Understanding the Evolving Cuban Consumer

Understanding the Evolving Cuban Consumer

          
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Understanding the Evolving Cuban Consumer

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  • Over the past 18 months, communications between the US and Cuba have improved significantly. The two countries now enjoy diplomatic relations, and President Obama’s recent trip to Havana was the first visit to Cuba by a US head of state in nearly 90 years. Restrictions on trade and travel are easing. Cuba has taken steps toward opening its market and loosening the rules governing private businesses, and it has made overtures toward reestablishing international trade. Both Pope Francis and the Rolling Stones traveled to Cuba during the past year, highlighting the scope of global interest in the country.

    All of these changes have created interest and excitement, and many of Cuba’s government ministries are backed up with requests from outside organizations looking to forge ties to the country.

    US consumer goods companies see a clear opportunity: Cuba’s economy is growing, yet its people still have very little exposure to consumer products and brands, so it remains one of the last true white-space markets on the planet. At the same time, most US executives know little about Cuban consumers. Economic data about the island’s economy is incomplete, and its retail and distribution networks are opaque. Management teams lack the data they need to properly assess the opportunity.

    Recently, BCG has been studying Cuba’s economic evolution, the emerging profile of Cuban consumers, and the potential opportunity for US companies. This article is the second in a series. The first looked at Cuba’s overall macroeconomic development. (See “What Cuba’s Economic Evolution Means for Multinationals,” BCG article, April 2016.) A third will analyze the country’s travel and tourism industry.

    In our analysis, we examined Cuba’s retail infrastructure and the behavior of its consumers, including their spending trends, brand awareness and purchasing habits, and sources of product information. (See “Methodology.”)

    Methodology

    BCG surveyed 326 Cuban respondents in Havana (Cuba’s capital and largest city) and an additional 114 in Santiago (a smaller city in the poorer, eastern part of the country) to capture the perspectives of different types of consumers. Responses were anonymous, and all survey participants were responsible for making purchasing decisions for their households. Respondents’ ages mirrored the country’s overall demographics. However, given Cuba’s aging population, we sought to capture a larger proportion of younger respondents, who are considered by consumer goods companies to be more attractive customers.

    The respondent base included people who work for the state as well as those in the country’s emerging private sector. We also identified those who receive remittances—such as money and gifts—from the US and those who do not. Because Cuba has extremely limited Internet access, we conducted the interviews in person. For questions related to income and spending, we confirmed which of Cuba’s two currencies applied to each respondent’s answers.

    In addition to the survey, we interviewed experts across a range of disciplines in the US, Cuba, and Latin America, and we spoke with Cubans who had recently left the country for the US. Furthermore, we visited the island to study the country’s retail and distribution infrastructure firsthand.

    Our research results focus on consumers in urban areas. Overall, we believe that consumers in more rural areas have less purchasing power because of their limited access to remittances from friends and family in the US and less income from private enterprise and tourism.

    This study represents one of the first formal studies of the consumer market in Cuba. The retail landscape is still relatively undeveloped, as are the means for gathering market intelligence. We believe that our analysis is directionally accurate, but we also understand that some findings may not be in alignment with the direct or anecdotal experience of people doing business in Cuba.

    The results of our research suggest that the opportunity for consumer goods companies in Cuba will likely expand over the next five to ten years, primarily because of a small but growing group of urban, increasingly affluent consumers who have access to private income that supplements their government salaries. Some local factors—such as stiff regulations and a lack of infrastructure—present sizable challenges to foreign companies trying to get their products into the hands of Cuban shoppers, even compared with the challenges of other developing markets. (See “Getting Goods to Market.”) Yet over the long term, and with continued development of the economy, Cuba represents a promising opportunity.

    Getting Goods to Market

    US companies interested in establishing a footprint in Cuba may find that the process is challenging. The usual first step is to secure a license from the US government. Under the terms of the Cuba embargo, which was established in 1962, all domestic companies seeking to do business with Cuba must gain US government approval. Approvals have been most commonly granted in categories such as food and medical supplies, although, lately, the number of categories and the number of licenses issued overall have been rising. The US government stipulates the amount of product a company can sell. This degree of government control will not change as long as the embargo remains in place.

    With a license in hand, companies must work with Cuba’s Ministry of Trade, which controls the wholesale and retail sale of goods. (Companies may get permission from the Cuban government first and then approach the US government. That, however, is not the norm.) Companies may also work with a distributor that already has a relationship with the government, but, either way, the Cuban state makes all decisions, particularly regarding the quantity of goods and how they will be distributed. The quantity is frequently lower than what the US government allows, and such decisions are final. If, for example, supply runs out in October, the product will not be restocked until the beginning of the next year.

    The government handles distribution. However, payment systems, logistics, and even transportation infrastructure, such as refrigerated trucks, are all very basic in terms of capabilities. The country’s retail network is split into three primary channels:

    • Libreta, or ration book, stores are government-owned sites that sell primarily subsidized food—such as rice, beans, oil, and flour—and basic goods under a system that uses Cuban pesos.
    • Government-owned chains such as Cimex (Cuban Export-Import Corporation), TRD (Tiendas Recaudadoras de Divisa), and Cadena de Tiendas Caracol operate independently and sell other food and goods that are not included in the ration system. The government allocates products and sets category budgets for each outlet.
    • Some very small private retailers—mainly street vendors and home-based shops—also sell a small array of goods. These retailers are very fragmented and highly regulated. For example, people may sell clothing, but only garments that they themselves have made.
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