Robaina: A Model Cuban Cigar Brand

The Robaina cigar operation is constrained by a business model that makes success difficult; however, by focusing on its operational strengths, Robaina has managed to remain Cuba's premier cigar brand for more than 150 years

Robaina, founded in 1845, is one of Cuba’s premier cigar brands.  Less than two weeks ago, I visited both the Partagas cigar factory (Fábrica de Tabaco Partagas) in Havana and the Alejandro Robaina tobacco plantation (Finca El Pinar Robaina) in Pinar del Río.  The entire Robaina operation was a model of effective business and operational alignment.

Business model

Robaina is in a unique situation because the business model is fixed by the government.  The Cuban government mandates that 90% of production be sold to Cubatabaco, the state-owned tobacco company, while 10% of production can be sold to friends and family, loosely defined.  Quality is judged by a government inspector, who sets the final price the government will pay for the cigars.

Production is ~5 million cigars per year and is capped by the quantity of fertile land available.  A government-granted monopoly for the region ensures that Robaina has no competition for labor locally.  The Robaina family controls cigar production end-to-end, from growing tobacco leaves to selling cigars to the government.

The plantation claims that its primary asset is the unique soil.  However, in my opinion, Robaina’s primary advantage is its operational excellence.  The company uses 80% of its harvest in cigar production, compared to 35% for other plantations.

Operating Model

Robaina’s business model is supported by a unique operating model.  Given that Robaina’s value capture (price and quantity) is fixed, the interaction between business and operating models is that much more important.  Robaina has masterfully used its advantages to build a brand that has lasted for more than 150 years.  The unique attributes of Robaina’s operating model include:

High raw material costs and low labor costs

  • Robaina substitutes labor for capital whenever possible, with a focus on conservation of raw material, the limiting resource in the cigar-making process
  • The company is focused on maintaining the tobacco at a specific temperature to promote quality. Dozens of sweepers mix piles of tobacco leaves daily, ensuring that leaves at the top are the same temperature leaves at the bottom
  • Tobacco leaves are sorted into three types (wrapper, binder, and filler) according to quality to maximize output. The inner part (filler) affects cigar size, the middle part (binder) governs strength, and the outer part (wrapper) determines flavor
  • In the Partagas factory, hundreds of torcedores (cigar rollers) sit in long rows. They are trained for nine months before being allowed to roll cigars to avoid mistakes and wastage
  • Scraps from discarded tobacco leaves are collected and ground up into cigarettes

Flexible, adaptable workstreams

  • The plantation employs 10-20 people during the year and 150-200 people during harvest season from October through February. Each person rotates between tasks because the majority of the tobacco leaves follow a pre-determined process flow at the same time
  • When I visited the factory, there was a power outage, resulting in no lights and no working fans. An outcome that would have shuttered a typical American factory was barely felt. Windows were opened and workers continued about their business

Employees motivated to focus on quality

  • The Robaina plantation actively tries to hire families, particularly those who have lived in the Pinar del Río area. This legacy system ensures loyalty in a business where workers can significantly affect quality
  • Employees of the plantation and factory earn a nominal salary equivalent to $1/day, but they receive 5 cigars. These cigars can be sold easily on the black market for approximately their monthly salary (representing half the retail price). As a result, workers are invested in the quality of the brand because a large portion of their compensation depends on perceptions of Robaina
  • Importantly, cigars used to compensate workers are excluded from the 10% limit of sales to friends and family

Introduction of new line to expand production

  • Given production constraints in Cuba, the Robaina family began marketing cigars produced in Nicaragua in the United States. The introduction of the “HR” (Hirochi Robaina) line allows for greater value capture from the brand

Sources:

Factory tour at Partagas cigar factory, November 27, 2015.

Employee interview at Alejandro Robaina tobacco plantation, November 28, 2015.

Bloomberg View.  “The Cuban Cigar King Sets his Sights on America.” February 27, 2015. http://www.bloomberg.com/news/features/2015-02-27/the-cuban-cigar-king-sets-his-sights-on-america

Miami New Times.  “Hirochi Robaina Grows Tobacco for the Castros but Tours the U.S. Selling His Own Stogies.” February 11, 2015. http://www.miaminewtimes.com/news/hirochi-robaina-grows-tobacco-for-the-castros-but-tours-the-us-selling-his-own-stogies-6557923

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10 thoughts on “Robaina: A Model Cuban Cigar Brand

  1. Your article is incredibly interesting because it considers a company who cannot change its business model, something that is unthinkable in most startups or sexy US companies. With necessity being the mother of invention, I enjoyed reading about how the company was smart about utilizing resources to maximize their output while forcing costs down. I would be interested to hear the conversations of management on the purchase of any capital equipment to know what is feasible. Finally, the idea of paying the employees in cigars is brilliant to the point you made of ensuring quality. It also sounds like the Cuban version of paying in stock options. Great job!

    1. Appreciate the comment! Agreed with the interesting analogy of daily cigar payments as a substitute for stock options. In visiting the factory and plantation, I didn’t observe any processes where machines could be easily substituted for manual labor while preserving quality. That said, in a country with labor costs ~50-100x higher, I’m sure that machines could provide some sort of creative solution. In particular, visiting a cigar factory in the U.S. to observe production systems would probably add to the conclusions above.

      Thanks again Matt, great thoughts.

  2. Very cool post. Necessity is the mother of invention, indeed. Thank you.

    1. Thank you! One of the most unique businesses I’ve seen, I really enjoyed the on-site visit. Will certainly continue to follow their progress during the next several years …

  3. I find many interesting parallels in this story. Robaina paying employees cigars is just like Google issuing employees shares. (It also helps make employees feel good about their products and company.) Robaina using cheap labor to conserve tobacco is just like BYD using cheap labor to replace robotics. Ingenious!

    1. Agreed, thanks for the comment. At the end of the day, fascinated by the capital vs. labor tradeoff, as I think this is too often overlooked by both business and economists.

  4. Cigar factories – great idea!

    Big question I have here – as the Cuban economy opens up more, perhaps some of the regulations, like the 90/10 rule here, may start to fall down. Is Robaina equipped to re-formulate their business model – perhaps by moving more of the value chain in house? Or will they/should they continue to operate in a similar fashion to how they do now?

    1. Thank you – inspiration for the idea just hit me one day!

      My view is this would fundamentally change how Robaina sells cigars, mostly for the better. The big limitation would remain production volume (capped by land availability), but the addressable market would skyrocket. Robaina-branded retail stores, for example, would be huge, both in the US and in Cuba. Perhaps there could be consolidation in ownership of the various Cuban brands? Or they could segment into labels of different quality now that they no longer have to pass a single government inspection? Lots of options, but I’m confident that they would be able to capture the value associated with the Cuban economy opening up.

  5. Nice post Will. Just wondering why the other plantations are able to use only 35% of their harvest whereas Robaina uses 85%? That’s a fairly large gap – is it due to the ways the cultivation is done or the ways the leaves are treated post harvest?

    1. Great question, and agreed, I was shocked by those numbers! It’s the latter, i.e. the ways the leaves are treated post-harvest. Specifically, the care taken by workers during the fermentation process ensures that most of the leaves can be used. There are two fermentation processes, each lasting between 4 to 12 weeks, during which the leaves must be constantly attended to. Since Robaina’s limitation is the quantity of leaves produced, their employees are laser-focused on ensuring that the maximum percentage makes it through to be used in cigar production (ideally as wrapper leaves, which are the highest quality leaves).

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