2007 - Interesting Times Ahead

[Trevor2118]

While updaing my website, I decided to do a piece looking forward. My views only.

With Fidel Castro probably terminally ill and having temporally handed over power to his younger brother, what will happen to Cuba upon his death?

The biggest hurdle is the USA embargo against Cuba. This embargo and the loss of support from the Soviet Union (after their collapse in 1992) caused almost a decade of hardship in Cuba (its so-called "Special Period"). Cuba has (to some extent) overcome this setback but lifting the embargo will create its own problems.

Firstly, before the majority of Cuban cigars can be sold in the USA, the current band duplication will have to be sorted out, probably in long costly drawn-out court cases. Almost all of the major Cuban brands are duplicated as non-Cuban brands and sold worldwide and the USA. These include Cohiba, Hoyo de Monterrey, Montecristo, Partagas, Romeo y Julieta, Quintero etc etc. There are obvious brand and trademark concerns. There would be confusion and dilution within the market if both Cuban and non-Cuban brands co-existed. What could result, is "win some, lose some", in which some current well known Cuban brand names will no longer be "Cuban cigars".

Secondly, there may be a supply and demand problem, with feared price increases. It should be remembered that Cuban cigars are currently readily available worldwide, except for the USA. However there is already substantial availability and use of Cuban cigars in the USA by Cuban enthusiasts, who currently do not let the embargo weigh too heavily on their minds. These current enthusiasts can (and do) obtain all the Cubans that they currently need. The extra demand can only be created by other cigar smokers switching to Cubans. The higher price points for Cubans and loyalty for current brands may mitigate against this. The anti-smoking lobby will continue their current war on smoking and the lifting of the cigar embargo will probably regalvanise them, probably calling for additional tariffs. If excise was made similar to UK, Europe, and Australia, the USA Cuban smokers would see an approximate 50% increase in the cost of Cuban cigars irrespective of any supply and demand pressures.

Finally, there is the possibility of the renewal of USA buyouts within Cuba, along with the possibility of Cuban tobacco being exported from Cuba and used in world brands. This itself would cause shortages, price increases, and quality reduction; all in the quest for market share and markets "bottom line". This depends on the level of relaxation of control within Cuba, a total unknown at this stage. Unrestricted control could cause chaos in the Cuban cigar industry.

All the above assumes that the embargo will be lifted. The history of the embargo goes back to the "Cuban Missile Crises" of 1962, but US relations were strained since 1959 when Castro took power and nationalised (the many) USA industries in Cuba. Cuba's ties with the Soviet Union continued the irritation with the USA. With the Soviet Union gone, the Communism aspect has gone, but clearly, while Castro remained in power the USA was not inclined to lift its embargo.

[COJ]

» While updaing my website, I decided to do a piece looking forward. My

» views only.

»

» With Fidel Castro probably terminally ill and having temporally handed

» over power to his younger brother, what will happen to Cuba upon his

» death?

»

» The biggest hurdle is the USA embargo against Cuba. This embargo and the

» loss of support from the Soviet Union (after their collapse in 1992)

» caused almost a decade of hardship in Cuba (its so-called "Special

» Period"). Cuba has (to some extent) overcome this setback but lifting the

» embargo will create its own problems.

»

» Firstly, before the majority of Cuban cigars can be sold in the USA, the

» current band duplication will have to be sorted out, probably in long

» costly drawn-out court cases. Almost all of the major Cuban brands are

» duplicated as non-Cuban brands and sold worldwide and the USA. These

» include Cohiba, Hoyo de Monterrey, Montecristo, Partagas, Romeo y Julieta,

» Quintero etc etc. There are obvious brand and trademark concerns. There

» would be confusion and dilution within the market if both Cuban and

» non-Cuban brands co-existed. What could result, is "win some, lose some",

» in which some current well known Cuban brand names will no longer be "Cuban

» cigars".

»

» Secondly, there may be a supply and demand problem, with feared price

» increases. It should be remembered that Cuban cigars are currently

» readily available worldwide, except for the USA. However there is already

» substantial availability and use of Cuban cigars in the USA by Cuban

» enthusiasts, who currently do not let the embargo weigh too heavily on

» their minds. These current enthusiasts can (and do) obtain all the Cubans

» that they currently need. The extra demand can only be created by other

» cigar smokers switching to Cubans. The higher price points for Cubans and

» loyalty for current brands may mitigate against this. The anti-smoking

» lobby will continue their current war on smoking and the lifting of the

» cigar embargo will probably regalvanise them, probably calling for

» additional tariffs. If excise was made similar to UK, Europe, and

» Australia, the USA Cuban smokers would see an approximate 50% increase in

» the cost of Cuban cigars irrespective of any supply and demand pressures.

»

» Finally, there is the possibility of the renewal of USA buyouts within

» Cuba, along with the possibility of Cuban tobacco being exported from Cuba

» and used in world brands. This itself would cause shortages, price

» increases, and quality reduction; all in the quest for market share and

» markets "bottom line". This depends on the level of relaxation of control

» within Cuba, a total unknown at this stage. Unrestricted control could

» cause chaos in the Cuban cigar industry.

»

» All the above assumes that the embargo will be lifted. The history of the

» embargo goes back to the "Cuban Missile Crises" of 1962, but US relations

» were strained since 1959 when Castro took power and nationalised (the

» many) USA industries in Cuba. Cuba's ties with the Soviet Union continued

» the irritation with the USA. With the Soviet Union gone, the Communism

» aspect has gone, but clearly, while Castro remained in power the USA was

» not inclined to lift its embargo.

As far as I know Altadis controlls over half of all cigar brands that have double country of origin.

And I'm convinced the purchase of JR in 2003 was a part of a strategy to controll as many as possible when the embargo is lifted.

As for the consern that there should be problems if a brand is produced in...this is a fact today...as there are many brands produced in more then one country.

Most of the time its one line produced in DR and another in Nicaragua or Honduras...and that works just fine...consumers are used to this.

Just my 2 cents....US cents mind you :-D

[Black Plague]

This is the topic that inevitably gets beat around any cigar forum a million times.

But one strange logical leap people make is assuming that after Castro dies and/or the embargo ends, that Cuba's gonna suddenly cease to be communist.

Of course, if Cuba were to become a capitalist liberal democracy, the embargo would almost undoubtedly drop. But that's not a two-way argument. The embargo could drop with a Cuba STILL communist.

In that case, I highly, highly, HIGHLY doubt they're gonna privatize tobacco. Hell, even a liberal democratic Cuba might not privatize it if they can help it! Sugar, tobacco, and tourism are the bread and butter of the Cuban economy. The embargo is also no obstacle to the old owners trying to get their land back, like some seem to think...they tried that in the World Court at the Hague in the 60's and 70's to no avail.

Now, just who has the rights to a brand in the US is a problem, just as it is in the market world outside the US (example: the non-Cuban Hoyo de Monterrey cannot sell under that name outside the US, because Cubatabaco holds the trademark...that's actually how the Excalibur line started, as a rebanded non-Cuban Hoyo for the European market).

With Altadis being half-owner of Habanos SA with Cubatabaco, and owning the majority of the trademark rights in the US that are still in use by Cuban brands...that won't be a problem. Most likely, they'll just change the names of the non-Cuban brands and release the Cuban ones on the US market (example: the non-Cuban H. Upmann might be changed to some other name, for shits-and-giggles let's say G. Downmann or maybe the less drastic H. Upmann Dominican Selection, and the Cuban H. Upmann put out on the US market so that the names don't clash).

Swedish Match (owners of General Cigar and most of the rest of the big trademarks, like Partagas and La Gloria Cubana) is an X factor. On the US market, Altadis is a fierce competitor with them. But in the rest of the world, they cooperate a whole lot. (example: Swedish Match works with Altadis very closely to distribute all of Altadis' and Habanos' products in Scandinavia, and they worked together to create the recently-released Romeo y Juliet and Montecristo brands of Swedish snus).

MATASA holds the trademark for Fonseca...but they're a pretty small, insignificant company in the US market, so Altadis would probably beat them down with an all-star legal team in the courts, since MATASA has about as much connection to the Fonseca name they distribute as Bacardi does to Havana Club!

The thing that I personally will be disgusted by is when Fuente, K. Hansotia, and all the other makers of grossly-overpriced non-Cuban cigars can get their hands on an ounce of Cuban tobacco and start charging people $50 instead of $20 for their crap and hyping the **** out of it in every magazine, website, and vendor in the US. I don't buy their crap now and I especially won't touch it then.

[Trevor2118]

» As far as I know Altadis controls over half of all cigar brands that have double country of origin.

» And I'm convinced the purchase of JR in 2003 was a part of a strategy to control as many as possible when the embargo is lifted.

»

» As for the concern that there should be problems if a brand is produced in...this is a fact today...as there are many brands produced in more than one country.

» Most of the time its one line produced in DR and another in Nicaragua or Honduras...and that works just fine...consumers are used to this.

»

» Just my 2 cents....US cents mind you :-D

I certainly don't disagree because I don't know.

However, regarding Altadis owing half of the (dual) brands, the other giant...General Cigar Company...owns the other half. GCC have Cohiba, Hoyo de Monterrey, and Partigas....3 of Hananos' 5 Global brands, as well as Bolivar & Punch (also top brands) plus 4 or 5 others.

These giants may fight each other or they may reach an agreement and fight the anti-smoking lobby instead.

[Trevor2118]

» This is the topic that inevitably gets beat around any cigar forum a million times.

»

» But one strange logical leap people make is assuming that after Castro dies and/or the embargo ends, that Cuba's gonna suddenly cease to be communist.

»

» Of course, if Cuba were to become a capitalist liberal democracy, the embargo would almost undoubtedly drop. But that's not a two-way argument. The embargo could drop with a Cuba STILL communist.

:-D Yes, I have too much time on my hands, but let me elaborate on a point I made:

With the Soviet Union gone, the Communism aspect has gone, but clearly, while Castro remained in power the USA was not inclined to lift its embargo.

From this side of the world, it appeared that Castro was the sticking point with the US, not Communism.

Also, I agree, democracy will not come quickly to Cuba. The trouble is, with Castro gone, the new regime may wish to get things rolling and for that they need cash. Cuba sold 50% of Habanos SA....what next if the pressures on? Companies only need a controlling interest to change things!

Anyway.....what ever the outcome....interesting times ahead.

Cheers, Trevor.

[Black Plague]

» Cuba sold 50% of Habanos SA....what next if the

» pressures on? Companies only need a controlling interest to change

» things!

Good point! Didn't think of that.

[El Presidente]

Trevor,

Couple of points on a favourite subject :-D

1. Cuba can't afford open democracy for the forseeable future. Chinese style socialist model encouraging the opening up of sectors of the economy is certainly more palateable domestically within Cuba (if not for the Cuban exiles).

2. Altadis and Swedish Match (General Cigar) are global mortal enemies. It is hard to describe the animosity each feels for the other.

The issue will be whether in the end, dollars will prove stronger than hate.

[Trevor2118]

» Trevor,

»

» Couple of points on a favourite subject :-D

»

» 1. Cuba can't afford open democracy for the foreseeable future. Chinese style socialist model encouraging the opening up of sectors of the economy is certainly more palatable domestically within Cuba (if not for the Cuban exiles).

»

» 2. Altadis and Swedish Match (General Cigar) are global mortal enemies. It is hard to describe the animosity each feels for the other. The issue will be whether in the end, dollars will prove stronger than hate.

I love this crystal ball stuff....:-P

I agree with you that the Chinese style socialist model is the most probably & I don't think the US would be too concerned about this if adopted by Cuba. With Cuba, I think anti-Castro was the main US concern, rather than anti-communism.

Interesting regarding Altadis and Swedish Match (General Cigar). Is it the dual Cuban brands that have caused the animosity or is there something else? One would normally assume that each wants to be number one but there has to be limits.

What do you think of the increasing adverse effect of the anti-smoking lobby. They are winning the war and smokers are the causalities. I can see the US clan up-sizing their bandwagon when open Cuban cigar import looks likely (even if it is effectively minimal).

Cheers, Trevor.

[Mark Twain]

Whatever happens I think that it will be a great long while before us folks in the US see legal imports of Cuban cigars. We Americans are a litigious bunch of people, and as mentioned above, there remain major legal hurdles to overcome after the political embargo ends.

I also agree that there is no telling what a non-Castro Cuban government might do. Many democratic South American countires have taken steps to nationalize companies so it would not be surprising to see a non-Castro Cuba refuse to open tobacco companies to private ownership.

[El Presidente]

» Interesting regarding Altadis and Swedish Match (General Cigar). Is it

» the dual Cuban brands that have caused the animosity or is there something

» else? One would normally assume that each wants to be number one but there

» has to be limits.

They have fought tooth and nail in every corner of the globe. Swedish Match were Habanos distribtors in many parts of the globe but this has been reversed almost everywhere. It is no coincidence that the reversal accelerated under the Altadis 50% buyout of Habanos s.a.

There are limits obviously.....but consider the chances of Coke and Pepsi working together....and you will get an idea of the challenge.

»

» What do you think of the increasing adverse effect of the anti-smoking

» lobby. They are winning the war and smokers are the causalities. I can

» see the US clan up-sizing their bandwagon when open Cuban cigar import

There is no war. It is a massacre by a focused organised and well funded enemy against a rabble.

However....cigar sales are up almost worldwide.

The thing which antagonises the sexless, friendless, funless, tofu eating ****wits is when you continue to thrive.....not givibg a rats arse.

Laws are one thing. Enforcement of personal rights in your truck, camping, house, golf, fishing etc etc is impossible. They will continue to try but it will make no difference.

[tigger]

» There are limits obviously.....but consider the chances of Coke and Pepsi

» working together....and you will get an idea of the challenge.

Tough, but it seems to me that Altadis and Swedish Match will both have needs to be met that will push them toward an agreement, with Altadis having a bit of an upper hand.

With Altadis being able to sell Cuban Montecristo, Upmann, JL, PL, SLR, RyJ and Trinidad cigars, is anyone in the US going to want to continue to buy overpriced, hohum Dominican Cohibas? Altadis owns enough brands that, especially with the initial wave of "gotta smoke Habanos" that will happen here, I forsee the NC brands taking a big hit.

That said, everyone's going to want to smoke a real Cohiba as well.

It will be in both companies' best interests to make nice, I think.

As far as the embargo ending, I'll say what I said on another board:

I think that Fidel's passing, when it happens, will open the door to the eventual removal of the embargo, but I don't think it will happen right away. The only reason sanctions are still in place is because of the powerful Cuban and Cuban American political lobby that exists in this country (particularly in FL).

They don't just want Castro gone, they want their families' properties back.

I don't see Raul handing back much in the way of property or businesses any time soon...

[Trevor2118]

From Perelman's Email yesterday

"The rumour that won’t go away:

Financial analysts, who get paid a lot of money to predict such things, are convinced that Japan Tobacco’s purchase of British tobacco giant Gallagher Group will lead to more consolidations in the tobacco sector.

This brings back the ever-present rumour that Britain’s Imperial Tobacco will buy Altadis, S.A., the Spanish-French firm created in 2000 by the merger of the Spanish and French tobacco monopolies. The financial press reported yesterday that Imperial was considering a bid of about $13 billion (U.S.) for Altadis.

There are good reasons for Imperial to consider such a bid as its major markets do not overlap with Altadis’s strongholds in Spain and France.

Imperial had sales of $21.86 billion for its fiscal year ended September 30, 2006. It sells products in 130 countries, but is focused on cigarettes, especially with its Davidoff premium brand, British market leaders Lambert & Butler and Richmond and strong market shares in Germany, Belgium, the Netherlands, Greece, Poland, Hungary, Czech Republic, Russia, Ukraine and Asia. It made $2.454 billion in profit from operations in 2006 and has almost nothing to do with cigars.

Altadis is much smaller, with sales of 4.11 billion Euro ($5.3 billion U.S.) in calendar year 2005 (the last full year for which results are available) with a profit of 1.23 billion euro ($1.59 billion). Cigarettes are the leading seller for Altadis, which owns the famous Gauloises and Gitanes brands, but cigars are a major factor in its success. Cigar sales in 2005 totalled 21.5% of the company’s total at 884.7 million Euro ($1.14 billion) and 20.6% of the company’s profits at 253.7 million Euro ($327.1).

In a combined company, however, cigar sales would be a minuscule 4.2% of revenues. Would Imperial even care? Would it spin the cigar segment off? (my emphasis)

Analysts also noted that Swedish Match, considerably smaller than Altadis, but handsomely profitable, could also be in play. Swedish Match, of course, owns General Cigar and its profile of U.S.-market-leading cigar brands including Macanudo, Partagas, Hoyo de Monterrey, Punch, Cohiba and others. "......end quote

One scenario: Imperial buys Altadas SA & sells the (4.2%) cigar sector to Swedish Match (General Cigars).

How sweet would the be for Swedish Match??????

The icing on the cake???......................Cuban Embargo ends! :-D

[Ginseng]

I posted this in response to a question asked on another forum. I'm sure it's a bit off base on a few points but this is what seems to make sense to me right now.

Great analysis BTW, Trevor2118.

The first thing to realize is that although demand and supply are related, they are not always directly related. And in the case of Cuban cigars and the American market, the situation is even more complicated. I'd venture to say that the level of realized demand will not increase. That is, those who buy Habanos right now and at the levels they choose to, will in all likelihood not suddenly buy double what they're presently buying once the embargo is lifted.

However, it makes sense that there will be a huge surge in 1) curiosity demand, and 2) genuine persistent demand (budding Havanaphiles). But what about supply? Unless Cuba has been ramping up cultivation and stockpiling tobacco, and there are no indications that this is happening, the supply will remain essentially unchanged.

What then remains is how the existing supply will be redistributed. My belief is that cigars to supply the open American market will necessarily be pulled from exisiting markets. How would this happen? Through the mediating mechanism of price. Basically, the exhorbitant prices the newly unleashed American smoker of Habanos are willing to pay will be what will allow us to appropriate inventory that presently goes to Hunters&Frankau, Pacific Cigar Company, Intertabak, Fifth Avenue, Altadis (France and Spain), and the other Habanos regional distributors.

The additional complication is that the existing American underground market for Habanos draws their cigars from the world regions that will be pinched when supply is routed through legitimate channels in the United States! In other words, opening the U.S. market will create supply hardship for the existing Havanaphiles who will now have to start looking at new in-country sources for their addiction. Holy crap. The net effect will depend in part on how Habanos decides to split the supply for the existing (underground) U.S. consumers between their traditional ex-U.S. mail order supplies and the new in-U.S. direct distribution (b&m's and mailorder.)

Now as for blended cigars using Cuban and other tobaccos, it is my belief that when this occurs, it will not be until the U.S. market for the existing Habanos brands is developing. The issue, again, is tobacco supply. Even if Cuba does not turn into a free market overnight, foreign investment from the Padrons and Olivas would certainly provide leverage to swing some leaf for experimentation. But again, these won't see light of day until the additional demand in the the U.S. is at least partially satisfied and overall tobacco production has come back up to levels that provide a bit of relief for the other world regions that gave up inventory to feed the U.S.

I hope that when Cuba makes leaf available for blending that it will exercise extreme judgement and control over who gets to do it. Otherwise, we could have junk coming out with 1% Cuban leaf and potentially doing some serious damage to the prestige of Cuban leaf. One positive thing that would come out of blended products is that would be that bogus cigars like Pinar and A/R Robaina would be put out of our misery.

Wilkey

[Colt45]

Trevor, nice post, and Wilkey, as usual, a well thought out post as well. Some of

this has been discussed here a few times. So purely for the sake of discussion,

I'll add my two bits...

» That is, those who buy Habanos right now and at the levels they

» choose to, will in all ikelihood not suddenly buy double what

» they're presently buying once the embargo is lifted.

I agree 100%

» But what about supply?

It has been discussed that there are unused fields that are ready for planting.

As for distribution / pricing, Habanos has been steadily increasing prices, with

the thought of Havanas as luxury items - maybe weed out the riff-raff?!

(that includes me) - we'll see how that pans out.

And lastly, as to blending, this has come up as well, and the reply was that most

are dead set against selling Cuban tobacco for this purpose.

Interesting indeed - thanks again for the posts.