Yesterday, executives from Habanos S.A. told international media that the Cuban cigar company was waiting for the U.S. embargo to end and expected to “conservatively” capture 25-30 percent of the U.S. market once that happened.
The speculation of course carries a bit more importance after President Obama announced a normalization of relations with Cuba last year with an ultimate goal of ending the embargo.
If you are taken back by the idea of Cuba capturing 25-30 percent of the U.S. market, you might want to sit down. The executives went on to say that the Cuban company expected to eventually capture 70 percent of the U.S. market, which is about the average Habanos has worldwide in other markets.
Those claims are bold, really bold.
And when asked how it would possibly be able to supply this amount of cigars, the executive decided it was time to stop speculating, although they did say they had a plan.
Now, the U.S. is likely already the largest market of Cuban cigars in the world, even with the embargo making the importation of Cuban cigars illegal, but 25-30 percent of the market is an astonishing number. About the numbers.
There are two key ones to understanding how realistic this all sounds:
- 275 million — The amount of handmade premium cigars imported to the U.S., well, the number is actually 275-300 million according to the International Premium Cigar & Pipe Retailers Association.[ref]This also assumes the market wouldn’t experience a “mini-boom” following the lift of the embargo.[/ref]
- 84.7 million — The amount of cigars exported by Cuba in 2013, according to Cuba.
By that math, 25 percent of the market would be 69 million cigars—or 80 percent of what Cuba exported in 2013.
Now, many Cubans already end up in the U.S., let’s say it’s a third of all Cubans exported (28.2 million), an ambitious percentage. By that math, Cuba would only need to make an additional 40.8 million cigars, increasing production by nearly half.
But perhaps Cuba is saving some cigars, waiting for the embargo. Even if that number was 10 percent of total exports, Cuba would still need to produce an additional 30 million cigars for export to the U.S.
In 2007, Cuba exported 123.1 million cigars, a year later that number was at 109.1 million and then 75.4 million by 2009. The economic collapse of 2008 is explained as the culprit for the steep cutbacks, but serious questions remain about whether Cuba has the capacity to return to this level of production, particularly since production has only risen to 84.7 million in four years.
The year before, Cuban’s production was at 217.4 million, which is probably about the number it would need to capture 70 percent of the U.S. market and keep up with global demand elsewhere, at least mathematically.
But that’s the problem.
Even if we ignore the idea that Cuba hasn’t exported this type of production since 2007 and fact that the quality of tobacco would almost certainly diminish exponentially there are other concerns.
While competition is hurting Cuba in some (European) markets,[ref]Germany, the Netherland and the U.K. would be my guess of where it’s being felt the most.[/ref] competition in the U.S. is going to be on a whole different level. While I don’t agree with many of the arguments made by non-Cuban manufacturers, there are some obvious issues.
U.S. consumers are not used to the idea of needing to age cigars before they become smokeable, price points of Cuban cigars are going to be higher than non-Cubans and Habanos S.A.’s portfolio, where petit coronas outnumber 56 ring gauge offerings at exponential rate, is not well suited to the U.S. market, at least not yet.
And then there are more practical concerns.
Unless Cuba has a large supply of cigars sitting and ready to go, it’s not like it can suddenly decided to have cigars ready to ship to the U.S. in 30 days. Tobacco has to be planted, harvested, aged and rolled—a process that even when rushed needs a year just to produce a product and far more time if the product is supposed to be superior.
There are trademark issues.
As of right now, Habanos S.A. would need to acquire licensing agreements to sell Bolívar, Cohiba, Fonseca, José L. Piedra, Hoyo de Monterrey, La Gloria Cubana, Partagás, Punch and San Cristobal de La Habana. That’s four of the seven “global” marcas, three of the five “multilocal” brands and all but two of those licenses would need to come from General Cigar Co.,[ref]Fonseca is owned by the Quesada family, José L. Piedra by the Padróns and San Cristobal by Ashton.[/ref] the company Habanos S.A. has spent the last 16 years fighting over a single trademark.
With the lattermost concern, there’s a solution. One that’s more costly, but a lot easier than suddenly doubling cigar production. Habanos S.A. claims to have a plan and perhaps they do; they most certainly have more riding on the end of the embargo than any other company, but the numbers and realities add up to one answer to the question of whether either target seems remotely possible.
Update — The original version of this article indicated all but two of the aforementioned trademarks were owned by General Cigar Co., the number is three.