"There's no slowdown in the number of better cigars at the right price that are being sold," Rothman contends. "The only slowdown that's occurring is that there's no more pipelining." For manufacturers, the effect was sudden, and the slowing orders caught many, small and large, off guard.

"For four or five years, you had a lot of cigar stores opening. All these people - duty-free shops, wine stores, hardware stores, gun stores, gas stations - were putting cigars on their shelves. That represented probably 25 percent of all cigar sales, if not more," Rothman asserts. In other words, a significant portion of manufacturer's shipments over the span of the boom was priming the pipeline with stock, rather than representing consumer sales. This also included consumer's personal humidors, not an insignificant little sum either, says Rothman. "That stopped. That's what's missing. But the consumer take-away is greater than ever, in my opinion."

As a result, most manufacturers have been left with little idea of how many cigars they actually need to make to maintain their current distribution base. And that's why even the major manufacturers have had to lean hard on the rudders and halt the flow of new cigar production until everyone can see through the fog.

How to Succeed in Retail
While JR Cigar's successful IPO last year empowered the company to compete more effectively and deliver more value than ever to all of its various customer segments, little has changed in the corporation's overall business philosophy.

"It was a successful formula that we had for 27 years, before we went public, and I don't see any reason to change it," says Rothman, citing his proven performance in the best of times or the worst of times. He knows both sides well. "If you give people the freshest product, the fastest and the cheapest, at any level, whether it's wholesale, retail, or mail order, people are going to buy from you, and continue to buy from you. There is no secret formula."

It's a key point that Rothman feels has been lost on some retailers, particularly newer ones that entered the business during the last few years. Unrealistically high profit margins during the boom left many in shock once the glut arrived.

Tobacco shops that deal with Santa Clara, JR Cigar's wholesale division, know that the company made servicing its previously established wholesale customers a top priority during the boom, something that Rothman attests wasn't always the case with other companies faced with the same choices.

"My relationship with retailers right now is stronger than it's ever been," he says, dismissing outdated labels such as "evil discounter" that he feels simply aren't representative of his standing among tobacco shops these days. That is due largely to JR Cigar's decision during the cigar boom to keep merchandise moving, whenever possible, to its wholesale customers, even at the expense of the company's own retail stores.

Rothman is quick to point out that some wholesalers stopped selling to smaller stores during the boom, opting instead to keep valuable merchandise in their own retail stores, at full price, "to make a windfall profit."

Leaving other stores stranded was not an option that sat well with Rothman, even if it meant lost opportunities to cash in on the boom. "We were the only source of supply for a lot of the stores that buy from me," explains Rothman. "They weren't direct with General, or Consolidated, or Villazon; they had little stores. If we didn't supply them, and manufacturers weren't taking new customers, they would be out of business." And neither did JR Cigar raise its wholesale percentage. In fact, the company's retail division took an enormous beating in terms of lost opportunity, according to Rothman, "because we were feeding other stores cigars when we could have sold every single one of them in our own stores."

It came down to a matter of priorities, says Rothman. "We were the only ones that treated [retailers] like what they are, a longtime valuable customer," a sentiment Rothman holds equally important in both his wholesale and retail business. "We always look for the long term. My own store managers would call me and say 'hey, how come that guy down the block has Rey del Mundo and we don't? It's our cigar.' And I would say, 'Well, I divided it up as best as I could between our stores and the people who had confidence in us and took our brands before the cigar boom. I did what I thought was fair.'"

JR Cigar also drew the line earlier than most in restricting new wholesale accounts when product availability was dwindling. "We were the first people to stop taking new customers - in June of 1994. We didn't take a new wholesale customer until February of 1997," says Rothman. These days, the requirements are decidedly less stringent, a fact of life throughout the industry. "I sell to anybody that has money," Rothman says. "That's the one criteria we have."

The Smoke Shop is Still King
Despite the retail competition in the marketplace, Rothman is still convinced that the traditional smoke shop has the best potential out of them all in winning and keeping customers. "There is no mail-order service in the world that will ever replace a privately run smoke shop by somebody that treats their customers in the exact same manner as they would like to be treated themselves. Never."

The problem, says Rothman, is that many stores simply fail to meet customer expectations.

"I'm a retailer, and I know what people want. If I'm waiting on a guy, and I don't like the looks of the cigars in the box, I'll say, 'wait a minute. I'll get another box of these.' Some retailers will try to sell him all the stale cigars, to get rid of the stuff."

In recent years, customer service has suffered, something Rothman attributes to the changing fortunes made possible by the boom. Future prospects for smoke shops are bright, he believes, "providing that the smoke shop owners go back to what they were before," namely expert owner/operators. Recent trends have shown otherwise.

"What I've seen is that all of a sudden smoke shop owners don't actually work behind the counter anymore. They hired a flock of kids." a move that Rothman says has alienated the very customers stores should be bending over backwards to please. Consider the stakes: shoppers with executive-level salaries buying $125 boxes of Macanudo Rothchilds or $12 sticks of Fuente Fuente OpusX . "You shouldn't go into a cigar store and have somebody with no knowledge, and somebody who cannot possibly afford any of these products, giving you advice on which ones to buy," Rothman maintains. Knowledgeable staff is a must, and for most tobacco shops, that means the owner.

Rothman isn't merely taking swipes. Just steps from his office in his Whippany complex is one of his retail stores, where he may occasionally be found out on the floor. "If a guy came in here and he wanted to buy a $10 cigar and I knew he was there, I would wait on him myself, because this is the cream of the crop. I want to make sure this affluent person comes back to my store."

"But what happens," warns Rothman, "is that the 18-year-old kids are recommending what are today the Don Nobody cigars. The consumer lost confidence in the smoke shop."

Attention to service will be critical for shops who intend to survive what Rothman believes will be a continued shakeout of stores in regions that are clearly over-represented.

Continued...

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