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Winter, 2008

Habanos: An Empire That Endures
By Johnathan Bell
Despite the embargo from that market giant only a short boat ride to the north, Cuba’s Habanos empire continues to thrive in the markets of Europe and the Near East

The world changes around us. Fashions come and go in the shifting sands of human desires and tastes. But some products endure these changes through time, although they are few. One such product is the Cuban cigar.

Cuba can claim a special role in the birth of tobacco usage in the Western World. Its tobacco leaf was prized from the earliest times of Spanish occupation of the island, and has held sway as THE tobacco in Spain for four centuries. Despite a ban on Cuban leaf or cigars being exported anywhere except to Spain, as early as the 1760s Cuban cigars were a fashion in London society.

The making of cigars became centered in factories in and around Havana in the late 18th century. When the Spanish Crown lifted the restrictions on cigar and leaf exports in 1817, the first boom in Havana hand made cigars began.

With major commercial production capacity established in Havana, and exports at last granted to other nations than Spain, the “Cuban” cigar rapidly became the elite cigar of European society and the ideal smoke against which others were judged. This place of honor remained despite changes in smoking habits. Neither the advent of cigarettes nor even the Great Depression of the last century dimmed what had become a prize to connoisseurs.

With the US embargo on Cuba, including cigars, many might have supposed that the loss of its largest export market would be a blow to Havana’s production industries. Not so.

The sudden slack in market demand was soon replaced by that of European markets. Spain is and has been for many years the largest consumer of Havana cigars, with strong demand as well in the UK, France, Germany, Switzerland, and the Benelux nations.

Today, the European Union consumes almost 70% of Cuban cigar exports, with the remainder going to non - EU nations around the globe, especially to other nations in the Western Hemisphere and the Near East.

Some figure that despite the embargo in the US, smuggled Cuban cigars still remain a significant factor in consumption of premium cigars in the US itself. Despite all, it would seem, the aura of a “Havana” has lived on and between 4–5 mn of the cigars are still being smoked by Americans.

This is not to say that the Cuban cigar industry has not had its hard times. Being an island in “hurricane alley” means that the precious five leaf production zones in western areas of Cuba - and especially that of the wrapper deemed by many to be the best grown anyway - can be periodically visited with destruction. Also, as anywhere where tobacco is grown, attacks of leaf disease can reduce yields.

Therefore, even though leaf supplies are kept in stock to help cover short falls in tobacco crops the tricks of weather and nature are an uncontrollable factor affecting Cuban cigar production outputs.

Another recent factor has been the Cuban government’s struggle to fund the needs of the some 40 cigar factories on the island, plus those of the thousands of tobacco farmers themselves. Although cigars rank among the top four items in value of Cuban export items, the US embargo has impacted on the governments’ capabilities to support tobacco.

This became yet another variable in the consistent production of Havana cigars from year to year. The situation, however, improved significantly after 1994 when Tabacalera, then the Spanish tobacco monopoly, entered into an aid agreement - this later becoming a partnership between Habanos S.A. and Tabacalera. This again shifted when Tabacalera transformed into Altadis - a Spanish - French tobacco product and distribution company.

The teaming of the Cuban cigar industry with European investment has brought renewed stability to Cuban cigar production, which continues to this day. As a result, growth has been achieved in over - all production and exports too. A major rebuilding effort led in recent years to considerable achievements, and the 2006 export offering in fact is hailed by many as perhaps the best in quality in memory.

Most recently, the European interests in Cuban tobacco has again changed with the acquisition of Altadis by Britain’s Imperial Tobacco. Although some doubt lingered until end of 2007, after the initial buyout, over Habanos accepting Imperial as a partner - the company held right of approval for its participation in any purchase of Altadis - as of last December Altadis share holders had agreed to the union and the EU approved it.

For now this seems to seal the bargain. Assuming it does lead to a friendly partnership, the union is very good news for Havana cigar smokers as it should mean a continued, perhaps even stronger, commitment to supporting, improving and expanding Cuban cigar production.

It would appear, albeit from ever uncertain statistics, that the Cuban industry can now produce about 170 mn cigars per year. Although local consumption plus the rapid growth in the Cuban tourist trade are increasing domestic disappearance - the majority of these cigars, perhaps now up to 150 mn, are exported.

Yet demand for these cigars, as reflected in rising prices for them, has far from peaked. Demand remains stronger than production, a truth that is obviously of special interest to Imperial and explains the shuttle diplomacy between England and Cuba after the buyout of Altadis to secure the participation of Habanos. For this reason there continues a vibrant trade in “fake” Cubans. This is a matter of importance to importers, retailers and customers.

At this time, Habanos S.A. is proposing 27 brands - of which it defines seven as “global,” three as “niche” or specialty cigars, five as “multi - local” (available in most markets), and 12 as “local” (limited to a few countries).

Last year, Habanos sales by brand were composed as follows: Montecristo (23%), Romeo y Julieta (15%), Partagas (12%), Jose L. Piedra (12%), Cohiba (11%), Quintero (5%) and Hoyo de Monterrey (5%). This means seven brands of the total on offer gave the company more than 80% of its sales.

Cohiba is the most profitable of the cigars made, holding 20% of the company’s revenues. The Montecristo family in sum holds 29% of sales value, meaning that together the two labels contribute almost 50% to the company’s sales. Value of exports is about 350 mn dollars yearly.

For the future, if the union with Imperial is fully achieved, good possibilities exist to further expand leaf production and cigar making. The goal, and the difficulty, is to do so while maintaining quality, the prize that has given Cuban cigars their fame and fortune.

Tobacco Products International - Winter, 2008
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