Slow road for US hotel companies eyeing Cuba
29 APRIL 2015 6:43 AM
Many obstacles stand between U.S.-based hotel companies and the lucrative Cuban market, said speakers at the Caribbean Hotel & Resort Investment Summit.
MIAMI—The door for U.S. companies to enter Cuba is ajar, but it won’t be thrust open any time soon.
That doesn’t mean there isn’t opportunity for those companies in the island nation located 90 miles from the Florida shores, according to speakers at the Caribbean Hotels & Resort Investment Summit.
The conference’s 400 attendees heard repeated references to the 17 December 2014 announcement that the U.S. was lifting sanctions on Cuba. Most speakers said it will take time for any meaningful change to occur.
They reminded attendees that the U.S. embargo on Cuba remains in place, but there’s optimism the hotel industry will benefit greatly when it is eventually lifted.
“This is not the end, this is not even the beginning of the end,” said Pedro Freyre, partner with Akerman and a Cuban American. “It may be the end of the beginning.”
“It is not something that is going to happen automatically,” added Alejandro Zozaya, CEO of U.S.-based Apple Leisure Group. “There’s tremendous potential, but there are a lot of challenges.”
Jorge Duany, director of the Cuban Research Institute at Florida International University, said there won’t be major changes in the short term. He cited the policy that allows U.S. citizens in 12 categories to make the trip to Cuba. That translates to 100,000 people a year.
Travel-related transactions are permitted by general license for certain travel related to the following activities, subject to criteria and conditions in each general license: family visits; official business of the U.S. government, foreign governments, and certain intergovernmental organizations; journalistic activity; professional research and professional meetings; educational activities; religious activities; public performances, clinics, workshops, athletic and other competitions, and exhibitions; support for the Cuban people; humanitarian projects; activities of private foundations or research or educational institutes; exportation, importation, or transmission of information or information materials; and certain authorized export transactions.
Duany said the benefits of an eventual embargo lift will go both ways. Already there is activity in Cuba to prepare for that eventuality.
“I foresee an immediate growth in the tourist industry, perhaps not related to the big U.S. market until the embargo is lifted in the next couple of years,” he said.
Executives of American companies wishing to eventually conduct business in Cuba need to take one simple step, according to the speakers.
“Get on the plane,” Freyre said.
“You don’t have to wait for the embargo to be lifted—there’s already tremendous traffic,” Duany added.
The lifting of the sanctions and eventual dismissing of the embargo will have a huge effect on the hotel industry in Cuba, Freyre said.
“The Willy Wonka gold ticket (for Cuba) is hotels, it’s tourism,” he said.
A solid hotel industry already exists
Zozaya said the hotel inventory in Cuba one notch below that in the U.S.
“Rates are a little lower, and operations of the hotel present a challenge,” he said. “There are big opportunities to develop 5-star infrastructure, particularly a high-end market that wouldn’t be happy with the current product.”
Occupancy in Cuba, particularly in resorts, matches high occupancy areas of other major Caribbean markets, Zozaya added.
Things that most Americans view as essential—included air conditioning, quality food outlets, quality roads and shopping—are lacking in most of Cuba’s current inventory, according to Zozaya.
“The type of convenience Americans are used to just isn’t there,” Freyre said.
But that doesn’t mean there isn’t a successful hotel industry. European hotel companies have operated in Cuba for years.
“It is a prosperous business, it’s profitable,” Zozaya said. “There is not enough supply in the market.”
Zozaya warned that too many tourists too quickly could present problems.
“The proximity to the U.S. could be a double-edged sword,” he said. “It could become a weekend play, which is not good for the country, not good for us in the business. They need to develop the additional things to do to increase the stay, otherwise the temptation of going there for just two nights is too huge.”
Therefore, Zozaya said the cruise industry will be the first to benefit when the embargo is lifted because ships can travel from port to port and provide the expected amenities from American travelers.
“The cruise chips will take a huge advantage in the short term,” Zozaya said. “That could have an impact on other major cruise ship ports in the Caribbean.”
Most speakers that addressed the issue said they didn’t think the thawing relations between the U.S. and Cuba would affect other Caribbean destinations.
“Cuba I think of as a magnet,” said Frank Comito, CEO and director general of the Caribbean Hotel & Tourism Association, during the conference’s opening “Emerging opportunities in the Caribbean” session. “I don’t subscribe to a doomsday approach to it. There’s a rising tide, and everybody benefits.
“Cuba is something we should embrace and figure out how it works to everyone’s advantage and also use it as a motivator to improve and enhance our existing properties and competitiveness,” he said.
There will be roadblocks
Zozaya cited infrastructure, monetary and legal issues as three big hurdles Cuba must clear before it can become a serious player in the global hotel landscape.
Freyre called the infrastructure “deficient across the board.” He cited energy shortages caused by the lack of natural resources and the lack of efficient delivery methods and pothole-ridden roads as primary shortcomings.
“Cuba is going to need a massive, massive amount of investment to get all that infrastructure going,” Freyre said.
In a chicken-and-egg scenario, Zozaya said he envisions infrastructure improvements in Cuba being driven by the industry that needs it the most.
“Infrastructure is going to be driven by tourism and all of the industries linked to tourism, mainly hotels,” he said.
There are other potential bumps not related to physical infrastructure, according to the speakers. Zozaya said a significant roadblock is investing options in Cuba exist only in a 50/50 partnership with the government. On the operations side, hotel companies will be able to manage properties owned by the government.
“We don’t have right to acquire property by ourselves,” Zozaya said. “That has nothing to do with the embargo, but I hope that changes as well.”
Freyre said the continued belief by some government executives that capitalism is the enemy will stunt immediate growth in the country. He said property rights and predictable, applicable rules—along with the government stepping out of the way to allow business to flourish—is the recipe for success for the island nation.
Duany said the Cuban government will need to recognize dual citizenship to foster investment from Cuban Americans.
“Internal policies in Cuba have to change if they really want to grow and compete with the international destinations,” Zozaya said.
Freyre said one thing American companies will need to understand about Cuba is that it still has a feudal system with definite classes built around territorial hierarchy.
“You need to understand the lay of the land,” he said. “You need to understand who opens what door; make sure you don’t step on the wrongs toes. It is absolutely critical to make the right contacts at the right place.”
While the workforce is intelligent, it’s important for American companies to remember that two generations of workers have had “guaranteed” jobs from the government, so there will be a learning curve for them when it comes to meeting Western service standards, Freyre said.
“There’s an immense labor force waiting there to be trained,” Duany said.
Freyre also said the fact that currently employers pay an employee’s salary in U.S. dollars to the Cuban government, which then dispenses it in pesos to the employee will cause issues when the embargo is lifted.