Cuban Cigar Industry: SWOT and Porter's Five Forces Analysis

Introduction: Communism and the Cuban Cigar Industry

The Cuban cigar industry is a microcosm of how industries become weakened when communist regimes cripple free enterprise with the intention of keeping specific industries nationalistic and free of outside investment and control. The revolution that led to a communist takeover of the economy also led to the disbanding of entire companies and brands. The dissolution of those brands hurled the industry into disarray and opened up significant opportunities for global competitors, including Swedish Match AB, French-based SEITA S.A. — which merged with Tabacalera S.A. to form Altadis S.A. — and Habanos S.A., which entered the Cuban market via a joint venture with Altadis S.A. Joint ventures of this kind represent a common market entry strategy for cigar and tobacco distributors from Asia, Europe, and the United States. Cuba's Union of Tobacco Enterprises wielded considerable political power over which distributors could gain access to the country's state-run cigar factories.

The crippling effects of the communist regime on free trade quickly began to drive down economic growth, leading to severe austerity programs and rationing. Beginning with the U.S.-led blockade of Cuba and the curtailing of all sugar purchases, Cuba's GNP and GDP plummeted. Russia began subsidizing entire Cuban industries — starting with sugar — yet this failed to avert financial hardship or the need for continued rationing for all citizens. At one point, Russia was responsible for subsidizing 25% of Cuba's total economy. During the early 1990s, the Eastern Bloc collapsed, as did Russia's ability to provide foreign assistance to Cuba; rationing increased and a national program titled "Special Period for Peacetime" was instituted. It was during this period that the effects of the U.S. embargo grew more acute and noticeable across all industries, including tobacco.

The Helms-Burton Act, passed in 1996, further fueled greater restrictions on U.S.-based corporations looking to trade with Cuba. The net effect of all these pressures was a per capita GNP of just $1,700 in 2002. Many Cuban citizens and Cuban-Americans have called for the renunciation of the embargo. In the tobacco industry, the possibility of the embargo being lifted presents both a major opportunity for companies positioned to take advantage of Cuban tobacco sourcing and a significant competitive threat for those — such as Swedish Match — that do not have substantial joint ventures in place. Amid a troubled economy, the loss of Russian funding, and a sub-standard GNP, Cuba has looked to revitalize its tobacco and cigar industry through selective joint ventures with distribution companies, while seeking to keep American culture, investment, and influence from reshaping the island nation.

SWOT Analysis

Cuba benefits from abundant soil and climate conditions ideal for growing the premium tobacco used in cigar production. The country has developed expertise across all forms of production, from entirely manual methods through hybrid (manual and machine-based) processes to fully mechanized production. The Cuban government has extensive experience and developed expertise working with tobacco distributors, and wields significant power through its Union of Tobacco Enterprises. This expertise extends to the production process itself, including the curing and storage of cigars for optimal flavor. Despite the communist regime's approach to disbanding brands, Cuban cigars still carry a highly respected reputation as among the finest in the world.

The dissolution of established brands nearly permanently crippled one of Cuba's most promising industries. A lack of agricultural stewardship may negatively impact yields in the future. The U.S. embargo redirects more than 70% of global cigar demand through non-Cuban distributors, enriching other nations and companies rather than Cuba itself. A lack of foresight on the part of communist party leaders and market planners nearly ruined the structure of the tobacco and cigar industry in the early 1990s. Poor supply chain management and planning by Cuban communist party officials — who appear, from the available evidence, to be ill-equipped for market planning and resource allocation — further compounded these problems. Continued state ownership of the tobacco and cigar industry is in effect costing the Cuban economy billions of dollars annually, and the ideological conversion of all industries to communism nearly destroyed the most powerful premium cigar brand in the world.

Cuba has the opportunity to allow a higher level of Foreign Direct Investment (FDI) from all countries, including the United States. With respect to the U.S. specifically, there is a pressing need to work through the issues surrounding the embargo and pursue its removal, as Cuba ultimately needs to embrace free trade to survive. Additional opportunities include creating more distribution and joint venture agreements with tobacco growers, establishing investment funds aimed at enabling higher levels of productivity in the industry, allowing greater use of branding to leverage Cuba's reputation for premium cigars as a lasting competitive advantage, and permitting greater privatization of sales from growers to global distributors — effectively reducing government interference in order to attract more capital investment.

Low per-capita incomes often lead to political turmoil and even revolution, as has been the case in Haiti. Cuba's communist leaders need to recognize that their most critical export sector — tobacco and cigars — must be more freely traded globally in order to stimulate the broader economy. Additional threats include American tobacco growers increasing quality (they already lead in yield per acre) and developing premium brands capable of displacing Cuban products. Island nations with comparable climates conducive to tobacco growing, such as Jamaica, could also overtake Cuba's premium branding position, causing Cuba to lose a key competitive advantage. Finally, an epidemic of blue mold or insect infestation could significantly impact the profitability of any given year's crop.