Canadian Business
June 21, 2004

The Cuban connection

Canadian companies like Labatt are grabbing key roles in the island economy

Peter Diekmeyer | In Cuba
A half-dozen young Cubans sit at tables overlooking the dance floor on the 25th floor of the Habana 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 beat. "You are true friends of the Cuban people." His companions, Anna, Joellis and Wesysley, agree. Although the 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 SA, 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, friendly Latin culture--and indefatigable Communist leader, 77-year-old Fidel Castro. But during the past decade, a small group of Canadian companies have quietly taken major positions in several 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 Rafael Dausá, 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 Cuba's 2.5-million-hectolitre 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% interest in Cerveceria Bucanero, 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."

In Communist Cuba, the beer market is highly regulated. Most of the beer consumed is produced by state enterprises and then sold for pesos to ordinary Cubans as part of their monthly food allotment. But about 30% of Cuban beer is bought in so-called dollar stores and hotels frequented by foreign tourists and state officials. It's this attractive chunk of business Labatt targeted when it signed on to 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 vast untapped tourism potential to fuel its future growth. The 1.9 million tourists who visited Cuba last year are flush with cash; for them, paying 75¢US a beer is eminently affordable. And despite the Castro regime's continued introspection about how far to extend market reforms, tourism is 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, operated by a consortium of Quebec investors including former Montreal Canadiens 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 in Cayo Coco, off the northern coast of Cuba, it has become a 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 and Maritimes markets heavily, and last year almost half of its 35,000 visitors were drawn from outside Quebec.

Millions of tourists visit the Caribbean each year, many of them Americans who are barred by U.S. law from visiting Cuba. Both the 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 easing travel restrictions could lead to hordes of U.S. tourists visiting Cuba, just 150 kilometres from Key West, Fla.

That would create a bonanza for companies like Labatt that rely on tourist dollars for growth. It would also send the hotel industry, in which Canadians are big investors, soaring. "Room prices would rise by 25% immediately," says Marcelo Montenegro, president of Wilton Properties Ltd., the Cuban arm of Leisure Canada Inc., whose executive chairman, Walter Berukoff, has been investing in Cuba for a decade. "But more important, occupancy rates would skyrocket."

Leisure Canada has options on several Cuban properties that are in various stages of development. The most advanced of these is its US$95-million Monte Barreto project, a massive 850-room, two-block, waterfront resort 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," he says. "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 a day at the beach. One big potential pitfall is Title 4 of the Helms-Burton law, which gives Washington leeway to ban executives and directors of companies from travelling in the United States if they are deemed to be trafficking in property nationalized by the Cuban government after the 1959 revolution. Title 4 has rarely been used in the past, once against Canadian-based Sherritt International Corp., the largest foreign investor in Cuba. But the Bush administration, anxious to keep the Cuban exile community in the crucial Florida battleground 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 investing in Cuba 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, according to Labatt, a 35% share of the Cuban hard-currency beer market. Lawyers from Miami-based Blanco Herrera Holdings have warned the Canadian brewery, which has extensive holdings and interests in the United States, that use of the Cristal trademark could make it subject to sanctions under Helms-Burton's Title 3 and 4 provisions. "We have an issue with Labatt. They are trafficking in stolen property," says Manny Portuondo, president and managing director of Blanco Herrera Holdings. "We will use the laws of the United States to enforce our interests."

Labatt executives contend they bought the Cristal trademark from a nationalized Cuban company after the revolution, and that they own it outright. But their actions speak louder than words. Like many investors in Cuba, Labatt's holdings, business dealings and even its choice of manufacturing facilities have been structured to insulate the company from potential U.S. retaliation.

Other problems that Canadian companies face in Cuba are typical of those in a centralized economy. They include corruption, bureaucracy and ever-changing legislation. One of the biggest challenges is employee theft, which is rampant due to workers' subsistence wages. 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," says one businessman, who has been targeted repeatedly in his own operation. "You just can't watch them all the time."

Looking ahead, Democratic presidential hopeful John Kerry is thought to be far more open to Cuba than George Bush, and Canadian businessmen will be watching the November U.S. election results carefully. "People from all over the world come to Cuba," says hotelier Montenegro. "Why shouldn't Americans have the chance?" There are certainly some great Canadian-run resorts that would welcome them with open arms.