Cuba, Now Or Later
Is it too late to buy in to the hottest market in the Caribbean?
By Joan Marsan, Associate Editor -- HOTELS Magazine, 11/1/1999
With its unique set of problems
and promise, Cuba has attracted the interest of many
foreign companies with its offerings of bountiful opportunity
and minimum commitment. "A
good management fee with zero investment," says
one European hotel executive of deals with Cuba. "You
can't get that anywhere else."
This enthusiasm, however, is tempered
with the realization that Cuba is one of the world's
last communist outposts, and its unique political climate
creates barriers for many companies trying to do business.
Every deal emphasizes the good of the country, a good
that may interfere with off-shore companies' interest
in earning a profit. One foreign developer who has
worked successfully with Cuban companies to establish
partnerships and deals points out, "Relationships mean nothing. It's what's best
for the country." Cuban companies, after all, are
out to make a profit, in the most capitalistic sense.
"To be good in this business, we have to work as
capitalists," acknowledges Orlando Pedroso, director
of external relations, Cubanacan, Cuba's largest hotel
company. And like good capitalists, Cuban companies will
shift loyalties as opportunities evolve, leaving partners
in a lurch.
It is just this quality that may offer U.S. companies
an opportunity to participate in Cuba's tourism industry
if, or when, the trade embargo lifts. Steps such as a
failed September U.S. Senate bid to allow the sale of
food and medicine to Cuba and a July visit to Cuba by
U.S. Chamber of Commerce President Tom Donohue reflect
what seems to be a growing interest in resuming relations
between the two countries. Many U.S. hoteliers have worried
that the move may come too late.
But Roberto Marty, officer of the
Cuban ministry of tourism, doesn't hide the fact that
management contracts rarely extend past five years,
and they are subject to renewal. "If Hyatt wants
to take an existing contract, they will have to make
a better offer: 80 or 90 percent occupancy, cash, or
renovations."
Peter Blyth, president of development, Radisson, may
have just such a deal in the works. He has verbal agreements
to manage three hotels in Cuba when the embargo lifts,
he told CNN reporters. For those who wait, either by
will or by force of law, it may take more money. But
ultimately, anyone with dollars up front to sweeten the
deal can get a piece of the action in Cuba, now or later.
Unprecedented Growth
In the mid-1950s, more than 270,000 Americans traveled
to Cuba each year, accounting for up to 60% of Cuba's
tourism. But by 1959, the revolution had brought the
infusion of dollars and much of the island's tourism
activity to a screeching halt. It wasn't until 1988 that
Cuban officials directed fully dedicated energies to
the revivification of the industry, establishing a tourism
office and projecting and preparing for a tourism boom.
The plan set into motion has inspired a boom of sonic
proportions. Tourism in Cuba has grown an average of
19.3% for the past five years, while the rest of the
Caribbean, including Cuba, has experienced growth rates
of 4.3% during the same period. The number of visitors
Cuba has received has grown from 340,300 in 1990 to 1.4
million in 1998. The island expects to host 1.7 million
tourists in 1999, and as many as 2.5 million in 2000.
Based on what they consider a conservative 13% to 15%
growth rate, Cuban officials are planning for the arrival
of almost 7 million tourists in the year 2010. They note,
however, that Europeans would make up 65% of this figure,
and they suggest the total number of guests could increase
exponentially if the market opened up to Americans.
To accommodate the incoming tide of travelers, the number
of hotel rooms has far more than doubled since 1990,
when the country contained 12,866 rooms. The Ministry
of Tourism estimates rooms will total 49,556 by 2000.
Today, about 160 hotels with more than 35,000 rooms dot
the island. But occupancy rates and ADRs lend credence
to some hoteliers' concerns that the island is overbuilt.
Cuban officials insist that development plans are based
on the absence of American visitors; however, the country's
rapid construction in the face of below-stellar rates
suggests otherwise. Throughout Cuba, occupancy averages
65% and ADRs range from US$50 to US$125. In Havana, rates
fluctuate widely, with occupancy ranging from below 50%
to above 90% depending on the season. In the resort capital
Varadero where occupancy averages are often highest,
occupancy dips to about 62% during the low season and
should average 71% in 1999. ADR for Varadero averages
US$75. In the lesser-known oceanfront resort area of
Cayo Coco, reported occupancy rarely falls below 60%,
although these hotels draw their crowds with ADRs averaging
US$50, a practice worrisome to many management companies
and at best aggravating to Caribbean operators outside
of Cuba.
Still, the rapid growth of the industry in Cuba has
resulted in exactly what Cuban hotel companies have sought--an
influx of dollars (ironically, because of economic despair,
the dollar of the island's embattled neighbor is the
only hard currency accepted throughout much of Cuba's
tourism sector). Cuba collected US$1.45 million from
tourists in 1987. By 1997, visitors contributed US$1.5
billion in revenues to the economy, and the figure jumped
again, to US$1.8 billion in 1998.
Cuban Companies
Plans and appearances suggest the government funnels
much of this new money back into the travel industry
through its four government-established, fiercely competitive
hospitality companies. Gran Caribe and Cubanacan own
the majority of Cuba's properties. Gaviota has significant
holdings, and a smaller Cuban group, Habaguanex, holds
prime specialty properties in Havana's historic quarter.
Gran Caribe runs restaurants and assorted tourism enterprises
in addition to its 42 hotels with 9,000 rooms. Throughout
Gran Caribe, occupancy rates averaged 66% in 1998. The
company received US$175 million in gross revenues in
1998, and is forecasted to collect US$220 million in
1999. Gran Caribe's investment plans focus on the development
of beach hotels, with rooms in that sector doubling to
7,600 rooms in the next three years. Most new deals will
be joint ventures, the company's president, Alejandro
Escobar Burgos says, because Gran Caribe needs capital.
Escobar estimates that foreign companies will operate
60% of Gran Caribe hotels by 2000. Gran Caribe is also
taking its products overseas by franchising their Floridita
restaurant concept. The original Floridita, located in
Old Havana, was a favorite hangout of Ernest Hemingway
and served as the birthplace of the daiquiri. Outlets
are opening in Mexico, Spain, France and Abu Dhabi.
Like Gran Caribe, Cubanacan is a hospitality company
with wide-ranging interests. The tourism giant Cubanacan
owns and operates marinas, restaurants, travel agencies,
tour services and 11,000 rooms in 54 hotels. Much like
Gran Caribe, the company plans to add 3,000 rooms per
year, doubling its number of rooms to a government-mandated
figure of 20,000 within three years. Cubanacan's focus
also is on beach locations, especially Santa Maria Key,
where the company hopes to establish leisure complexes
with five hotels each. By next September, four such hotels
should be completed, and eight are expected to be operational
by 2001.
Gaviota was founded in 1989, and has a transport company,
rental car company, travel agency and nature tourism
company. They have two marinas, a chain of shopping centers,
restaurants and a supply company for hotels and restaurants.
And the company holds 18 hotels with 2,200 rooms and
expects 1,000 of 1,500 rooms under construction to be
operational by the year's end. At end of June, Gaviota
hotels averaged 75% occupancy. The majority of properties
are 4-stars with ADRs between US$100 and US$120.
Unlike Gran Caribe and Cubanacan,
so far, Gaviota has no joint venture partners. But
unlike Habaguanex, which holds only historic properties
and therefore cannot enter into joint ventures (the
government forbids foreign ownership, to any degree,
of existing property), José Manuél
Bisbe York, vice president of marketing, says Gaviota
is seeking foreign investment for the future. Gaviota
has been growing 35%-40% per year using its own capital
and plans to add another 5,000 to 6,000 rooms between
2001 and 2003. Like other Cuban hospitality companies,
to realize development plans, Gaviota requires a cash
infusion from off-shore companies.
Foreign Funds
About 25 joint venture companies are providing Cuba
with the cash it needs for growth. These companies have
contributed to the construction of some 13,100 rooms,
3,540 of which are in operation, and they have more than
US$885 million in capital allocated for Cuba's tourism
industry. Most foreign involvement, however, comes in
the form of management contracts, covering about 45 of
the state-owned hotels.
Among the companies sharing capital
or management expertise with Cuba's hotel industry
are Accor, Barcelo, Horizontes, Islazul, LTI, Miramar,
Riu, Sandals, Superclubs, Sol Meliá and Tryp. Two Canadian companies, Cuban
Club Resorts and Leisure Canada, have cemented deals
with Cuban companies and hope to bring timeshare to Cuba,
though neither has properties up and running yet. Sol
Meliá, with the largest foreign presence in Cuba,
has lent its management expertise to 14 Cuban hotels,
and the number is growing. Meliá established relations
with Cubanacan in 1987.
The company's ability to consistently
yield above-average GOPs has aided Sol Meliá's growth in Cuba, in
terms of relationships and profits. For as long as managers
deliver promised profits, contracts remain peacefully
in place. The Meliá Cohiba in Havana reports earning
43% GOP on revenues of US$26.5 million in 1998, during
which time the property was running at 75% occupancy
with an ADR of US$70. Outside of Havana, GOPs reach similar
heights, though ADRs decrease. The 270-room Sol Club
Cayo Coco, located far from urban attractions, produces
a GOP of 45% on a growing US$7 million in annual revenues.
Occupancy rates average 80% and ADR ranges from US$45
to US$75--95% of which is generated through package deals.
The Cayo Coco property opened in November 1997 after
Sol Meliá invested US$2 million in renovations
of the former Riu property.
Supplies And Incentives
The ability of managers to turn
profits in Cuba depends upon their adeptness at dealing
with a distinct set of impediments. Antonio Martínez Rodríguez
runs the country's most prestigious landmark hotel, the
Hotel Nacional de Cuba, founded in 1930. The hotel has
a reputation for being one the most successful operations
in Cuba, and with an 85% occupancy rate, the property
collects US$21 million in revenues and US$13 million
in earnings. But Martínez notes that the Nacional
struggles with the food and supply shortages that affect
the industry throughout the country. "Because of
conditions, we need to conserve as much as possible and
work with what we have," Martínez says.
Even with strict conservation measures,
supply difficulties increase the cost and decrease
the profits of Cuban operations. José Sánchez, general manager of the Meliá Varadero,
echoes the concerns of GMs and f&b directors across
the island when he says it is difficult to procure a
good variety and quality for food and beverage. The items
imported can be as much as twice as expensive as in other
Caribbean locations because he cannot buy from the closest
supplier, the United States. Sánchez estimates
the trade embargo affects a four to five percentage point
decrease on his GOP, a cost of US$800,000. The Meliá Varadero
has a GOP of 49%, with revenues at US$8.5 million.
And throughout the city of Havana
and the country as a whole, incentives remain an issue,
an issue that will grow more problematic when timeshare
and its necessary sales positions are introduced. In
truly Marxist form, all staff positions, from porter
to manager, earn a set monthly wage of 400 pesos, or
about US$20. Because there is little opportunity for
financial gain, general managers find it difficult
to motivate staff to take on additional responsibility
or do jobs to the best of their ability. Marco Cardillo,
general manager of the 972-room, two-hotel complex,
Tryp Club Cayo Coco, says empowerment is the most effective
incentive for staff. He holds every department at the
property responsible for its own budget. "This
is important," Cardillo says. "It gives them
a sense of ownership."
The Future Face Of Development
Cuba is 12.5 times bigger than Puerto Rico and offers
a wealth of opportunities for development, some in areas
that have already experienced explosive growth, others
in virgin territory. Most companies want to do business
in the already-proven markets of Havana and the beach
resort capital Varadero, as outer regions lack a culture
and infrastructure outside of resort complexes themselves.
But Cuba is developing infrastructure and building hotels
in six other regions in an effort to spur further development
throughout the island. This vision for the future of
Cuban tourism finds realization in Cayo Coco and its
neighbor Cayo Guillermo, located 35 minutes from Nassau
by plane.
Construction in Cayo Coco began in 1988. The first hotel
was completed in 1993. Currently six hotels with 2,000
rooms grace the forested key. Another 1,000 rooms are
under construction. The two Cayos will receive more than
168,000 visitors in 1999 and expect 240,000 in 2001.
The hotels are family- and nature-oriented, accommodating
water and sports activities with expansive beaches and
marinas. Two national parks protect sea and wild life
and prime scuba diving beckons in a coral reef just off
Cayo Coco's coast. The government requires that all construction
on the keys complement this rich, natural environment,
so properties are low rises built back from the beach
and circled by trees. The party line is that Cuba treasures
its environment and development cannot threaten this
primary draw.
Only 5% of the entire area is developed;
and plans for the future bode the construction of 50
hotels with some 20,000 rooms. To support this growth,
the government is constructing an international airport
that will open at the end of this year. A new marina
with 300-slip capacity and three golf courses are under
development. The state even established a town in Cayo
Coco for tourism training, and 3,000 workers in the area
have graduated from the new-founded community's school.
To date, Cuba has invested US$300 million in the area
without the benefit of joint ventures, though Cuban companies
are actively courting investors, providing an opening
now for entry into the Cuban market.
How To Succeed In
Cuba
David McMillan, president of Toronto-based Cuban Club
Resorts (CCR), has spent the past five years negotiating
with the government to become the first timeshare operator
in the country. He succeeded after an arduous education
process and intense negotiations that, he says, were
both honest and open. CCR, in a joint venture with Cuba's
Grand Caribe hotel company, will develop a US$250 million
project with 2,000 rooms at four locations around the
island.
During the last New York University hotel investment
conference in June, McMillan offered some advice to others
who want to do business with the Cuban government:
- When businesspeople go to Cuba,
they expect to educate the Cubans about the hotel
business. But McMillan says it is more important
to find out how their system works and how to work
within their system. "We are still
learning," he says.
- Cubans are intense analysts. They
want to know about everything you plan to do. Prepare
for them to do extensive analysis.
- Have realistic expectations because
the system takes a long time. So it is best to
under-promise and over-deliver.
- You need to believe in what they are
doing in Cuba and the changes they are making.
Nourish their personal strengths and empower them with
things that need to be done as you work through the
long process.
- It is not atypical to take five or
six years to agree on a joint venture. It is best
that you are there all the time throughout the process.
You can't do business with Cubans over the fax
machine. You have to be there and look them in the
eye.
- When foreign companies go to Cuba
their aim is to meet senior officials. While that
is essential, you first must develop relationships
and trust at all levels.
- It helps a lot if you speak Spanish
and realize that Cuban Spanish has its own dialect.
You must sensitize your documents to their language.
- Understand that Cuba is a very cost-conscious
society. They audit everything and account for
all dollars. They will be very cautious about how you
spend their half of the investment.
- And remember, it is legal for
American business executives to travel to Cuba as
long as they are "fully hosted" by
the Cuban government. In other words, you can't spend
any money to get there or stay there. If you go,
you can talk business and create a memorandum of understanding
as long as you don't enter into a binding agreement.
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