The Motley Fool/
By Nick Slepko
Cuba's iconic tobacco and alcohol products are the benchmark vices
for many – including Americans which are still the largest consumers of
the island’s sin exports.
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| eat-and-be-merry.blogspot.com |
After acquiring Spain’s
Altadis in 2008 with its 50% interest in Cuba’s state cigar monopoly
Habanos, Britain’s
Imperial Tobacco (NASDAQOTH: ITYBY.PK)
became the leading distributor for the island’s premium tobacco
products. Although in 2010, Habanos lost its legal battle in American
courts against the Miami-based
Guantanamera Cigars Company for
the rights to the Guantanamera brand in the US. Today, Habanos still
sells its “affordable” Guantanamera in other jurisdictions, but GCC’s
premium version is an increasingly preferred choice in the markets where
they compete directly. (Although, Florida's most powerful
Cuban-American, Senator Marco Rubio, still tends to
wax nostalgic over Nicaragua-sourced Padrons manufactured by Tampa-based
Piloto Cigars. Evidently Central American communists are preferable to Caribbean ones.)
However, both Habanos and Guantanamera, along with others, are
finding their bottom lines hit hard by counterfeiters. While not at all
what Che Guevara would have envisioned (mostly for his lack of
imagination), Habanos has introduced
online authentication for its products as a major step in brand protection. Interestingly, it is similar to many new systems being tested to
verify pharmaceuticals
by end consumers around the world (in part to avoid counterfeit drugs
that are originating from places like Cuba). Whether or not Cuba’s most
famous product has been able to maintain its craftsmanship, there is no
disputing it has retained its mystique.
James Suckling, former European editor of
Cigar Aficionado and producer of the documentary
Cigars: The Heart and Soul of Cuba,
estimates that Americans are still the cigars’ largest consumers
(accounting for a quarter of end-users often “through Switzerland and
other channels”) despite the legal restrictions on US citizens acquiring
or consuming Cuban products even when abroad. Suckling
estimates that:
…global sales of Cuban cigars were up nine percent to about $401
million, with particular growth in Asia Pacific, Middle East, Russia,
and Latin America. Habanos would not reveal how many cigars were sold,
but estimates are between 80 million and 90 million cigars in 2011. I
would suggest that Americans, in reality, accounted for $150 million to
$200 million of the Cuban cigar sales in 2011.
The current state of Cuban rum offers even more of an insight into
Ghosts of Lawyers Yet to Come for the long-assumed US-Cuba
rapprochement. As with physical property, Cuban intellectual property
is a hotly disputed topic, not least of all because so many parties
impacted are still alive (and have documentation – and an unrequited
passion for vengeance/justice).
Earlier this year, the US Supreme Court declined to intervene over
state-owned CubaExport’s petition to renew its US trademark on the
Havana Club rum brand name which seems to have put an end to a
decade-old dispute. France’s
Pernod Ricard (NASDAQOTH: PDRDF.PK), the world’s major rum distributor, sued Bermuda-based private distiller
Bacardi
in 1998 when it began selling rum under the name Havana Club. Using
political connections and special legislation pertaining to expropriated
Cuban properties, Bacardi successfully weathered the legal assault and
retained its trademark to the prestigious name in the United States –
which accounts for 40% of the world rum market. Now that Pernod appears
to have exhausted its legal options, it has announced intentions to
retail the alcohol under the name Havanista in American outlets when the
embargo is lifted.
If history is any guide, then the Pernod-Bacardi divide may spend the
decade after the Castros’ passings developing along the lines of the
Mercks. America’s
Merck & Co., Inc. (NYSE: MRK) was created from the confiscated assets of Germany’s
Merck KGaA
(FWB:MRK) during World War I. Both companies still operate
independently (though US Merck is four times larger now by revenues, and
German Merck operates in North America under the name EMD).
Still, more interesting for American investors in the short-term may
not be Cuban exports, but rather which US companies have been able to
squeeze out what little hard currency the country is able to generate
each year. Nowadays, it is less likely that the Cuban diplomatic
missions are printing their own US dollars (North Koreans have aced them
out of that market), and it is more likely that Cuban enterprise is the
victim of counterfeit pesos and lost market share to counterfeit cigars
– over a million dollars in fakes are
seized
every year in the US (and considering what a low-priority the industry
is for American law enforcement compared to illegal downloading witch
hunts, pharma and narcotic smuggling, and general terrorist plots, it is
likely this figure is an infinitesimal fraction of the real problem).
In 2011, at least 83 US for-profits (companies and individuals)
received (or renewed) licenses to engage in Cuban activities.
Minneapolis-based travel consultancy
Navitaire – a subsidiary of Dublin-headquartered
Accenture (NYSE: ACN)
– had its four-year license extended another four, however it seems to
be a rare exception. Of the few licenses that indicate expiration
dates, none are valid for more than two years – and it appears
Bank of America (NYSE: BAC) has been renewing its arrangements since 1964 (possibly OFAC’s longest-running license holder for trade with Cuba.)
Also, considering official statistics from all sides which reflect
declining trade between the US and Cuba, there are probably less than
200 for-profit US entities licensed to do business with Cuba. Of those
that can be identified from the 2011 cohort (which is less than half),
their activities range from horse breeding and funeral services to
tourism- and medical-related enterprises. While less than a quarter of
the for-profits are likely to be publicly-traded American companies,
only 34 are clearly connected to any of the recent licenses:
American Express
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NYSE
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AXP
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Archer Daniels Midland
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NYSE
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ADM
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AT&T
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NYSE
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T
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Bank of America
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NYSE
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BAC
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Bank of New York
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NYSE
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BK
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Baxter Healthcare
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NYSE
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BAX
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Becton Dickinson
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NYSE
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BDX
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Bemis Company
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NYSE
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BMS
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Boeing
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NYSE
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BA
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Cisco
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NASDAQ
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CSCO
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Citigroup
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NYSE
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C
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Coca-Cola
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NYSE
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KO
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Diageo North America
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NYSE
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DEO
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Dresser-Rand
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NYSE
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DRC
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FMC Corporation
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NYSE
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FMC
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Gen Re (Berkshire Hathaway)
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NYSE
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BRK-A, BRK-B
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General Cigar (Swedish Match)
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NASDAQOTH
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SWMAF.PK
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Google
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NASDAQ
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GOOG
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JPMorgan Chase
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NYSE
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JPM
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M&T Bank
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NYSE
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MTB
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Marriott
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NYSE
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MAR
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Mercer (Marsh & McLennan)
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NYSE
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MMC
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MoneyGram
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NYSE
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MGI
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Navitaire (Accenture)
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NYSE
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CAN
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Northern Trust
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NASDAQ
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NTRS
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Pfizer
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NYSE
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PFE
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Princess Cruises (Carnival)
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NYSE
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CCL
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Rockwell Collins
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NYSE
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COL
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Thermo King (Ingersoll-Rand)
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NYSE
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IR
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Utah Medical Products
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NASDAQ
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UTMD
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Walmart
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NYSE
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WMT
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Wells Fargo
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NYSE
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WFC
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World Fuel Services
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NYSE
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INT
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Xerox
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NYSE
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XRX
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Still, with many of these corporations on the Fortune 500, even a
functional Cuban economy is unlikely to make a huge impact on their
tickers. However, they may be good indicators of areas where other
American companies with their geography and efficiencies have yet to
penetrate due to sanctions and reservations. In the decade following
the end of the Castros, it is likely that only a handful of Latin
American countries will field companies that can compete for the
long-haul with the US when the embargo is lifted. Meanwhile, the less
advantaged Canadian and European enterprises are likely to be margined
out when the Miami-Havana link becomes a bridge of cargo ships spanning
the Florida Strait. (Although, in a number of cases, it will just be a
matter of changing the flag and restructuring subsidiaries that are
truly
US in all but name at the moment.)
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