The Cuban

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The
 Cuban
 Cigar
 Industry
 
 

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 Davidson
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  J u n e
  8 t h
  2 0 1 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  B U 4 8 1 -­
  S
 

To: Mr. John Hernandez,
  Re: Strategic Analysis of the Cuban Cigar Industry With the potential for significant political reform and absolution of the U.S trade embargo, it is critical to determine the probability and effects of these changes on the Cuban cigar industry. After reviewing these scenarios and two possible entrance strategies; creation of a joint venture and investment in an existing firm; it was determined that entering the Cuban cigar industry is not favorable at this time. After analyzing industry forces it is clear that entrance into Cuba is unlikely (see Appendix A). The industry exhibits high barriers to entry due to government restrictions. Foreign land ownership is not permitted, which makes entrance into the industry as a supplier impossible. Moreover, even if ownership laws are relaxed, government control over production is driving low supplier power, making it an unenviable position within the value chain. The other sections of the value chain, export distribution and marketing, are again controlled by the state through Habanos S.A. Habanos has already agreed to a joint venture with Altadis, an established cigar company with large amounts of capital. This makes entrance into the Cuban industry not only unlikely but also unattractive, as a $1,000,000 investment is likely to drive little value. The second entrance strategy considered was investment in either Swedish Match or Altadis. Given the decline of the cigar industry as a whole, the future growth opportunity for either company was deemed a crucial criterion for investment. Swedish Match is unattractive, as their premium cigars are already sold in all international markets, limiting growth. Thus, future success is dependent on stealing market share from Altadis which, given its size and power, seems unlikely. Altadis, on the other hand, has better growth prospects given its ties to Habanos and Cuba. These growth prospects are dependent on three major factors, which are key to success and driving value. (see Appendix B):

 

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1) Significant increases in Cuban yields and productivity 2) The preservation of Cuba’s superior brand image in the eyes of consumers 3) The U.S trade embargo being dropped Improvements in yields and productivity are dependent on increased foreign investment and improved economic conditions (see Appendix C). The improvement of economic conditions seems unlikely, as Government reforms focused on the separation of large plantations will only hinder yield improvements. Investment is limited in this area, and a lack of consolidation inhibits the ability to achieve the economies of scale necessary to match yields of competitors. Continued bouts of blue mold will also affect the supply of tobacco required for production. The first two factors are obviously connected given the challenge of balancing quality and increased production (see Appendix D). Cuba’s brand image has already been tarnished once due to their inability to control quality....
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