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Dosal Tobacco Feels Pack of Trouble

As Margarita and Martin Dosal and their two young children vacationed in Lake Placid, N.Y., in December 1958, the five-year civil war in their home country of Cuba was nearing its end. By the end of the month, life for the Dosals, a wealthy family with a successful cigarette manufacturing business, had changed forever. Fidel Castro’s rebel army toppled Fulgencio Batista’s regime, and the Dosals became political exiles — their land, factory and personal possessions confiscated by the new communist government.

Margarita Dosal
Margarita Dosal and her late husband resurrected the family’s Cuba tobacco business in Miami after Castro took over. Today, Dosal Tobacco employs 130. [Photo: Eileen Escarda]

“I was very spoiled when I was in Havana. The family was so well off. I never expected to be without a penny when I came over here. Castro took care of it all — all my pennies and everyone else’s,” recalls Margarita Dosal.

The Dosals settled in Miami, where they began rebuilding their lives and their tobacco business. With a small sum from Martin Dosal’s father, they purchased some old machinery and rented space in a garage-sized building in an industrial section of Hialeah.

In 1962, working in partnership with the manufacturers of other leading brands from Cuba who had also fled to the U.S., the Dosal Tobacco Corp. launched its line of Competidora cigarettes along with other contracted Cuban brands. “The company started growing little by little, and little by little we all did some work. The whole family worked in that factory,” says Margarita Dosal.

The Dosal family eventually became the sole proprietor of the operation, which didn’t make much of a dent in the market competing against big American tobacco companies. As recently as the 1990s, Dosal’s obscure brand of smokes garnered only about 1% of Florida’s cigarette market.

In 1997, however, came a turning point — the $11.3-billion settlement of a 1995 lawsuit in which the state sued a number of tobacco manufacturers over the way they marketed their products. The state aimed to recoup money it has to spend caring for those with tobacco-related illnesses.

The settlement required the four manufacturers to pay an approximate 45-cent assessment on each pack of cigarettes, on top of existing state and federal excise taxes on cigarette purchases. Consumers also pay a state sales tax on cigarettes that’s collected by retailers.

Dosal wasn’t part of the settlement, however. A judge dismissed the company from the lawsuit, ruling that there was not enough evidence to show that the company had engaged in deceptive marketing practices or violations of racketeering laws.

Dosal tobacco worker
Dosal — which wasn’t part of the state’s landmark settlement with larger tobacco companies — has seen its share of the Florida market rise to about 13%. Meanwhile, larger tobacco companies’ market share has fallen from 97% presettlement to 85%.
Dosal tobacco machine
[Photos: Eileen Escarda]

In the wake of the lawsuit, the “Big Four” tobacco companies at the time — Philip Morris, R.J. Reynolds, Brown & Williamson and Lorillard — and other manufacturers raised their prices to cover the costs of the settlement. Meanwhile, Dosal and other manufacturers not named in the suit suddenly found themselves with a price advantage.

“It provided certain opportunities in the industry. That’s why so many (new) companies came into the industry,” says Yolanda Nader, Dosal’s CEO and CFO.

In May 2001, Dosal launched a new line of cigarettes called 305’s. Named after Miami’s area code and selling for $1.79 a pack — approximately a third less than competitors’ brands — 305’s quickly became Dosal’s best-selling brand. Nader says the cigarettes’ packaging — which features a waving flag and a silhouette of the United States — also proved timely, appealing to patriotic sensibilities after the Sept. 11, 2001, terrorist attacks. “It was a well-priced product,” she says. “It was an attractive product with this label. Those factors were what made it sort of take off.”

Indeed. The success of 305’s has given Dosal between 12% and 14% of Florida’s cigarette market. Larger cigarette manufacturers, meanwhile, have watched their market share drop from around 97% presettlement to around 85%.

Dosal cigarettes Dosal’s sales growth is particularly notable since major retailers like Publix, Wal-Mart, Costco and others don’t carry Dosal brands. Typically, big retail chains have complex agreements with cigarette manufacturers involving shelf space and liability issues. Dosal chooses not to participate: With just five distributors in the state, the company sells its cigarettes primarily at mom-and-pop convenience stores and other independents. Even there, customers may have to ask for Dosal brands, which are often kept under the counter rather than on shelves.

But Dosal’s success has bred resentment that’s surfacing as state lawmakers consider raising the state’s cigarette tax — at 33.9 cents a pack, one of the lowest in the nation. Dosal’s larger competitors say they’ll only support a tax increase to $1 a pack if the state agrees to levy an additional 40-cent per pack assessment on Dosal and other discount cigarette manufacturers, including New York-based Smokin Joes, that weren’t part of the 1997 tobacco settlement.

Barney Bishop, president and CEO of Associated Industries of Florida, which represents the major manufacturers, argues that the assessment would level the playing field for the tobacco companies and raise at least $89 million more for the state.

Anti-tobacco campaigners also have jumped into the fray. The Florida Association of Healthy Start Coalitions has thrown its support behind the fee, arguing that it would close a “loophole” in the state’s tobacco policy and allow the state to help expand Medicaid coverage up to 200% of the poverty level and better fund programs aimed at protecting the health of pregnant women and babies.

Yolanda Nader
“Given that our product sells on price, when you make our product equivalent in price to Marlboro ... inevitably, the consumer will buy the brand name. It’s sort of like buying a Geo or a Mercedes-Benz. If they’re the same price, you’re going to buy the Mercedes-Benz.”
— Dosal CEO/CFO Yolanda Nader

[Photo: Eileen Escarda]

Dosal executives say that retroactively levying the fee against their company and a few others is unfair. The company wasn’t a part of the 1997 settlement because it didn’t engage in the practices for which the other cigarette makers were sued. The company’s products face the same state and federal excise taxes as other manufacturers, and they say it’s not right, after the fact, to make Dosal part of a legal settlement in which it had no part.

They claim the fee could even destroy the company. “Given that our product sells on price, when you make our product equivalent in price to Marlboro ... inevitably, the consumer will buy the brand name. It’s sort of like buying a Geo or a Mercedes-Benz. People are going to buy the Mercedes-Benz if they’re the same price,” says Nader.

Guillermo J. Fernandez-Quincoces, outside general counsel for Dosal, says that if the state needs more money it should simply raise the excise tax across the board. The excise tax, he notes, is unrelated to the 1997 tobacco suit settlement. “This whole thing was created by the lawsuits, the settlements, and it’s an awfully hard thing to correct at this stage in the game. The majors always say, ‘Level the playing field.’ Well, there’s no way to do that.”

Nader adds that lawmakers should “not try to affect a market by ... targeting a company such as ours with a special tax above and beyond what everyone else is going to be requested to pay.”

Dosal has been in this battle before. Since 2004, the company has fought numerous bills that would have added up to 50 cents per pack on cigarettes sold by the smaller tobacco companies. Since then, Dosal executives have become adept at the political game. Last year, the company gave more than $250,000 in campaign contributions to state lawmakers and political parties. This year, Dosal has hired more than 20 lobbyists to fight the fee. “We spend so much time in Tallahassee we have an apartment one block from the Capitol,” says Fernandez-Quincoces.

But Tallahassee insiders say there is considerably more impetus to pass the bill this year. While Gov. Charlie Crist has said he opposes any new taxes amid the ongoing economic crisis, many lawmakers may find it difficult to pass up what many see as one of the few politically palatable tax increases. “The greater challenge that we have today is the fact that the state is in such a desperate need of money — it has created the perfect storm,” says Nader.

Margarita Dosal, for one, says she won’t give up the fight. “I’ll die with my boots on.”

Dosal cigarette machine

Dosal makes about 16 million cigarettes a day at its Opa-Locka facility. Its brands sell primarily at mom-and-pop convenience stores and other independents.
[Photos: Eileen Escarda]

Dosal cigarette machineAs part of its fight against a proposed fee on cigarettes, Dosal has been offering reporters tours of the Opa-Locka plant, where it produces approximately 80,000 cartons every day. But it’s not so much the cigarettes the company wants people to see. It’s the 130 employees who earn an average of $12 to $15 an hour and receive benefits, including full healthcare coverage. “If Dosal was put out of business, none of these employees would ever be able to find themselves anywhere near the position they find themselves in today,” says CEO and CFO Yolanda Nader.

Dori BryantControversial Partner
Before introducing its 305’s brand in 2001, Dosal did contract manufacturing for other cigarette companies. From 1989-97, Dosal manufactured the Santa Fe Tobacco Co.’s line of Natural American Spirit cigarettes, which comprised approximately 90% of Dosal’s production by the end of that period. The brand has been controversial because some believe its packaging implies its cigarettes are safer to smoke because they contain no additives. Also raising hackles is the company’s use of Native American imagery — Native Americans neither own the company nor make the cigarettes.
R.J. Reynolds acquired Santa Fe Tobacco in 2002.