Has Havana hit the jackpot?

As America plans to lift its trade embargo against Cuba, EDGAR investigates the global implications for the country’s most famous export: the Cuban cigar.

March 23, 2015

President Barack Obama’s declaration that he wanted to welcome Cuba back into America’s fold of friends ought to be pretty cut and dry. The cigar industry has had plenty of time to plan ahead since a US trade embargo stopped sales of Cuban cigars and other goods in 1962.

By announcing an end to the US’s “failed” and “outdated” embargo policy, the world’s smokers — especially those in the US — no doubt opened the humidor and lit up a cigar and began to consider the implications. Economic logic, they might believe, should dictate that the quality and consistency of Cuban cigars would be forced to improve, and that’s a good thing. Though on the flip-side, steely supply-and-demand principles would surely hit global Cuban cigar prices, which have been growing consistently, not least in the Middle East.

Cuba’s current biggest market, Spain, has a population of 47 million — small beans in comparison to America’s close to 320 million. But increasing the demand for its cigars potentially by a factor of six overnight will cause all sorts of problems to the rickety supply system in Cuba, and you don’t have to be an economist to work out the effect this could have on the price of cigars.

Just as great complexity is the hallmark of a fine Cuban cigar, it is also the measure by which matters are addressed on the island. Nothing to do with Cuba is simple and expected. For a country that is as sleepy and slow-paced as it is beautiful and polemic, the little Caribbean backwater can surprise even the most pragmatic with its ability to complicate even the most simple of matters. obama cuba Obama’s wish for an end to the enmity certainly wasn’t simple, and it is important to note that absolutely nothing has changed yet. Through his announcement, the two countries are now talking officially, with a view to re-establishing the trading and travel relations that were severed at the start of Fidel Castro’s long rule.

“[Obama’s announcement] marked the start of a new chapter in the long history of Havanas, but it is impossible to predict when its effect will start to be felt,” says Simon Chase, a British cigar consultant who is one of the world’s best-known authorities on the industry.

“It is true that at some stage [state-owned Cuban cigar exporter] Habanos S.A. can expect an increase in demand for its famous products, but there is a long way to go before the full range of Havanas will be available in US cigars stores. Not only must the embargo be lifted, which requires the consent of the American government, but also there are many trademark problems to be resolved.”

This issue concerns the copyright to most of the well-known Havana brand names, which are also widely owned by entirely different, non-Cuban companies. The roots to this are in the early years of the embargo, when a number of US and Cuban suppliers and manufacturers found they were able to avoid it by licensing Cuban-origin brands for production in other Latin American territories, in particular Dominican Republic. These products currently proliferate in the US market and unpicking the legal and trademark complications caused by such arrangements will not be quick or easy.Cohiba cigarsToday, Scandinavian Tobacco Group owns the non-Cuban copyright to brands like Bolívar, Partagás, Hoyo de Monterrey, Punch, Ramón Allones, La Gloria Cubana, Sancho Panza and even Cohiba, though this is disputed by Habanos. Meanwhile, Altadis USA, an offshoot of Imperial Tobacco, owns brands like Montecristo, Romeo y Julieta, H. Upmann, Por Larrañaga, Juan López and Trinidad.

As Imperial Tobacco also owns half of Habanos, it will be a corporate rather than litigation-led decision as to whether the Cuban versions of these brands could be sold in the US and other markets.

This issue has the potential to hit cigar smokers hard in the Middle East and the UAE, where premium cigars, most of which come from Cuba, accounted for over 90 per cent of the market in 2013, according to Euromonitor research. Will the great Cuban names cease to exist at some point, while old humidor stocks of them gain massively in value? At the moment, it’s anybody’s guess.

According to Chase, in the short- to medium-term, international Havana enthusiasts have nothing to fear. Beyond that, the lawyers will probably benefit more than anybody else. Euromonitor tobacco analyst Shane MacGuill agrees. “In an immediate sense, it is not open season for Cuban cigars yet as only the Senate can remove the blanket trade embargo and restrictions on the products remain,” he says. cuban cigars american ban. The US cigar market is currently worth around $8 billion, meaning that Cuba, which has traditionally had difficulties with its quality and distribution, might have difficulty satisfying demand. After all, these two factors are essential for even the island’s biggest names to find success in America’s lucrative and knowledgeable market.

Once again, Imperial Tobacco’s role as a watertight, Western influence on Cuba’s cigar bureaucracy will be pivotal here. The company inherited a 50 per cent holding in the Cuban state cigar company Corporación Habanos through its purchase of the French-Spanish tobacco giant Altadis in 2007.

“It is thought that [Imperial], which distributes the Cohiba and Montecristo premium cigar brands outside the US, and non-Cuban brands such as Romeo y Julieta within it, has been anticipating the relaxation of the trade embargo for some time and has plans to ramp up production by 50 per cent to meet increased demand,” says MacGuill.

In a November analyst briefing, Imperial chief executive Alison Cooper made reference to some supply issues in Cuba, including a poor leaf harvest, which may or may not impact this target.

“It is something we’re actively managing. It’s something we have a very full plan now, with the Cuban government to actually address and take forward,” Cooper said. cuban cigars american ban. Growing one’s leaf supply, as Cuban brands found in the late ‘Nineties, when Habanos massively over-produced new stocks thus leading to widespread quality issues, can be a very delicate practice so Imperial is expected to proceed with caution. Conversely, some optimists could be forgiven for arguing that the opening up of America to genuine Cuban cigars might actually have a very limited impact on the country’s production.

One estimate is that 10-30 per cent of Cuban production is already being consumed in the US illegally. This means that between the purchase of Cuban-origin brands and existing illicit Cuban cigar consumption, there may not be significant additional demand in the US market for the products beyond a short-term bounce generated by the mystique of the embargo.

Regardless of the impending demand — and it is typical of the Cuban cigar industry that even those at the heart of it are still hedging their bets — cigar consultant Chase believes Habanos has learnt its lesson about over-production.

“There is no danger that quality will be compromised,” he says. “In any case there will be time to prepare for the increase in demand, which will start with building stocks of raw material.” cuban cigars american ban. Moreover, Chase believes it’s “inevitable” that when the forbidden fruit is no longer proscribed to US cigar smokers, the initial surge to try the best Havanas will be followed by a return to their usual non-Cuban brands.

“American cigar smokers have become used to different flavour profiles from Havanas. Many will be tempted to try them out, but given the fact that the quality of non-Cuban premium cigars has improved out of all recognition over the past 15 years, a significant proportion are likely to return to their former loyalties,” Chase says.

One group that will stand to lose from a potential lifting of the embargo would likely be cigar counterfeiters, who have seen their segment grow massively around the world as more naïve smokers think they have found an online bargain and often never realise that the cigars in their humidors have little in common with Cuba. cuban cigars american ban. Many of these high-quality forgers — it is often very difficult even for the best cigar aficionado to tell the difference by sight alone — have cut their teeth on America’s demand for Cuban cigars during the embargo, and if that source is destined to disappear, they will no doubt turn to more lucrative revenue streams, quite possibly away from tobacco.

Otherwise, just a couple of months after President Obama’s seminal statement, analysts and aficionados are still little the wiser about what to expect if and when relations between Cuba and the US improve. One thing is for sure: the non-Cuban cigar majors like Davidoff in Switzerland and Florida-based Arturo Fuente will have been having endless frenzied policy meetings; while the Cuban-owned half of Habanos will have been doing much the same, albeit without nearly as obvious mania.

Imperial Tobacco will be pivotal in devising a supply-and-demand policy for Habanos that satisfies its shareholders, the Cuban government and cigar consumers in the US and further afield. The transition will be on Imperial’s watch, so the company will be praying the reputation of its Cuban cigars is not about to go up in smoke.