China: the leading importer of Cuban cigars
From the discovery of the Americas to the present day, Cuba has always been regarded by Europeans as the cigar country. Indeed, it was on its soil that the first tobacco plants intended for the Old World were cultivated. Renowned for the quality of its soil and climate, the country quickly became the world’s center of premium cigar production. Even today, Habanos are considered the best cigars on the market, with prestigious brands such as Cohiba, Montecristo, Romeo y Julieta or even Partagas. Distributed exclusively by Habanos S.A, these cigar brands are sold in more than 150 countries. European countries, led by Spain, alone account for 60% of export-related sales. But this trend is being gradually challenged by China’s rise in 2020 to the number one spot among importers of Cuban cigars.
China and Cuban cigars: a story of luxury
As early as 2012, the distribution company Habanos S.A focused its marketing strategy on China. Indeed, this country represents significant growth potential, with more than 300 million smokers on its territory. That same year, the Middle Kingdom overtook Germany to become the world’s 3rd largest importer of Cuban cigars, behind Spain and France. Thanks to an agreement signed in 2017 between Habanos S.A and the China National Tobacco Corporation, Cuban cigar exports jumped by 12% in a single year. According to Jose Maria Lopez Inchaurbe, vice president of Habanos, this acceleration in Habanos sales had an impact on the 5% rise in the luxury market in 2017.
In 2020, this shift in the market toward Asia was confirmed with the buyout of Imperial Brands’ stake in Habanos by the Hong Kong company Allied Cigar Corp. The British company indeed held 50% of Habanos S.A’s shares, on an equal footing with the Cuban state. With a deal estimated at $1.04 billion, Allied Cigar Corp thus became a major shareholder in the Cuban distribution company and pulled off one of the biggest deals in the tobacco industry in decades.
In addition to Habanos S.A.’s effective marketing strategy in emerging countries such as China, the success of Habanos in China can also be explained by a favorable Chinese economic situation. Despite the global economic crisis, the Chinese economy has in fact never stopped growing, reaching $15 billion in 2020. China has thus become the world’s second-largest economic power behind the United States. It is also the country with the largest number of ultra-rich people in the world, with 992 billionaires living on its territory in 2021, compared with only 696 in the United States. This exponential increase in domestic wealth goes hand in hand with changing social attitudes and a growing interest among Chinese consumers in luxury products. According to Wang Zheng, a Chinese Habanos specialist, Cuban cigars conquered the Chinese market because of their reputation but also because of their origin. Chinese consumers are indeed more willing to consume luxury products from socialist countries than they would be with Western products. Synonymous with luxury and elitism, the Cuban cigar is also seen as a status symbol.
What are the consequences for the global market?
The strong demand for Cuban cigars in China is not without consequences for the global market. For several years, the distribution of Cuban cigars had already been suffering from production problems due to various factors such as issues in manufacturing the wrappers needed to make premium cigars and logistical problems linked to the health crisis. With the increase in sales of Habanos in China, especially those of the Cohiba brand, which are highly prized because of their prestige, Cuban cigar makers are struggling to meet global demand. European countries, whose demand rose with the Covid crisis, are the first affected, with supply shortages that have continued to worsen since 2020.
In 2020, 5th Avenue Trading, the exclusive importer of Cuban cigars for Germany, Austria and Poland, was already sounding the alarm, stating that stock shortages on standard ranges were becoming increasingly common. The following year, around 90% of the Cuban catalog was out of stock. While many distributors had sufficient inventory to cope with the early stages of the shortage, rising demand and falling supply, along with limited stocks, are now sustaining this crisis.
But while exclusive distributors and Habanos retail outlets now find themselves in a critical situation, the export company Habanos S.A. does not appear to be suffering. During the Habanos World Days 2022 festival, its executives announced record results for 2021, with $568 million in revenue, representing 15% growth compared with the previous year. The boom in Asian markets has thus enabled Habanos S.A. to retain its position as the world’s No. 1 distributor of premium cigars.
Buoyed by this status, the company recently announced its intention to raise the prices of certain habanos brands by aligning them with the prices charged in Hong Kong. This price-harmonization strategy aims to curb parallel markets between countries and restore premium products such as cigares Cohiba or Trinidad to their exclusive place in the luxury market. It should also make it possible to regulate the supply of Cuban cigars across different markets by rebalancing supply and demand. Given the current situation and the exponential demand for premium cigars in China, however, caution is still warranted regarding how the global situation will evolve. Premium Cuban cigars may once again become a rare commodity reserved for the wealthiest elite.