The END in Sight?

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The END in Sight?

March 21, 2016

What the thaw in U.S.-Cuban relations means for the electronic nicotine delivery systems.

By Givi Topchishvili

As U.S. President Barack Obama is making his historic visit to Cuba—the first by sitting American president in almost 90 years—the business community is asking itself what the thawing in relationship means to it. Calumet Advisors recently concluded an assessment of risks and opportunities for the vaping sector in the South American market, with Cuba being a part of the study. While our findings show that the current environment in Cuba is not yet ripe for a serious market entry, we do see a number of opportunities and are happy to share some of these observations.

According to the 2015 revision of the World Population Prospects, the total population of Cuba stands at 11.39 million, and is projected to decrease by 9.2 percent to 10.34 million by 2050. By then Cuba is also projected to become the ninth oldest country in the world, with a median age of 51.9 years.

On the economic front, the Cuban government continues to balance the need for loosening its socialist economic system against a desire for firm political control. As the government has cut state-sector jobs as part of the reform process, it has opened up some retail services to “self-employment,” leading to the rise of so-called “cuentapropistas,” or entrepreneurs. Approximately 476,000 Cuban workers are currently registered as self-employed.

Yet despite the recent reforms, the average Cuban’s standard of living remains at a lower level than before the collapse of the Soviet Union and the resulting downturn of the 1990s, with an average income of just $300 per year. That means very limited buying power for most Cuban consumers, especially for non-essential goods and services.

At the same time, Cuba is home to some of the toughest anti-smoking laws in the region. In 2011 it conducted the Third Survey on Risk Factors of Non-Transmissible Diseases. It polled 9 million people and is recognized as the most important study on the issue to date. The study yielded significant results, such as the fact that 36.4 percent of those interviewed smoked at least once in their lives, and that two out of every 10 women and three out of every 10 men are addicted to cigarettes. As much as 53 percent of all black and mixed-raced people on the island claim to be smokers—a figure of more than double the rate of white Cubans who smoke (24 percent).

At the moment the Cuban authorities are working on new anti-tobacco legislation that would provide the framework for even tougher restrictions on smokers than exist today, and strengthen commercial limitations on tobacco-derived products. In addition to reiterating provisions that forbid smoking in closed spaces and the sale of tobacco products to people under 18, the proposed legislation would include restrictions on the promotion and sponsoring of tobacco products in the country, prohibit their sale at health, educational, and sporting institutions, and the sale of single units or packages with less than 20 cigarettes. It would also raise the prices of tobacco products.

Another important factor to consider is the fact that currently all tobacco products are tightly controlled by Tabacuba, the state tobacco monopoly, which will most likely seek authority over the future sale of e-cigarette and vapor products once the market begins to open up.

Interestingly enough, currently, there are no limitations or restrictions on sale or use of vaping products in Cuba, something that was confirmed by tourists and locals alike.  The actual current size of the electronic nicotine delivery systems (ENDS) market there is under $4 million a year, and to date there are no established local retail or online market for vape devices or e-liquid products.

It’s clear that the current economic and political environment in Cuba is not yet welcoming enough to make significant investments in market entry. One possible venue for entry that we identified is an exploration of a joint venture with, or becoming a supplier to Tabacuba. Working with government controlled monopolies comes with a price, but as we have seen in analogous places it carries less risk than attempts to bypass it.

However, the real opportunity for development and expansion of ENDS market at the moment is within the smoking-cessation campaign going on in Cuba. Now is the time to influence the public perception and legislative work pointing at Cuban antismoking environment. It is worth considering respective lobbying efforts, especially with the high number of U.S. and European tourists willing to visit Cuba in the future. It is noteworthy that the U.K. has just ruled on licensing BAT e-cigarettes as quit-smoking medicine, which was announced in January 2016. This U.K. ruling may pave the way for other countries to follow this route and should be closely monitored in general and in the context of entering the Cuban market in particular. With a population base of 11 million people and 3 million tourists annually, Cuba could, potentially, become a large player in the Caribbean vape market.

Givi Topchishvili is a co-founder of Calumet Advisors, an international strategic consulting company dedicated to the e-cigarette segment.

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