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BrasCuba steps up local cigarette sales as venture's Latin export market shrinks
CubaNews / December 2002

By Larry Luxner

HAVANA — Felicio Ferraz doesn’t smoke. Neither does Orlando Flores Vega. But both men’s jobs depend on getting Cubans who do smoke to buy their cigarettes with dollars, not pesos.

“This market is very price-sensitive,” says Ferraz, a native of Brazil. “When the economy improves, we sell more. When things get worse, Cubans run to the peso market.”

Ferraz, 32, is marketing director of BrasCuba Cigarrillos S.A., a joint venture between state entity Tabacuba and Rio de Janeiro-based Souza Cruz S.A. He and Flores, the venture’s local merchandising manager, have helped BrasCuba grab a whopping 95% share of the island’s hard-currency cigarette market, estimated at 1.4 billion sticks, or individual cigarettes.

Cuba’s total market — which includes peso and dollar sales — stands at 11 billion sticks, of which BrasCuba currently has a 12% share.

“This year, we’re producing 1.3 billion sticks for the domestic market, and 100 million for the export market,” said Ferraz, who’s been with Souza Cruz for the past eight years, and has lived in Cuba for the last two. That compares to 2000 production of 1.025 billion cigarettes for the domestic market and 681 million for export.

“Our market here is Cubans,” he said. “We try to sell to foreigners also, but we can’t imagine that a tourist will change brands in one week.”

The venture’s success depends in large part on the manufacturing and marketing expertise of Souza Cruz, a $1 billion giant which controls 80% of Brazil’s enormous cigarette market and is 75% owned by British American Tobacco (BAT).

Flavio de Andrade, president and CEO of Souza Cruz, says BrasCuba represents his company’s first and only foreign investment to date.

“Cuba is the most important market in the Caribbean region, and it was the only country where BAT did not have a presence,” said Andrade, interviewed in Rio de Janeiro.

“So BAT asked Souza Cruz if we were inclined to participate in the Cuban market. We said yes. It took two years from the time we started talks with the Cuban authorities, until the time we closed the deal. Since the beginning, this operation has been profitable.”

BrasCuba’s cigarettes are produced at the old Henry Clark factory in Havana’s industrial Luyanó district, which before the revolution produced Lucky Strike. In 1960, the plant was nationalized, its British owners were compensated, and the factory was renamed for René Arcay, a Marxist revolutionary.

Since its inauguration in 1996, Souza Cruz has poured $20 million into its Cuban venture.

Says Andrade: “We manage this company like we manage Souza Cruz itself. BrasCuba is by far more efficient than the Cuban government-owned cigarette companies.”

The proof: go shopping for cigarettes in Cuba’s peso market, and you’ll end up spending only seven pesos (about 27 cents) for a pack of low-quality, unfiltered cigarettes. By contrast, BrasCuba’s brands, sold at hard-currency shops throughout Cuba, are filtered, quality-tested and packaged in cellophane. These brands range from Popular —the best-selling brand — at 50 cents, to Monterrey at 60 cents, all the way up to Hollywood and Romeo y Julieta, each at $1 per pack, and Lucky Strike, which costs $1.60 a pack.

Romeo y Julieta, a premium dark tobacco cigarette, is made from 100% tobacco from the Vuelta Abajo region Cuba’s western province of Pinar del Río, which has been growing such leaves for three centuries. Hollywood appears in two versions — full flavor and menthol — and is made from a combination of Virginia, Burley and Oriental tobacco leaves.

BrasCuba’s six production lines can work three shifts a day and produce four different brands simultaneously. The venture has 3,600 points of sale across Cuba, using a computerized control system that allows stock rotation, ensuring freshness and optimum condition.

Even though BrasCuba’s brands are beyond the budgets of most Cuban smokers, they’re still far cheaper than imported brands, which claim 5% of the hard-currency market. These include Salem, which sells in Cuba for $2.10; More ($2.20); Merit Lights ($2.85) and Benson & Hedges ($3.75).

The cigarettes BrasCuba makes are sold to the government, which then sells it to the public at a 210% markup. So, as Ferraz explained, “I sell a pack of Popular for 22 cents to Cupet or Oro Negro. They multiply by 2.1 and sell it for 50 cents. But the advantage we have regarding imports is taxation,” since the tax on imported cigarettes is 250%.

Last year, BrasCuba’s revenues came to $19 million, though this year, sales will drop slightly — to around $18 million — because the company’s export market has diminished. That’s mainly due to economic difficulties and smuggling of Souza Cruz brands in Latin America, which was BrasCuba’s top market when it began exporting a few years ago.

“Our exports used to be 50% of our production volume,” said Ferraz. “This year, exports of blended cigarettes came to almost zero.”

On the other hand, the internal Cuban hard-currency cigarette market is much stronger than it used to be.

“Five years ago, blended Virginia-type cigarettes represented only 3% of Cuba’s domestic hard-currency market. Now they’re 20%,” says the tobacco executive. “Why? Because Hollywood is increasing its participation in the market. Even though our total volume is the same, we’re getting better prices.”

Because of that, BrasCuba will probably finish 2002 with profits of $7.6 million, up from $7.3 million in 2001 and $7.0 million in 2000.

By the end of December, Ferraz expects to launch a new venture. BrasCuba will begin producing — under license from Habanos S.A. — Cohiba cigarettes for the domestic market. The 20-unit boxes will sport the exact same yellow-and-black design that Cohiba cigars have, and they’ll retail for between $1.25 and $1.50 a pack.

The Cohiba-brand cigarettes will be exported to Mexico immediately, with shipments to Brazil and Russia beginning in mid-2003.

“We’re trying to take advantage of the image that Cuban cigars have. That will help a lot,” said Ferraz, noting that “our contract with Habanos allows us to produce Cohibas for Latin America and Russia. CITA [a separate venture between Habanos and a company in the Canary Islands] produces Cohiba cigarettes for the European market.”

The company employs 243 people, of which 150 work in cigarette production. According to government statistics, 40% of the factory’s staff are university graduates, and 58% have a high-school or technical-level education.

Yet Ferraz says things could be better.

“We would like to get our people more motivated, but it’s difficult,” said Ferraz. “This is the biggest issue, how to motivate people. I would like to have more flexibility on this.”

That’s unlikely, given that foreign companies in Cuba are generally prohibited from paying commissions or bonuses based on individual performance.

Under Cuban law, however, “our employees can receive 10% of their salary in pesos convertibles if the company meets its monthly targets,” said Ferraz. “Almost all of the mixed joint ventures in Cuba have this possibility.”

That means that in any given month in which the plant meets its production quota, a worker earning 245 pesos would be able to take home the equivalent of $24.50 — an amount worth 637 pesos at current ex-change rates, or 2.6 times his regular salary.

“We have the freedom to hire or fire [any employee],” he said. “The problem is you need to create a history so that you can fire him without facing any problems, as long as we can prove that he’s not being productive.”

Ferraz says that since 1996, the company has trained 15 salespeople and has even sent 10 of them to Brazil.

“We know that other companies pay employees an izquierda [illegal bribe] under the table,” he said. “We lost our best sales guy this way. All the investment we made in him was wasted. Now he will compete against us.”

Asked about market data, Ferraz laughs.

“We’re not allowed to do any kind of research here. It’s almost impossible,” he said. “But Cuba has 11 million people, and we know they consume 11 billion units a year. That average [of 1,000 units a year] is higher than in most other countries.”

To meet that demand, Tabacuba is investing millions of dollars in a highly sophisticated factory in Holguín, 800 km east of Havana, to produce cigarettes for the peso market.

While those cigarettes may eventually compete with BrasCuba’s dollar cigarettes, Ferraz says “we’re helping them because Tabacuba is a partner in our venture. We are trying to leverage the quality of the product and teach them how to increase productivity. In the future, we will benefit from this. They may ask us someday to manage their operations.”

In the meantime, Ferraz says he expects the Cuban market for hard-currency cigarettes to grow as more and more Cubans gain access to dollars. On the other hand, Cubans may also become more health-conscious and decide that smoking isn’t good for them. Ferraz says he hopes to diffuse the issue by supporting warning labels on cigarettes.

“If you want to smoke, you need to know that it damages your health,” he said. “We are working with health authorities to make this a law, if only to protect ourselves in the future.”

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