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Diplomatic Normalisation Promises Cuban Evolution for US Cigar Market

12/18/2014
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The almost total thawing out of diplomatic relations between the US and Cuba, announced yesterday, 17th December by President Barack Obama, could lead to the smouldering of Cuban cigars from coast to coast in the US$8 billion dollar US cigar market. The biggest winners from the relaxing of the trade embargo with Cuba are likely to be Imperial Tobacco plc, the world’s 4th largest international tobacco company and part owner, with the Cuban government of the state cigar company Corporacion Habanos and the US tobacco specialist stores which currently supply around 40% of the country’s cigars and through which high price point Cuban offerings will largely be distributed.

Imperial Tobacco inherited  a 50% holding in the Cuban state cigar company Corporacion Habanos through its purchase of the French-Spanish tobacco giant Altadis in 2007. It is thought that the company, 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% to meet increased demand. However, in an analyst briefing in November 2014, Imperial CEO Alison Cooper made reference to some supply issues in Cuba which may or may not impact this target:

Cuba - it is a supply constraint because of a number of things that have happened through the overall August, over the last year or so and also we are seeing quite increased demand as well for Cuban products globally. So it 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 and it’s working through basically. - Alison Cooper, Imperial CEO

The developments also represent a boon for the US’s tobacco specialist retailers as the premium positioning and price points of the products (a single Montecristo No.1 cigar retails at over US$20 in the UK) virtually completely exclude the convenience channels which dominate sales of mass market smaller cigars and cigarillos. Greater availability of Cuban cigars is also likely to underscore the case for premium handmade cigars to be exempted from impending FDA regulation as they are clearly inaccessible to the most vulnerable groups at the protection of whom the proposed regulation is aimed. Traditionally, the Cuban authorities are also resistant to regulatory imposition on the formulation or presentation of their products.

However, Cuban revolution in the US cigar market will be neither swift nor complete nor will the greater legal availability of the products in the medium to longer term be enough to halt declining US large cigar consumption in the face of taxation, tobacco control laws and increased health awareness.

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 as David Savonda at Cigar Aficionado observes:

For the first time since the Bush Administration, travellers who go on a trip between Cuba and the U.S. will be permitted to return to the U.S. with up to $400 in Cuban goods. Only $100 of those goods can be tobacco or alcohol. Since most boxes of 25 Cuban cigars sell for more than $100 in Havana, in many cases travellers will be prohibited from legally bring back a full box of cigars - Cigar Aficionado  

Moreover, in the past, many US and Cuban suppliers and manufacturers avoided the embargo 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 won’t be quick or easy. Further, one estimate is that 10-30% of Cuban production is already consumed in the US illegally. This means that between consumption 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).

The wider availability of Cuban tobacco products in the United States will undoubtedly be welcomed by both the US and Cuban industries and prompt nostalgic and intrigue driven purchasing. However, it is also a case that this development has come far too late to meaningfully reverse a decline in consumption of large cigars in the US (10% volume loss between 2008 and 2013) caused by increased tax taxation, elevated health awareness and the regulation-prompted dwindling of consumption opportunities. For many American consumers, it may be a case of sparking up a first and last Cuban cigar - for old time’s sake.

 

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