The Business Year

Hendrik Kelner

DOMINICAN REPUBLIC - Industry

The Complete Package

Managing Director, Tabadom Holding

Bio

Hendrik Kelner was born in 1945 and graduated from the Technological Institute of Monterrey as an Industrial Engineer. He is Managing Director of several Oettinger Davidoff Group companies in the Dominican Republic, including Tabadom Holding, Corporací­on Zona Franca Palmarejo, Cidav Corp, OK Cigar, Occidental Cigars Corp, and Procesadora de Tabaco Palmarejo. He previously worked as General Manager at Tabacos Dominicanos and as General Manager at Compañia Anónima Tabacalera. He is also the President of the Association of Dominican Cigar Manufacturers (PROCIGAR) and the Tobacco Institute of the Dominican Republic.

"Over 2013, we are looking to produce 25 million cigars."

Why do you make 100% Dominican cigars for Davidoff?

The Dominican Republic is a country with 500 years of tradition in tobacco production. However, the majority of cigars the Dominican Republic exports are not 100% Dominican. The problem is that this country has made cigars for many years—for centuries even—but never produced the wrapper. The wrapper is a delicate and difficult investment. You need demand in the localmarket to make a 100% Dominican cigar. The Dominican Republic was a very poor country in the 19th century; in that time it didn’t have a large enough population to develop an internal market. Typically, to export you need to start with the local market. Then as the demand of the local market increases it also improves quality, and then you create a better wrapper. It’s the same in any country. It is why France produces large amounts of wine, because the French consume a lot. The Dominican cigar industry truly began in 1969 because of the free trade zone and the US embargo of Cuba. Production was then transferred from other countries to the Dominican Republic, and there was the possibility to bring all the tobacco and blends of cigars here, as it had the knowledge and tradition. At that time, the Dominican Republic was an exporter of raw materials for cigars. The country uses different types of tobacco from different countries, with different tastes. This is why the Dominican Republic is the number one cigar exporter. There is a cigar for any smoker, and every smoker can find a cigar from the Dominican Republic according to his or her taste.

What role does domestic and international demand play in your business activity?

For TABADOM, the local market is not important. We only sell cigars to stores that have the conditions to preserve their quality, which sometimes can be a problem because there are not many stores that meet our requirements. In the Dominican Republic our biggest demand comes from tourists, but that is still a small market for us. TABADOM now has a distribution company that sells in the Dominican Republic; however, it is very limited. Our cigars are expensive; not too many people in the Dominican Republic are able to afford them. There are a lot of other factories that produce less expensive cigars, and I think they play an important role in the industry.

What markets do you look for outside of the US?

The US is the most important market for the Dominican Republic, but not so much for us. Our focus is on the EU, with Switzerland, Germany, and Spain our biggest markets. Duty free sales are also very important to us, especially from Dubai airport.

“Over 2013, we are looking to produce 25 million cigars.”

What are your current production numbers?

Over 2013, we are looking to produce 25 million cigars. This is a mix of different brands, with Davidoff making up around one-third.

How does this compare to before the global financial crisis?

For us it is stable, though in some countries demand has decreased, such as Spain, although in others demand has increased, like in China. The US is a stable market, and so is Switzerland and Germany.

What are the current trends in the cigar industry?

The strong cigar has a greater advertising appeal; people talk more about stronger cigars. However, the biggest sellers are not the strong cigars. Consumers are very loyal and they don’t often look for different experiences. In the US, it’s a less mature market. There are more people that like a strong cigar. Something that is clear in the market is that people prefer cigars with a bigger ring gauge and shorter length; this is because people don’t have time to smoke anymore, especially because in many countries it’s difficult to find a place to smoke

What effect could Australia’s plain packaging laws have on the global cigar industry?

Australia is not an important market because it is very small. However, the problem is the possibility of other countries adopting this type of regulation. We will lose our property rights; the brand name is the most important asset of any company. The law says the packaging has to be a generic design, the boxes are all the same color, all text with the same font, and you can’t use the traditional design to draw attention to the brand. The problem will be that consumers will start to buy cheaper cigars because all the boxes are the same, meaning you can’t identify new brand names. For that reason, the Dominican government decided to fight this packaging regulation through the World Trade Organization (WTO). The tobacco industry is a very important one for the Dominican Republic. In 2012, the country has earned around $500 million in exports, while the industry employs across the farms, factories, and tobacco processors around 70,000 people.

Could you describe what purpose ProCigar serves?

ProCigar has brought several Dominican cigar factories together into an association. We are the only organization that has the capacity to engage with people. We have a very good relationship with members of the senate and with the cabinet.

How would you assess the government’s support for the tobacco industry?

The government only supports the tobacco farmers, especially the low-income farmers, because they are the backbone of the entire industry.

How will changes to the labor code and tax reforms affect the industry?

This will affect us in two ways. The first is the government proposes changes to free trade zone regulations. One is an increase in the sales tax on the local market. However, this is not so important for the tobacco industry. The other is that the government proposes a tax of 10% on dividends, which again is not too important because the majority of the industry doesn’t make a profit, meaning there are no dividends to tax. These are not important to us, but it is a change. When companies come to the Dominican Republic it is because they analyze different countries and they decide to come here because of the conditions of the free trade zones; however, if they change the rules, it could affect investment. The Dominican Republic has a big opportunity to increase the production of exports and create more employment. The changes in taxes for business will only raise around $3 million in revenue. It doesn’t make sense to risk investment over such an amount. Then the increase in taxes on goods, on products like coffee, petrol, and chocolate makes it harder for the population because of the increase in costs. In addition to the taxes and the reaction of the people, the changes to labor conditions could see strikes across several industries, which will interrupt production. When the people are not happy you cannot make a good product, and this is a bigger problem than the tax reforms. The government should plan additional benefits for the people.

What is your forecast for the cigar industry over the next few years?

Because of the high price of handmade cigars, we will maintain our market share. However, machine made cigars are in huge demand and that demand is growing every year. Santiago is the number one producer of machine made cigars, and that’s a product for the US market. This is good because it increases employment, and also because those types of cigars use the tobacco from poor farmers. For me, this is more important because today the industry is growing too fast; only 15% of the tobacco is Dominican. Much of the cheap tobacco comes from India, Pakistan, or Bangladesh. This is a big opportunity for the Dominican Republic, and this is where the future of tobacco is. While machine made cigars are not our business, it is good for the country.

© The Business Year – March 2013

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