There is growing tourist demand for cigars, with tobacco also benefiting from a growing Cuban mid-income group. However, tobacco harvests were impacted by inefficiency and poor weather in 2015 and 2016, resulting in slow sales growth. Forecast period sales will benefit from heavy investment in expanding production capacity and improving quality. Domestic cigarette demand will be constrained by health concerns and anti-smoking legislation but tourists will support good sales growth for cigars.

This report analyses the market for tobacco in Cuba. For the purposes of the study, the market has been defined as follows:

Cigarettes

Cigars, Cigarillos and Smoking Tobacco

Smokeless Tobacco and Vapour Products

Explanations of terminology used in this report are as follows:

GBO refers to Global Brand Owner, which is the ultimate owner of a brand.

NBO refers to National Brand Owner, which is the company licensed to distribute a brand on behalf of a GBO. The NBO may be a subsidiary of a GBO or it may be a completely separate company.

Retail refers to sales of tobacco through retail outlets including supermarkets, hypermarkets, discounters, convenience stores, internet and other store and non-store channels, as well as sales of tobacco through bar-tobacconists and hotels/restaurants/bars.

Duty-paid retail sales are legitimate sales with tax applied to the final price.

Illicit trade refers to sales of duty-not-paid (or DNP) tobacco.

Note:

Market sizes are researched at category level, lower data levels are modelled.

Although cross-border and duty-free sales are considered legitimate, they are excluded from duty-paid sales.

Illicit trade (DNP) tobacco refers to contraband, counterfeit and unbranded tobacco, as well as illicit whites.

Due to restrictions, we are unable to publish pricing data on tobacco in Cuba.

Attitudes to tobacco are complex and shifting in Cuba, with the tobacco industry playing a strong role in the country's history and culture. The country has exported tobacco since the 1500s and tobacco was smoked by the country's indigenous people long before this. Tobacco exports remain hugely important to the country's economy, being the fourth largest source of GDP and contributing USD445 million in 2016, while employing around 200,000 workers. In some regions such as Pinar del Rio, the vast majority of the workforce are within the tobacco industry. The tobacco industry is also closely linked to the state, with monopoly player Corporación Habanos jointly owned by Cubatabaco and Imperial Brands. Cubatabaco is in turn a state-owned company and produces all products sold by Corporación Habanos.

Tobacco is increasingly important to the Cuban economy, with demand for Cuban cigars soaring. This was chiefly due to a relaxation on US purchases and strong growth in tourism. US tourist numbers rose dramatically following the restoration of US-Cuban diplomatic ties in December 2014, with this enabling US travellers to visit the country. While there remains a legal ban on US tourist travel to the country, those tourists claiming to visit the country for reasons such as educational or religious activities are now able to do so. There was also a surge in the number of flights into the country from around the world, making trips to Cuba easier and more affordable. Overall arrival numbers rose by an impressive 18% in 2015 over the previous year, with further growth of 13% reported by the Cuban Ministry of Tourism in 2016.

December 2015 saw US President Obama announce that US travellers would be permitted to bring Cuban cigars to the value of USD100 into the US. In October 2016, the USD100 limit was fully lifted, making unlimited personal imports possible and attracting many high-income US cigar enthusiasts. However, it remains illegal to sell Cuban cigars in the US, with imports solely permitted for personal use. Consequently, there was a surge in the number visiting Cuba to buy cigars in the last few months of 2016. Growth in tourist numbers is furthermore not only resulting in stronger sales to tourists but also benefiting disposable income levels for those working in the tourist industry, enabling many Cuban smokers to spend more on tobacco.

Indeed, much of the criticism faced by the Cuban tobacco industry towards the end of the review period focused not on its potential health impact but on the industry's inefficiency. Agricultural credits for farmers, which are essential for their effective operation, are frequently impacted by lengthy bureaucratic delays. These credits are ideally made available from August in order to facilitate soil preparation and seeding but 2016 saw these credits delayed to late November. Cubatabaco thus began an extensive modernisation programme in June 2016, with this set to greatly increase production capacity in the forecast period.

Tobacco harvests in 2015 and 2016 were further impacted by poor weather conditions, with surging demand thus unable to be met at times. This resulted in sporadic product shortages in the last two years of the review period. The Cuban tobacco industry thus proved unable to fully capitalise on growing demand from both tourists and Cubans.

Cubans are however also increasingly concerned about the impact of smoking and passive smoking on health. Many of those who smoke do so heavily, particularly in terms of cigarettes, with an estimated 10% of cigarette smokers smoking over 20 sticks per day. Passive smoking is a particular issue, with the National Tobacco Programme estimating in 2015 that 51% of pregnant women, 55% of children and 60% of adolescents are regularly impacted by passive smoking. While there is a smoking ban in place, this is often ignored, with reports of smoking even by teachers and students in schools. In mid-2015, MINSAP, the Ministry of Public Health, estimated that 36 people were dying each day as a result of tobacco-related illnesses. There is also growing concern over a rapid rise in underage smoking.

Many are thus keen for the government to intensify anti-smoking legislation, particularly with regard to passive smoking. While the government has stated that it is reinforcing its anti-smoking measures, these mainly focus on discouraging underage smoking and supporting smoking cessation. All proceeds from the country's annual Habanos Cigar Festival's Humidor Auction also go to the Cuban public healthcare system. The public smoking ban continues to be poorly enforced however and tobacco prices remain low. Indeed, it was only in 2010 that the government ceased to offer four packs per month of heavily-subsidised cigarettes to those aged 54 years and over. Cubatabaco also continues to permit those working in its hand-rolled cigar factories to smoke as many of its lower-end cigars as they like while they work.

The majority of Cubans do not smoke, with smoking prevalence estimated at 23% of the population by the government in 2014. Only 16% of over 15-year-old women smoked, in comparison to 31% of men. Anti-smoking initiatives are thus beginning to emerge. October 2015 saw the launch of a joint campaign by non-profit youth organisations Juventud Activa Cuba Unida (JACU) and the Ecosocial Movement, with this targeting families and children with anti-smoking leaflets and DVDs. There is a growing focus on the negative health impact of smoking, with this resulting in many smokers feeling under pressure to reduce their consumption or quit altogether.

Dominant brand Criollos and other leading brands continue to focus on their classic products for sales via Cuban pesos (CUP), with these sold in traditional paper packs. However, some of these brands also introduced carton packs towards the end of the review period, such as Popular. These carton packs are exclusively sold via outlets offering products priced in Cuban Convertible Pesos (CUC).

Within cigarettes, international brands saw the strongest innovation towards the end of the review period, with these high-priced products also sold via CUC outlets. Launches towards the end of the review period included Hollywood Menthol and Lucky Strike with mint flavour capsules. These launches aim to capitalise on rising tourist demand and growing interest in flavoured cigarettes among young adults and women.

The most significant new product development occurred at the start of the forecast period however, with the launch of Dunhill in January 2017. This brand brought many innovations, including its Fine Cut variant, which offers tobacco cut twice as fine as standard for a smoother and yet more intense flavour. Dunhill Tube Filter also has a premium positioning, with this offering a recessed filter to minimise staining and offer a smoother flavour. These launches offer more premium options and are designed to appeal to tourists and a small but growing number of aspirational mid- to high-income Cubans.

Cigars see strong new product development on an annual basis. New products, including super premium limited editions, are launched with considerable fanfare at the annual Habanos Cigar Festival. 2016 launches included Hoyo de Monterrey' Reserva Cosecha 2012 and a 20th anniversary limited edition for Cuaba La Casa del Habano. H Upmann furthermore added the Magnum 54 to its regular range in 2016, with this being a short but considerably thicker cigar with a 120mm length and 54 ring gauge. New cigar launches mainly target high-income tourists and export sales.

Tobacco is expected to see a stronger performance in the forecast period, with a 3% value CAGR at constant 2016 prices in comparison to just a 1% review period CAGR. Growth will be supported by improvements in domestic production capacity and quality. Cigars will remain the main growth driver, benefiting from growing tourist demand and the iconic global reputation of Cuban cigars.

The election of President Trump in November 2016 raised concerns that private imports of cigars would be banned once more, resulting in many US cigar aficionados rushing to buy cigars in Cuba in early 2017. However, while Trump is tightening restrictions on Cuba, he has made no move to prevent private cigar imports from Cuba into the US. With sales of Cuban cigars in the US likely to remain banned in the forecast period, US tourists are expected to be a significant growth driver in Cuban sales. However, Trump is not expected to permit sales of Cuban cigars within the US, which is likely to deter international investment in this area. Prior to Trump's election, May 2016 saw Imperial Brands announce that it was considering investing in Cuban cigar production, with a view to gaining a first-mover advantage if imports to the US became permitted. Following Trump's election, these plans appear to have been put on hold.

The supply shortages that hindered cigars towards the end of the review period may be a thing of the past. Corporación Habanos is upgrading its existing machine-manufactured cigar factory, while also constructing another machine-manufactured cigar factory for domestic sales. For hand-rolled cigars, the company is shifting its focus towards luxury products. The 2017 harvest also proved the best over the last decade, which should safeguard supplies at the start of the forecast period. This harvest notably benefited from a shift towards covered cultivation, with this not only increasing volumes and protecting against poor weather conditions but also enabling greater production of the large thin leaves used as luxury cigar wrappers. In addition, when planting for the July 2018 harvest the company has opted for higher-volume varieties of tobacco that are more resistant to disease, which should offer some safeguard against the impact of poor weather conditions.

Corporación Habanos is also planning extensive modernisation for its cigarette operations. This includes the construction of a new USD100 million factory for cigarettes in the Mariel Special Development Zone, with this set to launch operations by the end of 2018. This will have an annual production capacity of eight billion export quality cigarettes, while the company will also invest in upgrading its Lázaro Peña cigarette factory to meet international product standards. With a shift towards export-quality cigarettes, higher-priced and higher-quality cigarettes are expected to become available within the country. A wider range of international brands are also being added to the company's portfolio, notably including Dunhill in January 2017. Sales growth for cigarettes is however set to be muted, with much of the new production capacity focused on export sales. In addition, many smokers are facing growing pressure from families and friends to cut back on consumption due to health concerns.

Socioeconomic trends

The two different currencies used in Cuba impact tobacco pricing and access. A small number of brands are sold priced in Cuban pesos (CUP), with these offering very low prices. These include the dominant Criollos brand and the leading Popular and Titanes brands, with these using black/air-cured tobacco. Flue-cured tobacco brand Aromas is also sold via these outlets at a slightly higher price. Single sticks continue to be legally available for brands priced in Cuban pesos, making these products highly affordable. These products continue to dominate due to their accessible prices, with Criollos alone accounting for 70% of retail volume in 2016. The majority of Cuban smokers continue to face financial constraints, wit 75% of the workforce working for the state and being paid just USD20-40/month. Smokers within this group are thus primarily focused on value-for-money when buying cigarettes.

Products priced using Cuban Convertible Pesos (CUC) tend to offer higher quality but are considerably higher in price, being priced at around double the level of CUP cigarettes. These are mainly international brands, although some domestic brands such as Popular are also sold via CUC, with these using carton packs rather than traditional soft paper packs for differentiation. CUC-priced products mainly appeal to tourists and Cuba's emerging mid-income group. Many Cubans are benefiting from the growing number of tourists in the country, such as taxi drivers and on-trade operators. Many are also benefiting from growth in foreign remittances, with these groups most likely to buy higher-priced CUC cigarettes. Younger mid- to high-income consumers are also increasingly interested in these products, which have a strong aspirational image. These products are generally sold in packs of 10 sticks in order to make them more affordable.

Similar currency divisions are seen in cigars and cigarillos. Around 25% of domestic production is sold via CUC, with these products primarily targeting tourists, while the remainder is sold via CUP at considerably lower prices. Almost all machine-manufactured cigars are exported, although some are sold via state-owned cigar shops Casas del Habano, with these stores using CUC. As a result of affordable CUP-priced cigars, most Cuban smokers can afford economy cigars, while aspirational mid-income consumers often trade up to higher-quality CUC-priced products. High-income Cubans and tourists can also easily access luxury cigars in the country, with limited editions notably commanding very high prices.

Cuba's population is ageing and seeing little growth. There was a sharp rise in median age from 39 years in 2011 to 42 years in 2016, with this linked to a low birth rate and high working age migration. These trends are largely negative for tobacco. Tobacco is not however likely to be heavily impacted by these trends, due to growing tourist demand. In addition, while the number aged 18-25-years is diminishing, smoking prevalence is rising within this group and benefiting overall sales of tobacco.

Logistics/infrastructure

Tobacco products are widely accessible in Cuba, with distribution reach defined by the currency used for pricing. Domestic economy cigarettes, cigars and cigarillos sold via Cuban pesos (CUP) are mainly sold via bars, cafés and restaurants. Higher-priced export-quality Cuban Convertible Peso (CUC) products are also sold via more upmarket bars and restaurants but are, in addition, sold via chained grocery retailers and hotels. With both CUC and CUP products sold mainly via hotels/restaurants/bars, this channel dominates sales of cigarettes and accounted for an 87% retail volume share in 2016.

Within cigars and cigarillos, hotels/restaurants/bars are also strong with a 46% share, although tobacco specialists dominate overall sales, with a share of 54% of retail volume in 2016. This is due to the strength of the state-owned Casas del Habano chain of cigar specialists, which offers a wide range of high-quality products priced in CUC. Tobacco specialists are expected to continue to gain share from hotels/restaurants/bars in the forecast period, with many tourists appreciating both the ambience and wide range of products offered by Casas del Habano.

Illicit cigarettes do not have a significant presence in Cuba. While illicit domestic production was significant in the 1990s due to supply shortages, these products were not available by the start of the review period. Cigarettes are affordable and widely available, resulting in a lack of demand for lower-quality illicit products.

There is a presence for illicit cigars in Cuba, with these mainly targeting tourists. These are generally products diverted from official cigar factories or illegally produced counterfeits. Counterfeits tend to use seals and official packaging, with this also diverted from official cigar factories and used to offer an authentic image. Counterfeit cigars are generally available for around 15-20% of the price of genuine products. Illicit sales of cigars are growing, with the growing number of incoming tourists making this trade increasingly lucrative.

Counterfeit cigars are often bought by people intending to resell these products in their own country, although many unsuspecting tourists also buy these products, being unable to resist the opportunity to buy Cuban cigars at low prices. There is however growing awareness of the potential for counterfeiting, with tourist blogs increasingly warning tourists to shop only at licensed vendors. Consequently, tourists are shifting away from illicit street purchases and increasingly purchasing cigars via Casas del Habano outlets or hotels/restaurants/bars.

Legislation

While Cuba has no minimum legal smoking age, the minimum purchasing age for tobacco is set at 18 years. This remained unchanged during the review period.

Underage smoking is an increasing problem, largely due to poor age limit enforcement by retailers. Teenagers find it easy to buy cigarettes, with a growing number starting to smoke at aged 12-13-years. Many teenagers believe that smoking makes them appear more attractive and also believe that smoking aids weight loss. Underage smoking is also linked to the fact that many teenagers are frequently around adults smoking, with many potential role models often smoking, such as teachers, parents and friends.

There is no legal limit on tar levels for cigarettes in Cuba, although producers must indicate tar levels on product packaging. There is also a ban on the use of potentially misleading terms such as "smooth" or "low tar."

Most smokers prefer high tar cigarettes, with these viewed as offering a richer flavour. This is particularly true of male smokers. Women are more likely to opt for lower tar variants with a milder flavour. A preference for high tar cigarettes is also more pronounced among older smokers, with many young smokers opting for lighter variants. A growing number of young adults and female smokers indeed prefer menthol variants, with menthol further masking the flavour of tobacco.

There is no legislation prohibiting advertising, promotion or sponsorship for tobacco products. However, advertising overall is virtually non-existent in Cuba, while Corporación Habanos is a state-owned monopoly, with marketing thus being minimal. State-controlled TV notably often broadcasts anti-smoking messages. In late 2014, the government announced that it planned to introduce legal restrictions on tobacco promotion and sponsorship, although these are yet to be finalised.

Only textual health warnings are mandatory for tobacco products in Cuba, with packaging required to carry one of five specified warnings, with these rotated regularly. Textual warnings must cover a 30% average of the front and back of packs. Graphic health warnings are not mandatory. However, the government announced in late 2014 that it planned to introduce these, with graphic health warnings thus likely to become mandatory in the forecast period.

A partial smoking ban has been in place since 2005. This bans smoking in enclosed public spaces other than designated smoking areas, with this including offices, on-trade outlets, meeting rooms, theatres, healthcare and educational centres and public transport. Healthcare and educational facilities furthermore have a full smoking ban and are not allowed to offer smoking areas.

However, the smoking ban is widely ignored in Cuba, with the government thus beginning to work on stricter legislation towards the end of the review period. It is likely that greater enforcement and heavier fines will be introduced in the forecast period. This would however be unlikely to have a heavy impact on smoking, with on-trade outlets simply offering designated smoking areas or permitting smoking outdoors.

Taxation and duty levies

Tobacco products face a number of different taxes. A special tax is imposed, with this being adjusted in the budget each year. Both special tax and import duty are applied to imported products, with import duty only slightly lower in comparison to special tax. This offers domestic products a strong price advantage, while imports are also heavily restricted by the government. Tax rates are flat across all tobacco products, which further enables domestic players to offer very low prices for economy products. Tobacco is also impacted by a sales tax, which is set at 2% for goods sold in the wholesale network and 10% for goods sold in the retail and on-trade.

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