Habanos Today

Three top executives of Cuba's cigar company discuss the status of their primary asset: Cuba's global brands
| By Gordon Mott | From Matthew McConaughey, March/April 2011
Habanos Today

Every June, the head executives from Cuba's Habanos S.A. sit down with their distributors from around the world to create new cigars. This is the birth of the Edicións Regionales, or Regional Editions, as connoisseurs of Cuban cigars around the world know them. The distributors present their requests for special cigars that will be limited to their specific market, a kind of local brand extension for their loyal consumers.

"Each distributor is looking for something different, something for their collectors that is a little unusual," says Ana López Garcia, the director of marketing operations for Habanos, Cuba's worldwide distributor of Cuban cigars, during an extensive interview in Havana. "And each market can ask for something special."

Around the large conference table, the two other Habanos executives nod in agreement as they describe the creation of these limited-edition smokes, which is just one of the many projects they oversee every year: planning what cigars Cuba will add to its portfolio, what might be removed from the product line, and how Cuba's many cigar brands will be marketed to the global audience that enjoys them.

López is joined by Buenaventura Jiménez Sánchez-Cañete, the co-president of Habanos, and Gonzalo Fernández de Navarrete González-Valerio, the sub-director of marketing, at this interview on a rainy day in December. Oscar Basulto Torres, then the Cuban co-president of Habanos, had been called away urgently to visit cigar plantations in Pinar del Río with a Cuban government official. (A new co-president, Jorge Luis Fernandez Maique, was appointed to take over for Basulto Torres, who will remain in charge of Tabacuba, which oversees all aspects of tobacco production from the fields to the factories.)

What is clear is that this is a team charged with keeping Habanos at the forefront of the world's cigar market.

"We receive 30 to 35 requests for Regional Edition cigars every year," says Jiménez Sánchez-Cañete. But he adds that Habanos has begun to limit the annual new releases. The Habanos officials say they keep each ER exclusive to the region or country for at least two years, and do not limit each region to one Edicion Regional during that period. However, each distributor is required to purchase 25,000 sticks of each new cigar.

Habanos acknowledges that the program has become a logistical nightmare. Each cigar requires a different band and a different box, and since it is often a different size for a particular brand, it requires a new blend to keep the taste within that brand's normal flavor parameters. "We are trying to keep to the standard sizes and boxes," says López. She adds that each new cigar requires a new blending process. In all, it takes nearly a year from the approval for a new Regional Edition until it is ready to be shipped to the marketplace.

The Regional Editions, which were first introduced in 2005, emerged from the success of Cuba's Edición Limitadas, which were launched in 2000. Cuba has made as many as five Edición Limitadas in a year (there were none in 2002), and finally settled on three new sizes per year starting with 2005. But the philosophy behind them is different. "We know that collectors look for these Edición Limitada cigars every year," Jiménez Sánchez-Cañete says. And he notes that while many retailers sell them immediately, many others hold on to them to age and sell as collectibles.

The tobacco for the Edición Limitadas, according to the Habanos executives, is specially selected from higher primings of the tobacco plant so that they are generally considered to have darker wrappers, and then, all the tobacco is aged for at least two years before being rolled. Each EL stems from one of Habanos' major global brands, but they are produced in a new size for that brand, such as the Cohiba Pirámide in 2001, or the Montecristo Robusto in 2000. The 2010 ELs were the Montecristo Grand Edmundo, the Partagás Serie D Especial and the Trinidad Short Robusto T.

The executives declined to identify the new sizes which will be produced for 2011, but they did confirm that the three brands will be Cohiba, Ramon Allones and Hoyo de Monterrey.

If there is one conclusion that can be reached from Habanos' experience with each of these specialty categories, it might be that everything it learned from them went into the making of the Cohiba Behike, of which the BHK 52 was named Cigar Aficionado's Cigar of the Year for 2010.

The idea first germinated around the creation of a 40th anniversary Cohiba cigar, which was called a Cohiba Behike—it came in one size, 7 1/2 inches by 52 ring, and was packaged in a Elie Bleu humidor containing 40 cigars. Only 4,000 cigars were made. But from that, according to Jiménez Sanchez-Cañete, the decision was made in 2006 to create the best Cohiba they could, and they began researching old blends and history books about Cuban tobacco. And there they found medio tiempo.

"The idea of the medio tiempo came out from some old history books, and we thought that might be the key to a full-flavored Cohiba blend," says Jiménez Sánchez-Cañete. He says Habanos discovered that medio tiempo had been sorted for years along with other ligero, and used as a regular ligero. So, they decided to sort and ferment the medio tiempo leaves separately. But that decision raised some production issues, for only about one in 10 tobacco plants actually produces medio tiempo, which emerge as two very small leaves at the very top of the plant.

But that was just the beginning. They brought in tobacco from the top five Cohiba vegas, or farms, in San Juan y Martínez and San Luis—Cuchillas de Barbacoa, La Fe, Santa Damiana, La Perla and El Corojo. Then, special teams of rollers at El Laguito were retrained to make the new trio of Behikes, most of them much thicker than the original: BHK 52, BHK 54 and BHK 56, all straight-sided cigars with the signature pigtail.

During training, the blending process began, which brought together 25 top tasters from the five most important factories in Havana along with about 20 other tasters to finalize the blend. But there was another effort underway to produce entirely new bands, a new box and a new logo for the brand.

"One of our suppliers looked at what we wanted to do and said it was too difficult, that's not possible," says Fernandez de Navarrete. But he explains that the final result was not only different, but beautiful, too.

The project really took the focus of the entire organization. Habanos S.A. consists of about 260 employees, from the warehouses where the cigars are stored and shipped to the administrative offices in an old residential area in the Miramar section of Havana. Habanos S.A. was created in 1994 by taking the responsibility for marketing and distribution of cigars and cigarettes out of Cubatabaco, the state tobacco monopoly that oversees tobacco production and manufacturing. Habanos S.A. is also now a joint venture with the global cigar conglomerate Altadis S.A., which was acquired by Imperial Tobacco PLC, the British tobacco giant, in 2008.

In addition, Habanos oversees all the La Casas del Habano in the world; there are currently 142 Casas del Habano, including 17 in Cuba. "From the beginning in 1990 in Cancún, we wanted them to always have the best selection of Havana cigars, to guarantee their origin, and to provide the best information about them and then to have a place to relax and smoke them," says Jiménez Sánchez-Cañete. "They are now recognized by the consumer, and we are going to continue to extend the franchise. Our goal is a Casa del Habano in every major city in the world."

The Cubans are adamant about maintaining the standards in Casas del Habano, and don't just automatically rubberstamp a franchisee's deal in perpetuity. "We opened 12 Casas last year," says López, "but we closed eight," because they didn't fulfill the obligations required of all franchise owners. According to Lopez, Habanos has also issued new rules, some of which are mandatory, while others are just suggestions.

Among these rules are that a Casa del Habano must be at least 60 square meters (645 square feet), although duty-free shops can be smaller, they can only sell Habanos products, that they have an ample walk-in humidor with lockers for loyal customers and a smoking lounge area that, if possible, should also have a bar. "We are simply demanding a minimum level of quality," López says.

She also says the company is always re-evaluating the brands that are exclusive to the Casas. For example, the Bolivar Gold Medal, which was once exclusive to the Casas, is now sold at many retail shops. And, she says, the sizes of San Cristóbal de la Habana that are exclusive to Casa del Habanos are going to be taken out of production for at least a few years. "We always look at the year-to-year sales of our cigars, and the ones that aren't selling, we often take them out of production," López says.

She declines, however, to reveal any new cigars that might be headed exclusively to the Casas, and which of Habanos' more than 300 different cigars (brands and their sizes) that might be discontinued.

The focus on cigars extends far beyond just the sales performance of each vitola. After years of suffering widespread complaints about quality, especially in terms of draw, Habanos now says that every Cuban cigar is draw-tested before it is finished and shipped. Jiménez Sánchez-Cañete says that the first draw machines were put on line in 2002, and by the end of 2005 every factory in Cuba was using them.

"We are not saying we have solved every problem, but we have put that era behind us, and the complaints have been dramatically reduced," he adds. Jiménez Sánchez-Cañete also explains that every cigar is now frozen before it leaves the warehouse to reduce or eliminate problems with tobacco beetles.

Jiménez Sánchez-Cañete also cites an example of how the Cuban manufacturing helps ensure consistency in the characteristic blends of every cigar—the system of a "mother factory" for each cigar. He describes an event a few years ago when Habanos was finalizing the blend for Por Larrañaga Magnificos, a Regional Edition cigar for the United Kingdom.

Representatives from the U.K. came to Havana for the tasting with a Por Larrañaga from the early 1970s that was virtually the same size as the Magnificos. "We tasted that cigar too, and the blend was almost the same to the new one being made two years ago," López says. "How is it possible that we can keep a blend the same through a generation? It's because of the mother factories."

The executives also explain that while not every cigar of a brand is always made in the same factory, when production is assigned outside the mother factory, the master blender travels to that factory to go over the blend with the blending director there to ensure the consistency of taste. The mother factory blender still retains responsibility for the quality of the blend, according to the Habanos executives.

Counterfeits remain a big concern for Habanos, and the executives admit it is difficult staying ahead of the people trying to produce fake cigars, and at the same time to stop the sale of gray market (improperly distributed) cigars. "We are trying to educate the consumer on what to look for," Jiménez Sánchez-Cañete says.

He adds that every box leaving Cuba now has a code showing where it is supposed to go, and where it ends up. He says they have also stopped counterfeiting operations in several parts of the world, but six months later another pops up.

The biggest problem areas are in the Middle East and in Central America, but he says the new seals, which contain the code and have several new security measures that make it harder to duplicate, including a stronger glue and some embedded holograms and water marks, have been in use since April 2010.

He says it will take several years to work through the inventory of boxes with the older seals, but eventually, every box of current-production Cuban cigars in the market will carry that new seal with the codes and the security measures.

"Gray market sales and counterfeits are extremely important to us because they damage the image of Cuban cigars," Jiménez Sánchez-Cañete says, "so we are doing everything possible to stop them." He admits that it is impossible to estimate just how many fake Cuban cigars are made, or how many cigars enter the market through gray market channels. But he adds, Habanos is constantly checking the marketplace and if they now find boxes with codes that are inappropriate for that market, they may terminate the agreement with the distributor where the box came from.

While Habanos refused to release the exact export figures for Cuban cigars, Fernández de Navarrete says worldwide sales would increase in value for 2010, after declining about eight percent in 2009. He says the Cuban cigar is experiencing the same phenomenon as many other cigar brands—people are smoking less but smoking better.

He attributes that trend, in part, to the no-smoking regulations that are being passed in every major market for Cuban cigars and to the economic conditions in their major markets. And, he says the slowdown in Cuban cigar sales during the global recession is starting to pick up, even though they expect the recovery period to continue for awhile, especially in places like Spain.

Western Europe remains the biggest market for Cuban cigars, accounting for about 55 percent of all export sales, followed by Asia-Pacific at 15 percent, Latin America and the Middle East at 10 percent each and the rest of the world—Africa, Eastern Europe and Russia—taking up the last 10 percent.

They decline to speculate about how many Cuban cigars enter the United States, but they agree with estimates that put the number at somewhere between five to 10 million cigars a year.

In terms of volume, the biggest selling brands remain Montecristo, Romeo y Julieta, Cohiba and Partagás, and in terms of revenue, the ranking is Cohiba, Montecristo, Romeo y Julieta and Partagás.

The single best-selling vitola, or size, is the Montecristo No. 4, a corona sized cigar, while the best-selling robusto is the Partagás Serie D No. 4.

Cuba Cuba Report Habanos S.A.

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