Hotel & Tourism Development in Cuba

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DOI: 10.1177/0010880405275316 2005; 46; 223 Cornell Hotel and Restaurant Administration Quarterly

Julio Cerviño and José María Cubillo Hotel and Tourism Development in Cuba: Opportunities, Management Challenges, and Future Trends

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10.1177/0010880405275316

Hotel and TourismDevelopment

in CubaOpportunities, Management

Challenges, and Future Trends

by JULIO CERVIÑO and JOSÉ MARÍA CUBILLO

In the past ten years, Cuba has recorded the highestrate of growth in tourism arrivals of all Caribbean coun-tries to become the third most popular tourism desti-nation in the Caribbean region and the second desti-nation in the region for Europeans. In the process,tourism has become Cuba’s most lucrative sector.Based on in-depth interviews with senior executivesof Cuban and foreign international hotel chains operat-ing on the island and desk research in and outsideCuba, it appears that the benefits for internationaloperators in Cuba outweigh the risks involved. With itsexpansion of infrastructure and promotion of its his-tory and ecotourism, the country will continue to playa major role as a tourist destination in the Caribbean,regardless of whether the U.S. embargo remains inplace.

Keywords: Cuba; hotel development; Cuban tour-ism; Caribbean tourism

In June 1994, a director of Coopers & Lybrandoffered the following assessment of Cuba’s tourismprospects: “Despite the steady growth of Cuban

tourism, that country’s infrastructure is such a messthat big-name hotel operators would stay away evenafter a political turnaround.”1 Contrary to this view,James Macaulay, writing at the same time, saw Cubaas an island with great potential for tourism growth.2 Afew months later, in October 1994, a partner of Baker& McKenzie warned, “Cuba presents significantcountry risk. There are political as well as financial

MAY 2005 Cornell Hotel and Restaurant Administration Quarterly 223

© 2005 CORNELL UNIVERSITYDOI: 10.1177/0010880405275316Volume 46, Number 2 223-246



224 Cornell Hotel and Restaurant Administration Quarterly MAY 2005

CUBA HOTEL AND TOURISM DEVELOPMENT IN CUBA

and legal risks, and they render Cubaunsuitable for trade and investment byU.S. firms.”3 Now, ten years later, we mayhave a clearer picture regarding the coun-try’s potential for tourism and hotel busi-ness. In this article, we will argue that (asMacaulay suggested) Castro’s Cuba has,indeed, proved to be an excellent opportu-nity for hotel investors, with great poten-tial to achieve sustainable growth and

This article analyzes the changes taking place in the

Cuban tourist and hotel industry in recent years and

investigates the opportunities and risks involved with

possible expansion into the Cuban market for hotel

operators.

profits. Cuba has become the third mostpopular tourism destination in the Carib-bean region, the number-two destinationin the region for Europeans, and the desti-nation recording the highest rate of growthin tourism arrivals of all Caribbean coun-tries. These strong growth rates have beenachieved as a result of the country’s abilityto encourage foreign hotel operators to setup business in the country and the nation’sown efforts to provide a large inventory ofgood-quality hotel rooms, supported bydiverse tourism infrastructure, facilities,and products. As we see it, socialist Cubais gradually becoming involved in theworld market and the globalization pro-cesses via tourism, which (as we explainbelow) has acted as the engine of theCuban economy as the industry encour-ages development of its productive struc-ture to meet its needs.

The purpose of this article is to analyzethe changes taking place in the Cubantourist and hotel industry in the years fol-lowing the collapse of the Soviet Union

and to investigate the opportunities andrisks involved with possible expansioninto the Cuban market for hotel operators.In the first section, we provide a back-ground on Cuba’s tourist developmentfrom before the Cuban revolution up to thepresent time, and we also discuss the rela-tive success of Cuba’s recent tourism-development strategy. Then, we inquireinto the role of Cuban government in tour-ism development and the role played byforeign investors in the primary andrelated tourism activities. In the third sec-tion, the article provides a detailed de-scription and analysis of hotel-companystructure and foreign participation in thecountry. We follow by analyzing Cuba’scompetitive position within the Caribbeanregion and the specific characteristics,risks, and management challenges in-volved in doing business in the country.Finally, we conclude with our ownthoughts on the trends in Cuba’s hotelindustry.

MethodOf necessity, this work is principally

exploratory. Gathering market data ismore difficult in Cuba than in most othercountries because there are few sources ofinformation and analysis that are inde-pendent of the government, and the mediaare not free to disseminate accuratedescriptions of emerging developments.Official industry statistics are incomplete.Some official data are released by mentionduring speeches by government officials,but there is no integrated source of infor-mation. For the most part, business infor-mation must still be collected throughinterviews, usually with government offi-cials or with executives of government orjoint-venture companies. Even then,certain details remain shrouded in secrecy.

We used both secondary and primaryresearch sources from fieldwork carried



out in Cuba during the first part of 2003,when one of the authors held a visitingteaching position at the University ofHavana, and a visit in January 2004. In-depth interviews were conducted inHavana with senior executives of Cubanhotel operators, as well as with several ex-patriate executives of Spanish and Frenchhotel corporations. These include a totalof eight interviews with executivesbelonging to three main Cuban hotel cor-porations (namely, Cubanacan, GranCaribe, and Horizontes) and five foreignexecutives, from Accor, Barcelo, Ibero-star, Riu, and Sol Melía.

We have perforce taken a qualitativeapproach in this study, given that data cov-ering the six existing Cuban hotel chainsare not sufficient for statistical inferences.Furthermore, there is no clear database onhotel ownership, control, or contractarrangements in Cuba. Three of the sixCuban hotel chains we contacted (bymeans of a prior introduction by the vicedean of international relations of the Fac-ulty of Economics, University of Havana)agreed to be interviewed. The other threefirms have company policies prohibitinginterviews (i.e., Gaviota, Habaguanex,and Islazul). We arranged the interviewswith the five foreign executives prior toour visit to Havana through contacts intheir main offices in Madrid and Paris.

All face-to-face interviews took placein Havana, where all chain headquartersare located. All of the Cuban intervieweeswere CEOs responsible for the strategicdecision making within their organiza-tion. Three of the foreign executives werealso CEOs in charge of Cuban operations(those of Barceló, Riu, and Sol Melía).The other two were general managers oftheir chain’s flagship hotel in the country(namely, Accor and Iberostar). Issuesexplored included hotel structure,investment and location decisions,

management-contract negotiations, hotelmanagement challenges, tourist develop-ment in the Cuban market, and industrytrends and future projects. Interviewslasted up to two hours but were not tapeddue to sociocultural considerations. Wehave complemented these interviews withvisits to different hotels in Havana andVaradero.

Finally, for some of the secondary dataused in this research, we also had the sup-port of a major Cuban government con-sulting agency controlled by the Ministryof Foreign Investment and EconomicCooperation—Consultores Asociados(CONAS)—the general manager of whichwas a former professor at the University ofHavana and a Ph.D. graduate from theUniversidad Autonoma of Madrid.

Background on Cuba’s Tourismand Hotel Development

Cuba is the largest Caribbean island,comprising 110,922 sq. km in a land massthat stretches 1,250 km from end to end.Cuba is about 85 percent the size of Eng-land and three times larger than theDominican Republic. The island islocated at the mouth of the Gulf of Mex-ico, some 145 km south of the FloridaKeys (see Exhibit 1). The Cuban archipel-ago consists of the island of Cuba, the Isleof Youth, and some sixteen hundred off-shore keys and islets. Cuba has morecoastline than all Caribbean Islands com-bined, boasting more than three hundredfine sand beaches. The nation’s popula-tion is just more than 11.2 million people,three-quarters of whom reside in urbanareas, including Havana (more than 2.3million people) and Santiago de Cuba(500,000 people). Since gaining its inde-pendence in 1902, Cuba has been greatlyinfluenced by the political, economic, andsocial factors in the United States. Politi-cal corruption, economic uncertainty, and


HOTEL AND TOURISM DEVELOPMENT IN CUBA CUBA



U.S.-backed leadership led to increaseddissatisfaction in the Cuban populationfollowing the 1952 coup by FulgenioBatista y Zaldivar. That dissatisfactionwas harnessed by Fidel Castro, a politicalactivist and young lawyer, whose follow-ers forced Batista from the country onNew Year’s Eve 1958, at which timeCastro assumed power and established asocialist government.

Prerevolution Era: 1945-1958

Before the coup, tourism was a majorindustry and a primary source of hard cur-rency and employment. Between 1948and 1957, tourist arrivals to Cuba in-creased by more than 94 percent, and thenation dominated Caribbean tourism. Atthe tourism peak in 1957, Cuba attracted272,265 American tourists, who ac-counted for 89 percent of the total numberof visitors to the island. That year Cuba

drew 32 percent of total American arrivalsto the Caribbean region. In 1956, out of atotal room stock of 10,134 in the Carib-bean, Cuba had 3,716 rooms, or 37 per-cent.4 The total combined room stock ofthe next four competing destinations in theCaribbean (i.e., Puerto Rico, Jamaica, theBahamas, and Dutch Antilles) was lessthan the room stock in Cuba. Gambling,night entertainment, and sex were themain attractions apart from the sun, sea,and sand.

Postrevolution Era: 1959-1988

Following the 1959 revolution, tourismpractically disappeared from the island,along with the gambling and illicit nightlife. In October 1959, the governmentnationalized all leading hotels, along with150 other U.S.-based investments. By1960, one year after the revolution, thenumber of tourists had dropped to 61,098,



Exhibit 1:Key Tourism Destinations within the Caribbean Region



plummeted further to 4,180 in 1961, anddwindled to almost zero over the next twodecades.5 The loss of tourism was partlydue to the fact that the U.S. market driedup as a result of the U.S. embargo imposedin 1960. More to the point, however,Cuba’s strategy for economic and socialdevelopment did not consider touristactivity to be a key factor in the future ofthe island. Part of this philosophystemmed from the authorities’revulsion atthe societal ills associated with 1950s’tourism: gambling, drugs, prostitution,and the presence of organized crime inhotels and casinos.6 Cuba’s focus turnedonce more to its sugar, tobacco, and min-eral exports. Favorable barter arrange-ments with the USSR saw Cuba’s sugarbeing purchased at a market premium, inexchange for agricultural machinery,crude oil, and technology.

1989 to the Present:The Tourist Boom

Prior to 1989, the Soviet and EasternEuropean bloc accounted for approxi-mately 85 percent of Cuba’s total foreigntrade. About 70 percent of this was withthe Soviet Union alone.7 The 1989 col-lapse of the Soviet Union signaled an endto the economic subsidies and barteragreements between the two countries.Cuba lost its most important markets andsources of manufactured goods and finan-cial support. The inefficiencies of Cuba’scentrally planned economy, which hadbeen largely obscured by external subsi-dies, suddenly became glaringly apparent.Without Soviet subsidies, many stateenterprises were closed, and in 1990 thegovernment imposed a program called“Special Period in Time of Peace.” Inshort, Cubans found themselves with asurplus of pesos but nothing to buy. From1989 to 1993, Cuba’s GDP dropped 35

percent, imports plummeted 75 percent,and the deficit rose to 33 percent of GDP.8

To earn foreign exchange, the Cubangovernment started a drive in 1989 towardeconomic diversification and the estab-lishment of partnerships with foreigncompanies. As has occurred in other tran-sitional economies,9 tourism was viewedas a good prospect for producing high andrapid returns and as a way to create a mar-ket for diverse goods and services sup-plied by Cuba’s domestic industry. Thefirst joint tourism venture was formed in1988 by the then-new state tourist corpo-ration, Cubanacan, with Spanish hotelgroup Sol Melía to build and run a hotel inthe tourist resort of Varadero. This hotel—Sol Palmeras—opened in May 1990.Another hotel—Tuxpan Hotel—openedin 1990 in a joint venture with the Germancompany, LTI International Hotels.

Cuba’s 1988 reentry into world tourismdrew 309,000 visitors. During the suc-ceeding fifteen years, Cuba has experi-enced a tourism boom, with arrivals in-creasing from that 1988 figure to morethan 1.8 million in 2003, representing acompound annual growth of 17.5 percent,more than three times the level of globaland Caribbean tourism growth. Cuba nowfollows only the Dominican Republic andMexico’s Cancun in Caribbean tourism.Significant as this may seem, it shouldalso be noted that this has been achieved inthe face of the continued U.S. boycott,even though the U.S. market is the mainsupplier for Caribbean tourism.

Cuban GovernmentStrategy toward Tourismand Hotel Development

The increase in Cuban tourism can beattributed to the design and implementa-tion of a strategy to build tourism that isbased on Cuba’s social and cultural assets.With the collapse of the Soviet bloc,





Cuba’s policy makers had no choice but torestructure the socialist economy, usingelements of capitalism. Thus it was thatthe government was forced to loosen itsgrip somewhat on the country’s economy.Major parts of Cuban society and indus-tries underwent a decentralization processtoward a market socialist model,10 withtourism and foreign investment at theheart of these developments. However, aswe explain later, Cuba has neither aban-doned socialism nor proclaimed a system-atic reform that follows the models of Chi-nese, Vietnamese, or any other socialism.The state retains a predominantly guidingrole in economic production.11

Opening the country to tourism jointventures was part of the 1990 market-based reform, which also legalized thecirculation of U.S. dollars and authorizedself-employment (pr ivate micro-enterprises) for some occupations. (Thegovernment also converted the majority ofstate farms to cooperatives or collectivesat this time.) In 1992, the Cuban Constitu-tion was amended, among other things torecognize and protect foreign-held privateproperty, as an inducement to attract moreforeign capital. The legalization of theU.S. dollar allowed all companies con-nected with foreign capital, includinghotels, to trade in U.S. dollars, which hasoccurred since the opening of the firsthotel in Varadero. All financial transac-tions and accounting within the tourismsector are also in U.S. dollars.

In 1994, the Ministry of Tourism(MINTUR) was created, and several state-run and quasi-independent tourist corpo-rations were established for the promotionof hotel- and tourist-related foreigninvestment and activities. In September1995, Cuba’s National Assembly of Peo-ples’Power approved what appeared to bea progressive investment law. The initia-tive clarified laws to guarantee the free

repatriation of profits, to spell out howbusinesses were to be run and how busi-ness disputes were to be settled, to allowthe government to create duty-free zones,and to emphasize guarantees to foreigninvestors against expropriation and third-party claims. In addition to allowing profitrepatriation, the government made con-siderable tax concessions—all of whichstimulated interest from foreign compa-nies. In spite of the U.S embargo and theHelms-Burton law of 1996 (which we dis-cuss below), the number of internationaleconomic associations and joint ventureshad risen to 403 by the end of 2003,broadly diversified in some thirty-five sec-tors (see Exhibit 2).12 Seventy-five out ofthe 403 ventures (or about 19 percent) arein the tourist industry, of which more than30 were classified as hotels.13 In the 1990s,the greatest percentage of economic asso-ciations with foreign capital was linked tobasic industries (mainly, oil, energy, andmining), followed by tourism, construc-tion, and light manufacturing. Many of theinvestments in industries other than tour-ism are somehow connected to the touristinfrastructure and services. Those are, forinstance, energy (Cuban CanadianEnergas), water (Cuban Spanish Aguasdel Oeste), cement and construction(Cuban and Swiss-Spanish Iberzuizas),telecommunications (Cuban ItalianEtecsa and Cuban Canadian Cubacel), andsupplies for the tourist sector.

Since the inception of the government’snew policy, the nation has built a tourismindustry with hotels, resorts, restaurants,retail shops, airports, and ancillary ser-vices virtually from scratch. By the late1990s, twenty-five joint-venture compa-nies were providing Cuba with the cashand know-how it needed for growth.These companies, including Accor, LTI,Mirama, Riu, Sandals, SuperClubs, andSol Melía, have contributed to the con-





struction of some 13,100 rooms. Thesefirst injections of capital into the touristsector were accompanied by other inflowsof foreign direct investment (FDI) in pri-mary and secondary areas of tourism de-mand. Tourism development helped theCuban government to obtain FDI in spe-cific industries that are potential suppliersto tourism.

Over the past fifteen years, tourismoperators have developed local connec-tions for goods and services. In 1990,practically all products used by hotels andrestaurants had to be imported at highprices due to the lack of local productionand financing and the U.S. embargo.However, through international joint ven-

tures, the proportion of domesticallyproduced goods provided to the touristindustry has increased from 12 percent in1990 to 67 percent in 2001.14 Furthermore,sectors related to the tourism industryoperate in an environment of competition.Tourist demand has become an economicengine as a result of a basic principle,which is not to force any tourist entity tobuy national products, especially if thoseproducts are not considered internation-ally competitive.

Joint ventures and cooperative produc-tion agreements with such companies asSwiss Nestlé, Anglo-Dutch Unilever,French Pernord-Ricard, Canadian LabattBrewing, and Spanish Freixenet, among



Exhibit 2:Associations with Foreign Capital by Sector in 2001

Source: Minvec (Ministerio de la Inversión Extranjera y la Cooperación Económica), Guía para lainversión en Cuba (Habana, Cuba: Centro de Promoción de Inversiones de la Habana, 2002).



others, have, for instance, allowed thefood and beverage industry to be fully ableto keep up with the developments in thetourist sector. Today, such arrangementssupply 76 percent of tourism demand.Foreign investments have also ensuredsufficient goods and services for tourismin such areas as phone systems, paperproducts, textiles, and building materials.

Other joint-venture arrangementsfocused on upgrading and building infra-structure, such as the major internationalairports located in the main tourist zones.A Canadian company rebuilt the Varaderoairport, for instance, and built the new Ter-minal 3 at Havana’s Jose Martí interna-tional airport. Another joint venture,formed by Cuban, Canadian, Spanish, andGerman corporations, financed, built, andoperate the new airport at Cayo Largo, anisland off Cuba’s north-central coast. Thenew airport is operated by AENA, a Span-ish airport-management company.

To promote and market Cuban Tourismabroad, MINTUR opened offices inArgentina, Brazil, Canada (Toronto andMontreal), England, France, Germany,Italy, Mexico, Russia, Spain, and Sweden.MINTUR participates in the major tour-ism trade fairs in Canada, Europe, Japan,and Latin America. These promotionalefforts are also complemented by othersundertaken by Cuban tourism and hotelcorporations, which maintain branchoffices in various European and Americancountries. MINTUR has also establishedstrategic alliances with the main interna-tional tour operators and hotel chains forspecific promotions. For instance, in June2004, the first TV campaign for Cubantourism was broadcast in Spain, in collab-oration with Sol Melía and Travelplán, amajor Spanish tour operator,15 promotinga combined destination featuring sun,beaches, and Cuba’s historical cities. In

October 2004, MINTUR, together withSol Melía and Mexican tour operators,launched a campaign in Mexico to pro-mote family tourism on the island.16 Basedon its specific characteristics, Cuba’stourism-promotion strategy is builtaround its three main attractions—beachresorts, history and colonial architecture,and nature and ecotourism—as part of aneffort to minimize the image of Cuba as aland of only sun and beaches. Health-ori-ented tourism is another option promotedby MINTUR, taking advantage of the rec-ognized international prestige of Cubanmedical science.17

The tourism ministry has targeted eightregions around the island for tourismdevelopment. Cuban tourism is highlyconcentrated in the two poles of Havanaand Varadero beach, which together gen-erate 70 percent of tourist revenue. Thenation seeks a better balance throughoutthe island, shifting its emphasis since1999 to six other regions and investing$700 million to date in regional infrastruc-ture (see Exhibit 3). The six regions arealso home (or close) to the majority ofCuba’s natural, historic, and culturalattractions, including the seven UNESCOWorld Heritage Sites. Cuba also benefitsat the moment from the mystery and addedattraction of its still being the home of oneof the world’s few existing socialist revo-lutions. In that vein, the latest tourist prod-uct launched is named Ruta Guerrillera(Guerrilla’s Route), in honor of Ernesto“Che” Guevara, who is interred in Cuba,where he participated with Castro in over-throwing the Batista regime, and who wasCuba’s early minister of industry.18 Forthose of less revolutionary outlook, Cubais also the place where Ernest Hemingwayspent one-third of his life.

In addition to committing tangible andcommercial capital, the government





implemented a countrywide program fordeveloping the human resources neededfor Cuba’s tourism sector. Cuba alreadyhas the most educated population withinthe Caribbean. Of the 11.2 million resi-dents, 95 percent are literate. Cuba isusing that considerable strength to chooseand train employees for tourism. In 1994,all tourist training centers were con-solidated into a network known asFormatur—the national training and edu-cation agency for the tourism and hospi-tality sector. Today, Cuba’s twenty-twohospitality schools, with more than onethousand teachers, now train some twentythousand students and issue an equivalentnumber of certificates annually.19 Forma-tur has also introduced a rapid one-yeareducation program to convert managersfrom other fields into assistant managersof hotels.20

In sum, as Cuba’s most successful sec-tor, tourism has been acting as the enginefor the Cuban economy in the 1990s, over-taking in terms of revenues and strategicimportance Cuba’s traditional industries,notably, sugar. Exhibit 4 compares thevalue of exports of the sugar industry andrevenue from international tourism for theperiod of 1990 through 2000. As shown inExhibit 4, tourism surpassed the sugar in-dustry as Cuba’s strongest economic sec-tor and main generator of export revenuesin 1994.

Hotel Structure andForeign Participation

To develop the tourist sector accordingto international standards, the Cuban gov-ernment attempted to apply “private sec-tor” management to certain hotels and totransfer hotel and tourism management



Exhibit 3:Major Hotel Nodes and Tourism Development Regions



skills to the country. This led to a restruc-turing of the hotel sector, creating thesemiautonomous tourist corporations andhotel chains that we have already men-tioned, which dominate the market. Theseare Cubanacan Corporation, Hotel GroupGran Caribe, Horizontes Hotels, Haba-guanex, Gaviota Tourist Group, and Isla-zul. These organizations group togetherdifferent types of hotels, restaurants, andtravel packages relating to all tourism-related activities and needs within theisland (e.g., airport transfers and transpor-tation services, travel agencies, andinsurance).

Among these, the oldest and largest isthe Cubanacan Corporation, whichaccounts for more than 40 percent of the

tourist market. It was formed to operatefour- and five-star hotels, restaurants, caf-eterias, retail stores, water and other recre-ation centers, health facilities, and recep-tion centers. It has nine offices in Europeand the Americas and twenty-three jointventures for the development of hotels andother businesses. Cubanacan ownstwenty-seven hotels located on beachesand in cities; thirty-eight health centersand hotels specialized in health tourism;two marinas, ten diving centers, and ninefishing locations; fifteen entertainmentcenters; one reception and travel agency;one transportation agency offering trans-fer, car-rental, and taxi services; and oneconference center on famous Varaderobeach. Its restaurant division, Palmares,



Exhibit 4:Sugar Exports and Tourism Revenues, 1990-1999 (in millions of pesos)

Source: J. F. Pérez-López, The Cuban Economy in an Unending Special Period (Washington, DC: Associ-ation for the Study of the Cuban Economy [ACSE], 2002), 507-21.



owns and manages fifty-two restaurantsand cafeterias in towns and beachesthroughout Cuba.

Cubanacan is involved in many of thefour- and five-star hotels, administered aseither international economic associationcontracts or joint ventures. Joint invest-ment arrangements have been developedby Cubanacan with Grupo Sol Melía(Spain), LTI (Germany), Golden Tulip(Holland—now part of NH Hotels fromSpain), SuperClubs (Jamaica), and mostrecently, Barceló Hotels and Resorts(Spain).

Gran Caribe Hotel Group owns forty-eight four- and five-star hotels, with morethan eleven thousand rooms for touristsscattered throughout the country, al-though most of them are located in Havanaand Varadero. Half of its hotels are oper-ated by well-known international chains,such as Accor, Iberostar, Riu, and SolMelía. Gran Caribe directly operates thefollowing three main brands: Classic,which involves five city hotels, includ-ing landmark hotels such as the HotelNacional de Cuba and the Hotel Ingla-terra; Premium, which comprises sevenluxury city and beach hotels; and Club,which is thirteen hotels, mainly vacationproperties. In addition, the group operatesthree primary tourist attractions inHavana, the Restaurant La Bodeguita delMedio, Bar and Restaurant La Floridita,and the Cabaret Tropicana chain. It alsofranchises its restaurants internationally,with locations in Italy, France, Spain,Mexico, and Abu Dhabi.

Horizontes Hotels operates forty-fourproperties, mostly holding two or threestars, comprising more than seven thou-sand rooms. Horizontes is the third-largesthotel chain in Cuba, with hotels in almostall provinces of the country, main cities,major national parks, and places of eco-

logical interest. It also operates two- andthree-star all-inclusive hotels in Varaderobeach and facilities with mineral-waterbaths, treatments for stress, and one spa.

Habaguanex was founded in 1994 toprovide a cultural historic product focusedmainly on old Havana. Belonging to theHistorical Office of Havana, Habaguanexstarted out with a modest number of res-taurants and quickly became a fast-growing tourism company operating awide network of restaurants (more thanthirty), cafeterias (more than sixty), andshopping outlets, including one depart-ment store (Harris Brothers Departments).Habaguanex owns and operates sixteenthree- and four-star hotels for interna-tional tourists in the Historic Center of OldHavana (a UNESCO World Heritage Sitesince 1982), with approximately thirteenhundred rooms.

Gaviota Tourist Group is a companycontrolled by the Revolutionary ArmedForces. With businesses that include oper-ation of four- and five-star hotels anddevelopment of marinas, recreationalwater facilities, and health facilities fortourists, its twelve hotels, generallylocated in the main tourist destinationsand ecological areas, offer twenty-fourhundred rooms for international tourists.Most of its hotels are operated by inter-national firms, such as Accor, Club Medi-terranée, Maritim Hotel Group, and SolMelía.

Islazul was established to develop two-and three-star hotels for internationaltourists seeking low-cost accommoda-tions. It owns and operates a total oftwenty-eight hotels around the country:thirteen city hotels, four beach hotels, andeleven ecological tourism hotels, with atotal of thirteen hundred rooms. Today,many of its hotels are also targeted towarddomestic tourism.





These six Cuban hotel operators haveestablished links with many non-U.S.international hotel operators in the past tenyears. In contrast to the experience ofother transitional economies, such asChina,21 those links have helped the coun-try develop a simple and centralized hotelstructure, based on a mix of Cuban andforeign investments and managementdeals. Joint ventures were the predomi-nant form of foreign participation in theearly 1990s, when domestic capital andmanagement know-how was scarce.Eleven hotels were built under 50 percentjoint-venture agreements in the first yearsof the 1990s, and many others were con-structed by the Cuban government andmanaged by foreign hotel firms. In the late1990s and the beginning of the 2000s,Cuban corporations have increasinglyassumed a 100 percent investment in newhotels, and new arrangements, such ashotel management contracts, have beenused more frequently as Cuba recoveredfrom the depths of its 1992 to 1993 eco-nomic crisis and had domestic capital toinvest in hotels. Unlike other Caribbeancountries, such as the Dominican Re-public, Mexico, or Jamaica, Cuba hasfinanced its hotel investments mainly withlocal capital while applying the manage-ment know-how of foreign hotel corpora-tions. Moreover, two Cuban hotelchains—Cubanacan and Gran Caribe—are among the one hundred top hotelchains in the world (Cubanacan at sixty-five and Gran Caribe at eighty-two)22 andhave become the second and third in LatinAmerica, just behind the Mexican GroupPosadas Management.

Cuba’s hotel supply, in terms of inter-national quality hotels, grew from about10,000 rooms in 1988 to 47,500 in 2003,representing an average annual increase ofmore than 10 percent. Over the sameperiod, arrivals in Cuba grew by 13 per-

cent, raising the average room occupancyfrom about 55 percent in the initial yearsto more than 65 percent today. Based ontravel agencies’ sales brochures and hotelweb information, the total number ofhotels at the end of 2003 amounts to 263,giving Cuba the second largest hotelcapacity in the Caribbean. Of Cuba’s 263hotels, 32 properties are five-star hotels,102 properties are four star, 87 propertiesare three star, and 42 properties are twostar. Of the 47,500 rooms available in thecountry, nearly 70 percent have a four- orfive-star rating. Moreover, by the end of2003, more than half of the country’s hotelcapacity (56 percent, or 26,500 rooms)was administered by seventeen interna-tional hotel chains under hotel manage-ment contracts. At the same time, 73 out ofthe 263 hotels intended for foreign visitorsto Cuba are under international manage-ment, with that trend strongly on the rise(see Exhibit 5). Spanish hotel corpora-tions have a leading position in the market,managing more than 17,000 rooms, ornearly 40 percent of those dedicated tointernational tourism. Of all Cuban-owned or joint-venture hotels under for-eign management contracts, Spanish hotelcorporations manage three-quarters ofthem, representing 78 percent of allforeign-managed rooms. Sol MeliáGroup, the leading foreign operator, man-ages 23 hotels with 9,450 rooms, repre-senting nearly half of all foreign-managedrooms in the country (42 percent).

Of the total supply, just more than14,000 hotel rooms are located in Havana,while about 17,000 are in Varadero. Thenew important nodes of hotel supply arethe North Holguin area (4,780 rooms),Jardines del Rey region (3,800 rooms),North Camaguey (3,300), Santiago deCuba (2,100), Canarreos (1,400), and theTrinidad-Cienfuegos area (1,300)—seeExhibit 3.







Exhibit 5:Hotel Structure in Cuba

Category

Cuban Foreign Partner NumberOwnership and Operation Operator (Country) Hotels of Stars Rooms

State owned and foreign Cubanacan Iberostar (Spain) 3 4&5 1,060managed Cubanacan Brau (Spain) 1 5 458

Cubanacan Sol Melia (Spain) 3 5 1,216Cubanacan Sandals (Jamaica) 2 5 754Cubanacan Superclubs (Jamaica) 2 4 520Cubanacan LTI (Germany) 2 4 680Cubanacan Barcelo Hotels (Spain) 1 4 510Cubanacan Valtur (Italy) 1 4 400Gran Caribe Iberostar (Spain) 2 4 690Gran Caribe Riu Hotels (Spain) 3 4 666Gran Caribe Hotels C (Spain) 3 4 855Gran Caribe Barcelo Hotels (Spain) 4 4 850Gran Caribe Sol Melia (Spain) 8 4&5 3,242Gran Caribe Superclubs (Jamaica) 1 4 532Gran Caribe Accor (France) 3 4&5 875Gaviota Sol Melia (Spain) 9 4&5 3,647Gaviota Occidental Hotels (Spain) 3 4&5 1,458Gaviota Brau (Spain) 1 4 325Gaviota Grupo Piñeiro (Spain) 1 5 225Gaviota Maritim (Germany) 3 4 930Gaviota Superclubs (Jamaica) 1 5 480Gaviota Grand Med (France) 1 5 550Horizontes Hotetur (Spain) 2 3 800Horizontes Brau (Spain) 1 4 169Horizontes CRET (Spain) 1 3 85

Subtotal 62 21,977Joint venture and foreign Cubanacan Brau (Spain) 1 5 395

managed Cubanacan Brau (Spain) 1 4 356Cubanacan Sol Melía (Spain) 3 4&5 1,345Cubanacan NH Hotels (Spain) 1 4 277Cubanacan LTI (Germany) 1 4 350Cubanacan Superclub (Jamaica) 1 4 400Gran Caribe Leisure Canada (Canada) 1 5 850Gran Caribe Accor (France) 2 5 585

Subtotal 11 4,558State owned and managed Cubanacan 65 2, 3, & 4 4,900

Horizontes 44 3 7,000Gaviota 12 3, 4, &5 2,010Gran Caribe 25 4&5 4,551Habaguanex 16 4 1,300Isla Azul 28 2&3 1,300

Subtotal 190 21,061Total number of hotels and 263 47,596

rooms

Source: Elaborated by the authors from interviews, Web information, and Directorio Turístico de Cuba 2003.



During the 1990s, Cuba’s hotels weregenerally accorded a star rating higherthan those recognized elsewhere in theworld, and categories had to be reduced byone star to conform to international stan-dards.23 Despite that change, the introduc-tion of new hotel concepts through jointventures and management contracts withforeign partners has allowed Cuba tochange its image of mediocre- or poor-quality hotels, lack of professional staff,and poor service. Hotel developments dur-ing 2003 in both beach resorts and urbanareas have generally been higher in qual-ity than earlier developments. From fieldresearch and personal experience, wecould say that the hotels’ conformance totheir stated ratings has improved consider-ably. However, to really meet internationalstandards, the hotels’ ratings should stillbe reduced by perhaps half a star.

International associations have pro-vided Cuban hotel corporations with agreat deal of know-how, management ser-vices, and marketing skills, which haveencouraged Cuban corporations to fullymanage some of their newly estab-lished properties. Resorts (such as the all-inclusive five-star, 944-room Playa Pes-quero Resort, a $100-million investmentand the biggest hotel in the country,24

owned and managed by Cuban groupGaviota, or the Gran Caribe Hotel Vara-dero International) compete in qualityand service with other international well-known hotels. Additionally, HabaguanexGroup offers a customized and high-quality service in its sixteen historicalquasi-boutique hotels.

Furthermore, industry experience andknow-how have also encouraged Cubanoperators to establish ventures with for-eign partners in other markets. In Mexico,Cubanacan holds an “unspecified” stakein the Paradisus Riviera Hotel in Cancunin partnership with Sol Melía Group. On

nearby Cozumel Island, Cubanacan man-ages three “independently owned” hotels,including the Hotel Cozumel & Resort. InChina, Cubanacan and China’s SuntimeInternational are partners in a jointly ownedfive-star, seven-hundred-room hotel inShanghai, also managed by Sol Melía.

An important challenge for the Cubangovernment is to balance hotel invest-ments and those related to developingother tourist facilities. During the 1990s,the construction of hotel rooms accountedfor 73 percent of tourism investments. Theremaining 27 percent was devoted to in-frastructure (11.3 percent for airports and5.6 percent for a series of causeways) inthe Coconut Key region, leaving othertourist-related investments such as resto-ration and recreation with only 13.8 per-cent of the total. The result has been animbalance between hotel investment andthat in tourist attractions.25

In this regard, the Cuban government isseeking to speed up investments in non-hotel facilities and infrastructure, such asgolf courses and marinas, that make theindustry more competitive and profitable.Cuba wants to funnel much of the touristrevenues back into this type of investment,and joint ventures allow Cuba to preserveits own capital to use in these projects.With the exception of Habaguanex, whichholds only historic properties and cannotenter into joint ventures,26 the other Cubanhospitality companies are seeking part-ners to invest in new hotel developmentsin the near future. In the following years, itis expected that all new projects for large-size hotels of the four- and five-star cate-gory will be carried out only with capitalinvestment by and management agree-ments with foreign partners.

With this goal in mind, the governmentis placing restrictions on new agreements.A CEO of a Spanish hotel chain stated,“For example, foreign direct investment in





Havana, Varadero, and Cayo Largo is gen-erally conditioned by our investment inother areas of the country.” According tothe Tourism Ministry, at the start of 2003there were twenty-seven hotel companiesinvolving foreign partners, for a combinedcommitment to build new 15,600 rooms.At this writing, 4,800 of those rooms havebeen completed.

This vision for the future of Cubantourism finds realization in Cayo Cocoand its neighbor, Cayo Guillermo, locatedthirty-five minutes from Nassau by plane.Construction in Cayo Coco began in 1988,the first hotel was completed in 1993, andnine hotels with thirty-eight hundredrooms now grace this forested key. Thegovernment requires all construction onthe keys to complement the natural envi-ronment. Only 7 percent of the entire areais developed, and plans call for construc-tion of fifty hotels with some twenty thou-sand rooms. To support this growth, the

government has constructed an interna-tional airport, a new marina with a three-hundred-slip capacity, and one golfcourse, with two others under develop-ment. The state even established a town inCayo Coco for tourism training, and threethousand workers in the area have gradu-ated from this newly founded school. Todate, Cuba has invested US$400 millionin the area without the benefit of jointventures.

Market andCompetitive Analysis

Exhibit 6 reflects the trends in touristarrivals to Cuba, market share, and aver-age annual growth compared to otherCaribbean countries. As we stated above,Cuba’s share of Caribbean tourism in-creased during the 1990s, from an averageof 3 percent during the 1980s to about 10percent in 2002. The economic downturnof 2001 and the travel scare that followed



Exhibit 6:International Tourist Arrivals by Country of Destination—Major Cuban Competitors

Market AverageInternational Tourist Arrivals Share in the Annual

(in thousands) Region (%) Growth (%)

1990 1995 2000 2001 2002 1995 2002 1990-1995 1995-2000

Total North America 71,747 80,491 91,213 84,388 81,616 74.0 71.1 2.3 2.5Mexico 17,176 20,241 20,641 19,810 19,667 18.6 17.1 3.3 0.4Total Caribbean 11,400 14,025 17,180 16,902 16,058 12.9 14.0 4.2 4.1Bahamas 1,562 1,598 1,544 1,538 1,402 1.5 — 0.5 –0.7Cuba 327 742 1,741 1,736 1,687 0.7 1.4 17.8 18.6Dominican Republic 1,305 1,776 2,973 2,882 2,811 1.6 2.4 6.4 10.9Jamaica 989 1,147 1,323 1,277 1,266 1.1 1.1 3.0 2.9Martinique 282 457 526 460 448 0.4 0.4 10.1 2.9Puerto Rico 2,560 3,131 3,341 3,551 3,087 2.9 2.7 4.1 1.3UA Virgen Is 463 454 607 592 553 0.4 0.5 –0.4 6.0Total Central America 1,945 2,611 4,345 4,417 4,701 2.4 4.1 6.1 10.7Costa Rica 435 785 1,088 1,131 1,113 0.7 1.0 12.5 6.8

Source: World Tourism Organization (WTO), data as collected by September 2003. See http://www.world-tourism.org/facts/menu.html.



the September 11 attacks combined tostop the growth of Cuban tourism in 2001and 2002. In concert with the rest of theCaribbean, however, growth resumed atthe end of 2002 and in 2003, with an in-creased volume of almost 16 percent overthe previous year. Cuba’s 10 percent mar-ket share is impressive in view of the U.S.boycott, especially when one notes thatmore than seven hundred thousand U.S.tourists travel to the Dominican Republicannually, and much of Puerto Rico’s tour-ism is based on Puerto Ricans going backhome to visit friends and relatives.27

In 2003, gross income from interna-tional tourism rose by 16 percent (to a totalof US$1.9 billion) after having declined inthe preceding two years (see Exhibit 7).The upturn reflected a 13 percent increasein the number of visitors (to a total of 1.8million arrivals) and a 4 percent increase(to 47,500 units) in the number of roomsavailable. Data from the first half of 2004show that the influx of tourists rose bymore than 10 percent, thus increasing the

likelihood that the target level of 2 millionvisitors will be met in 2004.28

An analysis of tourism arrivals indi-cates that Canada is the single largestsource country for tourism to Cuba, repre-senting 23.7 percent of all arrivals, withthe absolute number growing by an aver-age of 12 percent annually to its 2003 levelof four hundred thousand. In regionalterms, Europe is in second place with 54percent of all tourist arrivals in 2003 (fol-lowing North America), with touristscoming principally from France, Ger-many, Italy, Spain, and the United King-dom. Among Latin American countries,Mexico, Argentina, Colombia, and Chileare the major suppliers of tourists to Cuba.Other countries are emerging as importantsource markets, with tour groups fromJapan, China, and other Asian countriesstarting to show a stronger presence.

Because Europeans generally stay lon-ger and spend more than tourists fromother locations, drawing tourists fromEurope improves expenditure and length-



Exhibit 7:International Tourism Receipts by Country of Destination—Major Cuban Competitors

Average Per MarketPer Capita Share in Average

International Tourist Receipts Tourist Receipts the Region Annual(US$ million) (US$) (US$) (%) Growth (%)

Major Areasand Markets 1990 1995 2000 2001 2002 2002 2002 1995 2002 1990-1995 1995-2000

Total North America 54,813 77,456 101,534 91,068 85,105 — — 77.7 74.5 7.2 5.6Mexico 5,467 6,179 8,295 8,401 8,858 450 90 6.2 7.8 2.5 6.1Total Caribbean 8,712 12,185 16,993 17,125 16,616 — — 12.2 14.5 6.9 6.9Bahamas 1,324 1,346 1,719 1,636 1,580 1,055 5,147 1.4 — 0.3 5.0Cuba 243 963 1,737 1,692 1,633 968 146 1.0 1.4 31.7 12.5Dominican Republic 900 1,568 2,860 2,798 2,736 973 322 1.6 2.4 11.7 12.8Jamaica 740 1,069 1,333 1,233 1,209 955 468 1.1 1.1 7.6 4.5Martinique 240 384 302 245 249 556 630 0.4 — 9.9 –4.7Puerto Rico 1,366 1,828 2,388 2,728 2,486 805 643 1.8 2.2 6.0 5.5UA Virgen Is 697 822 1,292 1,323 1,240 2,242 13,333 0.8 1.1 3.4 9.5Total Central America 735 822 1,292 1,323 1,240 — — 0.8 1.1 3.4 9.5Costa Rica 275 660 1,229 1,096 1,078 969 268 0.7 0.9 19.1 13.2

Source: World Tourism Organization (WTO), data as collected by September 2003 and own elaboration. See http://www.onecaribbean.org/home/.



of-stay statistics, limits the cyclical natureof tourism by spreading recession risksamong various regions of origin, andsmoothes seasonality. Contrary to the restof Caribbean destinations, where the ma-jority of visitors arrive during the coldermonths of the northern hemisphere,Cuba’s high season is in the northernhemisphere’s summer. Cuba’s success intargeting the European market, which typ-ically vacations during the summer, hasresulted in strong visitation levels fromthis area from June to September. How-ever, tourists from Canada, and to a lesserextent from Argentina and Chile, offsetthat seasonality by arriving in the wintermonths.

As we mentioned above, overall occu-pancy rates average 65 percent, and typi-cal average daily rates (ADRs) range fromUS$50 to US$140. Havana remainssteeply seasonal, with occupancy ratesfluctuating widely, from less than 50 per-cent to more than 90 percent, dependingon the season. In the resort capital ofVaradero, where occupancy averages areoften highest, occupancy dips to about 62percent during the low season and aver-ages 75 percent overall. Varadero’s annualADR averages US$75. In the new de-velopment areas, such as Cayo Coco andCayo Guillermo, average occupancy rateduring 2003 was 56 percent, and the latestdata indicate that hotels there havereached 90 percent in January and Feb-ruary 2004,29 thanks mainly to Canadiantourists.

Most of the CEOs interviewed agreedthat over the past fourteen years, theCuban tourism industry has producedabove-average gross operating profits(GOPs) in most hotel groups. The islandhas consistently been Sol Melía’s mostprofitable market during recent years. Atthe same time, the Sol Melía Group hasproved to be Cuba’s most influential stra-

tegic tourism asset because the group’sperformance has encouraged the initia-tives of competing corporations. As anillustration of Cuba’s value, Sol Melía’stotal group management fees increased byonly 0.9 percent worldwide in 2002, witha 9.3 percent decrease in Latin Americaand the Caribbean. Despite that difficultyear, management fees in the Cuban divi-sion have increased by 2.5 percent.30 As awhole, in 2003, Sol Melía’s twenty-threehotels registered an average occupancyrate of 75.7 percent and an ADR of $78.

Like the Sol Melía Group, other hote-liers consider Cuba to be a profitable mar-ket. A manager from Super Clubs wasquoted as saying that “we are makinggood profits” in the four hotels that it oper-ates.31 Another executive, from BarcelóHotels and Resorts, has also confirmed“consistent above-average GOPs, despitethe U.S. trade embargo.” Today, the over-all average room rate in the country is inaccord with Caribbean average prices,exceeding US$70-80.32 The rate growthreflects the changes made by Cuba in re-cent years, moving from a “one-dimensiondestination,”33 in which price is the mainpurchase motivation, to being a morecompetitive and complex destination thatoffers beach resorts, history, and colonialarchitecture, and nature and ecotourism.

In the past, Cuba’s market has seen thevast majority of travelers arriving viacharter airlines on low-price, all-inclusivepackage tours that focused on sun, sea,and sand. To draw high-spending visitors,investments are being made in golfcourses, museums, marinas, restaurants,and other facilities that make Cuba a morecomplete destination. To take advantageof its status as a World Heritage Site,Havana is being restored to its formersplendor. Colonial history, architecture,music and art, diving, and nature tourismare just a few areas that are providing new





added value and setting up the basis for thedevelopment of a more integrated, sus-tainable, and sophisticated assortment oftourist offerings. Ecotourism opportuni-ties in Cuba will compete with those ofother nations in the area.34 Health-orientedtourism is another attraction, given therecognized international prestige ofCuban medical science.35 Today, manyvisitors combine beach and city holidays,dividing their time between a resort andcities or natural parks.

The Cuban hotel CEOs are confidentthat Cuba offers a mixture of attractionsthat the rest of the Caribbean does not pro-vide. Said one, “It has culture and histori-cal heritage, a very low crime rate, andgenuinely friendly and literate people,natural attractions, unique public healthservices, and a rich cultural life—all inaddition to the sun and the sand.” Accord-ing to an executive from Sol Melía, “Theisland’s safe environment for tourists is akey competitive advantage vis-à-vis itsCaribbean neighbors.” Cuba’s relativesafety is highlighted by a report by theCanadian Tourism Commission on LatinAmerica and the Caribbean region, whichpoints out that safety and security threatsare a major constraint for tourism growthin the region.36 The curiosity factor forCuba is also a significant variable. As aCEO from Accor Group pointed out,“Many young tourists from France wantedto go to Cuba before Castro dies. Theywant to see a communist country in thesun. And it is cheaper than Spain.”

Finally, since the development of tour-ism on islands like Cuba depends on trans-portation, Cuba has improved its air trafficcapacity to meet the needs of the touristindustry, with eleven international air-ports now served by ninety foreign air-lines. The government is also expandingits capacity to host cruise ships. Cuba

plans to open its second cruise ship termi-nal in Havana in 2005, and the existingterminal in Havana has been expanded toaccommodate five ships rather than four inanticipation of an expected increase inship calls. A division of Cubanacan pro-vides tourism services to the fourteencruise ships that regularly arrive in thefour major Cuban ports. The Cuban gov-ernment expects 140,000 cruise ship pas-sengers to visit the island in 2004, com-pared to 120,000 in 2003, according toCubanacan.

Management Problemsand Challenges

The attractiveness of these opportuni-ties is mitigated by the continuingembargo on Cuba by the United States,including legislation that attempts toimpose U.S. law on companies in othercountries. In 1992, the United States tight-ened its embargo with the Cuban Demo-cratic Act, and the U.S. Congress passedthe Helms-Burton Law in 1996. These twomeasures meant, among other things, thatships docking in Cuban ports could notenter the United States during the next 180days, that U.S. subsidiaries overseas couldnot sell to Cuba, and that foreign compa-nies could be sued in U.S. courts for trad-ing with or investing in U.S. citizens’con-fiscated property.

A Spanish executive of a five-star hotelechoes the concerns of general managersacross the island when he says that “theitems imported can be as much as twiceas expensive as in other Caribbean loca-tions” because he cannot buy from theclosest supplier, the United States. He es-timates that the trade embargo causes a 4-to 5-percentage-point decrease in hisGOP, a cost of $1 million in his hotelalone. Therefore, reducing the importcomponent of tourism is an explicit policy





goal in Cuba, and significant progress hasbeen made, as we analyzed above. A Brit-ish study estimated that U.S. sanctionshave imposed on Cuba a “virtual penalty”of 30 percent on imports because of theincreased purchasing and shipping costsentailed to avoid the U.S. embargo.37

Beyond the embargo, the U.S. anti-expropriation law is worrisome. AnotherCEO stated that “there is always the risk of‘owning’ or ‘sharing’ contested land.Close to 6,000 U.S. expropriation claimshave been filed since 1961.”

However, for most hotel-managementcorporations, risks are relatively low. ACEO from Iberostar Hotel Group ex-presses his cautious mind-set with regardto Cuba as follows: “As you can imagine,we are hardly likely to go there and investnot knowing the future circumstances. Sothe arrangement is relatively simple, withmanagement contracts. Our investment islimited to our skill, expertise, and market-ing ability.” In this regard, another execu-tive followed by saying, “Cuba is offeringa good management fee with zero invest-ment, offering brand-new four- and five-star hotels. You cannot get that anywhereelse.” However, as we mentioned above,this “free ride” will end in the near future,as the Cuban government is seeking for-eign hotel chains to share investment innew hotel joint ventures.

Although the U.S. laws increase therisks and costs for foreign companies inthe Cuban market, they also provide aform of safe harbor by preventing U.S.-based competitors from entering the mar-ket. Several executives have pointed outthat market opportunities are interestingdue to the lack of U.S competition. TheSol Melía CEO emphasized the impor-tance of the current absence of the largeU.S. hotel chains in this market, coupledwith the potential for profitability should

economic and political relations with theUnited States eventually improve.

Other management problems that for-eign hotel managers face in Cuba are typi-cal of those in a centralized economy.They include excessive bureaucracy,increasing corruption, ever-changing leg-islation, and costly dollar payments toCuban workers recruited by a state entity.The employment system that requiresthird-party payments in dollars is particu-larly challenging. Though Cuba has awell-educated workforce that is highlymotivated to work for foreign hotel corpo-rations, the labor market could easily beconsidered a deterrent to foreign invest-ment. Foreign-operated hotels must hireall their employees through an employ-ment agency. Although employers havethe right to fire a worker and request areplacement, they are not permitted toselect the candidate of their choice in thefirst place. They are also required to paythe employment agency rather than pay-ing the worker directly, and they are askedto pay a monthly base salary in U.S. dol-lars, plus an additional 25 percent for pen-sion, workers’ compensation, and holidaypay. Wages are centrally established andare the same all over the country for allhotel corporations. Monthly salariesrange from US$300-1,500 per month.

The hotel’s workers do not benefit fromthe value of those third-party dollar pay-ments, however. Instead, the governmentpays the worker in pesos rather than dol-lars, at a conversion rate of 1 peso per 1U.S. dollar, even though the market ex-change rate is closer to 26 pesos to the dol-lar. The government also reserves the rightto “rationalize” or “equalize” salaries. So,for example, a Spanish hotel corporationmight pay the employing agency US$500per month for each restaurant manager,but that person actually receives from the





employment agency 500 cuban pesos,worth about US$20. Just to give an idea ofthe purchasing power of that $20, a one-liter bottle of vegetable oil costs US$2.20in the state hard-currency retail stores, theonly stores where one can find vegetableoil.

Foreign investors and hoteliers find re-quirements such as these to be onerous.They result in higher employment costs,diminish the motivation of workers, andlimit the implementation of Western-styleHR compensation practices and incentivesystems. The concepts of incentives orstimulation pay are foreign to the socialistsystem, so it is extremely difficult for for-eign hotel corporations to offer a high basesalary or productivity bonuses. As a result,employee theft is rampant due to workers’subsistence wages. Thefts typically in-volve all the employees in a department; tomake sure no one rats out the culprits, allemployees share in the proceeds, evenmanagers and those on vacation. “It is avery socialistic way of stealing,” says asenior hotel manager. Furthermore, be-cause there is little opportunity for finan-cial gain, general managers find it difficultto motivate staff to take on additionalresponsibility or do jobs to the best of theirability.

An additional complication for foreignoperators are Cuban executives close tothe government, who are typically foundat the hotel management level. Accordingto one European CEO, “These people areoften retired military, party, or govern-ment officials.” These Cubans in executivepositions typically work for the StateSecurity Agency and must try to obtainintelligence from foreign partners.

Future for HotelDevelopment in Cuba

Despite its rapid growth, Cuba’s tour-ism sector is still small, in Caribbean

terms, relative to the size of its economy,and it is safe to assume that Cuban tourismwill continue to grow substantially even ifU.S. policy remains unchanged.

MINTUR estimates a potential short-fall of forty-six thousand rooms by 2010under its medium-growth estimates, andsixty-three thousand if high-growth esti-mates are realized. These forecasts arebased on continuing development ofCuba’s tourism facilities, combined with aprojected 50 percent increase in Carib-bean tourist arrivals between 2000 and2010. By the year 2010, Cuba officiallyexpects to receive 5 to 7 million visitors—still without U.S. tourism—generatinggross profits and tax revenues of US$5billion.

However, within the current interna-tional scenario (given such threats as ter-rorism and falling economy growth rates),the growth of tourism arrivals is unlikelyto maintain the strong rate of the past tenyears. Indeed, if Cuba continued its recent10 percent annual growth rate for the nextfive years, the number of arrivals wouldincrease to more than 3 million by 2008.At that rate, if occupancy levels, averagelength of stay, and number of guests peroccupied room were not to change, Cubawould require a total of seventy thousandrooms, or the addition of twenty-threethousand rooms over today’s level.38 Thisscenario initially appears to be reasonablyrealistic, except when one considers thatthe actual level of increase over the pastfive years (1988-2003) has been a total ofonly ninety-five hundred rooms. Regard-less of which scenario comes true, theCuban government’s return to favoringjoint ventures with foreign partners couldprovide the capital necessary to keep hoteland room growth on pace with anticipatedtourism levels.

Another scenario focuses on the ques-tion of how many travelers from the





United States would tour Cuba if travelrestrictions were lifted. Estimates varywidely regarding this matter. In its 2001report, the U.S. International Trade Com-mission (USITC) predicted that, absent allsanctions on trade with Cuba, only100,000 to 350,000 U.S. residents wouldtravel to Cuba each year, primarily as tour-ists.39 By comparison, the head of theAmerican Society of Travel Agents(ASTA) predicted in 2002 that if the travelban were lifted, 1 million U.S. travelerswould visit Cuba the first year—a numberthat would cause a 58 percent increaseover current visitation levels—and, fur-thermore, the number of U.S. arrivalswould increase to 5 million within fiveyears.40 In June 2002, a report issued bythe Center of Sustainable Tourism at theUniversity of Colorado estimated 950,000American tourist arrivals in year one and2.7 million arrivals in year five.41 Mostrecently, a new report based on travel pat-terns of closely comparable groups (Cana-dians and U.S. residents) estimates that2.8 million U.S.-based tourists would visitCuba annually.42 Without any doubt, ifrestrictions on U.S. travel were elimi-nated, Cuba would experience a secondboom even greater than the one experi-enced in the 1990s.

Whatever the future scenario of travelrestrictions may be, Cuba is already be-coming part of the Caribbean tourist cir-cuit for travelers from nations other thanthe United States, and the Cuban govern-ment is directing its hotel and touristinvestment program at activities that willinterest international hotel chains, as wellas the prospective U.S. market. Althoughthe executives whom we interviewed seeno early end to the embargo, recent hotelprojects are being built to meet SouthFlorida Building Code Standards, therebyensuring that these projects will be attrac-tive to major North American hotel brands

should they ever be able to do business inCuba.43

A particular danger to tourism develop-ment in Cuba comes from stringent appli-cation of the Helms-Burton legislation. Aswe mentioned above, this law threatenslawsuits against foreign companies andexclusion of their executives from U.S.soil for the use of any property in Cubaever confiscated from anyone who is nowa U.S. citizen. Recently, SuperClubspulled out of one hotel contract in Cubaafter the U.S. State Department threatenedto cancel top executives’ U.S. visas on thegrounds that the company is “trafficking”in property confiscated from CubanAmericans. Though neither European norCanadian hotel corporations were threat-ened by the Helms-Burton legislation, themove could serve to dissuade investorswho are thinking about delving intoCuba’s burgeoning tourism industry.Helms-Burton does not threaten tourismprojects that are being developed in unex-ploited areas, which involve no propertyclaims from Cuban Americans or U.S.corporations.

Concluding RemarksUntil recent years, Cuba has been the

main destination for Caribbean tourism.The changes that have taken place in theisland over the past fifteen years corrobo-rate the fact that Cuba will continue to be amajor force in the Caribbean tourismindustry. Cuba made a spectacular start inthe 1990s, increasing annual tourist visitsfivefold and becoming the world’s fastest-growing tourist market—as it moved from3 percent of Caribbean tourism in 1990 to10 percent in 2000.

The dynamism of the Cuban touristsector has attracted most of the FDI in thecountry, acting as the engine for the Cubaneconomy. The rapid growth of the touristindustry has resulted in exactly what the





Cuban government has sought—an influxof foreign exchange and direct invest-ment. The government funnels much ofthis money back into the major touristconglomerates and related infrastructure.With this new infrastructure in place—hotels, resorts, marinas, and eleven inter-national airports now served by ninety for-eign airlines—Cuba is ready to receivegreater numbers of visitors, and we be-lieve Cuba has the potential to obtain alarger share of Caribbean tourism. Cuba’sdistinctive attractions give it a strong rea-son to draw more tourists. In contrast toregional competitors that offer primarilybeach resorts, Cuba has colonial architec-ture; natural riches; cultural attractions;and Havana, the Caribbean’s largest city, aplace that intrigues many visitors in spiteof its physical decay.

Weighing against those favorable pros-pects, the economics of Cuban tourismand hotel business involve two majorgrowth restrictions, namely, political riskand management-efficiency problems. Aswe explained above, Cuba’s socialist gov-ernment distorts market forces, notablywith its human resources policies, andCuba remains the only Caribbean destina-tion that is cut off from its natural market,the United States. With regard to market-related issues, foreign investors have beenthe strongest element in terms of introduc-ing market-oriented behavior, and foreignhotel chains have played an importanttutorial role in developing local markets.Therefore, we should expect a trend to-ward a more flexible market socialistmodel. As far as the U.S. embargo, per-haps the greatest unknown is the future oftravel restrictions for U.S. tourists toCuba. The impact of a free Cuban tourismmarket will be substantial, with greatpotential—especially over the shortterm—to draw market share away fromother Caribbean destinations. So far, early

market entry providing good locationsand the possibility of negotiating favor-able investment arrangements are seen asan advantage by many non-U.S. hotelchains prior to the possible lifting of theU.S. embargo.

Endnotes

1. S. C. Berman, “The Challenge of Cuban Tour-ism,” Cornell Hotel and Restaurant Adminis-tration Quarterly 35, no. 3 (June 1994): 10-15.

2. J. F. Macaulay, “Tourism and the Transforma-tion of Cuba,” Cornell Hotel and RestaurantAdministration Quarterly 35, no. 3 (June1994): 16-21.

3. S. A. Leiseca, “Letter: Even without the U.S.Embargo, Cuba Is Not an Environment Favor-able to Business,” Cornell Hotel and Restau-rant Administration Quarterly 35, no. 5 (Octo-ber 1994): 7.

4. C. Jayawardena, “Revolution to Revolution:Why Is Tourism Booming in Cuba?” Interna-tional Journal of Contemporary HospitalityManagement 15, no. 1 (2003): 52-58.

5. L. Jebodsingh, Cuba: A Market Profile (NewYork: Arthur Andersen, 2000).

6. R. Schwartz, Pleasure Island: Tourism andTemptation in Cuba (Lincoln: University ofNebraska Press, 1997).

7. M. Miller and T. L. Henthorne, Investment inthe New Cuban Tourist Industry: A Guide toEntrepreneurial Opportunities (Westport, CT:Quorum Books, 1997).

8. C. W. Chatham, “Cuba’s Economy Strategy,”Princeton Journal of Foreign Affairs, Winter1998, www.princeton.edu/foreigna/winter1998/cuba.html.

9. F. L. Simon, “Tourism Development in Transi-tion Economies: The Cuba Case,” ColumbiaJournal of World Business 30, no. 1 (Spring1995): 26-41.

10. C. Jensen, “Socialism, Spillovers, and Marketsin Cuba,” Post-Communist Economics 15, no. 3(September 2003): 435-59.

11. “No Official Market Economy for Cuba,” Ca-ribbean and Central America Report, August2000.

12. Considering that the United States is attempt-ing to impede the flow of foreign direct invest-ment (FDI) to Cuba, which highly affects its





country risk, the amount of FDI has muchgreater significance for Cuba than whatemerges from a simple qualitative comparisonon the investment flows to other countries inthe region.

13. O. E. Pérez Villanueva, Cuba: An Overview ofForeign Direct Investment (Havana, Cuba:Center for the Study of the Cuban Economy atthe University of Havana, 2002), 1-25.

14. P. Spadoni, “Foreign Investment in Cuba: Re-cent Developments and Role in the Economy,”Cuba in Transition (Washington, DC: Associa-tion for the Study of the Cuban Economy[ASCE], 2002), 158-78; and Economic Surveyof Latin America and the Caribbean, 1999-2000 (Santiago, Chile: Economic Commissionfor Latin America and the Caribbean[ECLAC], 2000), 189-94.

15. “Cuba: Destino Estrella en el Caribe,” Hos-teltur, July 2004, p. 91.

16. “Cuba Busca Aumentar Llegada de TuristasMexicanos,” Hosteltur, November 2004, p. 113.

17. J. N. Goodrich, “Socialist Cuba: A Study ofHealth Tourism,” Journal of Travel Research32, no. 1 (Summer 1993): 36-42.

18. Cubatravel, “Cuba Launches Tourist ProductDedicated to Che Guevara,” Cubatravel.cu (ac-cessed December 6, 2004).

19. O. Gutiérrez and N. Gancedo, “Tourism De-velopment: Locomotive for the Cuban Econ-omy,” 2003, www.fas.harvard.edu/drclas/publications/revista.

20. Jayawardena, “Revolution to Revolution,” 52-58.21. See R. Pine, “China’s Hotel Industry: Serving a

Massive Market,” Cornell Hotel and Restau-rant Administration Quarterly 43, no. 3 (June2002): 61-70.

22. “Cadenas Cubanas Mejoran Ubicación enRanking Hotelero Mundial,” Hosteltur, Octo-ber 2004, p. 98.

23. C. Suddaby, “Cuba’s Tourism Industry,” inCuba in Transition (Washington, DC: ASCE,1997), 123-30.

24. “100 Millones de Inversión en el Playa Pes-quero,” Hosteltur, February 2003, p. 71.

25. Gutiérrez and Gancedo, “TourismDevelopment.”

26. The Cuban government forbids any degree offoreign ownership of existing property.

27. A. Padilla, “The Tourism Industry in the Carib-bean after Castro,” in Cuba in Transition(Washington, DC: ASCE, 2003), 77-98.

28. Economic Survey of Latin America and the Ca-ribbean, 2003-2004, pp. 287-293, ECLAC.cl/publication/Desarrolloeconomico/5/Cuba.pdf.

29. “2003 Ha Sido el Mejor Año del Turismo enJardines del Rey,” Hosteltur, February 2004,p. 98; and “Nuevo Record en Jardines del Rey,”Hosteltur, April 2004, p. 104.

30. Sol Melia Annual Report 2002, www.solmelia.com.

31. “Cuban Hotels Industry Thriving with ForeignPartners,” Hotel and Motel Management, July5, 2001, www.cubanet.org/Cnews/Y01/jul01/06e4.htm.

32. “Caribbean Tourism—Performance in 2003and Prospects for 2004,” the Caribbean Tour-ism Organization, www.onecaribbean.org.

33. F. L. Simon, “Tourism Development in Transi-tion Economies: The Cuba Case,” ColumbiaJournal of World Business 30, no. 1 (Spring1995): 26-41.

34. E. Linden, “The Nature of Cuba,” Smithsonian34 (May 2003): 94-106.

35. J. N. Goodrich, “Socialist Cuba: A Study ofHealth Tourism,” Journal of Travel Research32, no. 1 (Summer 1993): 36-42.

36. N. Strizzi and S. Meis, “Current and Future -Development in Tourism Markets in Latin Amer-ica and Caribbean Region,” Canadian TourismCommission, May 1999, www. hotel-online.com/Neo/Trends/PanAmerProceedingsMay99/ DevelopMarketLAC.htm.

37. The Impact of Economic Sanctions on Healthand Well-Being (London: Relief and Rehabili-tation Network, November 1999).

38. N. Crespo and C. Suddaby, “A Comparison ofCuba’s Tourism Industry with the DominicanRepublic and Cancún, 1988-1999,” in Cuba inTransition (Washington, DC: ASCE, 2000),352-59.

39. U.S. International Trade Commission, TheEconomic Impact of U.S. Sanctions with Re-spect to Cuba, Publication 3398, February2001, www.usitc.gov/wais/reports/arc/w3398.htm.

40. M. Murray, “Cuba Ban Said to Hinder TravelAgents,” MSNBC, April 6, 2002. The Ameri-can Society of Travel Agents (ASTA) includedthe same estimates as part of its written submis-sion to the International Trade Commission(ITC) study cited above.

41. E. Sander and P. Long, “Economic Benefits tothe United States from Lifting the Ban on Travelto Cuba,” Center of Sustainable Tourism,





Leeds School of Business, University of Colo-rado, June 2002, www. cubapolicyfoundation.org/pdf/CubaTravel. htm.

42. D. Robyn, J. D. Reitzes, and B. Church, “TheImpact on the U.S. Economy of Lifting Re-strictions on Travel to Cuba,” in Cuba in Tran-sition (Washington, DC: ASCE, 2002), 262-75.

43. “Leisure Canada Inc. Launches Five-Star Ha-vana Waterfront Hotel Development Program,”Canada NewsWire, www.newswire.ca/en/releases/archive/July2002/08/c3044.html. An-other example is the opening in 2000 ofthe Paradisus upscale brand of Melia’s all-inclusive hotel in Varadero.



Julio Cerviño, Ph.D., is on the faculty of Uni-versity Carlos III of Madrid ([email protected]). José María Cubillo, Ph.D., is on thefaculty of University Polytechnic of Madrid(josemaria. [email protected]).



Documents

Hotel & Tourism Development in Cuba