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Aug./Sept.
2000

Cuba’s Pinar del Río region, where El Corojo plantings have nearly been replaced with the hybrid Habana2000 leaf. Other farming innovations include modern irrigation and accelerated curing barns
Habanos
Gets
Down to Business

The 1990s were by all accounts a difficult decade for nearly every aspect of the Cuban economy, cigars included. But after weathering the disappearance of Soviet funding for its agriculture infrastructure, the Cuban cigar industry is flush with cash from a new alliance with Europe’s Altadis S.A. Changes are underway, and Cuba is again setting its sights on the world market, albeit realistically.

by E. Edward Hoyt III

On the grounds of the La Cabaña fortress overlooking Havana Harbor on a balmy evening in late February, Oscar Basulto, co-president of Habanos S.A., welcomed hundreds of guests to this year’s annual havana cigar festival.

“Mostly, this is a pretext to get together...and smoke our habanos in their native land,” Basulto said at the flamboyant reception. The sentiments seemed true enough amid the generously flowing Cuban rum, cigars, food, and internationally-acclaimed Cuban musicians as the week-long Festival del Habano celebration got underway.

But while some in attendance were merely cigar fans, the overwhelming presence of Habanos S.A. business partners from around the world ensured that the event was as every bit as much an inauguration of the major changes at hand in Cuba’s cigar industry as the casual celebration it appeared. Unveiled at a simultaneous trade fair on Cuban cigars was the industry’s first look at an unprecedented international partnership; evidence of a redoubled commitment to quality control; emerging trends in Cuba’s tobacco production; and major efforts to compete in the global machine-made segment.

Altadis: Foreign Marketing Partner
Oscar Basulto, president of Habanos S.A. (right), at the opening of Cuba’s newest La Casa del Habanos retail store at the Hotel Nacional, Havana.
In February, Habanos S.A. sold a 50% stake to Altadis S.A., the European tobacco company formed last year by the merger of Tabacalera de España and Seita S.A. of France. The deal, valued at US$500 million, is designed to “maximize sales of Havana cigars around the world,” according to Habanos. S.A. vice president of marketing Manuel Garcia. In addition to boosting exports of Cuba’s premium, hand-made cigars, Habanos will establish the nation’s entry into machine-made mini cigars, both through marketing efforts and construction of new factories. The new joint venture will continue to operate under the Habanos S.A. name, led jointly by co-presidents Oscar Basulto, formerly a Vice Minister of Agriculture, and Jaime Garcia Andrade, a Havana-based official of Tabacalera de España.

Reaction to the Altadis-Habanos alliance at the Habanos Festival was largely positive among international retailers of Cuban cigars, who anticipate the financial support will translate into improvements in current shortcomings and a general strengthening of Cuban brands worldwide.

The quality of Cuba’s signature premium cigars has been a concern among retailers and consumers in recent years. Worries have centered on ambitious production goals that were unveiled in the mid 1990s and saw output triple within three years, from 50 million units in 1995 to 160 million in 1998. The number of factories producing cigars has grown from 17 in 1995 to over 50 currently. Only two years ago, Cuban cigar officials anticipated that production would reach 300 million sticks annually by this year.

To the relief of many, production targets have since been scaled back considerably after missing intended goals over the past several years. But the new year has already had a dubious start: a severe production slowdown at Havana’s top factories - the result of tobacco leaf shortages - jeopardizes even the modest production goal of 160 - 170 million cigars that was set for export this year, an 8-10 percent increase over last year.

Cuban officials site an outbreak of blue mold in last year’s harvest for a shortage of wrapper leaf that was due to reach factories by January of this year. At the festival, a number of sources said that tobacco theft has also been a factor, with entire shipments failing to reach intended factories. More recently, Garcia stated that extreme dry weather across the nation has further delayed the transfer of this season’s harvested leaf from curing barns to fermentation.

Redoubled efforts at maintaining high quality standards for exported cigars may also affect total output in the short term, as Habanos S.A. settles in to its joint operation format with Altadis. While Cuban officials stress that premium cigar production will remain firmly under Cuban control and is not an area affected by the Altadis alliance, a number of sources at the festival said that Altadis quality control expertise will indeed emerge at the factory level, albeit in an advisory capacity, assisting Cuban producers in their efforts to maintain consistency. Officially, Cuba’s Union of Tobacco Enterprises, which operates the nation’s premium cigar factories, remains entirely separate from the Altadis-Habanos joint venture.

“We are adapting. We are adjusting our agriculture and our manufacturing process to the demands of the market,” explains Basulto. “We do not want to produce more than what the market demands. We do not want to create large stocks of the product because that affects the quality of the cigars.”

Basulto cites improper handling after exportation from Cuba as the primary cause of quality problems. Large inventories increase the risk of damaging cigars in storage or handling, according to Basulto. “We have discussed that with other distributors, and they have agreed to keep their stocks…manageable,” he says.

Reading the markets correctly is clearly a concern. “Sometimes a distributor tells you, ‘I need more Double Coronas,’ for instance,” suggests Basulto, “because a customer went to three different shops and asked for [the same desired] Double Coronas.” Suspicions that stated demand is artificially inflated echo the rapid frenzy for cigars that plagued the U.S. market during the height of the boom and misled manufacturers into a period of overproduction.

Some variables that are at the mercy of nature, such as blue mold outbreaks, may become far less threatening to production goals as plantings of the Habana2000 leaf increase. The tobacco is a Cuban-developed hybrid which is far more resistant to the devastating disease than traditional varieties, say agricultural experts. Famed Pinar del Río tobacco farmer Don Alejandro Robaina - the namesake of Habanos S.A.’s Vegas Robaina cigar - has nearly replaced all of his traditional Corojo plants with the new plant, a fact that was heavily promoted during the trade fair. Overall, it is estimated that more than half of the current tobacco plantings in Pinar Del Río are of the Habana2000 variety.

Meanwhile, the full effects of other changes in production methods remain to be seen, such as the use of “controlled curing” processes. These new procedures significantly accelerate the curing of wrapper leaf by strictly regulating temperature and humidity in curing barns. Agricultural officials stress the new practice is not “artificial curing,” but a new technology aimed at streamlining the total production process.

“We try to be more efficient in each of the links of production,” Basulto says. A number of improvements are also being implemented on the agricultural side. Tobacco seedling systems are being updated to more modern floating systems. “That’s a new technology. By doing it [that way], you don’t need to use so many chemicals,” Basulto notes.

“We have also implemented the drip irrigation system… something we are trying to introduce fully.” Additional changes include reducing the number of days in plantation growth cycles and implementing more uniform procedures among the thousands of divergent plantations throughout Cuba.

Within a few years, say officials, the benefits of currently implemented, modern quality -control procedures will be seen by customers.

Other experiments are also on tap. Premium cigars utilizing blends of tobaccos from non-traditional growing regions - such as the Vuelta Arriba - are currently under development and testing. Officials explain that cigars bearing the name of their origins - much like wine denominations - could eventually be introduced to the market, adding additional value and prestige to Cuban cigars.

Growth Market: Machine-Made Cigars
When the Altadis-Habanos joint-venture is fully completed this summer, one of the partnership’s missions will be to leverage Cuba into the $10 billion global market for lower-cost, machine-made cigars. The effort will build upon current Cuban activities in the machine-made segment which to date have been limited primarily to European markets.

New production facilities will be based in Cuba rather than abroad, and Habanos will rely on the unique blend and taste of Cuban tobaccos to differentiate its products from the Dutch and European machine-made standards.

“We want to compete worldwide in this area,” explains Basulto, who foresees significant growth potential for Cuba’s cigar industry in the lower-cost, mass-market segment.

This stands in contrast to more tempered expectations for boosting exports of its large, premium cigars. In fact, after a series of new premium brand introductions over the past several years - including Cuaba, Vegas Robaina, and San Cristobal de la Habana - Basulto says no new launches of Cuban hand-made cigars are planned in the near future.

“We are working to develop a non-premium cigar to be able to go into the mechanized non-premium cigar [market],” explains Basulto, “We are trying to bring in ten billion cigars.”

Targeting consumers who “like to smoke cigars, but can’t afford Churchills or other ‘big’ cigars,” Habanos S.A. envisions a broad new market for its machine mades. Last year Cuba exported a total of 148 million large, premium cigars, of which only about 18 million were non-premium, machine-made.

Cuba’s large-scale entry into this segment would build upon the country’s reputation for stronger, full-bodied smokes. While Cuban cigarillos won’t pack the full punch of their traditional hand rolled counterparts, they will be distinctively different than current market standards, according to Basulto.

“Machine-made European cigars are very light,” he says. “We have to go for a kind of cigar which tastes like ours, but which is milder than our Habanos. That is the sector where we are working.”

Timing for the move has been largely determined by commitments to premium cigar production. “We couldn’t start before, because we had to make sure that our premium [cigars were of] good quality…that is our strength,” Basulto says.

For its part, Altadis S.A. brings not only financing to the partnership, but precisely the experience in marketing and distributing lower-priced cigars to mass-market consumers Cuba needs. Habanos S.A.’s existing worldwide distribution channels are geared exclusively to premium cigars, which are marketed through a network of 23 distribution partners and more than 70 La Casa del Habano franchise retail stores.

According to Basulto, future efforts will aim to keep the bulk of machine-made production on the island. This enhances Cuba’s ability to create value-added products for export, rather than serving merely as a supplier of raw materials. Two of the newest projects move in this direction.

Initial efforts in the machine-made segment will focus on the least expensive price segments. “We want to first start working in the very low segments so that we can identify the taste, the smell,” explains Basulto. “Once we identify that, we will continue to grow.”

Moving Ahead
In April, early reports indicated that tobacco harvests in Cuba’s renowned Vuelta Abajo farming region in the western Pinar del Río province were excellent, a bumper crop of perhaps the best quality seen in the past decade. That is good news as Cuba gets down to work and attempts to fulfill its lengthy agenda of improvements.

Another high priority is a crackdown on counterfeit cigars, and Cuban officials are working closely with customs offices worldwide. A changeover to new cigar box warranty seals - created by Cuba’s currency agency and employing state-of-the-art printing technologies - will assist in identifying authentic product. Eventually, even invoices will use the same technology. An ambitious plan to employ embedded electronic chips capable of tracking the progress of cigar boxes throughout each segment of the entire production and distribution chain will eventually allow retailers to electronically verify the origin of authentic cigars.

“We have to work very hard because people will always…try to find a way out, try to circumvent [counterfeit measures]” says Basulto. “They cannot be permanent measures. We have to modify, to upgrade them.”

Rapid evolution could well become a mantra for Habanos in the next several years, as the financial influx from the Altadis investment brings modern technology - and even capitalistic-style marketing expertise - to Cuba’s cigar industry.

At the gala awards dinner and charity auction that marked the close of this year’s Festival del Habanos, attendees sampled rare Cohiba Gran Coronas as a number of honorees associated with the Cuban cigar industry were singled out for recognition. Amid the excitement of soaring bids for donated artwork and cigars, and the presence of Cuban President Fidel Castro, attendees couldn’t help but ponder what changes will await next year’s gathering.


SMOKESHOP - August 2000