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As it goes into its fourth generation of family ownership, luxury cigar maker Davidoff recently hit the reset button in order to focus on its core strategy. Selling off its cigarette business and concentrating on what they call a “crop-to-shop” philosophy, Davidoff is now grossing nearly $1.3 billion annually selling top-notch product through its global chain of flagship stores. With revenue rising and production figures breaking records, the company’s first non-family CEO, Hans-Kristian Hoejsgaard told Forbes the future of luxury lies in the Middle East and Asia, adding that the thawing relations between Cuba and the U.S. will unleash a wave of excitement that is set to further boost the cigar market, giving Davidoff even greater opportunities to fulfill its global ambitions. 

Davidoff used to have its own line of Cuban cigars, now they produce mainly in the Dominican Republic, Nicaragua, and Honduras – Photographer: Brent Lewin/Bloomberg

 “Premium cigars are the only category of tobacco products that continue to grow,” Hoejsgaard explained from his office in Basel, Switzerland, “and we are the biggest producers of luxury cigars with about 10% [market] share.” With Hoejsgaard at the helm since 2011, 140 year-old Oettinger Davidoff has become a global powerhouse with one of the most recognizable luxury brand names, used to christen everything from perfumes to watches and even cognacs and coffee.

 The company’s forte, though, can be traced back to its beginnings in Basel in 1875, when Max Oettinger opened a specialist tobacco shop named Habana-Haus. Having survived bankruptcy and two World Wars, the company became Switzerland’s most important tobacco wholesaler by 1945, and under the leadership of a Basel lawyer named Ernst Schneider, acquired Zino Davidoff’s Geneva shop and brand of Cuban cigars for the “crazy” sum of3 million swiss francs (about $700,000 dollars at the time) in 1970.

 Zino Davidoff was a charismatic Ukrainian who inherited his father’s tobacco shop and, during World War II, cornered the European market for Cuban cigars from neutral Switzerland, and became the global face of the cigar industry. Even after the Cuban Revolution of the 1950s that saw Fidel Castro rise to power and nationalize the tobacco industry, Davidoff’s charm helped him become the only foreign player to be allowed to have its own brand of Cuban cigars and a dedicated factory, giving further prestige to his firm. By 1989, the relationship had deteriorated and Davidoff left Cuba, moving the bulk of its operations to the Dominican Republic.

 With the global cigar industry finding its second—and maybe even third—wind, Davidoff is uniquely positioned to capitalize on the opportunity. In the aftermath of the 2008 global financial crisis, extreme wealth creation has shifted from the U.S. and Europe toward Asia and the Middle East. “The premium cigar world is about pleasure, [smoking a Davidoff] is a ceremony, an excuse or a catalyst for taking time out,” explains Hoejsgaard before adding, “it’s a degustation, like wine.” Hoejsgaard is pushing hard to associate Davidoff with high luxury, targeting 28 to 35-year-olds in emerging countries who are beginning to acquire high-brow habits and finally have the cash to splurge on a Michelin-star meal or an expensive bottle of wine.

While it’s hard to properly define the size of the market for premium cigars—which must be hand rolled and retailing for more than $8—Hoejsgaard estimates that global sales stand at around 600 million units, with 50% of that in the U.S. “We have about 10% [of the market], the rest is extremely fragmented,” he says. The Davidoff brand saw sales jump 12% in 2014, while the company’s production hit a record 44 million units, up 13.1% from the previous year. Underpinning their growth was a steady performance in the U.S. (up 20%) and across Asia, despite a market that “shrank significantly” in Europe, and lower duty free sales as a consequence of the economic slowdowns in Russia and China. In Asia, which is “Davidoff’s most important future market,” Hoejsgaard recently closed deals with distributor Bluebell Cigars and Hong Kong-based Sparkle Roll Group, which should help it expand its market presence.

Beyond delivering consistent quality, Hoejsgaard understands that luxury is more than just product, it requires an experience. Davidoff is focusing on its chain of more than 70 flagship stores across the world, where clients can buy cigars, humidors, and other accessories, but also enjoy a smoke in the lounge. Davidoff has also partnered with Art Basel, becoming the art fair’s second largest sponsor, and is pushing forth with the Davidoff Art Initiative which turns their lounges into exhibition and lecture spaces. The cigar manufacturer is also supporting a residency program for young artists which takes four Caribbean artists to New York, Berlin, Beijing, or Basel, while bringing five international artists to work in the Dominican Republic.

A further source of optimism can be tied to Cuba, traditionally seen as the cradle of tobacco and cigar smoking. After the mediation of Pope Francis, Cuba and the U.S. began to normalize diplomatic relations, which could lead to the end of the decades-old embargo and a true insertion of Cuban puros into the largest market for premium cigars. While Fidel Castro and Che Guevara drove major producers out of the country, Cuba retains a special place in cigar smokers’ mind akin to what Bordeaux signifies in the world of fine wine. “It will take quite some time until the embargo is lifted, but there’s a lot of excitement, and that wave will benefit the entire market,” Hoejsgaard says. He does provide a word of caution, however: “the American taste profile is different, more light bodied compared to Cuban cigars which are on the fuller side.”

Davidoff seems to be hitting its stride. While Big Tobacco names like Philip Morris and Imperial Tobacco see annual revenues decline as regulators clamp down on smoking and society demonizes cigarettes, luxury cigar makers have distanced their product while creating an aura around their brands. Under Hoejsgaard’s leadership, Davidoff will push deeper to become a luxury lifestyle brand, targeting affluence and tracking wealth creation across the globe. “We want it to be like opening a bottle of champagne,” he tops it off.

 

(Source: Forbes.com)

 

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