Culbro Corp., the corporate parent of General Cigar, has been enjoying an exciting year. Business for the cigar subsidiary is booming, and the corporation is repositioning itself to become a major player in not only cigars, but in cigar-related merchandise and upscale products. The biggest change has come at the top. The company's longtime chief executive officer, Edgar M. Cullman Sr., 78, turned over the day-to-day operations to his son, Edgar M. Cullman Jr.
Cullman, 50, has been preparing for this job his entire adult life. After graduating from Yale University in 1968, he went through stints in the Army and then Manufacturer's Hanover Trust Co. as a management trainee. He joined General Cigar Co. in 1974, and became senior vice president for cigars and tobacco in 1976 and later that year, the executive vice president for marketing. He became executive vice president and chief operating officer of General Cigar in 1978 and was appointed in 1980 to president of the division as well as a member of the board of directors of Culbro. In 1983, he was named executive vice president of Culbro and took over as president the following year.
Cullman's rise to the company's top job couldn't have come at a more challenging time. But his strategy is simple: keep the company at the top of the cigar industry. He discussed his plans for Culbro, and General Cigar, in a wide-ranging interview this past June with Marvin R. Shanken, editor and publisher of Cigar Aficionado magazine.
CIGAR AFICIONADO: This year begins a new era for Culbro. How would you articulate your father's contribution to the company, and has the transition been difficult?
Cullman: Well, first let me say the transition wasn't difficult. The decision was one that he knew he had to make. It was just a question of when. He knew that it was going to happen, and he knew who was going to be taking over. That's made it easier. For his achievements, you've got to go back to 1961, when my father first bought in to the General Cigar Co. He bought a controlling interest at that point. It was really the culmination of his love of tobacco and the cigar industry. Over the years, he added a lot of businesses, many of which are not part of Culbro today. But the cigar business is still part of Culbro and it has been his vision all along and his love. He realized that if he could put all of those efforts against a business that was less difficult than the cigar business, he might have made more money. He might have been more successful, but at the end of the day he wouldn't have been as happy because he loved the cigar business. For him, it's been difficult to separate what is business and what is personal interest. If there's a legacy that he passes on to me, it is that if you hang onto it long enough, and you believe in it, it comes back.
Look at what is going on today in the cigar business. I pushed to de-emphasize the cigar business in the '80s and early '90s. We were struggling. You couldn't shed assets fast enough to maintain any viability. It is remarkable what has happened. So if there's a legacy here, it's to follow your heart and the things that you really believe in. You can add tremendous value in that kind of situation. That's what he has done all of his life.
CA: When you joined the company in 1974, what was your attitude towards cigars, and has it changed?
Cullman: I knew very little about cigars except through my father's discussions at the dinner table or other places. In 1974, after getting discharged from the Army, I had spent about three years with what at that time was Manufacturer's Hanover Trust Co., which is now Chase bank. I knew very little about the cigar business or the tobacco business, but I enjoyed smoking cigars, I enjoyed the legacy. The family legacy.
It was reassuring to know that I was entering a business that was not necessarily started by my father or even by my grandfather, but started really by my great-grandfather. That gives you a certain feeling of a place that you belong. And I felt right along that I belonged. I started working in Puerto Rico, where we were sorting Connecticut wrappers. I learned the process from A to Z. I lived down in Puerto Rico. My wife was pregnant with our first child and very upset that I wasn't home, but we lived through those first years. It was a real learning experience.
CA: How long did you do that?
Cullman: It wasn't that long. I spent from 1974 to about 1976 in a training mode in various positions throughout the company. I was in Puerto Rico. I was in Kingston, Jamaica; Tampa, Florida, where we had an operation; and in Philipsburg, Pennsylvania, where we had a cigar factory. I was moving from our handmade factories to our machine-made factories. Throughout, I was learning everything about the cigar business. From tobacco growing and processing through cigar making.
CA: After that "training program," what happened in the next two or three years?
Cullman: My father constantly pushed me to do things. Just as I was getting comfortable understanding something, he would push me on to something else. I became head of the Connecticut operation, which was at that time the real estate business, the nursery business and the tobacco-growing business. All three divisions reported to one person, who was also head of the tobacco business; that influenced the emphasis that was given to the other two businesses. I was a sort of King Solomon who sorted out the needs of the various businesses. I learned a lot about the nursery business and the real estate business. From there, I went on to be president of General Cigar. I also had been head of all tobacco operations, where I worked with Alfons Mayer [the head tobacco buyer for the company].
CA: How big was General Cigar in terms of revenues when you became president in 1980?
Cullman: Less than half of what it is today. Our peak year was in 1969 when revenues were around $250 million. In the late '70s, it was struggling at around $50 million. But we've been growing rapidly. In 1994, revenues were about $88 million and climbed to $124 million in 1995, and in 1996, we expect at least $135 million.
CA: Let's go back for a minute. You are the fourth generation in the business. How did it start?
Cullman: My great-grandfather, who came from Germany, started in tobacco and later wrapper tobacco for cigars.
CA: When was the peak of Culbro tobacco farming operations in Connecticut?
Cullman: Well, I guess there were several golden eras. My grandfather started growing tobacco around 1910 in the Connecticut River Valley. That was when Connecticut Shade was introduced to the Connecticut valley. Prior to that he was dealing in tobaccos from around the world such as Indonesia and other countries.
CA: In an earlier interview with your father, he said that Culbro, at one point, had about 1,800 acres of tobacco?
CA: Today, how many acres do you own of wrapper tobacco land, and of that, how much is being farmed?
Cullman: We still own about 5,500 acres of land in Connecticut, but most of it is not available for tobacco now. I shouldn't say most of it. A good portion of it. We have about 330 acres that we're growing this summer.
CA: Isn't that substantially lower than in the past?
Cullman: Way down.
CA: But with the demand for large-leaf Connecticut wrappers growing so rapidly, why is the farming operation getting smaller and smaller?
Cullman: It actually has increased in the last three years. It was down to about 200 acres, when we hit our lowest point. The biggest problem is that every acre costs at least $25,000 to grow. It's just a risky and expensive business. We're able to today, because of our involvement with the grower Oliver Thrall, to have access to a lot more tobacco than we had before. Thrall is one of the growers in Connecticut who used to be with Windsor Shade. He has broken away from Windsor Shade as of last year. We processed tobacco for him in the Dominican Republic. And our agreement is such that we have first pick of certain tobaccos that he grows.
The real demand is for tobaccos for premium cigars, not for domestically made cigars. What we used to do is sell a significant portion of our tobacco to English buyers and use some of the rest for ourselves and for domestic cigars. The higher primings, the tobaccos that had more guts, were used for Macanudo. But we really are not in the business of growing tobacco for other manufacturers.
CA: How many acres does Thrall farm?
Cullman: He farms about 300-plus acres.
CA: But unlike Windsor Shade, you're vertically integrated.
Cullman: Yes, in that we use a lot of the tobacco we grow.
CA: And what you don't use for yourself, the higher quality tobacco, you sell primarily to the English market?
CA: It's not sold to other cigar manufacturers?
Cullman: We sell a little bit, but not a significant portion.
CA: And what portion of Oliver Thrall's crop do you end up with?
Cullman: He makes offers of tobacco to us, and we buy what we like for Macanudo.
CA: Between these two operations, you're basically able to get what you need for Macanudo and other cigars. Of course, Partagas has a Cameroon wrapper, so it's not part of these operations?
Cullman: No, it's grown in Africa.
CA: Have you sold some of your agricultural properties?
Cullman: Yes, we sold bits and pieces here and there. And, we've developed certain portions of the land for real estate. We use about a thousand acres for the nursery business, but in general, we still have plenty of growing acres.
CA: Let's talk about some of your brands. You can't start a conversation about cigars without talking about Macanudo. Why does Macanudo enjoy sales that no other brand in America can match?
Cullman: I think there are several reasons, Marvin. The first is that for every cigar that is made for the Macanudo brand, we have attempted to create a consistent smoke. So every time you buy a box or buy a single cigar, you know what you are getting. We do that with a tremendous inventory of tobacco, especially with the filler and binder. We age that tobacco. It's like what goes on in the champagne industry. They'll take seven or eight years of vintages and constantly blend them so that the end result of non-vintage bottles is a very good champagne that is consistent every time. There's no aspect of vintage to it. It's the same thing with our tobacco. Tobacco is a product of nature. It is affected by the weather and other factors to create a crop that is very strong, very mild, or it can be a heavy crop or a thin crop. If you have enough tobacco on hand, you can blend it several years together so that the outcome is a very consistent product. That's the first step.
The second factor is that we have consistently paid attention to Macanudo both from a marketing point of view as well as a sales point of view. We have not de-emphasized in any way the importance of Macanudo. That's one of the reasons you see Macanudo much more widely distributed than any other premium cigar. We even have concerns that we've gone too far. We pushed the brand into areas where maybe it doesn't belong, where it doesn't fit the brand's image. On the other hand, we have allowed some people to try Macanudo that maybe would never have tried it before, because it's available in a small superette on the corner that an individual might go to but wouldn't necessarily go to the tobacconist in the mall. And so they see it there, and yes, it's expensive, but you know, relative to the price of beer or anything else, it's not out of the question, so they might try it. That's one of the reasons why we have a wider audience, because we have this wide distribution and we've pushed it. We have a sales organization unlike many of the cigar companies in the premium end. They work both on our domestically made cigars and our premium handmade cigars. They carry both in their cars and they are responsible for the distribution of both. That's one of the reasons that Macanudo is consistently out there.
CA: What about the brand's marketing or advertising?
Cullman: We have been very consistent. We have always been an advertiser. Even before Cigar Aficionado, we were advertising Macanudo in various publications. As the industry declined, we were less aggressive, but still we were out there advertising.
CA: I remember seeing Macanudo ads for years, especially the golf ads.
Cullman: Exactly. We had various slogans, including, "This is a moment for Macanudo." They were very consistent, and I think that's another example that explains the brand's success.
CA: During the recent boom of the last three or four years, how has Macanudo responded in terms of sales, demand, inventory? Where, for instance, is it's volume today versus 1992, and where do you see it in five years? It is my understanding that Macanudo is in the 15-million-unit range.
Cullman: Well, we've hit a completely new high for Macanudo. We reached a peak in 1986, and declined from then until about 1993. But Marvin, it is our policy not to talk about specific unit sales for our brands, so I can't give an exact number.
CA: But Macanudo has not only responded to market demand, you've also increased the number of sizes, as well as moved up the price to reflect increased cost, market demand and the aging of tobacco inventory.
Cullman: Well, we have introduced new sizes. I am smoking a Hyde Park, as an example. That's a new size to the Macanudo line. It was a response to consumer interest in heavier gauge cigars. Our best-selling cigar today is the Baron de Rothschild, but it's very rapidly being overcome by the Prince Philip, which is a much heavier gauge cigar. In any case, we have added sizes, we have subtracted sizes. During this incredible surge in the cigar business, we've actually taken sizes off and discontinued them so we can concentrate on the sizes that have the most interest from consumers. We have also, as you know, added the vintage line and this summer we'll be introducing a whole new look on the vintage line at the RTDA [Retail Tobacco Dealers of America] convention.
CA: Will you tell us about that?
Cullman: The concept is that we will be producing a limited number of four vintages: 1978, 1984, 1988, and then we'll be introducing a new vintage with 1993. And we'll be sending them out as a package.
CA: How many cigars in the package?
Cullman: The cigars will be packaged by vintage and in one size only. But the retailer can buy a package of four different vintages for sale in their store.
CA: What kind of production will you have on this new line?
Cullman: It's not huge, but it's still a couple of million cigars in all, including the 1993.
CA: Where were you able to get tobacco for that?
Cullman: We've held it just for this purpose. What really gave us the idea was when we did the Partagas 150 [Signature Series] and saw how successful that was.
CA: The filler, binder and wrapper, it's all almost 20 years old?
Cullman: There's very little tobacco that old. I don't how many boxes we're going to be making of it, but we will have about 50,000 cigars of the 1978, 125,000 of the 1984, 400,000 of the 1988, and the new vintage, the 1993, will be in excess of a million cigars over several years.
CA: How do they taste?
Cullman: These are wonderful cigars.
CA: Let's talk about Partagas. I assume Partagas has enjoyed solid growth for the last four years, so that now it is in the 6 to 8 million range of unit sales?
Cullman: That's right.
CA: Obviously the introduction of the Partagas 150 caused a lot of interest on the part of consumers and the trade and was a very successful introduction. How has it affected the awareness and the positioning of Partagas for the future?
Cullman: I think it was a real teaser. I mean, it was a unique package, it was as we said in the advertising, "Once they're gone, they're gone," and so it was a real boost to the Partagas image--it added a tremendous cachet to the brand.
CA: What is the strategy for Partagas in the future?
Cullman: We don't have any specific new direction for Partagas. Partagas is unique, and is a different taste vehicle than Macanudo. It proves the rule that the wrapper has a huge impact on the taste of a cigar, because in essence, the binder and filler combination, with some small differences, is the same with a Macanudo and a Partagas. The big difference is the wrapper.
CA: In terms of the pricing of Macanudo and Partagas, how are they positioned against each other in terms of pricing for the consumers?
Cullman: They're very close, it's only about a 10 percent difference. Partagas is slightly higher. Early on--I mean this goes way back in history, when we first started with Macanudo--Macanudo was positioned as slightly less expensive than a Montecruz, and Macanudo and Montecruz were the two major smokes out there in the premium end. We introduced Partagas and we tried to make Partagas a little bit more expensive than Montecruz. So that was the position that we took and it sort of held.
CA: You have a number of other brands: Temple Hall, Bolivar, Cohiba, Ramon Allones, Canaria d'Oro, and very recently you came out with the Cifuentes brand, which must be playing off the life and history of Ramon Cifuentes. Why are you launching a new brand instead of focusing on some of the other brand names that have a richer tradition and higher market awareness?
Cullman: The proliferation of brands in the marketplace has been extraordinary. We are continually looking for tobaccos that will provide unique tastes. Unique in every sense while also being very good. We don't want to do something just for the sake of being unique. But we are stymied at this point. What we've done is come out with a Cifuentes that was an attempt to change some blends and use some different style wrappers. We are not convinced that it is a unique taste. It's a very good cigar, but it still is in the family of a Macanudo style. So, if we had to take a look at all of the brands that we have in our household, Cifuentes is probably the least well known. And so what we did was try to use our Connecticut wrappers but come out with something different.
CA: But, my understanding is that Cifuentes is never going to be a big brand or a big priority, so it's just another brand.
CA: One obvious question is Cohiba. What are you doing with that? You own the American rights but you haven't done much with it. Why haven't you taken the brand to market and made it a priority given the awareness and the consumer demand for the brand?
Cullman: I think it's a very good question and the answer really lies in the fact that we don't have a blend and a unique taste for that cigar today that we would be happy with. We think it's such a blockbuster brand name that we must come out with something that is equal to the expectation of the brand. We're at a very difficult position because all of our time and energies have been on developing or creating the tobaccos for Macanudo and Partagas. We need to develop a third leg, in essence, a taste for Cohiba. If we just came out with something that was a variation of a Macanudo or a variation of a Partagas, we don't think that would cut it.
CA: As experts in the field, with growers and blenders who have access to an almost unlimited range of tobacco from all over the world, why can't you do it? Other brand marketers have launched new brands of very high quality, very successfully. If they can do it, then why can't you do it? If you went out to sell the brand, you could make a fortune.
Cullman: We're not interested in selling it. We want to develop it.
CA: But why is it that other people can launch new brands of very high quality?
Cullman: I'll be very frank with you, Marvin--the number of unique tastes that are out there today, are not that significant. Once you get beyond a Dominican style cigar and I would say a Honduras/Nicaraguan, there isn't that much. But Opus X is a very interesting new cigar, even thought it's not available in any quantity so that consumers can really taste it. But it really is the germ of some very interesting new approaches to a new taste in the cigar business. That's what we're looking for and we're working very hard as the Fuentes [Tabacalera A. Fuente in the Dominican Republic] were before us. Unfortunately, we didn't get going as fast as they did. But we are very interested in developing new tastes. It will only come from experimentation. You can only grow a crop of tobacco once a year.
CA: You mentioned Opus X. I was thinking of Opus X among a number of brands from the Dominican Republic as well as Honduras. Are you doing anything in terms of experimentation or growing wrapper tobacco in the Dominican Republic?
Cullman: Yes. We've always grown wrapper tobacco in the Dominican Republic. We still grow it. What we grow mostly is candela. Candela is the green, fire-cured tobacco that is used as wrappers for many of our Garcia y Vega cigars. It is not used on premium cigars very much, but it is quite popular in the domestic [machine-made] end. We're doing a lot of experimentation in terms of new seeds and variations of seeds and taking variations of filler and binder tobaccos in the Dominican Republic, in Mexico where we grow also, and in Connecticut.
CA: Are you today growing wrappers in areas within the Dominican Republic that are conducive to the kind of quality wrapper that the Fuentes is producing?
CA: Is the quality high enough to be destined for future General Cigar products?
Cullman: Yes. Definitely. Absolutely. That's exactly what we're doing.
CA: Could you expand on it, I mean, where, how big, how soon?
Cullman: How soon is very hard to determine.
CA: Do you have any crops that you are now aging of wrapper tobacco that are in the new style and with the quality of Opus X?
Cullman: Yes. But not enough to make an introduction.
CA: For many years there was an understanding that you could not grow high-quality wrapper tobacco in the Dominican Republic, but Opus X has demonstrated that the theory is not correct.
Cullman: Right. But what we don't know, and I don't know, is what quantities they are able to produce. And at this point, until they come out in the market, there is no point in speculating.
CA: Of course, they're on the market, but only in certain areas.
CA: And in very, very limited quantities.
Cullman: Right. And that's a problem because as a company that is in the premium cigar business, producing a couple hundred thousand cigars is almost meaningless for us. It's much more important for us to look at any brand that would be many millions of cigars.
CA: But a launch of a couple hundred thousand on the way to many millions, five, seven to 10 years later is OK, too.
Cullman: It is OK. But it doesn't feel right to me to launch at two hundred thousand.
CA: I understand. But do you plan for new cigars, to be a factor in the new niche that has been created by Opus X, and if so, with an existing brand or a new brand or what?
Cullman: Yes, definitely. Cohiba is going to be our mark. There's no question about it.
CA: And when would this be?
Cullman: I hope it would be sooner rather than later, as my father would always like to say.
CA: Within the next two years?
CA: What I'm hearing, I just want to make sure, is that you plan to come out with Cohiba in the next two years utilizing a wrapper, similar in style to Opus X.
Cullman: That is our plan. It doesn't mean we will be successful.
CA: You are now farming enough of this wrapper for that project. But it seems from the Opus X experience that that kind of wrapper needs a lot more aging to enhance the flavors. It's not just something that you can turn around quickly, is it?
Cullman: That's the problem. Not only does it take time to develop the tobacco, but once you feel you have it and even in small quantities, it takes time to age it. And then, once you have made the cigars, you have to age it again. It is a very painstaking process.
CA: That's very interesting. Could you tell me how many acres of wrapper tobacco you have under cultivation?
Cullman: In this area?
Cullman: It's probably less than 20 acres at this point.
CA: For wrappers, that can be a huge amount.
Cullman: It could be, but much of it is not usable. It is not a commercial seed yet, so we're developing it.
CA: But even a few acres of wrapper tobacco would be a lot.
Cullman: Oh, it would be a lot if it were all good. The problem is there is a lot of waste.
CA: What happens to all the waste?
Cullman: Well, most of it will be sold as binders or as unusable tobacco. It's experimentation. We're taking various seeds that are well known and seeing if we can develop them.
CA: Is your farm where you're experimenting on the wrapper at all near where the Fuentes' farm is?
Cullman: No. It's about an hour outside of Santiago.
CA: Are your people convinced that you can grow commercially a wrapper in a different location of similar quality to the Fuentes?
Cullman: We are not convinced that it necessarily will be in the Dominican Republic. But over the years, we have developed seeds that we grow both in the Dominican Republic and in Connecticut. This allows us actually to have two crops per year because [the Connecticut tobacco grows in] our summertime and the Dominican grows in our wintertime, so we actually can get two crops.
CA: I'm a little confused. So, what I am hearing now is that the new Cohiba will not necessarily have a Dominican wrapper?
CA: Earlier, I think you said it would be.
Cullman: No, all I'm saying is that it will be a new wrapper. I don't know whether it will come from the Dominican Republic or Connecticut.
CA: Backing off the premium brands for a second, you have machine-made cigar businesses of approximately how many cigars?
Cullman: As I've said, we don't like to talk about numbers.
CA: You have brands like Garcia y Vega, White Owl, Tiparillos. Obviously, 20 years ago the volume was higher.
Cullman: [Emphatically] Much more.
CA: Where was the volume at its peak, and has there been any renaissance in those sales numbers?
Cullman: There were several peaks. The most recent peak for the entire industry was at the end of the '60s when the U.S. cigar industry hit 9 billion units in 1969 and 1970.
CA: What was your volume in that period?
Cullman: It was 1.8 billion units. From 1969 until 1993, there was a straight line decline in the industry from 9 billion to 2 billion or 2.1 billion, whatever it is. We probably suffered proportionately so, a little more, a little less, depending upon the year. But we had a very big business in 1969 in the small-cigar business. The Tiparillo and Tijuana Smalls were very, very big at that time. And it was because the first surgeon general's report on cigarette smoking came out [in 1964], many of the cigarette smokers turned to cigars as an alternative for a period of about four or five years. That created a major resurgence in the cigar business. Again, the cigar industry could not make enough cigars to fill the demand. That was short-lived, however, because it was based upon a false premise. The premise was the cigarette smokers could make a transition to cigars, and most of them could not. There just is a different taste, there's a different enjoyment level. I think the resurgence today has a very different foundation.
CA: What's happened between '92 and '96?
Cullman: What's happened is we had a big surge in all of our domestic-made cigars.
CA: Machine-made cigars?
Cullman: Machine-made cigars starting in early '94. So '94 and '95 were very big years across the board. What we're finding is things are settling out a little differently now. And what we are still finding is that our Garcia y Vega business has grown nicely, about 30 percent this year.
CA: Is that your biggest brand?
Cullman: It's our biggest brand in terms of dollars, but it's not in terms of units, because it's a higher-priced cigar.
CA: Without getting specific then, you've experienced a nice increase in machine-made cigars, too. Is that right?
Cullman: A nice increase. Remember, we have also raised prices at each level along the way. We've been much more aggressive as an industry than we have in the past. Price increases used to come few and far between in the cigar industry.
CA: In terms of tomorrow. You are the president of Culbro. Culbro is General Cigar. I would be interested to know what the future strategy of General Cigar is given your new responsibility and given the current climate of the premium handmade cigar market in America.
Cullman: I think that General Cigar's strategic direction is pretty well set to take full advantage of what is going on within the cigar industry, particularly with greater emphasis on the premium end. We have transformed the management of General Cigar significantly and will continue to do so. All with the eye to strengthen our abilities to take advantage of what's going on today. We want to have a stronger and stronger marketing effort. We want to be able to produce more cigars, at higher quality. We also want to be in the forefront in the marketing area for cigars. As you know last year, we introduced a whole line of sportswear. We also produced the Partagas 150. This year we are going to do more of the same. We'll have another line of sportswear. I told you about the vintage Macanudo line. We'll also be introducing a whole line of accessories at the RTDA that will be part of what is known as the "Macanudo Collection" with cutters, ashtrays and humidors. Each with a unique design that we've developed from our market studies and found out what were the pros and cons of each of those products. We've tried to develop a better mousetrap and we have.
CA: What price level would these be? High priced, or...
Cullman: Oh, very high priced. These are significant items. But not off the charts. It's all going to be affordable, but they're going to be expensive.
CA: You mentioned the change in management at General Cigar. It would seem that it started when you hired Austin McNamara more than two years ago, and that General Cigar's creativity, market presence, new product launches and almost a consumer-driven tenacity began to increase dramatically at that time. What is Austin's background?
Cullman: He wasn't in the cigar business. Sometimes you're lucky and sometimes you're not, but in this case I think we've been lucky. We recruited a new president of General Cigar a couple of years ago when David Burgh said he wanted to retire. We created a transition team, in essence, that allowed a transition to take place. The plan was for Austin to spend almost a year being head of marketing and sales and ultimately to step in for David the following year, which basically occurred. Austin came from a very interesting background, including his upbringing. He worked with his father in a McDonald's franchise and really understood what it was like to serve a customer.
CA: They understood the Big Mac.
Cullman: That's right; little did he know he was going to be in another Mac.
CA: Yes. [laughter]
Cullman: He worked for an ad agency, a Saatchi & Saatchi subsidiary, and then he worked for Proctor & Gamble and then he worked for Chiquita. But not in the banana business. In their food business. And in all cases, he's learned the consumer business: he's learned sales, distribution and intermediaries; he learned, of course, the marketing end. All of which combines in somebody who's got a tremendous personal drive. He's got a very strong personality with very, very good training. He's very methodical in the way he approaches these problems. He's very consumer-oriented. He likes to go out and test his ideas and his thoughts. So he has brought in, with our blessing, of course, a whole new management team. And the transition will continue as time goes on. That is the real direction for General Cigar, to be a first-rate marketing company. We will use cigars as our base, but cigars aren't the only thing, even though it will remain the principal thing.
CA: It's a new season for Culbro and there's much talk of shedding some of the past businesses, which are being sold or divested in different ways. There is the launch of Club Macanudo [in New York City] and the apparent interest in the luxury consumer business. What I would like to do is find out about this new corporate strategy and then learn more about how Club Macanudo fits in and what is the plan for Club Macanudo.
Cullman: As my father started talking to me about making the transition from himself to me, it became apparent that I had to develop a strategy for Culbro that was mine, not just his. It started back in 1993, and began with my interest in trying to take advantage of what was going on in the cigar business. Cigar Aficionado put another light on the concept of cigars as a key to a lifestyle and the notion that cigar smokers shared many other common interests. It was an intriguing idea for me, because it meant that there was a way for us to develop parts and services that would appeal not just to cigar smokers but maybe to other people who are similar to cigar smokers.
What we first did was develop Club Macanudo as a concept. By 1995 we started looking for a place and we actually opened in May '96. But the underlying concept here started with looking at General Cigar. We started to draw concentric circles and, as we got further and further away from the cigar business, we said to Austin that there was a line "where you can't cross. You have to stay within this line for the cigar business. That's your responsibility." As we looked at other opportunities, such as Club Macanudo, we said, "That can't be your responsibility, that has to be something we want to develop separately, because it would be distracting to the cigar company." General Cigar could not both keep up with the demand of the cigar business and also develop a whole new line of business. So the first step out for Culbro was really Club Macanudo.
We also made a decision at the beginning of this year to sell our packaging business. We have an agreement in principle with a potential buyer. The course is set for us to shed the businesses that do not fit this strategic view, which is quite simple: we want to concentrate on the cigar business and concentrate on the affluent market both for products and services that play off of the cigar industry. Not every product that we would be looking at and company that we would be looking at would necessarily mean that every one of our consumers would be a cigar smoker or vice versa, that every cigar smoker would be a consumer of the product. But this is how we want to develop this approach. We're seeing a tremendous resurgence of branded luxury products, which are the cornerstone of the consumer products business. For a period of time, brands were "out" because there was an awful lot of discounting going on, an awful lot of generic products being sold, etc. All that is well and good, but I think if you keep after the branded business, and you offer quality, you'll be ahead of the game.
CA: Can you be specific in terms of what you plan to do in addressing or penetrating the affluent market?
Cullman: I think it's a little too early to talk about it, because I haven't made up my mind exactly where it's going to lead.
CA: But, specifically, you now have Club Macanudo, which is beautiful. Have you determined whether or not it's going to be a single-unit flagship, or is it something that you plan to take to other cities around the country, around the world, or is that still in the analysis stage?
Cullman: As we speak, we are looking at sites in other cities in the United States. It's something we take very seriously, because I feel that the demand that we've seen at Club Macanudo is significant enough to warrant us to go look elsewhere. I think that after we have established two or three of these Club Macanudos around other parts of the country, we will seriously consider a franchise concept. I'm really not interested per se in running cigar bars. What I am interested in is in maintaining the brand.
CA: Will these likely be the obvious cities like Los Angeles and Chicago, which are major premium cigar markets?
Cullman: Absolutely. Obviously.
CA: Will future Club Macanudos be larger?
Cullman: Well, the first thing to look at is where in each of these markets we might end up. We all know Chicago is a big city or Los Angeles or Miami or Washington; they're all big cities and each has an area of the city that might be appropriate. I happen to know New York pretty well. The area we are in has proven to be a very, very successful location. You must have seen the article in The [New York] Times a couple of weeks ago about the resurgence of Madison Avenue and all of the boutiques along Madison Avenue. That's all in our neighborhood on 63rd Street between Madison and Park, so the most difficult decision is to narrow it down to a location that fits. We've also learned a great deal from Club Macanudo, so we will be able to take advantage of what we've learned. If we can, we will try to make it bigger. But it is big enough to generate good incomes for anyone ultimately who wants to franchise. And you are right, I'd like to take this around the world. I think there is a unique opportunity to create a cigar bar in major cities where cigar smoking actually is not that big. Take Tokyo as an example. I think it would be dynamite in Tokyo because there would be people who would flock there.
CA: There's been a lot said and written about the shortage of large-leaf tobacco for the bigger sizes of cigars. Is that still a problem? Will it continue to be a problem for the next few years or could consumers begin to find the larger size cigars which they really can't get today?
Cullman: Most retailers are selling more cigars today, at a larger ring gauge, and in larger sizes then they have ever sold before. So while you're saying you can't get them, there are many more that have been on the market.
CA: But in the leading brands, it's tough to come by.
Cullman: Well, we're making more of this cigar, Partagas No. 10, than we've ever made. We're making more of the Prince Philip than we've ever made.
CA: Yes, but as a consumer, when I go into a store, your shelf is empty.
Cullman: It's just that the demand is outstripping us. So, I don't know how to change that.
CA: Well, as an example, how many Partagas No. 10s are you making today versus three years ago?
Cullman: Probably double what we made three years ago.
CA: But it's obviously not enough.
Cullman: Not enough.
CA: The reason given is that the shortage is in wrappers.
Cullman: There is a shortage, over the years, but we're now in good shape with large leaves.
CA: Is the production of double coronas and Churchills and so forth increasing rapidly?
Cullman: Rapidly. And they will continue to grow.
CA: Can you give us what Partagas No. 10 production was in 1992 versus 1995 and 1996, and what your internal projections are for three years from now?
Cullman: Again, I can't give you specific numbers. But if you take 1992 as a baseline of 100, then in 1995 we produced 2.5 times as many of the No. 10s, and in 1996, we will produce 4.5 times as many.
CA: There's been a lot written and said that the industry back-orders are exceeding 25 million or 30 million to even 50 million today. Are you able in '96 to reduce your back-order problem, or when will you be?
Cullman: We have not been able to reduce our back-order problem, which is mounting. We do not want to give specific numbers, but I can tell you this, we have increased our production 20 percent this year, and yet we still are increasing our back orders.
CA: In 1995, your sales in units were far greater than the year before as reported in your annual report.
CA: What kind of increase in shipments will you have in '96?
Cullman: Our shipments will be up significantly in '96, but not as significantly as they were in '95 over '94. Mostly because we can't produce the cigars fast enough. The limitations are two: first, tobacco--not wrapper tobacco, we have enough wrapper tobacco--but mostly filler and binder. And we have enough filler and binder but it's not aged enough. We would be using too young tobaccos.
CA: If your production is up 20 percent this year, what kind of increase do you expect in 1997?
Cullman: We should have at least a 50 percent increase. I mean, if the demand still holds up.
CA: In 1995, how many handmade cigars did General Cigar make and sell?
Cullman: Without being specific, it exceeded 25 million cigars.
CA: And so in '96, there will be a 20 percent increase.
CA: And in '97 it could be 30 or 40 percent above the 30 million?
CA: One cannot have a discussion of handmade cigars, obviously, without talking about what happens when we wake up one morning and read that the embargo's over.
Cullman: It will be like the afterburners kicking in for the cigar business. I was talking to one individual in the industry a couple of weeks ago, who flatly said that five out of every six Cuban cigars that are made are being consumed in the United States.
CA: That's ridiculous.
Cullman: I think it's ridiculous. But, I remember saying 10 years ago that there were 10 million Cuban cigars consumed [annually] in the United States, and people said I was ridiculous. I think there's at least that today.
CA: Do you have any specific plans or is it really so difficult now until you know what the policy is going to be in terms of being able to purchase Cuban tobacco in bulk? Do you think we may end up with parallel brands, where you buy a Cuban-made Partagas and then a Dominican-made Partagas, and so on and so forth?
Cullman: It's a very good question. There are so many unanswerable questions in that area, but our thought was when we actually sat down to negotiate with Tabacalera [Spain's tobacco monopoly] last year there were advantages it offered us, including that they wanted to develop a worldwide cigar company. There wasn't such a thing.
CA: It should be pointed out that Tabacalera purchases 50 percent of all Cuban cigar exports for the world, so they really dominate the Cuban cigar industry in the world as a distributor.
Cullman: Exactly. So, their interest in building a worldwide cigar company was attractive to us. There is no such thing; unlike the multinationals in the cigarette industry or in the liquor industry, there really isn't anything like it in the cigar industry. The second advantage was their closeness to the Cuban tobacco industry. And, quite frankly, we would love to have seen a partnership we could have achieved, since they claim to have ownership of the Partagas brand outside of Cuba and the United States, and we have the Partagas brand in the United States. We thought it would be very interesting to see, as an experimental thing, if we could ever have gotten together. I hope it still may work. To me, it would be interesting to see the sale of the Partagas brand in Spain, with our Partagas right next to their Cuban Partagas, distinguished enough so that the consumer would not be confused and it would be obvious that our Partagas was a Dominican Partagas. It only strengthens the brand. That's how I'd love to see it happen in the United States. None of us, as manufacturers in the Dominican Republic, Jamaica, Honduras and other places, are going to give up our factories just because Cuban cigars are available.
CA: Of course. Well, there will always be great demand for your product.
Cullman: I hope so. That is our thought as well.
CA: But it could end up that the Cuban factories are privatized and that Mr. Moneybags, whether it's Philip Morris or General Motors, or whoever is able to pay the highest price, becomes the supplier to the world market, including the United States, of Partagas or Cohiba or Montecristo, and you end up either being able to or not being able to negotiate a distribution agreement in these markets. Conversely, because Macanudo is your brand, you have the ability to take that to the world market.
Cullman: Yes. It's very hard to know how the world will develop in this area.
CA: Well, it's very exciting.
Cullman: It's very exciting.
CA: But the bottom line is that the ending of the embargo will have a tremendous positive impact on cigar awareness and cigar consumption in the United States.
Cullman: I agree with that 100 percent. There's nothing to say that our Partagas or our Macanudo couldn't be blended with Havana tobacco in ways that improve our cigars but don't necessarily make them Havana cigars.
CA: This interview would not be complete without talking about and asking for your reaction regarding the article that appeared recently in The New York Times by Jane Brody on the negative impact of cigar smoking on one's health. As a leading executive in the cigar business, I would like to know--I think our readers would like to know--your reaction to it.
Cullman: This is a tricky subject. Unfortunately, tobacco and health have been in the headlines for many, many years. Since I'm not a scientist, it's very difficult for me to talk with great authority. But I can say this, that Jane Brody certainly stirred the pot. One of the studies that she quoted was a 1972 study and was way out of date. And many of these studies are based on cigar smokers outside the United States, mostly in Europe, who smoke small cigars, little cigars that are more like cigarettes than they are like cigars and are smoked in large quantities. We're finding in today's surge of cigar smoking that most cigar smokers may be smoking one cigar a day, maximum two, more likely one or two a week as opposed to one or two a day. They use it for relaxation. They use it for the enjoyment of companionship. I firmly believe that, as you have discovered in the wine and spirits industry, that products used in moderation can be of benefit to the psyche, to the general well-being of the individual as opposed to a real harm. The cigar is consumed in a very different way than a cigarette is. It's consumed without inhaling, it's consumed very infrequently, and it's not a habit. It's part of a lifestyle.