Canadian businesses bet big in Cuba
Companies like Labatt are taking advantage of U.S. embargo by grabbing key roles in the Cuban economy

A half-dozen students sit overlooking the dance floor on the 23rd floor of the Havana Libre Hotel. Their heads bob to Salsa music and cans of Bucanero beer litter the table.

"Canada is the great!" yells Reinald, a third-year medical student over the thumping music. "You are true friends of the Cuban people." His friends, Anna, Joellis and Wesysley agree.

Although music at the discotheque is Latin, the beer is Canadian. It was brewed at a massive facility in the Eastern province of Holguin, operated by Cerveceria Bucanero S.A., a joint venture between the Cuban government and Labatt Brewing Co. Ltd.

Most Canadians, including the 450,000 who visited the island last year, know Cuba for its stunning beaches, agreeable climate and friendly Latin culture.

But during the past decade a small group of Canadian companies have quietly taken major positions in almost all of Cuba's key economic sectors, while U.S. competitors remain shackled by a punitive economic blockade.

"We have a wide and broad relationship with Canada that includes business, social, cultural and university exchanges," says Raphael Dausa, director for North American affairs at the Cuban Ministry of Foreign Affairs. "And we want that relationship to grow."

Labatt, which holds a lucrative chunk of the Cuba's 2.45 million-hectoliter beer market, has been among the most aggressive investors. The company's operations are run through its Cerbuco Brewing Inc. subsidiary, which holds a 50 per cent interest in Cerveceria Bucanero S.A., the maximum foreign ownership permitted under Cuban law.

"We have the unique opportunity to produce world class quality beer for Cuban hard currency consumers and tourists," says Cerbuco's president Larry Innanen. "We have been rewarded by consumer demand that continues to grow each year."

As a communist country, Cuba's beer market is highly regulated. Most of the beer consumed is produced by state enterprises and is then sold for pesos to ordinary Cubans as part of their monthly food allotment.

But about one third of Cuban beer is bought in the dollar stores and luxury hotels frequented by tourists and state officials. It's this attractive chunk of business that Labatt targeted, when it signed onto the Bucanero venture in 1997. Last year it reinforced that commitment by agreeing to multi-year expansion of its production and distribution facilities.

Like many foreign investors in Cuba, Labatt is counting in large part on Cuba's vast untapped tourism potential and the beer that those tourists are expected to drink, to fuel its future growth.

Take-home salaries for ordinary Cubans are notoriously low. Most Bucanero workers can't afford to drink the beer they brew. Although the Cuban government provides workers' basic necessities such as food, lodging and medical care, a typical truck driver at Labatt's Holguin plant takes home only U.S. $36 a month, for a 56-hour workweek. That's a lot of money by Cuban standards, but it's hardly enough to provide for luxuries such as beer.

But the 1.9 million tourists who visited Cuba last year are flushed with cash. For them, paying $0.75 for a beer is eminently affordable. And despite the Castro administration's continued introspection about how far to extend Cuba's market reforms, tourism appears poised for major growth.

"They have nice quiet beaches, many of them in isolated places," says Marc-André Menard, a spokesman for the El Senador Hotel, which is operated by a consortium of Quebec investors including former Montreal Canadians captain Serge Savard. "And they really know how to take care of tourists.

Menard should know. In just three short years since the 690-room complex opened it has become the most popular destination for Canadian tourists. Not surprisingly considering Savard's high profile in Quebec, most of the hotel's initial visitors were Quebecers. But the El Senador has been pushing the Ontario market heavily, and last year more than half of its 35,000 visitors were drawn from other markets.

Indeed it's hard to overstate Cuba's tourism potential. The island offers an unbeatable combination of stunning natural beauty, magnificent colonial architecture and an educated, vibrant and friendly population. But its crown jewel is its spectacular coastline of undeveloped beaches, which makes developers' mouths water.

Approximately eight million tourists visit the Caribbean each year, most of them Americans, who are barred by U.S. law from visiting Cuba. Both the U.S. House of Representatives and Senate recently passed legislation to reverse the travel ban. Only a threatened veto by the Bush administration kept it off the table.

Experts say that such a move could eventually boost U.S. visits to Cuba to about 5 million per year. This would create a bonanza for companies like Labatt that rely on tourist dollars for growth.

"If the travel ban were lifted we would expect an increasingly larger number of Americans would be able to experience Cuban beers once again," says Innanen.

That boom would also send the hotel industry, in which Canadians are big investors, soaring.

"Room prices would rise by 25 per cent immediately," says Marcelo Montenegro, president of Wilton Properties, the Cuban arm of Leisure Canada International, whose chairman Walter Berukoff has been investing in Cuba since the early 1990s. "But more important occupancy rates would skyrocket."

Leisure Canada has options on several properties in Cuba which are in various stages of development. The most advanced of these is its U.S. $95 million Monte Barreto project, a massive 850 room two-block, waterfront development in Havana's Miramar business district. The company is expected to break ground on the project's first phase during 2005 and Montenegro has no doubt that demand will be hot.

"Tourism was up last year, and the first quarter numbers are good too," says Montenegro. "There has been no new hotel capacity added during that time. So we will be in a good position."

But doing business in Cuba is not all peaches and cream. One big potential pitfall is Title IV of the Helms-Burton law, which gives the U.S. administration leeway to ban executives and directors of companies that traffic in property nationalized by the Cuban government, from travelling in the U.S.

Title IV has been only rarely used in the past, including once against Canadian-based Sherritt Inc., the largest foreign investor in Cuba. But the Bush administration, anxious to keep the Cuban exile community in the crucial Florida battleground state happy in an election year, recently resumed enforcement of the provision. Although the restrictions the U.S. government is threatening are against a Jamaican firm --Superclubs,-- Canadian execs did not miss the message.

In fact, most Canadian firms that plan to invest in Cuba, such as Leisure Canada go to great lengths to ensure that none of the property they buy once belonged to Americans.

Labatt executives are particularly vulnerable to the Helms Burton provisions due to the company's use of the disputed Cristal brand, which commands an 80 per cent share of the Cuban beer market.

Labatt has extensive holdings and interests in the U.S. and complex negotiations surrounding Brazilian giant AmBev's imminent acquisition of Labatt's parent Interbrew, have raised the stakes even more.

Lawyers from Blanco Herrera Holdings have warned the Canadian brewery that use of the Cristal trademark could make it subject to sanctions under Helms-Burton's Title III and IV provisions.

"We have an issue with Labatt. They are trafficking in stolen property," said Manny Portuondo, a Ramon Blanco Herrera Holdings spokesman. "We will use the laws of the United States to enforce our interests."

Labatt executives refused any comment on the Cristal trademark dispute. But the company's actions speak louder than words. Like many investors in Cuba, Labatt's Cuban holdings, business dealings and even its choice manufacturing facilities have been structured to insulate it from potential U.S. retaliation.

Other problems that Canadian companies face dealing in Cuba are typical of those dealing in a centralized economy. They include widespread corruption, bureaucracy and ever changing legislation.

One of the biggest challenges is employee theft, which is rampant, due to Cuban workers' subsistence wages.

According to one Canadian businessman who has extensive dealings in Cuba, almost anything that can be moved is vulnerable to theft. That including parts, household items and building supplies such as cement, which are especially valuable on the black market.

Thefts typically involve all the employees in a department. To make sure no one rats out the culprits, all employees share in the proceeds, even managers and those on vacation.

"It's a very socialistic way of stealing," said the businessman, who has been targeted repeatedly in his own operation. "You just can't watch them all the time."

Companies deal with the problem the best way they can. For example all vehicles that leave Labatt's Holguin plant are searched. But these searches have only limited effectiveness.

As one hotel employee said with a smile: "The guy at the gate who looks through cars is a Cuban just like me. He has a family to feed too."

But according to most businessmen, the problems of doing business in Cuba are typical of the developing world. And those problems are small compared to the potential windfall profits that will greet companies who got in early, especially if the travel ban is eventually relaxed.

Democratic Party hopeful John Kerry, who now leads Bush in the polls, is thought to be far more open to Cuba, and Canadian businessmen will be watching the U.S. election results carefully.

"People from all over the world come to Cuba," said Montenegro. "Why shouldn't Americans have the chance?"

 

 

Sidebar: Sherritt's Cuban success formula

On Cuba's northeastern tip, 50 kilometers from the U.S. Naval base at Guantanomo Bay sits one of the world's most formidable nickel deposits.

If past experience is any guide, Toronto based Sherritt Inc., which already operates a nickel mine in Moa, adjacent to the promising property, has a better than average chance of sealing a development deal with a Cuban government.

"It's one of the cheapest nickel expansion opportunities on the planet," says Ian Delaney, Sherritt's low-profile chairman. "We haven't put the final pin into (the deal) yet. But we are going to do it."

Delaney is probably right. That's because Sherritt, has shown a unique and consistent ability to roll with the punches and to profitably take advantage of evolving opportunities in the Cuban market.

In addition to the Moa mine, Sherritt operates oil wells, a soya factory and holds a 25 per cent stake in the Melia Las Americas Hotel. Its power unit produces more than 10 per cent of the island's electricity.

Much of Sherritt's success in Cuba is due Delaney himself. His contacts and skill at navigating the island economy's ebbs and flows are legendary. And his insights serve as a how-to guide for Canadian investors trying to succeed there.

According to Delaney, a successful Cuban strategy boils down to education, relationships and effective cash management.

Sherritt executives were among the first to understand one of the key challenges of dealing with Cubans: their perplexity with capitalism.

Canadian bosses often complain that their Cuban partners overstaff joint-ventures as they do non-profit state enterprises. Sherritt solved the problem by giving Cuban partners courses in business, finance and marketing.

"We spent a lot of money to send Cubans to Canada to study management," says Delaney. "But it's paid off."

Delaney's second strength, common among most top level Sherritt executives, is his clear love of the Cuban people, evidenced in his monthly trips to the island.

"This has been absolutely been the easiest place I've ever been to fall in love with the culture," says Delaney. "They are easy to get to know and they party readily."

Delaney's comfort comes in especially handy in a country where the rule of law is not fully matured and where verbal agreements matter.

"They place a great deal of store in a handshake," Delaney says.

Canadian companies operating in Cuba also need to watch their liquidity carefully, Delaney says, advice that Sherritt with $365 million of cash on hand on March 31, 2004 takes to heart.

That a good thing, because coincidentally, development of the new nickel property is expected to cost several hundred million dollars.

 

 

peter@peterdiekmeyer.com

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