Cuba - Tourism as a Replacement Industry

By Michael A. Stein  Miami and Lani Kane-Hanan  Miami

During the Cold War, the Soviet Union's strategic alliance with Cuba generated $5 billion annually in financial aid to the small island nation, located just 90 miles off the southeastern coast of the United States. The breakup of the Soviet Union dealt a severe blow to this support, which, coupled with the drop in world prices for agricultural products, forced Fidel Castro's government to seek replacement industries. Tourism has been the country's prime bid for economic survival.

Cuba Key Facts Visitor Highlights
Largest Caribbean island 44,200 Sq. Mi. Approximately 617,000 visitors in 1994 (an increase of 77% from 1990-1994
Population Approx. 11.0 million 16.1% average annual growth from 1990 to 1994
Per Capita Income US $1,500 Approximately 23,600 hotel rooms of international standard
Work Force 3.6 million $720 million in gross tourism revenues in 1993
Language Spanish

Prior to 1959, Cuba was a magnet for tourism by virtue of its natural beauty and advanced infrastructure. With more than 350,000 annual visitors from the United States, Europe and Latin America, Cuba was the single largest tourism destination in the Caribbean, even surpassing the tourism industries in neighboring Central American nations. Building on this historical tourism base, the current Cuban government believes that the industry can be reactivated with limited investment. To support this initiative, the government has amended legislation (Legislative Decree No. 50) which permits joint ventures in the construction and reconditioning of hotels and other land-based tourist attractions.

According to Cuban officials, foreign investment in Cuba totaled an estimated USD $2.2 billion from 1990 to 1995. Nevertheless, a number of private and public sector sources estimate that this figure is exaggerated and that the realistic total is actually under USD $50 million in hard currency investment.

Cuba currently has approximately 180 hotels with more than 23,000 hotel rooms and another 10,000 rooms in the planning stage. Despite the U.S. embargo and travel-related restrictions, tourism surpassed the sugar industry as Cuba's strongest economic sector in 1994. During this period, the country attracted more than 600,000 visitors - although Cuban government sources have placed that figure at above 700,000. Preliminary estimates have indicated an increase of 6 percent in visitor volumes for 1995. However, current tourism to Cuba may be seriously affected if the new embargo levied in the Helms-Burton legislation remains unmodified. U.S. Congress approved this legislation after two private planes piloted by Cuban Americans were shot from the sky by the Cuban military in February, 1996. The embargo threatens lawsuits against foreign companies and exclusion of their executives from U.S. soil for use of any property in Cuba ever confiscated from anyone who is now a U.S. citizen.

Cuba's Hotel Profile

In general, Cuba's hotel product has been developed through joint venture partnerships between Cuban agencies and foreign investors, primarily from Europe, and to a lesser degree, Canada and Latin America. Hotel properties are concentrated in three major areas: Havana, Varadero and Cayo largo. The island's five major hotel owners include Cubanacan, Gran Caribe, Gaviota, Horizontes and Marinas Puertosol. In comparison to U.S. standards, more than 70 percent of the hotels in Cuba are two-to-three star product and less than 1 percent of the rooms inventory is of a luxury standard.

Cuba's market has been segmented with the vast majority of travelers arriving on low-priced packaged tours. The overall average room rate in the Caribbean exceeds USD $80. By contrast, Cuba's average room rate is under USD $50, which places it in last position in the region. To attract tour and wholesale packages from different regions, Cuba has networked with other Caribbean destinations. Three agencies sponsored by the government - Intar, Cubanacan and Gaviota - coordinate this networking, as well as serve as a conduit for the development of hotels.

A Slate of Tourism Goals

The Cuban government has set aggressive tourism goals to achieve by the year 2000. These objectives include increasing visitor levels by a factor of four. Other goals include:

  • Attract 2.5 million tourists per year (3.5 million if U.S. restrictions on travel and trade are lifted).
  • Generate USD $3.12 billion in hard currency revenue.
  • More than double available hotel rooms to 50,000f.
  • Invest USD $2.4 billion for development projects.
  • Operate cruise ships from three ports.
  • Add 14 additional hotels in Old Havana.
  • Expand airport facilities.
  • Develop four golf courses.
  • Replace aging air fleet.
  • Develop the island's watersport infrastructure.

Being the largest land mass in the Caribbean with more than 300 beaches, Cuba is an extraordinary "sun and sand" destination. It has a hotel inventory stock second only to the Dominican Republic, and remains a safe environment for travel. Cubans employed by the hospitality industry are generally warm and friendly with a tremendous desire to serve the "guest." Cuba looks forward to further complementing its tourism strengths with the addition of the country as a Caribbean cruise destination.

Even with these strengths, Cuba's tourism goals may be difficult to meet. Cuba must upgrade tourism products and adopt new strategies to attract more exclusive markets. This is essential to expanding tourism and improving the standard of living. In the industrialized world, the tourism dollar generally has a multiplier effect of 1.5 to 3.5 in the local economy. This is not the case with the packaged wholesale tours which are the current, predominant driver of visitations to Cuba. Wholesale tour operators provide a volume of visitors who do not typically generate additional expenditures outside the packaged tour to any great degree. As such, a country can remain stagnant economically even as it attracts more visitors. Few nations, however, have been able to move from a mass tourism market to an exclusive and less-price sensitive market over the short-to-medium term. On average, this turn around of image can take 10 to 15 years.

A number of hurdles must be overcome to achieve tourism goals, particularly in the absence of U.S. tourism - the largest single market generator and highest visitor expenditure to the Caribbean. Cuba's tourism industry currently relies exclusively on charter airlines. Food and goods are imported, on the whole, at high cost. Their variety is limited in entertainment, food and shopping, thus tending to shorten the visitor's stay. In addition, the island's shortage of energy, spare parts, materials, supplies and food stuffs, further impairs efficient operations in the hospitality sector.

Foreign Tourism Investors Urban Hotels
(four major cities)
Costa Cruises Italy
# rooms
Guitart-Hoteles Spain Havana 5,495
LTI Germany Santiago de Cuba 985
Melia Sol Spain Camguey 1,129
Raytur Caribe S.L. Spain Holguin 442
Rogner Group Australia
SuperClubs Jamaica

To construct and operate new tourism-related facilities, the government has been forced to maintain control of the cost of labor and goods, while charging international rates for their use. For example, the average wage of non expatriate hotel employees ranges between the equivalent of USD $3 and $6 monthly. As a result, properties can maintain a profit margin with low average rates and, at the same time, use these profits to renovate and build new properties. However, this does not raise the standard of living for the Cuban population, forcing the workforce to seek alternative jobs, which has led to further social degradation. Foreign corporations are not permitted to contract directly with the island's workforce, further impairing the provision of quality service levels.

A Post - Castro Cuba

A post-Castro Cuba has sparked the interest of many of the major hospitality players in the United States. The aging Castro's ultimate departure from government is the subject of intense speculation. A post Castro era is unlikely to be similar to the political and economic changes that have taken place in Eastern Europe with the fall of the Soviet Union. Prior to 1959, Cuba was a major trade force in the Caribbean, given its strategic location off the U.S. coast. Under a new government, the exiled Cuban population living in the Americas, as well as in Europe, will almost certainly become a major economic force with rapid infusion of investment capital to rebuild the country. In addition, the population base of more than 10 million would not only be rapidly assimilated into a market economy, but also become a large consumer market in itself.

Clearly, the quality and condition of the island's infrastructure will continue to be one of the nation's major impediments to future development. It is estimated that only a quarter of the island's infrastructure is operational. The Cuban government has announced plans to build a new $60 million passenger terminal at the Havana International Airport, capable of accommodating 3 million passengers a year. The first phase of the new airport terminal opened in December 1995, with additional improvements scheduled for completion in 1997.

The existing hotel inventory would not support the expected influx of business travelers and tourists. A post-Castro Cuba would potentially attract a wide range of visitors, including exiled Cubans and adventuresome travelers seeking to experience the unique qualities of the island before it is redeveloped. At the same time, it is likely that the rapid infusion of capital by the exiled Cuban community and by foreign governments through multilateral and bilateral institutions would generate accelerated development. The island's redevelopment would place a strain on all types of infrastructure and services as commercial and industrial projects were developed.

The rewriting of Cuba's Constitution and establishment of zoning and development ordinances could also be expected to create a chaotic situation under the strain of meeting economic goals and preserving the island's natural strengths. Castro's rise to power led to confiscation of almost $2.0 billion of U.S.-owned property in 1962. As a result, a post Castro, free-market Cuba would likely lead to a variety of U.S. corporate and individual property claims. The process may be complicated, and the resolution of these claims is likely to be a stipulation of resuming American-Cuban relations. In September 1995, Cuban laws related to foreign investment were passed which clarified foreign investment guarantees and simplified many of the island's investment procedures.

Opportunities for hotel investors in a post-Castro Cuba could be excellent with tremendous potential to achieve short, medium and long-term profits. Nevertheless, it may take at least a decade before Cuba's political and economic structure is clarified and stabilized.

(A partner of Arthur Andersen, Michael A. Stein has responsibility for the  firm's Real Estate Advisory Services in the Miami office. As a Manager in the firm's Miami office, Lani Kane-Hanan worked extensively with the hospitality industry in the Caribbean.)

This  report also features:
The Russian Hospitality Industry - A Market Economy Evolves
Vietnam - An Emerging Hospitality Market in Transition.

©Arthur Andersen

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