is Mr. Schelker [Georges Schelker, CEO].

C.A.: So he's your heir apparent?
Schneider: Exactly.

C.A.: And how old is he?
Schneider: He is 55. But the other guys who are in the management are all around 40 and 45, so people are always coming up from the bottom. We don't engage people from outside.

C.A.: Where do you see Davidoff a decade from now?
Schneider: Davidoff will still be developing. Davidoff will get stronger and stronger.

C.A.: Do you see yourselves with a more complete line like Dunhill?
Schneider: No, no, no. We have ties only to be protected in the textile category. That's the only reason why we have them. But we will stay--and this is a clear declaration--No. 1 in the luxury-cigar business and in the luxury-tobacco business. All the rest has to help to reach this goal and to go on in this direction.

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