• Milton Friedman Society

Cuba, quo vadis?

How the transformation of the national tobacco business opens up the opportunity for a new, economic-liberal Cuba


By Anton Memminger


When looking at the evolution of the stereotype of the capitalist, one can observe many consistent elements. One of the most frequent features, right next to a formal suit and an opulent body shape, is the cigar.


As a lover of a good smoke, this has always puzzled me. It’s not a particularly unfounded claim, as cigar smoking is indeed popular among businessmen and academics on the economic right, as well as politicians, yet it’s an inconsistency given the political alignment of the cigar business. Nicaragua, the Dominican Republic and Cuba, which has been the most prominent cigar exporter since the Second World War, are anti-capitalistic societies. Although the former two have established an independent industry of farmers and manufacturers, Cuba’s cigar business is still a state monopoly. This makes it even more interesting that in most conservative circles only Havanas are considered proper cigars.


Whether this inconsistent ideal, also observable in the consumption of Russian caviar and champagne, in spite of France’s socialist endeavors, can be solely explained by the superior quality of these goods is questionable, but this is not the purpose of this article.


What we try to highlight here instead is the possibility of change in a Cuba that is experiencing a period of intense transformations, driven precisely by the tobacco industry.


Although the oldest Cuban cigar manufacturer, Cabañas, was founded in the late seventeen-hundreds, most of the institutions that today are associated with Cuban cigars were founded in the middle of the last century. The most significant changes were made in 1962, when Fidel Castro, who had just taken over the country, wanted to turn the tobacco industry into a state monopoly. Farmers would grow tobacco on their fields that would then be bought by the state for a pre-determined price.


Although the farmers were allowed to roll cigars for themselves, it was strictly forbidden for them to sell anything but raw tobacco to anyone but the Cuban state. To administer these efforts, Castro established “Empresa Cubana del Tabaco” or short Cubatabaco, the only entity with the right to process and distribute all tobacco products.


In line with these changes, Castro wanted to abandon all established cigar brands and produce cigars under one Cuban brand. Zino Davidoff, at that time a well-regarded merchant running the cigar shop of his father, leveraged his contacts in Cuba to persuade Castro to keep the old brand structure and further developed the marketing for Cubatabaco, in order to keep demand high. These efforts, after showing early success, were ultimately rewarded by the establishment of Davidoffs’ own Cuban Cigars.


But after about twenty years problems started to show up. On one hand, several external influences, primarily the weather conditions, which added to the inefficiencies of the planning economy, depressed the quality of Cuban tobacco. An even bigger threat however was the building ideological conflict between communistic Cuba and the markets it supplied.

While Zino Davidoff enjoyed honor and praise for bringing commercial success to Cuba (he received the nickname “King of the brown Gold”), Cuba’s executives were seen as incompetent, deriving their relevance only from the luck of having the best microclimates and soil in the world for tobacco farming.


Fidel Castro thus decided to ramp up an existing brand, Cohiba, which had been founded in 1966 and initially was exclusively produced for diplomatic gifts and for Castro himself.

Making Cohiba famous as the best Cuban cigar producer and therefore, in their eyes, the best cigar producer in the world, was the flagship project of Castro and the executives at Cubatabaco. While being a hard task in itself, it also challenged the prestige of Davidoff, who famously gave his cigars the names of the biggest French wines, like Lafite and Dom Perignon.


The Castro administration escalated this conflict by supplying Davidoff with inferior materials and essentially cutting off his access to the best tobacco. In 1989 Zino Davidoff publicly burned his storage of Cuban Davidoff Cigars and took his production to the Dominican Republic.


Although the market recognized Cohiba as a great brand with an excellent product, the rest of its portfolio suffered from the beak up with Davidoff and subsequently for two horrendous harvests in 1998/99 and 1999/2000. The financial troubles that followed required the entry of an external investor.


Altadis, the holding company under which in 1999 two of Europe’s biggest tobacco companies, Tabacalera from Spain and Seita from France, had merged, approached Cubatabaco with a bid for their cigar business. The two parties arranged a deal, where the production and distribution rights for Cuban tobacco products were transferred to a joint venture, called Habanos S.A., whose ownership would be split between Altadis and Cubatabaco.


Indeed, the following restructuring of Cuba’s cigar offering brought financial stability, yet, after just seven years, Altadis was sold to Imperial Brands. It is now run as a subsidiary and the joint venture agreement lived on. On a sidenote, one of the potential buyers of Altadis was CVC Capital Partners, a PE fund notoriously known for their aggressive investment style.


In the early 2010s Habanos started to implement a very through quality and marketing campaign, positioning its brands at the top of the premium cigar market, like the aforementioned Cohiba, which was still the shining star in their portfolio and already enjoyed a status on par with companies like Rolex or Ferrari.


Habanos S.A. also enjoyed a shift in the demand for tobacco products in general, as cigarette smokers were scared by the pressing evidence regarding the health consequents and were looking for alternatives, while young communities were attracted by the re-emerging gentlemen style and parts of the “Hipster”-cult.


Demand skyrocketed, but the farmers in Cuba were unable to scale up production. They faced chronic underinvestment, while the uncertainty regarding the distribution of goods like gasoline and fertilizers prevented long-term planning. The organization and management of the involved parties was highly inefficient, crippled by corruption and nepotism. Especially the two latter factors were only intensified by the high demand, because aficionados-built (online) auction houses where currently unavailable cigars, like the Behike, were sold at high multiples of the retail price in Cuba.


In 2019 Imperial Brands signed a new long-term strategy, build around vaping and e-cigarettes. As the company wanted to lower its high debt burden, it looked into selling parts of its business that were considered to be non-core in the long run. The difficulty of dealing with the problems Cuba was facing made its stake in Habanos S.A. a prime candidate to be sold and in 2020 it found buyers for its whole premium cigar business.


Imperial Brands stake in Habanos S.A. was sold to a Hong Kong holding, with an anonymous owner. The deal, worth a little over one billion dollars, is quite dubious in itself and although some sources identify the buyer as Cheok Wa Chau, a hospitality mogul, it seems not unlikely that China was involved in the transaction, in an act to support its ideological ally Cuba.


Be that as it may, it scales down the number of people involved at the top of Habanos S.A. and allows for a more focused management of operations.


The important aspect of the transaction is that it constitutes a turning point for Cuba’s cigar business. It has made big investments to build-up the prestige of the brand lineup and built a decent external structure for their distribution, but both are suffering from inefficient supply. A reform of the tobacco industry in Cuba is needed and now that its key image product is short of bleeding to death, outplayed by Dominican and Nicaraguan manufacturers that leverage on the free market, it might be the moment of a reckoning.


The advantages of abandoning the communistic structure currently in place haven’t arisen just now. To be honest, they were identified many years ago, but considering the height from which Cuba might fall, I do not feel confident in ruling reforms out entirely. In case we do see change, a transfer of this model to the other industries of Cuba seems likely in reference to the broken window concept. Looking at the cultural richness of the country would bring joy to the islands’ citizens and the fans of art, good food and cigars.



REFERENCES


https://www.ft.com/content/725894fe-6b50-11e9-80c7-60ee53e6681d


https://www.cigaraficionado.com/article/the-co-presidents


https://www.imperialbrandsplc.com/media/key-announcements/2020/imperial-brands-plc-agrees-sale-of-worldwide-premium-cigar-busin.html


https://wallmine.com/hkse/1383/officer/2032207/cheok-wa-chau


https://www.bloomberg.com/news/articles/2020-05-11/macau-gambling-executive-linked-to-1-billion-cohiba-cigar-deal


https://wallmine.com/hkse/1383/officer/2032207/cheok-wa-chauca


https://www.englishblog.com/2016/03/cartoon-cuba-libre.html#.X8-aBBNKjuw


https://www.bbc.com/news/world-latin-america-19735631


https://www.irishcentral.com/roots/john-f-kennedy-snagged-1200-cuban-cigars-before-ordering-us-trade-embargo-on-cuba-video-139004464-237788511


https://www.holts.com/clubhouse/cigar-culture/oldest-cigar-brands#:~:text=The%20first%20independent%20cigar%20brand,Julieta%20was%20begun%20in%201875.


https://en.wikipedia.org/wiki/Altadis


Zino Davidoff; Zigarren Brivier: Von der Kunst, Zigarre zu Rauchen; 1975


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