International

Mi Casa Es Su Casa — Maybe!

RR Cuba“What I wouldn’t give for twenty more years! Here we are, protected, free to make our profits without Kefauver, the goddamn Justice Department and the F.B.I. ninety miles away, in partnership with a friendly government. Ninety miles! It’s nothing!” — Hyman Roth, The Godfather Part II

How right he was! Well, at least partly right!

For all you devotees of the film—and you know who you are—this character was based on the real life gangster Meyer Lansky, who, along with a Who’s-Who of organized crime, made millions investing in hotels, casinos and other businesses in Cuba during the 1940s and 1950s.

It was Vegas before there was a Vegas! And far more stylish.

Enter “the Beard”

As any student of history or the cinema knows, this came to an abrupt end on January 8, 1959 when Fidel Castro and his “barbudos,” bearded revolutionaries, rolled into Havana, sending the business-friendly Cuban president Fulgencio Batista running for greener and safer pastures, and turning elegant venues like the Hotel Nacional and the Tropicana into government-occupied chicken coops. Literally.

It was an ignominious end to what had once been a hotbed of trade and a playground for Americans, who swarmed to the island’s beaches, hotels, shops and casinos.

Could it become that again? Condos on the pristine beaches of Playa Paraiso, new designer shops in the Spanish Colonial architecture of Old Havana and maybe a JCPenney or Walmart in a suburban mall? (See related article, “Postcard from Havana,” page 18.)

An Emerging, Emerging Market As the Stars and Stripes were being raised over the newly minted U.S. embassy in Havana in August—the first step to ending the 56-year, emotion-fueled U.S. embargo—industry watchers started licking their collective chops over the prospect of normalized relations with the island nation. Or, as they see it, commercial opportunities in an emerging fourth-world market.

And why not? We have a long history of making friends with former enemies. That’s why you can book a luxury cruise along the Mekong River Delta without worrying about snipers.

For Cuba, the road back may be paved with good intentions, but it will be a bumpy ride. Getting a handle on the Cuban economy is tricky since the government dominates every aspect of it. Therefore, opening trade, tourism and capitalism is not simply accomplished by a flourish of the Executive pen.

As the International Council of Shopping Centers (ICSC) recently stated, real progress won’t happen in Cuba until the spending power of the island’s 11.3 million residents increases and convoluted barriers to trade are dismantled. This could be a Herculean task for a do-nothing Congress, which, by the way, is the only body that can lift sanctions completely.

Although some feel that Communism’s shelf life is getting close to its expiration date, the country has always had a history of political instability—not an attractive prospect for retailers who might consider multimillion-dollar investments (including gratuities to government officials for greasing the wheels of economic progress).

On top of that, we have the inflammatory rhetoric of the Cuban diaspora in the U.S. and the few narrow-minded politicians who side with them (hey, it’s an election year and Florida is a swing state!). By the way, if you value your eardrums and “cojones” don’t ever get into a political argument with a Cuban exile. They are an extremely passionate group.

Fueling Growth

Interestingly, the country’s future may be fueled, in part, by Cuban exiles that have prospered in the U.S. and may be induced to return with the right financial, political and social incentives. In fact, it’s been suggested that the same energy and vitality that transformed Miami from a decaying city into the center of Latin American economics could work for Cuba.

Labor costs would be relatively low but under current laws foreign investors would have to hire people through a state-run employment agency, which is one reason for low worker productivity.

Not exactly what today’s retailers are looking for.

On the other hand, the island has a fairly high literacy rate, a functioning health care infrastructure that is used by a majority of Cubans and a small but growing entrepreneurial class of small businesses or “micro enterprises,” made possible by government liberalization of private industry and $2 billion annually in remittances to the island from Cubans overseas. The latter could quadruple if additional restrictions on money transfers are lifted and lead to significant income and spending power.

Cuba already imports about 30 percent of its food from the U.S., thanks to years of political pressure from the U.S. agribusiness industry—and this number is expected to rise with increased liberalization of government policies.

Jockeying for Position

Basically, Cuba should be viewed with cautious optimism. This is what companies like Kellogg and Hormel are doing as they reportedly jockey for position in order to stay ahead of the growth curve in an untested but potentially lucrative market.

Moreover, Cuba wants foreign investment in order to sustain its growth. It wasn’t Communism that caused most of Cuba’s economic woes—it was the collapse of Russian oil subsidies in the early 1990s that sent agricultural production plummeting and laid waste to the fishing industry. Shortages developed when exports and imports took a nosedive. The same thing may be happening now with Venezuelan oil.

The good news for business is that imports and exports are continuing to recover thanks to projects like the Brazilian-backed $1 billion modernization of the Mariel Harbor deepwater port as a free trade zone.

Meanwhile, a number of Canadian, European and Chinese firms have already staked claims on the island through joint ventures. And the last thing an American company wants is to fight an established monopoly. As such, getting in first—or being among the first—may offset a somewhat risky investment.

Retail Prospects

How attractive a retail opportunity does all this present? It depends on your timeframe. Tomorrow, next week, next month or even next year—no! Everyone knows that Cuba is a long-term play. But the situation—economically and politically— should be closely monitored, and that’s exactly what the agricultural, automotive, energy, shipping and airline industries are doing.

As socialist policies dissipate, tourism will likely be the first business to be rebuilt. In fact, online rental company Airbnb has already figured out how to enable people from outside the U.S. to rent private homes in Cuba. This has provided an infusion of capital into the economy, and boosts the average wage, which is running a little over $200 per month for the average government employee.

RELATED:   Speeding Up on the Information Superhighway

This might seem too meager to support retail initiatives. But consider what happened to the standard of living in China as business developed and a middle class with money evolved. I’ll give you a hint—W-M!

I’m sure the Cubans would welcome a Walmart Supercenter. It’s an unlikely scenario at this point. But is it so far fetched to consider Cuba for a version of its Neighborhood Market or another small store format like Aldi, Lidl or Save-ALot— or even Target, if they’ve learned anything from their Canada debacle. But this will require a complete overhaul of the Cuban monetary and governmental subsidy system.

Cuba is not going to be a destination for Neiman Marcus or Bloomingdales any time soon. But observers say that a Sears, Walmart or JCPenney is not out of the question. Nor is it out of the question that opening the country to private industry could lead to a U.S.-infused apparel manufacturing industry only 90 miles away—China West. Clearly, the recent refurbishment of Mariel Harbor could facilitate imports and exports.

The next few years will be crucial to Cuba’s economic and social development; even Raul Castro’s designated successor, Miguel Diaz-Canel, has stated that the country has yet to deal with the big issues.

To again quote one of moviedom’s most nefarious characters—“What I wouldn’t give for another 20 years!” But… it may not take quite that long.

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