Bacardi and the Long Fight for Cuba

by Gjelten, Tom

  In 1973 Prado helped arrange for Ramón Arechabala to fly to Nassau to meet with Orfilio Peláez, the Bacardi executive designated by Pepín Bosch to handle Cuba-related issues. The two men discussed the prospect of a joint Bacardi-Arechabala effort to reclaim the Havana Club trademark. No accord was reached, however. Peláez said he needed to check on the status of the brand at the U.S. Patent and Trademark Office (USPTO), and the Arechabalas did not follow up. Other pressing commercial concerns soon intervened, and the idea of a joint Havana Club initiative was dropped.

  Most products manufactured in Cuba after Fidel Castro’s revolution were not of export quality, but there was a moderate international demand for Havana Club rum. Perhaps it was its Tropicana cachet, as the rum associated with the vibrant Havana nightlife, or maybe it was as smooth as its promoters claimed it was. Veteran rum workers in Santiago or Cárdenas knew the basics of distilling, aging, and blending, notwithstanding their lack of technical expertise and their ignorance of basic business management principles. The quality was undoubtedly inconsistent, but for every bad bottle there was at least one decent bottle. A Washington Post travel writer in 1978 reported that Havana Club rum was “good enough to drink any time of the day or night.” A rum reviewer for Playboy magazine wrote in 1983 that the Havana Club rums from Cuba that he tasted were “quite muted, with a shade more taste and character than the Puerto Rican ones.”

  In 1973 the Cuban authorities began exporting Havana Club to Canada, where a bottle could bring six dollars or more. In 1978 the president of Pepsi-Cola’s Wine and Spirits International subsidiary, Norman Heller, put his company in position to bring Havana Club to U.S. drinkers. President Jimmy Carter was moving toward the restoration of commercial relations with Cuba, and Heller hoped to be first in line to import Castro’s rum. In a letter to the president of the Cuban government’s export agency, Cubaexport, Heller said he and his fellow Pepsi executives were “very much interested in importing and selling Havana Club Rum in the U.S. market and are hopeful that we will be able to do so in the not too distant future.” In Europe the rum was distributed by Cinzano, the Italian vermouth manufacturer. By the early 1980s, Havana Club had been introduced in Spain, France, Germany, Italy, Sweden, and even in Britain, where it was served to customers at Trader Vic’s bar in the London Hilton.

  None of the Western markets ever accounted for a significant part of the Cuban rum trade, however. Fidel Castro, the only Cuban whose judgment mattered, believed Cuba’s future lay with the socialist East, not the capitalist West, and he cared more about satisfying the trade requirements of his Soviet bloc partners than about establishing new commercial relationships with Western companies. Between 1975 and 1984, the Soviet bloc took over 90 percent of Cuba’s rum exports.

  In return for its rum—as well as its tobacco, sugar, citrus products, and nickel—the socialist bloc gave Cuba virtually everything it needed. The Soviet Union shipped about thirteen million tons of oil each year to Cuba, about three million tons more than what the island needed. By selling the surplus on the world market, Fidel Castro’s government earned more than $500 million a year in much-needed hard currency. Socialist countries also financed and built steel mills, oil refineries, fertilizer factories, and nickel plants in Cuba and provided the island with most of its manufactured goods and half its food supply. The trade was on highly favorable terms, and Cubans were able to enjoy a relatively good standard of living.

  And then came the great shock: The whole socialist system suddenly unraveled, and Cuba was left on its own. In the late 1980s, Soviet premier Mikhail Gorbachev cast Marxist-Leninist orthodoxy aside and embraced free-market principles. When Fidel Castro defiantly refused to follow his example, Gorbachev insisted that Soviet aid to the island be restructured as loans rather than grants. But that was only the beginning. Encouraged by Gorbachev’s reforms, citizens across Eastern Europe rose up in the summer and fall of 1989, toppling Communist regimes from Berlin to Bucharest and decisively repudiating the very ideology that was the basis of Fidel Castro’s rule. Within months, new democratic governments took power across the region and began cancel ing the subsidized trade arrangements upon which Cuba depended. With the dissolution of the Soviet Union at the end of 1991, all its aid to Cuba—both military and economic—was eliminated. Russia and other former socialist countries continued to trade with Cuba, but only on the basis of international market prices.

  For the Cuban economy, the effect was staggering. In 1989 Cuba received about six billion dollars in aid and subsidies from socialist allies; in 1992 it received zero. The effects of the U.S. trade embargo became a far more serious concern. Seeing an opportunity to undermine Castro’s rule, the U.S. government in 1992 made the embargo even tighter. A fall in the market price of sugar, Cuba’s main commodity export, made the situation still worse. Cuban economists estimate that the country’s total output during the 1989-92 period shrank by at least 40 percent. With oil supplies cut in half, the industrial sector operated at only half its capacity. Factories were open only during daylight hours, and many closed during the months of July and August, with the workers being sent to the countryside to do agricultural work. Oxen replaced tractors in the fields.

  Many observers predicted the Castro government would collapse under the strain, as surely and suddenly as the socialist governments of Eastern Europe had fallen. Castro himself seemed to welcome the crisis, just as he had embraced earlier life-or-death moments in his revolution—at the gates of the Moncada, in the Sierra Maestra mountains, at the Bay of Pigs, or during the nuclear showdown in October 1962. He would either survive or go down in glory, taking his revolution with him; the prospect of a final suicidal stand actually seemed to excite him. Faced with the collapse of the Soviet bloc, Castro replaced his old “fatherland or death” exhortation with a new one: “socialism or death.” His speech before a meeting of the Communist Youth in April 1992 was pure bravado: “True revolutionaries never surrender, never sell out, never betray. That is for cowards, traitors and opportunists. None of us want that trash that [capitalists] are offering us. We prefer any sacrifice, any fate, to the humiliation that capitalism entails.”

  In reality, Castro knew he had no practical choice but to compromise if his regime were to survive. Within a year of that 1992 speech, he was grudgingly moving to allow reforms he had spurned just a few years earlier. Cubans would for the first time be allowed to hold hard currency, including U.S. dollars, and spend them in stores previously reserved for diplomats, tourists, and foreign businessmen. The reform made it possible for Cubans to receive cash remittances from their relatives in exile, providing the Cuban economy with a boost in foreign currency earnings. Castro also agreed to tolerate self-employment in Cuba, in areas ranging from shoe shining to handicrafts, and he allowed farmers’ markets to reopen. But such reforms were not enough. Abandoned by his old socialist allies, Castro realized he would have to integrate Cuba with the West if his revolution were to survive. He would have to do business with capitalists.

  The Cuban government in 1982 had authorized foreign investment on the island, as long as it was carried out through joint ventures with the Cuban state. The conditions were restrictive, however, limiting the foreign partner to a minority stake, and Castro did not bother to promote the few investment opportunities that did exist. He made no secret of his distaste for foreign capital, and the Cuban government offered minimal legal protection for those Western businesses willing to invest on the island. As of 1988, the only joint venture on the island was the Sol Palmeras Hotel at Varadero Beach, partly owned by Sol Meliá, a Spanish hotel company.

  The Varadero venture was a logical starting point, however. Cuban officials knew that tourism, once scorned by Castro, held enormous potential for the island, and in 1990 the government loosened the labor regulations for tourism ventures, giving managers in those enterprises more leeway in firing and hiring decisions. Several more hotel developments soon followed. In 1992, three months after denouncing the “trash” that capit
alism brought, Castro approved new terms for foreign investment in Cuba, allowing foreign partners in joint ventures to hold up to 50 percent of the shares and permitting them to repatriate all profits. “Capital and capitalism are not the same,” he told a group of visiting businessmen and potential investors. “Capitalists will not be the owners of our country. The country will continue to be socialist.” Foreign investors heard what they wanted to hear and ignored the rest. By 1993, the number of joint ventures in Cuba had risen to more than a hundred. Many were in tourism, but there was considerable foreign interest in other promising sectors of the Cuban economy, including nickel, tobacco, telecommunications ... and rum.

  When the Soviet bloc collapsed, so did Cuba’s rum trade. Commercial relations in the socialist world consisted largely of barter deals, and Cuba had been sending large quantities of rum to its allies in direct exchange for other products. No attention was paid to marketing, and there were almost no commercial distribution networks of the type that existed in Western countries. Among the socialist allies, rum was treated as just another commodity, like sugar or oil. When the big government-to-government trade deals were suspended, most of Cuba’s rum went unsold. In 1986 Cubaexport had shipped more than a half million cases of Havana Club to the Soviet Union and Eastern Europe. In 1992, with Cuba’s trade relations reshaped by free-market forces, the agency managed to move only four hundred cases across the same region. About 175,000 cases were sold in the rest of the world that year, but it was the lowest Havana Club export volume in more than a decade.

  The global changes affected the Cuban rum business more than the country’s sugar, citrus, or nickel industries, because those products were relatively undifferentiated and could be sold in quantity at prevailing world prices. Rum, on the other hand, had to be marketed. Consumers cared about brands and color and quality; they had to be convinced to buy Havana Club in particular rather than another spirit. Cuban state enterprises, moreover, had less experience in brand promotion and advertising than did their Western commercial counterparts and were therefore not well positioned to compete, especially in those countries where Cuban products were not well known. If the Havana Club rum operation were to do well under the changed geopolitical circumstances, it would need a foreign partner with marketing expertise.

  There was immediate interest among Western companies. After Communism’s collapse, potential investors figured it was only a matter of time before Cuba would also make the transition to capitalism. Foreign firms were anxious to get an early foothold on the island, and the Cuban rum business held great promise. The tourism boom was bringing hundreds of thousands of foreign visitors to the island each year, and the number was rising sharply. Just as U.S. visitors to Cuba during the early part of the century had become fans of Bacardi rum, tourists in the 1990s were likely to go home hooked on Havana Club. Seagram’s, the Canadian liquor giant, and Britain’s International Distillers & Vintners (IDV) both began maneuvering to get a piece of the Cuban rum business.

  The most eager suitor, however, was Pernod Ricard, the French company best known at the time for its anise spirits. The Pernod Ricard president and chief executive, Thierry Jacquillat, saw the possibility of a joint rum venture as a way to move Cuba toward a market economy. “The idea was that the Communists had failed,” he said later. “I thought the Cuban people should get assistance from other countries than Russia. I thought it would be a good idea for them to work with European companies.” In the fall of 1992, Jacquillat sent the Pernod Ricard director for Spain, Michel Bord, to Havana to inquire about the possibility of a joint French-Cuban venture to develop the Havana Club brand in Europe and beyond.

  To Jacquillat’s dismay, Bord came back from Havana with a pessimistic report. The Cubans, it seemed, had such strong emotional and cultural ties to their rum that they did not want to share it with a foreign capitalist partner. Selling oil exploration rights or access to Cuba’s nickel deposits or beaches was one thing; rum was apparently something else. Bord told Jacquillat the Cubans with whom he met told him Havana Club was a “national jewel,” and he predicted it would be “tough” to negotiate co-ownership of the brand with them. Jacquillat, however, was determined to pursue a deal. In Spain and a few other Western markets, Havana Club rum was already emerging as a top-performing brand. With more professional marketing and the Pernod Ricard distribution network, the brand clearly had growth potential.

  The key official on the Cuban side was Luis Perdomo, a veteran Cuban bureaucrat who had gone from directing the state flour company to taking charge of rum production at the Empresa Bebidas y Licores (Beverage and Liquor Enterprise). Perdomo was a loyal member of the Cuban Communist Party, but he was also a savvy businessman, and he was not going to negotiate joint ownership of the Havana Club brand at anything below a steep price. In September 1993, he and other Cuban officials reached a tentative agreement with Pernod Ricard representatives on a joint venture: The Cubans would produce Havana Club rum, and Pernod Ricard would market it.

  Bacardi executives followed all these developments closely. Havana Club was by no means a serious competitor, but the Bacardis still resented that it was marketed as the “genuine” Cuban rum. Bacardi was now a multinational company with no overt connection to Cuba, but since the early 1960s the Bacardis had been determined to return to Cuba and reestablish operations there. At this key moment in Cuban history, they were not inclined to stand aside and let Fidel Castro and his foreign capitalist friends claim the heralded Cuban rum business for themselves.

  Thirty years earlier, the Bacardis and the U.S. government had supported attempts to overthrow Fidel Castro by force. But it now appeared the Castro regime might collapse under its own weight, fatally weakened by the same maladies that had undermined Communist governments in the Soviet Union and Eastern Europe: inefficiency, corruption, mismanagement, and popular alienation. Around the world, the socialist model was proving to be unsustain able, and the suspense in Cuba lay mostly in the uncertainty of how the end would come, what would be preserved, and who would emerge in control of national jewels like the rum and tobacco industries.

  The Bacardis had hoped there would be a sharp, clean break from the Castro era and a quick transition to democracy and a free-market economy. What was shaping up instead was a gradual and negotiated change. The Eastern Europe experience demonstrated that the end of Communist rule did not necessarily mean the end of power and privilege for the nomenklatura elite who had been on top during the years of dictatorship. Negotiated transitions to democracy were likely to leave many of the old elites in control of the very resources and institutions they had dominated previously. With the privatization of state-owned enterprises, the former managers of those enterprises could emerge with a big share of the profits, because they knew the assets of the enterprise and had all the important contacts. Too often, in Russia and elsewhere, the transition had not been from Communism to democracy and free markets, but from Communism to cronyism and more corruption. The battle looming might not be with Fidel Castro so much as with those other actors, including foreign corporations, who were positioning themselves to move in after Fidel was gone.

  In October 1993, Bacardi chairman Manuel Jorge Cutillas wrote an open letter to liquor executives around the world cautioning them about investment deals with the Cuban government and warning that such actions could get them in legal trouble with his own company, which had not abandoned its claim to the Cuban assets it had lost more than thirty years earlier. “Bacardi has reason to believe that its properties are among those being offered by the Castro regime to prospective purchasers,” Cutillas wrote.

  It is Bacardi’s position, supported by expert legal advice, that its confiscated assets continue to be its lawful property, and that no one who accepts a purported conveyance of any such property from the Castro regime will acquire good title under either Cuban or international law. Once the rule of law and representative government are restored in Cuba, Bacardi intends to take every appropriate step both to reco
ver its properties and also to seek appropriate compensation from those who have acquired from the present regime, exploited and misused those properties during the period when Bacardi was deprived of their possession.

  Thierry Jacquillat of Pernod Ricard was among those to receive the Bacardi letter, but he dismissed the warning as irrelevant. Pernod Ricard did not contemplate the purchase of any physical properties in Cuba and was not seeking any former Bacardi assets.

  The contract that Pernod Ricard signed with the Cuban government created a joint venture company, Havana Club International, co-owned by Pernod Ricard and a new Cuban company, Corporación CubaRon, S.A. Legally, CubaRon was an independent private Cuban corporation, with individual shareholders, but in reality it was simply a spin-off of the rum-producing unit of the Bebidas y Licores state enterprise under the Ministry of Food. The capital came from the Cuban state, the profits went to the state, and the individual “shareholders” were Cuban government officials. Under the terms of the joint venture agreement, CubaRon was to produce and bottle Havana Club rum and then sell it to the joint venture. Pernod Ricard, as the French partner, would provide the marketing expertise and distribution network. Thierry Jacquillat flew to Havana for the signing ceremony, accompanied by Patrick Ricard, the chairman of the Pernod Ricard board. Fidel Castro hosted the men for dinner after giving his blessing to the enterprise.