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Don’t take eye off potential Cuban price


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Philip F. Zeidman

Imagine the exciting prospect of a totally new marketplace for your franchise, one where no American franchise has ever ventured. Then, you begin to learn a bit more about it:

  • The size of Virginia;
  • The population of Ohio;
  • The purchasing power of Syria, or Turkmenistan (contrasted to 1958, when its per capita income was greater than Japan, and its workers had the eighth highest wages in the world).

Heart still racing?  Maybe not so much?

You guessed it:  Cuba.  You know the rap:  Controversial; 80 to 85 percent state-run economy (and badly); a virtual “police state”; mired in the infrastructure of the 1950s; most of the population unable to think of themselves as consumers; “entrepreneurship” a forbidden concept during our lifetime.

But…

Ignacio Sanchez

Ignacio Sanchez

But only 90 miles from Florida, a short hop from any U.S. city east of the Mississippi. A magnet for American tourists as soon as it opens, all of them likely to be responsive to familiar products, services and advertising.

Predictably, the hotel companies were the first to signal interest in President Obama’s recent announcement of a proposed “opening” of the Cuban market, from Marriott to Hilton to InterContinental to Choice and others.  

While there is understandable skepticism about whether franchised models can be established in Cuba, some franchises, including foodservice and others, have been exploring the possibility for years.  

In fact, whenever a potential opening toward Cuba has been periodically hoped for (at the time of the fall of the Soviet Union and Soviet bloc; when sanctions reforms were first surfaced, etc.), U.S. franchisees have pressed their franchisors to enter into prospective agreements for the Cuban market.

The same holds true now. The retail consultancy that helped bring Bloomingdale’s to Dubai expects “fast-food franchises and mass stores will be the first to open in Cuba, a repeat of what happened in other emerging markets.”

But the differences, of course, are stark:  Consider the enormous disparity in the size of the potential markets in China and Russia, even after one subtracts those not realistically on any franchisor’s radar. And let’s not forget the years of uncertainty, by no means yet fully resolved, which stretched out before franchisors even in those beckoning markets.

Diplomatic measures

While fully cognizant of the many impediments, those of us who worked to introduce franchising to the former Soviet Union after the fall of the Berlin Wall are nonetheless intrigued by the prospect of exploring the possible parallels. Against that backdrop, let’s consider what has happened, and what has to happen to make this potential a reality.

Diplomatic relations with Cuba were severed by President Eisenhower just weeks before leaving office. In October 1960, President Kennedy imposed an embargo only on exports to Cuba.  Sixteen months later he issued an executive order imposing a full embargo on Cuba in part due to Cuba’s confiscation of U.S. property.  

In the normal course of time, the Treasury Department implemented comprehensive trade sanctions regulations giving effect to President Kennedy’s orders. And so it remained, with minor modifications made by subsequent administrations—a product of presidential power and prerogative.

In 1992, however, Congress began to assert itself with respect to Cuba policy. That year it passed legislation making the Cuba trade sanctions applicable to foreign subsidiaries of U.S. companies, but also allowed for enhanced telecommunications from the U.S. directly to Cuba.

Then, in 1996, when Cuban MiGs shot down two civilian aircraft looking for rafters in the Florida Straits, Congress responded by accelerating passage of a second Cuba sanctions bill that, among other things, “codified” all existing sanctions regulations related to Cuba, but also established the prerequisite political and legal conditions for suspending and eliminating U.S. sanctions against Cuba.

Against this backdrop, on December 17, President Obama announced his desire to chart a new course on U.S.-Cuba policy. To that end, he instructed the secretary of state to initiate discussions with Cuba on the re-establishment of diplomatic relations (a subject not directly covered by Congress efforts on Cuba sanctions).

In addition, among other diplomatic measures, the president announced a number of other steps. They include facilitation of travel, generally within the 12 existing categories of authorized travel; facilitating remittances to Cuba by U.S. persons, including to support the development of private businesses in Cuba; authorizing the expansion of sales or exports from the U.S. of certain goods and services; facilitation of financial transactions; and facilitation of telecommunication.  

Who wins this war of words may depend on how the announcement (merely a statement, not an executive order) is implemented, and how much the new regulations diverge from the 1996 parameters. Further, what measures the Cuban government itself takes to liberalize its economy (for example, allowing foreign companies to pay and hire workers directly, allowing unions, etc.) and release its repressive hold on the Cuban people will also have a direct political impact on the debate, as will how pugnaciously Congress reacts.

Just a little longer

It is obvious the uncertainties that abound, taken together with the inadequacies of both physical infrastructure and legal framework, make it premature to jump too soon at the prospect of new business opportunities for franchisors in Cuba.  But it is equally clear it would be foolish to take your eye off that potential jewel in the Caribbean.

The question is not whether, but when. And, after 50 years, we can wait a bit longer.

Philip Zeidman, top photo, is a partner in the Franchise and Distribution Group of DLA Piper in Washington, D.C. Reach him at philip.zeidman@dlapiper.com.

Ignacio Sanchez, a Cuban-American, is co-chair of DLA Piper’s Government Affairs Practice Group. Reach him at (202) 799-4315 or at ignacio.sanchez@dlapiper.com. The authors gratefully acknowledge the assistance of the firm’s Miami and Madrid offices.

 

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