by Alan Massarsky, President, Marshall-Alan Associates
It’s been nearly impossible recently to ignore the buzz about all the exciting new opportunities for American hotel operators in Cuba. Since 1962, American business and travel to the island has been mostly forbidden, but suddenly Cuba has risen to the top of nearly every list of hot new destinations.
Immediately after U.S. government embargos and sanctions were relaxed in December 2014, numerous American entities began competing to get into Cuba first and capitalize on the huge demand. Thus far, the first wave has been comprised of tourists and companies with long-standing interests in Cuba. Starwood, the first American hotel brand approved to enter the Cuban market, is one of several American hotel companies involved in decades-long legal battles relating to multi-million dollar claims over the expropriation of properties during the 1959 Cuban revolution. Many of the travelers who have visited first also have decades-long interests in Cuba, and its art and music, cigars and baseball, classic cars and architecture, history and politics. There’s also been a recent uptick in Cuban hotels hosting international business conferences, particularly in the medical and design fields. “You don’t just go to Cuba for a spontaneous beach vacation,” says Robb Report senior editor Jackie Caradonio, “for one, the beaches aren’t great because the Cubans haven’t invested in that infrastructure yet, but even more so because it’s too much of a hassle to get there, plus resort visits still aren’t permitted for Americans.”
Emerging Market Shift
Cuba has a long history and tradition of sophisticated luxury hospitality, catering to the American market during the first half of the twentieth century. Since the 1960s, only Non-Americans have been able to travel and establish businesses relatively freely, with hotels owned and operated by the Cuban state and companies like Melia and Iberostar. American business was heavily restricted, and tourists could only get visas to travel there through expensive organized group tour operators with set itineraries totally devoted to cultural and educational exchange and via private, chartered flights. American travelers will still be required to provide complete records of their time in Cuba, but they can now be issued visas as individuals under one of twelve permissible travel categories listed by the U.S. Treasury Department, the most popular being “people-to-people educational exchange.”
American travel and business in Cuba is set to surge now that the governments have finally agreed to significantly relax trade restrictions. According to a recent ABC News poll, 40% of Americans are interested in visiting Cuba, and 20% are very interested in visiting in the short-term. The first direct commercial flights will take off by next year. And with President Obama’s historic visit indicating that Cuba is officially open to American business, many hospitality operators are eager to establish a presence on the scene.
Demand for hotels, particularly in the luxury category, already far outpaces supply. There are fewer than 70,000 hotel rooms in all of Cuba, 65 percent of which have been given four- and five-star ratings from the Cuban government (though these ratings often do not correspond to American standards). Many travelers also stay in privately-owned and run bed-and-breakfasts. Top hotels are almost always completely booked months in advance, and there’s also a major shortage of restaurants.
In the past year alone, travel from the U.S. to Cuba has already jumped 50%. To prepare for the American influx, Airbnb successfully launched last year. Carnival Cruises will begin sailing to Havana next month. Marriott CEO Arne Sorenson (also vice chair of President Obama’s Export Council) traveled to Cuba with President Obama to formalize a deal for Marriott to develop new properties there. Starwood just announced plans to restore and manage Havana’s historic Hotel Inglaterra and Hotel Quinta Avenida. Cuban officials are also planning for expansive growth in the provinces outside Havana, including 20 new five-star hotels and hotel-golf-residence complexes budgeted at over $300 million.
Navigating the Complexities
Establishing luxury properties in former Cold War-era foes Vietnam and Russia has demonstrated that developing a marketplace for American travelers can be hugely profitable and rewarding for both American and local investors involved. But reaching that point requires overcoming a unique and complicated set of challenges, like government relations, hiring and training locals, and lack of infrastructure required for luxury travel.
“It’s everything to have the right investors and local partners to develop the assets and position them correctly,” says Albert Herrera, Senior Vice President of Global Product Partnerships at Virtuoso Travel. Indeed, in order to facilitate relationships with local government officials and vendors, it’s essential to have trusted, influential local parties to mediate and bridge cultural differences. In my experience working with hotel executives in Communist (and formerly Communist) countries, American companies also often discover that it generally takes much longer to get business done in such emerging markets, due to the unprecedented nature of negotiations and navigating complex bureaucracy.
Foreign hotel companies will still be legally required to partner with Cuban entities (which may include the Cuban military) and abide by an extensive set of regulations. In doing so, developers, owners, and managers will need to be prepared to negotiate control on important matters like human resources. Hiring decisions, other than general managers and a few other top positions, will be made by the Cuban government. Hotels will be staffed entirely by Cuban employees, who will be paid at fixed rates in accordance with Cuban labor standards. American management companies will pay a monthly lump sum for employee salaries to the Cuban government, which will take a large cut, and then distribute the remainder to the staff.
Developing local staff in newly-emerging markets can also be tricky. According to Alexis Romer, Vice President of Travel Industry at the Ritz Carlton Hotel Company, “the service level required for a luxury property is always a big question mark. However, often it represents a unique opportunity to work with a labor pool that has no preconceived notions or training and is receptive and enthusiastic to learn. Being selected to work for a luxury property in many developing nations is an honor and often elevates their status and certainly their financial situation. The heartfelt dedication often produces exceptional results and makes entering these emerging markets very satisfying for all involved.” Training locals who have no experience of the service requirements of luxury clientele can be difficult, so I recommend that companies opening properties in emerging markets like Cuba import talented bilingual managers who have proven records of successful achievement in neighboring countries with better relations and stronger backgrounds in luxury hospitality.
Creating the type of luxury environment that many American and international travelers demand is problematic in countries like Cuba that are lacking in basic infrastructure. Beyond luxury hotels, Cuban wi-fi connections tend to be rare, slow, expensive, and heavily censored. American credit cards still can’t be processed and there are few ATMs, so travelers need to come prepared with cash. Phone service is rare, though AT&T, Sprint, and Verizon have already begun providing some roaming cellular and internet service. “Despite being so close to the U.S., Cuba feels a million miles away and Americans often have culture shock far beyond what they were expecting,” says Robb Report’s Caradonio, “and even though the Cuban government has become more open to change, it seems to have little interest in doing anything fast or drastic, or in becoming ‘Americanized.’”
The prospects for American hotel brands wishing to develop properties in Cuba are very exciting, despite the many complexities involved. To help navigate this uncharted territory, learning from the experience of international operators who have already established a presence in Cuba will prove invaluable as Americans pursue relationships there. Pulling from the large talent pool of American hospitality professionals who are bilingual, with family and cultural ties to Cuba, will also be helpful.
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As the situation normalizes and American companies overcome the initial obstacles and learning curve of doing business in Cuba, we can look forward to increasingly close relations between the two nations, and to Cuba becoming a favored destination for all segments of the American travel market.