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Culbro Corporation

387 Park Avenue South
New York, New York 10016-8899
U.S.A.
(212) 561-8700
Fax: (212) 561-8979

Public Company
Incorporated:
1906 as United Cigar Manufacturers
Company
Employees: 2,695
Sales: $185.42 million (1994)
Stock Exchanges: New York
SICs: 2121 Cigars; 6552 Subdivides & Developers, Not Elsewhere Classified; 6719 Holding Companies, Not Elsewhere Classified

Culbro Corporation is a diversified consumer and industrial products company operating in four principal areas: the manufacture and marketing of cigars and related tobacco products; the growing and sale of nursery products, including the owning and operating of field and container plant nurseries, and of wholesale sales centers; the manufacture and sale of packaging, labeling and other industrial products machinery, systems, and products such as shrink film labels and tamper-evident seals; and owning, managing, constructing, and developing commercial, industrial, and residential real estate. Culbros 1994 salesdown from nearly $1.4 billion in 1993reflect the deconsolidation of its Eli Witt Company subsidiary and the reduction of Culbros ownership in Eli Witt from 85 percent to 50.1 percent. Culbro is led by chairman and CEO Edgar M. Cullrnan, brother to former Philip Morris CEO Joseph F. Cullman III. Cullmans son, Edgar M. Cullman Jr., functions as Culbros president and chief operating officer. The Cullman family currently controls 52 percent of Culbros stock.

Tobacco and the Cullman family have been intertwined since the late 19th century, when Ferdinand Kullmann worked as a tobacco merchant in Germany. His sons, Joseph and Jacob, founded Cullman Bros, in New York in 1892. Initially, Cullman Bros, was chiefly involved in purchasing tobacco at U.S. and international auctions and reselling the tobacco to cigar manufacturers, but this activity soon led the brothers into other areas of the tobacco industry, including making their own cigars.

In 1906, the Cullmans formed their cigar-making operations into the United Cigar Manufacturers Company, which was first listed on the New York Stock Exchange that year. Joseph Cullman remained with Cullman Bros, while aiding the new company as a tobacco appraiser. Cullman Bros, next turned to growing tobacco, purchasing land in Connecticut already in use for growing binder and wrapper tobacco. In 1928, Joseph Cullmans sons, Joseph Jr. and Howard, organized the Tobacco & Allied Stocks, Inc. tobacco trust, which would lead to control of Benson & Hedges by 1938. and. in a $22.4 million deal in 1954, would bring Joseph Jr. and Joseph III into Philip Morriss top management.

United Cigar Manufacturers grew quickly in its first decadepaying its first dividends in 1909aided by a series of acquisitions of other cigar makers, during a time when the cigar industry itself was undergoing a rapid consolidation, especially among the largest tobacco companies, including American Tobacco and Consolidated Cigar Corp. In 1917, United Cigar Manufacturers changed its name to General Cigar Co., Inc., to reflect its growing holdings. The following year. General Cigar moved to change the faceand structureof the U.S. cigar industry.

Until the early 1920s, cigars were primarily sold as local brands or under private labels, so that, across the United States, there were hundreds of small-volume cigar names. General Cigar alone represented about 150 different brands. However, in 1918, the company moved to establish the first national cigar brands. It dropped nearly all of its brands and instead concentrated its manufacturing, sales, and advertising on five core brand names. Each of General Cigars brandswhich included White Owl, Van Dyck, Wm. Penn. and Robt. Burnshit a different price point. General Cigar was among the first companies to recognize the potential of radio and the developing radio networks, soon advertising and sponsoring programs on a nationwide scale. The companys net profits rose from $1.5 million in 1914 to $2.7 million in 1919. Cigar sales were on the rise throughout the country, reaching a high of 8.5 billion cigars sold in 1920.

During the 1920s, the cigar industry suffered, however, from image problems. The rise of organized crime during Prohibition and the image of the stogie-chomping gangsterdeveloped in part by Hollywood and personified by Edward G. Robinson gave the cigar an aura of unrespectability among the public. The cigar industry faced a second crisis later in that decade, when American Tobacco, promoting its new machine-rolled cigars, rolled out advertising that asked: Why run the risk of cigars made by dirty yellowed fingers and tipped in spit?

The image provoked by that campaign proved disastrous for the cigar industry as a whole. Even as cigar makers rushed to convert their manufacturing from hand-rolled to machine-rolled products, cigar sales plunged through the 1930s, down to 5.5 billion in 1939. The cigar industry was also hurt by the rise in cigarette usage across the United States during this same period, and cigar consumption would never recover to its early 1920s peak. General Cigar, which had posted a net income of $3.4 million in 1927, saw its own sales fall steadily throughout the 1930s. In 1924, General Cigar posted sales of $23.7 million and a profit of $2.3 million. By 1939, General Cigars fortunes had dropped to less than $19 million in sales, with a slight $880,000 profit.

The cigar industry fought to improve its image, organizing the Cigar Institute of America in 1940. The cigars image was helped, as the United States prepared to enter the Second World War, by Winston Churchills everpresent cigar. Hollywood was coaxed to take cigars away from its movie villains and give them instead to the heroes. More and more, cigars became props for the film industrys romantic leads, softening the publics and especially womensresistance to cigars. General Cigars sales climbed again, to $22 million in 1941, and $27 million in 1943. The following year, General Cigar again jolted the industry, with the rollout of its Robt. Burns Cigarillo.

The Cigarillo was a scaled-down panatela cigar, resembling more closely a cigarette than the old-style stogie, and wrapped in a lighter-shade wrapper tobacco. With a milder taste than the traditional cigar, the Cigarillo helped pull General Cigars revenues up to $35.6 million by 1947. General Cigar turned its efforts to research, developing new tobacco products and manufacturing techniques. In the 1950s, General Cigar introduced Homogenized Tobacco Leaf (HTL), a blended, continuous band of binder tobacco, which not only allowed for a more uniform product and a milder taste, but also enabled the high-speed manufacture of the smaller-shaped cigars at significant cost-savings. General Cigar soon formed a separate department for its automated machinery and equipment research and development efforts, selling its machines to other manufacturers. However, General Cigar had neglected the marketing of its own cigars, and sales remained flat, hovering around $35 million into the mid-1950s.

General Cigars R&D efforts began to pay off in the late 1950s, and its sales began a steady climb, to $45.2 million in 1956 and to $62 million in 1960. Licensing of its HTL systems and other equipment brought in growing income from royalty and licensing fees, from $680,000 in 1958 to $1.1 million in 1960. With about 37 percent of its common stock controlled by Bush Terminal Company, General Cigar gained a reputation as the industrys technological leader, while analysts noted the companys unbroken record of paying dividends in each year since 1909. Per capita consumption of cigars had risen steadily through the 1950s, to 134 cigars per adult male per year, up from 116. By 1961, General Cigar was firmly entrenched in its second-place industry position, behind leader Consolidated Cigar Corp. Most of General Cigars sales were in the low and medium price segments, with the Cigarillo dominating the five-cent segment, and its White Owl brand competing for leadership of the ten-cent segment. By then, General Cigar operated eight manufacturing facilities, four processing plants, and about 50 warehouses. While the Cuban revolution placed a burden across the cigar industry, General Cigar controlled some 800 acres of tobacco-growing land in Connecticut, supplying more than half of its wrapper leaf needs. Nevertheless, the company was forced to write off its Cuban operations, and sales sagged.

Late in 1961, Edgar Cullman led an investment group in the purchase of 37 percent of General Cigars stock, raising that stake to 45 percent by the following year. Cullman, who had joined Cullman Bros, in the late 1940s, taking over its 600 acres of tobacco growing and sales, soon assumed the presidency of General Cigar and began to revitalize its operations. Among General Cigars innovations was the introduction of a new Robt. Burns cigar, a Cigarillo with a plastic tip. The Tiparillo was launched with a heavy promotional campaignestimated at around $5.5 million in 1962featuring the slogans Cigars, Cigarettes, Tiparillos? and the soon-to-be famous Should a gentleman offer a Tiparillo to a lady? Sales began slowly, but by 1963 had taken off, raising General Cigars revenues to $69 million and giving the company the dominant position in the small cigar market.

The Surgeon Generals report on smoking of January 1964 proved a newif short-livedboon to the cigar industry. Throughout the following year, millions of cigarette smokers switched to cigars, and especially the smaller cigars. General Cigar reaped the benefits of this movement, particularly with its Tiparillo brand; the company also introduced its Ultra homogenized wrapper tobacco, which, like HTL, produced substantial cost savings in cigar production, adding more royalties and licensing fees to the companys income. In order to meet the surge in demand, General Cigar expanded its production capacity. It also began a series of acquisitions, including Gradiaz, Annis & Co. and its premium cigar labels, and the Cullman Bros. Farms. In 1964, General Cigar expanded beyond cigars, with the acquisition of Metropolitan Tobacco Co. and New Jersey Tobacco Co., into wholesale distribution, with activities focused on cigars, cigarettes, candy, tobacco, drugs, and other items. Year-end revenues for 1964 jumped to $193 million. By the end of the decade, after the 1967 acquisition of the Connecticut wrapper tobacco and nursery operation of American Sumatra Tobacco Corp., followed by the 1969 purchase of Ex-Lax Inc. for $33 million, revenues climbed to $246 million. The 1971 introduction of a new line of cigars, Tijuana Smalls, designed for the growing baby-boomer youth market, brought General Cigars revenues to $265 million, at a time when cigar sales overall continued their long decline. During this period, General Cigar also initiated its real estate development operations, converting portions of its 6,300-acre holdings into industrial and warehouse sites.

By the end of the 1970s, however, the companys fortunes had dwindled. The mid-1960s boom in cigar sales lasted less than a year, leaving General Cigar with production capacity far outreaching demand. The Ex-Lax acquisition gave the company a relatively stagnant product; to worsen matters, General Cigar almost immediately sold off that companys Feminine Hygiene division, its one division with growth potential. Next, General Cigar moved to enter the growing salted snack foods market, with the purchase for $26 million of Helme Products, Inc. and its smokeless tobacco and Bachman Foods subsidiaries. To emphasize its newly diversified operations, General Cigar changed its name to Culbro Corporation in 1976.

The Bachman brands of pretzels and potatoes were largely regionalmarketed in Pennsylvania and in some northeastern states. Culbro attempted to take the Bachman label national, to the extent that the Bachman brand name was given to all of the companys snack productswhich included the products of newly acquired Cains Marcelle Potato Chips Inc. and the potato/corn snack division of Fairmont Foods Co.most of which had been local, yet successful brands. The Bachman brand failed to inspire consumer interest, and ran into distribution difficulties, so that, despite steady rises in the salted snack food market, Bachman began losing money, including $9 million on 1978 sales of $80 million. At the beginning of 1980, Culbro sold off its Bachman division, taking a substantial loss. Meanwhile, cigar sales slumped as new and stiffer tobacco taxes, and growing levels of smoking restrictions, were added across the country. Despite revenues of $430 million in 1979, Culbro followed its $4.5 million loss in 1978 with a loss of $21 million in 1979. The following year, Culbro left the proprietary drug market as well, selling that division, including Ex-Lax, to Sandoz Ltd. of Switzerland for $94 million, returning Culbro to profitability. By 1987, Culbro had sold off its Helme Tobacco smokeless tobacco operations, and its Metropolitan Distribution Services, as well as the remains of its snack food business.

Despite these difficulties, Culbro still retained more than 6,000 acres of land, worth about $6 million at purchase price value, but many more times that if converted to industrial or residential use. Then, in 1983, Culbro acquired all of the outstanding shares of Eli Witt Company. Culbros revenues began a steady climb through the rest of the decade, from $626 million in 1983 to $ 1.1 billion in 1991. Through Eli Witt, Culbro began a new string of acquisitions, including those of Certified Grocers of Florida, Inc., and Trinity Distributors in 1993, and of the southern divisions of NCC L.P.s wholesale distribution business. As part of that last transaction, Culbro sold part of its Eli Witt common stock to MD Distribution Inc., reducing Culbros shareand unilateral controlof Eli Witt to 50.1 percent. In April 1994, Culbro deconsolidated Eli Witt from its financial statement.

Nearly half of Culbros 1994 sales of $185 million came from its General Cigar consumer products division, which by then included the distribution of the strong-selling Djeep lighters, sold primarily through Wal-Mart. During the mid-1990s, the cigar industry saw a slight reversal in the long-time decline of cigar sales, primarily from a renewed interest in high-end and hand-rolled cigars. Despite this, the long-term future of the cigar industry continued to be bleak. In May 1995, Culbro announced its intention, as part of an overall plan toward international expansion, to sell 51 percent of its interest in its cigar business to Tabacalera SA of Madrid, Spain, for $100 million. Talks between the two companies fell through by September 1995. However, it seemed likely that Culbro would continue to seek to divest its core cigar line.

Principal Subsidiaries

General Cigar Co., Inc.; CMS Gilbreth Packaging Systems, Inc.; Imperial Nurseries, Inc.; Culbro Land Resources, Inc.; Culbro Machine Systems, Inc.; 387 PAS Corporation; Trine Manufacturing Company; The Eli Witt Company (50.1%).

Further Reading

General Cigar Smokes a Sleeker Stogie Business Week, December 14, 1968, p. 72.

Ginsburg, Stanley, Everything Went Wrong for Edgar Cullman, Forbes, March 3, 1980, p. 90.

M. L. Cohen

Culbro Corporation

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