800-JR Cigar, Inc.

151 E. Broad Street
Statesville, North Carolina 28677
U.S.A.
(704) 872-9555
(800) JRCIGAR; (800) 572-4427
Fax: (973) 884-9556

Public Company
Incorporated: 1997
Employees: 1,150
Sales: $240.34 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: JRJR
SICs: 5191 Tobacco & Tobacco Products; 5961 Catalogue & Mail Order House; 5399 Miscellaneous Merchandise Stores; 5993 Tobacco Stores & Stands; 6719 Holding Companies

800-JR Cigar, Inc. is one of the largest distributors and retailers of tobacco and tobacco-related products in North America. Management believes that the company ranks as the leading retailer of brand name cigars in the United States. In addition, the company is the largest customer of many of the world’s top cigar manufacturers, including Consolidated Cigar Holdings, Inc., General Cigar Holdings, Inc., Swisher International Group, Inc., and Villazon & Co. The company markets its products via direct mail and through its six specialty cigar stores and three large discount outlet stores.

Steady Growth: 1970s-90s

Industry commentators have noted that for the past 100 years, the popularity of stogies has mirrored the peaks and troughs of the stock market in the United States. Cigar sales declined markedly following the stock market crash of 1929, and again in 1973 as the country met with a bear market. Surprisingly, however, while cigar sales declined steadily from 1973 to 1993, 800-JR Cigar’s business was growing. Lew and LaVonda Rothman opened their small, corner candy and tobacco store in 1970, just three years before cigar sales surged to an all-time high, and then began their steady 20-year decline. The business, originally named JR Tobacco after Lew’s father, Jack Rothman, quickly outgrew its original location at 6th Avenue and 45th Street in Manhattan, New York, and went from being a “mom and pop” shop to a bustling wholesale and direct mail retail operation.

According to Barron’s, the early 1990s marked a social backlash against the fit, careerist, Yuppie lifestyle that had been promoted and caricatured in the 1980s, and JR Cigar benefited from the shift. Helped by good times on Wall Street, the cigar industry indirectly encouraged many recently arrived professionals to explore new avenues of decadence. Cigars became associated with the sort of “refined rebellion” championed by the Baby Boomers, then 30- or 40-something and enjoying a time of life that lent itself to reveling in success. These individuals, male and female alike, helped build an industry that enjoyed a compounded annual growth rate of 20 percent, reaching $2 billion a year in total volume by 1997. Between 1991 and 1997, as the Dow climbed threefold, sales of premium cigar brands rose more than fourfold. An estimated 500 million cigars were imported into the United States in 1997.

All of this spelled good news for 800-JR Cigar, which by then ranked as one of the largest distributors and retailers of premium and mass market cigars in the United States and the largest customer of each of the world’s largest cigar manufacturers. Premium cigar imports increased an average of 37.6 percent a year between the years 1993 and 1996. Yet according to Rothman, major manufacturers, who increased their production by 50 percent or more, still could not meet the distribution demands of a swelling market. About six million Cuban cigars began to be smuggled into the United States yearly, but even these could not match the needs of this country’s estimated one million premium cigar smokers, whose demand created a situation in which there were 80 million cigars on back order. 800-JR Cigar’s net sales increased approximately 25 percent each year from 1995 to 1997, from $152.7 million to $192 million to $240.3 million—all without benefit of advertising.

Changes in Cigar Demographics: Mid-1990s

By 1994, the scarcity of premium, brand name products caused a horde of start-up companies, some foreign. As many as 150 small manufacturers of inferior cigars sprang up to meet the new need to provide smokers with the perishable product they desired, inundating the American market with lower-quality cigars. These “Don Nobodies” sold for as much as the better quality, better known brands due to a supply and demand imbalance. The established premium companies, whose products accounted for 40 percent of sales in dollar terms (ten percent of product sold), faced farther competition from another set of foreign companies, mostly Caribbean, that used the shortage to establish a bigger foothold in the United States for their handmade cigar brands.

In addition, the renaissance in cigar smoking drove up prices—by as much as 20 percent per year on premium products. This increase largely accounted for the wholesale price of quality tobacco leaf which went into premium cigar wrappers and which took at least three years to develop from seed to rolling desk. Prices for the most expensive kind of shade tobacco surged to $40 a pound in the mid-1990s, up from $17 only a few years earlier. Also in short supply was skilled labor, especially cigar rollers, who saw their wages increase fivefold in as many years, up to as much as $300 per week by 1997.

A Glut in the Market Spells Opportunity: Late 1990s

Then, in the late 1990s, the situation reversed. By 1997 the major manufacturers had caught up with production demands, and there developed an industry surplus consisting mainly of cigars with no brand equity. This situation caused sudden widespread discounting of the foreign no-names, which could no longer compete with the better quality and better known premiums. Of the approximately 500 million cigars imported into the United States in 1997, only 325 million or so were purchased. This turn of affairs spelled disaster for recognized name-brand manufacturers, such as Consolidated Cigar, General Cigar, Swisher, and Matasa, but opportunity for 800-JR Cigar. “What’s good news for the major manufacturers is normally good for us. And what’s bad for the major manufacturers is normally good for us as well...,” announced Rothman in a Wall Street Transcript interview. The mark-up on an inferior cigar is essentially the same as that on a high-end item, so as the upstart companies attempted to liquidate their inventories at vastly lower prices, 800-JR Cigar bought up the excess and sold it to its customers at reduced prices. With no competitors of its scope or scale, 800-JR Cigar experienced greater than the combined growth of its closest four or five competitors in 1997.

While analysts began voicing some concern that the peak in the cigar industry was over early in 1998, pointing to a sell-off of common stock by Consolidated Cigar, General Cigar, and 800-JR Cigar stock in 1997, business for 800-JR Cigar continued to boom. During the last quarter of 1997, it moved its Bergen County, New Jersey store to a new location in Paramus, New Jersey, and in that same quarter made its first sales to a distributor in Germany and another in Canada. Shortly afterward, it began looking into the possibility of opening duty-free areas in airports. Its stock, which sold for $17 at its initial public offering in June 1997, increased in value to $38 and then dropped back down to $27.

In 1998 the company formed a subsidiary, JR Tobacco of Burlington, Inc., which opened a new 128,000-square-foot JR Outlet Center in North Carolina in October of that year to serve as a distribution point and shipping facility for the company’s wholesale accounts. The outlet, which provided a significant improvement in 800-JR Cigar’s ability to efficiently process and ship orders, also allowed for additional product lines to be added to its retail, wholesale, and mail-order operations and provided the venue to test out these new items. Some of this merchandise constituted what Lew Rothman called “oral” products—cashews, coffee, pistachios. Others were “male-oriented”—shirts, jeans, fishing rods, designer fragrances—quality items that took into account the tastes and pocketbook of 800-JR’s established, typically male and well-to-do customer.

In March 1998 the company opened a 10,000-square-foot, upscale cigar humidor and bar in the heart of New York’s financial district in the New York Cocoa Exchange, a building steeped in history and known for its outstanding architecture and decor. Later that same year, another wholly owned subsidiary of 800-JR Cigar, Santa Clara, N.A. Ltd., became the exclusive U.S. distributor of Romeo y Julieta Cigars. The company also became the exclusive importer of all cigars produced in Nicaragua when it purchased a controlling interest in a factory producing 80,000 or more handmade cigars daily, Nicaraguan American Tobacco Inc. The price gap between these cigars—selling at 800-JR Cigar prices, which were 20 to 30 percent less than that of other companies in 1998—and other brand equity names was enormous.

Company Perspectives:

800-JR Cigar’s objective is to enhance its position as the leading retailer and distributor of an unmatched selection of tobacco products, including over two hundred brands of premium and mass market cigars. The company’s buying acumen and selling power enables it to earn a significant savings on purchases, and to pass those savings on to customers in the form of discounted prices. The company also markets an extensive selection of value-priced, private label, premium cigars which it believes compare favorably to nationally branded cigars selling at substantially higher prices. 800-JR Cigar believes that its success is due in part to its ability to purchase in large quantities from a broad range of suppliers.

Slowdown in the Industry

By March 1998, many stocks of cigar companies were nearing 52-week lows, and shares of the four largest public enterprises—Swisher International, General Cigar Holdings, Consolidated Cigar Holdings, and 800-JR Cigar—had dropped 20 to 46 percent since October 1997. There was a proposed multibillion-dollar tobacco settlement before Congress; in addition, a lengthy monograph at the National Cancer Institute, drawn from all salient research on medical implications of cigar smoking, was due out soon. As a result, industry watchers were predicting a slowdown in the sales of cigars and related products. These specialists were saying that, after years of annual growth in the nine percent range, cigar sales likely would taper off to around half that in 1998. The slowdown was expected to be especially marked in the premium cigar segment.

Still 800-JR Cigar remained optimistic. In the third quarter of 1998, it continued its unbroken string of record sales and earnings with its largest-to-date earnings of $73.2 million. After the opening of the new Burlington outlet, the company leased approximately 45 billboards on the interstate highway and moved warehousing and shipping into the world’s largest, 2.2-million-cubic-foot humidor. While sales were soft at the company’s specialty retail stores, wholesale and mail-order shipments of proprietary JR brands took over shelf space from the newer, overpriced entries of the recent cigar boom. 800-JR Cigar launched its new Bolivar premium cigar brand, and the company sought to dispel fear about recent hurricanes that had struck in several cigar-producing countries. Its literature assured stock owners and customers that the impact on the supply of raw materials and finished goods would be minimal, while at the same time urging shipments of clothing, tools, housewares, and food to the Dominican Republic and Nicaragua. 800-JR even organized a few such shipments and matched monetary donations sent in by its customers.

Whether cigar smoking would, in fact, prove a fad remained to be seen. Big cigars, long a symbol of success, confidence, and power, have always been bought by brand, and thus remained somewhat immune to price competition. Despite strong sales, the industry was still nowhere near its all-time peak of 11.3 billion cigars sold in 1973. Yet optimists assumed that the industry would continue to grow, albeit more slowly than it had in recent years. 800-JR Cigar sought to capitalize on the fact that cigar smokers are repeat customers by investing in advertising and software that would enable it to serve its current and future clients more quickly. Stressing the fact that it is not a matter of whether the customer will return, but where, Lew Rothman articulated his company’s philosophy: Fast, fresh and cheap. “Just keep all our old customers happy and make new customers at a conservative pace and our business will grow,” said Rothman. “All you have to do is treat people nicely and they’re going to come back. … From the bottom up, it’s a feeling of trust between ourselves and our vendors … [and] customers.”

Principal Subsidiaries

JR Tobacco Company of Michigan, Inc.; Cigars by Santa Clara NA Inc.; JR Tobacco Discount Outlet; JR Tobacco NC Inc.; J&R Tobacco New Jersey Inc.; JR Tobacco Outlet Inc.; JR-46th Street Inc.; JNR Grocery Corp.