Revisiting Cuba’s readiness for retail

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As we descended into José Martí International Airport, I could already tell Cuba wasn’t like the rest of Latin America. There were few cars on the rural highways, tall government housing buildings took the place of traditional shantytowns and air traffic was minimal.

Shortly after I passed through immigration, the power went out. Two baggage handlers had to transport bags by hand and push them through the carousel hold to the carousel while another piled them in front. It took nearly two hours to get my bag and leave the airport, something I heard wasn’t all that uncommon.

On the ride into Havana, I didn’t see a single commercial billboard; not a single sign advertising cell phones, fast food, luxury apparel, beer, bread or basic consumer products.

On the surface, Cuba’s cities, architecture, language and culture partly look like anywhere else in Latin America, but it’s vastly different on the economic front. Boston Consulting Group calls it “one of the last true white-space markets on the planet” and believes there could be big opportunities in the country for retailers.

If Cuba were a U.S. state, its population of 11.5 million would make it one of the 10 largest. And being only 90 miles from the United States, it seems accessible from a logistical point of view.

I had traveled to Cuba to report on how the economy was changing. Raúl Castro has slowly opened the economy a bit since taking power in 2008. Cubans can now own vehicles and homes, and they can engage in entrepreneurship in more than 200 categories. Some citizens are renting their homes to foreigners, opening their own cafes, starting small businesses and partaking in basic economic activities that were banned for more than a half century.

Seeking local partners

Despite its slow progress, Cuba remains far behind the curve in economic development. It’s still hindered by not only international trade restrictions but by a government that controls all economic activity. The Heritage Foundation’s Index of Economic Freedom ranks it as one of the most economically repressed countries in the world, just ahead of Venezuela and North Korea.

Former President Barack Obama took steps in late 2014 to foster more normalized relations between the two countries. But even if the U.S. were to lift trade restrictions tomorrow, the country’s own government would remain a significant barrier to the retail industry.

In Cuba, the government controls all imports and the retail sale of goods. Retailers would have to work through the Ministry of Trade, where approval to operate could be at the whim of a handful of people. According to Bloomberg, Grupo de Administración Empresarial SA (GAESA), a government-controlled organization led by Raul Castro’s son-in-law, controls the companies that produce from 50 to 80 percent of the business revenues on the island. Without any changes, U.S. retailers would likely have to partner with and cede much control and profit to local developers and GAESA.

There could also be continuous political risk from both the U.S. and Cuban governments. President Trump has hinted at rolling back some of Obama’s initiatives, and as a one-party authoritarian state Cuba can change policies at any time for any reason. Cuban officials could dictate everything from pricing to quantity of goods to be sold and distribution channels.

Government control could even impact marketing — aside from in-store displays, traditional marketing or advertising isn’t allowed on the island. And giving up so much profit and control to take a chance in a market where the upside is mediocre at best doesn’t seem desirable.

Even the internet is tightly controlled, not available in private homes and extremely expensive relative to local incomes. I had to buy access cards in order to use the internet, and use my phone in parks. At best, it was slow and unreliable. Ecommerce would be non-existent, and it would be questionable if U.S. companies would even have reliable real-time access to their Cuban stores’ performance and analytics.

Consumer challenges

At a time when retailers are struggling to compete in the omnichannel environment and piloting Internet of Things and analytics programs, will there be much incentive to enter a market so behind the times with such limited spending power?

Brands could have more opportunity in Cuba, assuming they can establish a distribution network through the government. Several brands including Tyson Foods and Nestlé, are already distributed through government-owned stores. Unilever Plc left the country in 2012 over a dispute about a controlling interest in their joint venture. The company is now returning with a new joint venture but only gets a 60 percent stake; Cuban state company Intersuchel SA gets 40 percent.

Infrastructure could present another challenge: Cuba recently opened its Mariel container terminal to handle more cargo but its roads and transportation network are in poor condition. It could be difficult and expensive for retailers to establish efficient supply chains, all of which would be reliant upon government-run transportation companies.

Then there’s the Cuban consumer. In theory, low-cost big-box retailers may be able to capitalize on the market, but would it be worth the hassle? The population doesn’t have much of a disposable income and the official minimum wage is $25 per month.

I stayed with Cuban families during my visit, and there’s a completely different shopping mindset. Things like clothes, books, tools, supplies and general merchandise are bought at government-run stores. Inventories are limited and prices are controlled, which can make them more or less expensive than they may be in a free market. When it comes to food, most Cubans still acquire basic necessities with ration books that offer staples such as rice, beans and sugar at government stores.

Nevertheless, there’s certainly a shortage of goods and options that U.S. retailers and brands could fill — in theory. I went into a local household store outside of Playa Giron looking for a snack and found little more than bags of rice, rum and beer. At one of the few gas stations on the Autopista Nacional, the only things to eat were fried ham sandwiches and ice cream. Even in Havana, the limits on advertising can make it difficult to find things. Many locals buy and sell on the black market.

Travel restrictions

Many say it would be best for retailers to follow the path of tourism, but even the tourism industry has a long way to go. Cruise ships are arriving and more Americans are going to Cuba, though it’s far from what many envisioned when travel restrictions were loosened in 2014.

Further complicating the picture is the expectation that Trump will tighten restrictions on travel to the island by limiting travel to 12 categories of non-tourist travel, and by banning the use of hotels and facilities owned by Cuba’s military.

U.S. airlines have already begun scaling back or canceling many flights to the island due to limited demand. Some travel publications report there’s also a shortage of places to stay. American credit cards don’t work on the island — and it costs a whopping 13 percent to change U.S. dollars.

Despite its rich history, culture, beautiful Caribbean waters and friendly people, Cuba can still be a difficult place to travel. While retail opportunities may exist, the challenges of doing business here may be significant, even if the embargo does fall.

Craig Guillot is based in New Orleans and writes about retail, real estate, business and personal finance. Read more of his work at www.craigdguillot.com.

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