PESTEL and Five Forces Analysis of the Cuban Cigar Industry.

by serenavw1990 (student)

University Degree Business and Administrative studies

1. PESTEL Analysis

➢ Political

The political environment in Cuba is not very stable. Before the Revolution, the Cuban cigar industry was not centralized. Every manufacturer was free to produce as much cigars and as different packaging styles as they desired. After Fidel Castro came into power, all private businesses became property of the government and many key players had to flee. Also, US-Cuba relationship deteriorated owing to the nationalization of US owed property, which later culminated to President Kennedy imposing the embargo on Cuba. Hence, the country specific risk is high as US is the largest market for cigars in the world.

➢ Economic

Though 300 million cigars are smoked in Cuba annually, it is the foreign premium cigar exports that play the pivotal role in sustaining the economy. The imposition of US embargo badly upset the Cuban economy and Cuba adopted a command type of economy. The support from Soviet Union helped reduce its impacts to a certain extent but with the dissolution of Soviet Union, Cuba lost a major market along with a major source of foreign assistance. In 2002, Cuba’s population was 11,224,321 with per capita GNP of merely $1700.Cuba faced problems like continuing trade deficit, foreign exchange problems and energy crisis. Despite all this, the Cuban economy is showing signs of improvement, following reform programs from government and the encouragement of foreign economic associations in areas like mining, tourism, tobacco, et cetera. Also, Cuba is getting assistance and investment from other countries like Spain and France that accounted for 42% and 33% of the total market share (2000) respectively. Thus, the economic environment is looking up and seems to be moderately favorable.

➢ Socio-cultural

The history of tobacco and Cuba are interwoven. Tobacco has been cultivated in Cuba indigenously from a long time back. The cigar industry is a part of the Cuban heritage. Families have been involved in cigar production for long. The farms are small and communities work together during harvest. The private farm system there allows family secrets and traditions to be preserved and passed on. The local farmers are responsible for production required to meet the state quotas. Also, foreign ownership of land is not permitted under the socialist regime; so the responsibility for tobacco falls upon the local labor force. Thus, socio-culturally, the Cuban environment is highly favorable.

➢ Technological

The shift in focus towards quality calls for high technology for delivering superior products. Cigars can be handmade, hand-finished and machine made. The machine-made cigar market is US $10 billion the world over. Sometimes combination of machine and handmade is used to distinguish the product or specific brand. Manually, 100 to 150 cigars can be produced in a day but through the use of machines, the amount can go up to 10000 cigars a day, thereby providing economies of scale. Moreover, with increasing pressures to improve yields and prevent diseases like blue mould (since weak economy limits the purchase of sufficient pesticides), new strains of tobacco seeds are being engineered and tested to battle these problems. However, the economic fragility and the lack of good infrastructures impede the use of high technology to a large extent. Thus, the technological environment is not entirely favorable.

➢ Environmental

The Cuban cigar industry is in transition phase. Altadis has brought increased investment, stability and increased production capacity in to the Cuban industry. The initiatives towards maintaining originality as well as quality through new methods, improving relationship with other countries, et cetera indicate a moderately favorable environment.

➢ Legal

Due to the socialist regime prevailing in Cuba, there are a lot of regulatory directives that the firms need to comply with. The Helm-Burton Act limits the trade that subsidiaries of US firms in other countries could conduct with Cuba. It also allows US to impose sanctions on countries trading with Cuba. Also, it bans officials of corporations doing business in Cuba to enter US. So, legal environment is not favorable.

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To evaluate the attractiveness of this industry it is also important to understand the intensity of the Five Porter’s forces:
* Suppliers :
Tobacco farmers, labor, transportation providers, machinery, manufacturing companies and land owners. I would consider them with a medium strength but in addition to that there is a strong control made by the government. Particularly, all the Cuban cigar factories are under the direct control of Cuba’s Union of Tobacco Enterprises, which means that Cuba could not trade with other suppliers rather than its own government, thus giving it a high bargaining power.
* Buyers :
The cigar industry is interested in selling its products to retailers, restaurants, specialized shops and hotels. By the way, the distribution channel is totally controlled by two companies: Atladis S.A. and Swedish Match. Only these exclusive dealers can distribute Havana cigars around the world. Thus the bargaining power of buyers can be considered to be high.
* Rivals :
Non-cuban cigar producers such as General Cigar Cohiba. I would consider this rivalry moderate, and this is a positive aspect if I want to enter in this industry. This is because they don’t have the same competitive advantage of the Cuban cigar industry from the point of view of the brand, knowledge and quality. Cuban cigars still landmark as the benchmark of the superior cigar in the world.
* Substitutes :
Cigarettes. It’s another positive aspect because they represent the interest of another target of consumer, usually people who loves cigars don’t appreciate cigarettes. The quality and more important the reputation of cigars is deeply different from the one of cigarettes and that’s the reason why there are no relevant substitutes to be considered.
* Barriers to entry :
Brand identity, government policy, formula/blend, capital requirements, plants. These barriers are considered high. Particularly if we look at the brand.The cigar industry represents not only a cigar production but also the history of a country and a special status symbol of wealth. In addition, the cigar industry is dependent on the quality of tobacco, which cannot be harvested all over the world. Growing and cultivating cigar tobacco requires the soil and climate to keep the humidity on the right level. Therefore, only few countries has the same climate as Cuba’s one to grow tobacco in the most suitable way. Another important barrier is represented by the economy of scale; speaking about that I should say that new entrants in cigar industry must enter in a large scale because, otherwise, they will have to sustain a disadvantage in the costs and a lower profitability. In conclusion, another barrier consists in the distribution of cigars that is completely controlled by two companies: Atladis S.A. and Swedish match.

Does your decision of not investing in Cuban Cigar industry change under the following two scenario? Why?

The U.S. embargo lifts.

1. Even if U.S lifts the embargo investment in the Cuban cigar industry does not seem to be a good idea.Because:

--> Resources are limited: Cuba followed a command economy which posed restrictions on land ownerships and nearly everything was controlled by the state.So it’d be hard, lengthy and complicated for investors to own and acquire land for growing tobacco.Moreover, even when U.S embargo was loosened a bit and land ownership were allowed to a little extent, there was a condition fro the land owners to grow the tobacco and sell it only to the government.And only the government would then distribute it to cigar making industries.This might limit the profitability of investors.

-->Declining market:

Even though U.S. imports of premium cigars seemed to climb up, the consumption for large cigars declined significantly.Moreover, Cuba’s export kept fluctuating with a decline in the year 2000.Overall, the cigar industry seemed to decline worldwide with more health awareness and campaigns.

-->Saturated Market:

There are already very large,famous and successful industries and joint ventures in the Cuban cigar market.With so big a market competing fiercely and successfully with excellent brand images, a new investment would prove not only hard but costly too and undoubtedly unpredictible.(promotion costs)

-->Product Differentiation:
With many Cuban cigar industries available there are already different brands with different combinations and blends in their cigars.To compete with them bard differentiation seems to be the only way.And its not that easy to come up with a different blend fro the cigars.Even if we do its hard to tell if consumers would be satisfied enough to place it over the other famous brands already available.

2. Industry’s Dominant traits
➢ Market Size: The global cigar market is estimated at roughly 15 billion units. The Cuban Cigar Industry has a very large market size. It caters to the domestic market as well as the international market.
➢ Scope of competitive rivals: Altadis SA and Swedish Match dominate the cigar industry. Apart from these, there is Altadis USA, that controls more than a third of the US cigar market and there are other small companies too. But the stiff competition rages between these major players only.
➢ Growth rate and cycle: The industry is in maturity stage. Cigar Aficionado, a magazine devoted to cigar lovers, was credited for transforming the US cigar market from a small blue-collar segment to an upscale market promoted in places like luxury hotels and golf courses. It presented cigars as symbols of a successful lifestyle. In 1990’s there was tremendous growth which resulted in increase of farmers from 25000 to 37000 and factories from 17 to 33. After the mid 90s, the demands have tapered off. The markets have registered slower volume growth and higher value growth.
➢ Number of rivals and their sizes: The post-revolution exodus of key players opened the doors for many competitors, especially US companies. Over one hundred major export brands were discontinued. However, new reforms provided relief to many small producers and there are many small firms working in the Cuban Cigar Industry. The two major companies, Altadis SA and Swedish Match, separately dominate the Cuban export market and these are the two largest cigar producers in the world.
➢ Number of buyers: The industry has both the domestic as well as foreign buyers. Despite 300 millions cigars being smoked in Cuba annually, the emphasis is on premium export quality cigars as they provide major support to the Cuban economy and the Cuban cigar exports has gradually increased with each year.
➢ Ease of entry and exit: The entry and exit from the Cuban cigar industry does not seem much easy. The production in the premium cigar factories is under the direct control of Cuba’s Union of Tobacco Enterprises. The foreign ownership of land is prohibited. The foreign firms can enter through joint ventures and there are other many regulations under Helm-Burton Act that companies need to comply with, that directly/indirectly make the entry and exit hassle-prone.
➢ Technological changes: The Cuban cigar industry has slowly started incorporating technology in producing cigars. They are investigating new agricultural methods and technologies to improve yields and quality simultaneously. firstly it used to produce handmade cigars but now they use automated machines to produce it. With
➢ Degree of learning and experience curve: The incumbents of the Cuban cigar industry have a high degree of learning and the experience curve is shifting outward as they have been in the business for a long time.
➢ Low cost efficiency and product differentiation: There is high degree of product differentiation as each brand has different blend in the filter, different type of binder and wrapper to finish the product. Also, the companies that have been operating for a long time have been able to achieve economies of scale through improved methods to increase yields and high degree of learning.