Introduction
The story of the Cuban cigar industry may be traced back to the 18th century with the discovery of the plant by Christopher Columbus, the Spanish and British control over the crop, and the post-revolution socialist regime in Cuba. The industry has faced imposition and elevation of trade restrictions on tobacco since the 18th century. Politics, history, and the tobacco industry in Cuba have intermingled to form a unique blend.
Political control over the industry and trade restrictions over the Cuban cigar industry has created devastating effect to popular cigar brands. Currently, the monopolistic power Cuba had on the global cigar market has dissipated to a great extent and the industry also faces numerous uncertainties due to political control, trade blocks, and increasing competition. This analysis of the industry tries to ascertain the industry attractiveness and the possible avenues for investing in the industry.
Main body
A brief background evaluation of the industry is required before the Cuban cigar industry‘s competitive analysis is done. Cuban cigars had enjoyed an undisputed monopoly in the international cigar market, which changed with the trade embargo of the post-revolution era in the 1960s. Since then, Cuban cigars have been conspicuously absent from the shelves of retailers in the United States.
This led the Cuban economy to a major crisis economically for the US was a major trade partner and investor in the country’s two major industries: cigar and sugar. They not only brought financial capital but also knowledge, skill, expertise to make high-quality cigars. The economy still did not face the full blow of the trade barrier due to increased subsidized trade with the erstwhile USSR and East European countries.
Worldwide cigar production and consumption declined from a relative peak in the mid-1960s until the early 1990s. At that time, consumers rediscovered large, premium cigars. The demand for these high-priced products began to increase and has yet to reach a peak, according to some industry analysts. The Cuban hand-made cigar industry has responded to this burgeoning demand by training new rollers and expanding its production for export. Cuba’s position in the international cigar market is complicated by the fact that U. S. citizens may not normally buy or possess cigars produced in Cuba.
In such a critical political situation, it is very important to do an analysis of the cigar industry in Cuba in order to ascertain where would be the best place to enter the industry and what would be the pros and cons of doing so. In order to do industry analysis, we use Michael Porter’s five forces model (Porter, 2008) to do a competitive analysis of the industry. Porter stated, “Understanding the competitive forces, and their underlying causes, reveals the roots of an industry’s current profitability while providing a framework for anticipating and influncing competition (and profitability) over time.” (Porter, p. 3)
The forces that shape the competitive framework of industry are determined by the challenges faced by potential entrants to an industry, the power of the suppliers in the industry, the power that the buyers have, the substitute products that are existent in the industry that provide a source of competition, and the rivalry and nature of competition among existing competitors. We will discuss each of the above-mentioned competitive forces in relation to the Cuban cigar industry (Porter, 2008).
Entry Barriers
The entry barrier in the industry in its current state of government control is very high. The production of the premium cigar is under the control of Cuba’s Union of Tobacco Enterprises (UTE), but the export and marketing of the product are managed by the Altadis-Habanos joint venture. Since they are the sole marketers and exporters of Cuban cigars presently, they enjoy immense power in terms of scale. Habanos has appointed distributors to exclusively distribute Havana cigars worldwide. Clearly, due to government control and exclusivity of distribution channels, the entry barriers in the industry are high.
Power of Suppliers
The substitutes of Cuban cigars were born out of the embargo. The US investors who enjoyed the supply of rich Cuban tobacco shifted grounds in the post-revolution era. In the pre-revolution era, 70 percent of the land was controlled by less than 10 percent of the landowners out of which 25 percent was under US control. The suppliers then had good power due to an oligopsonistic market structure.
With the revolution, the industry was completely nationalized, though currently the lands were taken under government control and the US investment dried up. With the present socialist regime, the land is held by small farmers who have to produce tobacco pertaining to the state quota (Kapoor & Beamish, 2003). So the prime suppliers to the industry have been again defragmented into small landowners who produce tobacco. Hence, the power of suppliers in the industry is not strong.
Power of Buyers
The buyers of Cuban cigars are the distributors who distribute the cigars to the retailers in the international market. The power of buyers is low as they have little or no control over getting access to the cigars. Further, with the centrally controlled industry structure and only one company responsible for branding and marketing of the product, the buyers’ power is considerably lowered. Moreover, the increase in demand for cigars over the past decade has shown that there is excess demand for the product when supply is limited. So buyers are willing to pay a premium price for the product. This shows that buyers have a low power over the market.
But if we consider countries like the US or the erstwhile USSR as a buyer then the power of buyers has a strong influence on the cigar industry in Cuba. This has been clearly shown in the 1960s trade embargo. Trade barriers had stopped cigar export to the US from Cuba. So Cuban cigars had to be either smuggled or sent to other ports to enter the US ports which increased their cost of transport considerably.
Rivalry among Competitors
The competition in the cigar industry is dominated by two cigar companies: General cigar Co. and El Credito Cigars Inc. In Cuba, there is only one marketing and distributing company for cigars which formed out of merging of Tabacalera, Sieta, and Habanos called Altadis. The competition in the market is immense due to the popularity of the Cuban cigars for their premium quality and the availability of the other variants at a cheaper price.
Further, during the 1990s Habanos set its target production consistently at 200 million cigars annually (Kapoor & Beamish, 2003). This was to meet with the boom in the global cigar market. But competition in the market is still strong due to the restrictions of distribution of cigars in the US market and the fall of the Eastern European market which was a major market for Cuban cigars in the post-revolution era.
Threat of Substitutes
The monopoly that the cigar industry of Cuba enjoyed before the embargo was no more with the US investors moving out of the country, the majority of the production going under government control. With the revolution in the 1960s, the pockets of tobacco production spread to different countries. Presently there are other countries that produce tobacco and have entered the cigar industry.
The countries are the Dominican Republic, the USA, Honduras/Nicaragua, Indonesia, Ecuador, Mexico, and Cameroon (Kapoor & Beamish, 2003). With the embargo on the trade of Cuban cigars, cigar lovers have learned to settle for less exotic but a close substitute of Cuban products (Kapoor & Beamish, 2003). Hence, the threat of substitutes for Cuban cigars has become a strong force for the Cuban industry.
The analysis of the five forces model shows that the entry barrier in the Cuban cigar industry is high even though the projected and the realized sale and profit in the industry is high. There the main area of production in Cuba is Vuelta Abuja where all the production requirements are available. The barriers arising in the way of investment in the cigar industry are trade barriers in export to the US which is the largest market for cigars and government control over the production process in Cuba.
Conclusion
If the trade embargo is lifted, the US market will open up for Cuban cigars which can be sold at a cheaper price than what is done now. This is so because presently the price incorporates the cost of transporting the cigar to another port from where the cigar can gain entry into the US market, which increases the cost. But with the lift in the ban, the logistical cost of cigar export to the US will fall, considerable and Cuban cigars will be in a position to counter its substitutes produced in countries like the Dominic Republic or the US.
Further, if foreign investors are allowed to invest in the Cuban land, then there will be increased competition as well as the investors will be able to gain control of the quality and the quantity of tobacco to be produced which will give them better power over controlling the market and meet the demand.
Works Cited
Kapoor, A., & Beamish, P. W. (2003). A Note on teh Cuban Cigar Industry (Case Study). Harvard Business Review , 1-23.
Porter, M. E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review , 1-19.