All Eyes on Havana

By Larry Luxner

Changes in Cuba spark debate on future of island’s cigar industry.

A long crowded, quirky Duval Street in downtown Key West, Fla., the karaoke bars, burger joints, art galleries, and tacky T-shirt vendors all sing the praises of Jimmy Buffett’s “Margaritaville” and the laid-back Florida Keys.

But one shop is oriented a little further south - about 90 miles south, to be exact.

The Cuba! Cuba! Store at 814 Duval St. lures in customers with decorative cigar boxes, coffee mugs, music CDs, baseball caps, keychains, and ceramic Cohiba ashtrays glorifying all things Cuban. Yet because of the U.S. trade embargo, nothing in the Cuba! Cuba! Store - except for a few choice paintings and little figurines which qualify as art - actually comes from the forbidden island (the baseball caps are assembled in Haiti and Nicaragua).

“We’re so close to Cuba that I thought this store would be a good idea for Key West,” shopowner Larry Winters says in between assisting customers. “A lot of European tourists ask me, ‘Where’s your Che T-shirts?’ I tell them I can’t sell that here.”

Not yet, anyway.

Che Guevara, the global symbol of revolution, is anathema to the one million or so Cuban exiles that call South Florida home. Even so, U.S. multinationals ranging from Marlboro to McDonalds have gazed longingly at Cuba since the early 1960s, waiting for Fidel Castro to quit or die so they could once again flood the Pennsylvania-sized island with their products and services.

But with 81-year-old Fidel now writing essays from his sickbed and younger brother Raúl (he’s only 76) officially running Cuba, it looks as if the waiting game will go on a little longer.

“The critical factor here is what the process the Cuban government will use to open up the economy,” says Carlos Saladrigas, vice-chairman of Miami-based Premier American Bank and founder of the Cuba Study Group.

“The next few months are going to be incredibly telling. Rumors are abundant that significant economic reforms are about to be undertaken,” said Saladrigas, who fled the island in 1961. “What I don’t understand is why Raúl is purposely raising the expectations of the people for change. If he doesn’t intend to deliver, he’s either a fool or he’s crazy.”

Economically, Cuba hasn’t been doing badly. Growth last year came to around 10 percent, boosted by record-high prices for nickel, the island’s chief export commodity. Tourism brought the island revenues of about $2 billion in 2007 - compared to $2.2 billion for nickel - and accounted for some 300,000 jobs, according to Cuban officials.

The tobacco industry, by comparison, brings in only $240 million annually. Each year, the island produces around 150 million cigars, with the vast majority exported to Europe. Given Fidel Castro’s resignation in late February after 49 years as the absolute ruler of Cuba, some experts are predicting a major economic and political opening that could eventually lead to an end of the punishing U.S. trade embargo enacted in 1962, three years after Fidel first came to power.

Clearly, the ability to once again sell cigars to the United States would give a major boost to the Cuban economy, though cigar importers debate how long that boom would really last.

“It would bring a new excitement to the industry,” predicts Michael Gold, president of Arango Cigar Co. in Northbrook, Ill. “Any time the American consumer is told he can’t have something, he wants it more.”

Says Gold: “It’s similar to what we here in the Midwest experienced back when you couldn’t buy Coors beer east of the Mississippi River. So people drove into Denver to load up their cars and bring beer back to college towns. Everyone clamored to get it, but once Coors became available east of the Mississippi, its market share dropped lower than most other beers.”

Likewise, he said, once Cuban stogies are freely available to Americans, they’ll grab less of a market share than Dominican or even Honduran cigars.

In 2007, according to the Cigar Association of America (CAA), some 5.6 billion cigars worth $3.2 billion at the retail level were sold to U.S. consumers. About 94 percent of that total were manufactured domestically - nearly all of them by machine - and sold for $1.25 apiece or less.

The remaining 6 percent consisted of premium imported cigars selling for an average $2.50 each. By far, the leading supplier of premium cigars in 2007 was the Dominican Republic, accounting for 177.6 million units, or 53 percent of the total. Other key suppliers are Honduras (84.6 million units) and Nicaragua (69.2 million units), with much smaller volumes of cigars coming from the Bahamas, Costa Rica, Indonesia, Jamaica, Mexico, Panama, and the Philippines.

Norm Sharp, president of the Cigar Association of America, said what people generally don’t understand is that “it was always Cuban tobacco that was highly sought after, not the cigars themselves.” He said most of the premium cigars consumed domestically prior to 1962 - when the embargo went into effect - were handmade in Customs-bonded factories in Miami, Tampa, New Jersey, and other U.S. cities with large Cuban immigrant populations.

Even with cheaper machine-rolled cigars, Cuban tobacco was used in the blend.

“It’s generally felt that, were the market to open to Cuban cigars, you’d see a resurgence of cigar sales in the United States, because people would experiment with Cuban cigars and be able to compare them to the cigars they’re now getting from the Dominican Republic, Honduras, and Nicaragua, none of which really had a cigar industry prior to the embargo,” Sharp told Smokeshop.

“There’s going to be pronounced competition for Cuban tobacco” which grows mainly in the western province of Pinar del Río, he said. “A lot of people will be looking towards incorporating Cuban tobacco in their blends, whether those cigars are made in the U.S. or elsewhere.”

Richard Di Meola, a retired cigar-industry executive living in Boca Raton, Fla., doesn’t think an end to the embargo will mean Cuba would suddenly flood the U.S. market with cigars.

In the five or six years prior to 1962, when the embargo went into effect, Cuban factories supplied an average 14 million of the 185 million premium cigars smoked in the United States - or only 7.5 percent of the total, he said.

“When the embargo was enacted, we couldn’t get Cuban tobacco anymore, and as the stocks were depleted, the market for premium cigars declined to as low as 50 million. But it began to come back after the Cuban cigarmakers left Cuba when their companies were nationalized. They established cigar-making affiliations in other parts of the world,” said Di Meola, who in 1956 began working with Faber, Coe & Gregg Inc., then the nation’s leading importer and distributor of Cuban cigars. He retired in 1998 from Consolidated Cigar Corp. (now Altadis USA) as chief operating officer and executive vice-president.

“I think if Cuban cigars once again became legal in the United States, there would be another cigar mini-boom,” he predicted. “There will be heavy interest focused on the premium cigar business, similar to what took place in the 1990s but not as intense. Cuban cigars will be tried and tested, and over time, they’ll compete on a more even playing field with other fine cigars being produced in the Dominican Republic, Honduras, and Nicaragua.

“Eventually, when the sense of the forbidden is gone, the Cuban cigar will no longer compete on its reputation alone, but on quality as measured against all other good cigars in the world,” he said, suggesting that in some ways, some Caribbean and Central American cigars are superior to their Cuban-made rivals.

“But when a Cuban cigar is good,” he added, “it’s very good.”

Some wonder whether Cuba could make enough cigars to satisfy the burgeoning market. And even if it could, a series of nasty trademark disputes would have to be resolved before the first Cuban-made cigar ever reaches U.S. shores legally.

For example, even if Altadis U.S.A. wanted to bring Cohibas into the United States, it couldn’t because General Cigar, which is a subsidiary of Swedish Match, owns the Cohiba trademark in the United States.

Interestingly, the Cigar Association of America doesn’t endorse or oppose the U.S. embargo. It can’t, said Sharp, because “within our membership, we have divergent views.” Some companies like Altadis have a close relationship with the Cuban government, while others are run by Cuban exiles fiercely opposed to the Castro regime.

Besides allowing Cuba to export cigars to the United States, an end to the embargo would also give Americans the chance to travel to the island legally for the first time in nearly half a century.

Yet observers hoping for a sign that Raúl would enact far-reaching economic or political reforms were disheartened by the National Assembly’s unanimous decision Feb. 24 to elevate 77-year-old hardliner José Ramón Machado Ventura - rather than the reform-minded economic czar Carlos Lage, who is 56 - to Raúl’s old job as first vice-president.

On the other hand, Cuba-watchers were encouraged by a Mar. 13 decree that authorizes the unrestricted sale of computers, DVD players, and video players to consumers immediately - with air-conditioners and other appliances to be made freely available over the next two years.

One Havana-based foreign banker told Smokeshop he expects “there will be modest changes in agriculture and some social restrictions,” but he warned against over-optimism.

“We have neither seen nor do we expect any substantial change over the next 12 months,” said the banker, who asked not to be identified. “Generally, the expectations that are circulating outside of this island are way, way ahead of anything that’s happening on this island.”

It’s widely expected that Cuba’s despised dual-currency system - under which Cubans are paid state salaries in the weak national peso, while the much stronger “convertible peso” circulates in the tourist sector and in hard-currency shops that sell cigars - will be scrapped very soon. Once the U.S. embargo is gone, however, the picture will change entirely.

“I’m not really thinking about Raúl. I’m thinking post-embargo,” said closed-end fund guru Thomas J. Herzfeld, whose Herzfeld Caribbean Basin Fund is worth about $28 million. The Herzfeld Fund, established in 1994, has about 3,500 individual investors and is invested in 100 or so companies that stand to benefit from a lifting of the embargo.

“Capital will come from multinational corporations that want to expand their businesses into Cuba - and from investment companies, private-equity funds, venture capital, institutional investors like our fund, all types of companies that take on risk,” said Herzfeld. “Then you have the Cuban-American community in South Florida, which will be very heavy investors, and we hope to partner with them.”

But that clearly won’t happen anytime soon.

“We knew that the transition to Raúl would mean no changes,” said Gold, whose Arango Cigar Co. is a national wholesaler, importing from all major cigar-producing countries. “Believe me, I’ve made a lot of money in 26 years betting that we wouldn’t have Cuban cigars for at least the first two years since making the bet. And I don’t expect the embargo to be lifted with Raúl in power.”

Larry Luxner is editor and publisher of CubaNews (www.cubanews.com), a monthly newsletter in Bethesda, Md. He also runs a stock photo website at www.luxner.com.

SMOKESHOP - April, 2008