Quickeinsurance: The Race to Click and Close (a)

Threat of New Entrants

One of the most important considerations to take into account is the ability for new firms to enter the industry. The likelihood of new entrants entering the Cuban cigar market is possible. However, barriers to entry tend to deter new firms from entering. The embargo provides a protectionist barrier against any U.S. competition entering the industry.

New entrants would be expected if the cigar industry were to expect an increase in sales as happened during the 1990’s. However, due to sales leveling off, acquisitions, and the dominance of Altadis and Swedish Match, the threat of new entrants is not significant. The cigar industry, like most industries, is always subject to imitation or low cost companies entering the market and attempting to replicate or undercut others.

The reactions of existing competitors may serve as a deterrent to new firms desiring to enter the industry. Altadis and Swedish Match probably posses significant resources to combat any new entrant. Since cigar sales have sloughed off, current competitors are likely to be reluctant to sharing any portion of the market. Because companies revved up production during the late 1990’s and sales have leveled, they may be assumed to be protectionist in order to achieve a return on their investments.

Economies of Scale

Altadis and Swedish Match control a large percentage of market share, have years of experience, and have a well established distribution system. A new entrant would have to face significant economies of scale in order to compete against the two largest firms.

Product Differentiation

It would be difficult for a new firm entering the market to establish a well recognized brand name. Swedish Match even has rights to market many of the non-Cuban brand names in the U.S. Altadis has a joint venture with Habanos S.A. who owns all Cuban brands outside the U.S. Another barrier new entrants may have to face is the difficulty associated with creating a brand name that customers trust to be true to its name. Brand pirating and forgery have likely caused some consumers to be weary of brand names signifying Cuban made cigars.

Capital Requirements

A large amount of capital for advertising would likely be required of new entrants. New entrants would need to spend a significant amount on advertising in order to establish their brand(s). If targeting the machine-made cigar business, new entrants would be required to invest large amounts of capital in plant and equipment.

Cost Disadvantages

Altadis and Swedish Match have several cost advantages new entrants would have to face upon entering the industry. One of the most significant cost disadvantages a new entrant has to face is Altadi’s monopoly hold on Cuban cigar exports. Altadis acquired Tabacalera who is Cuba’s biggest cigar partner. The strong relationship with the Cuban government likely accounts for considerable cost savings which a new entrant may not be able to establish for many years. Tabacalera probably has the best access to premium tobacco. Access to premium tobacco represents an important cost advantage due to the limited supply available for production. Soon, Altadis may even have a direct impact on production in the premium cigar factories. This could lead to even further cost advantages for the dominant firm. A new entrant may face its greatest cost disadvantage due to its own inexperience. The dominant firms have spent many years building up knowledge and relationships which translate to cost advantages from suppliers to end customers.

Access to Distribution Channels

New entrants face a difficult barrier to distribution. Habanos S.A. controls the export and marketing of Cuban cigars. Since Habanos has entered into a joint venture agreement with Altadis, it may be difficult for new entrants to receive desirable treatment from Habanos. Habanos has appointed exclusive dealers and made jurisdiction agreements to distribute Havana cigars. Only the appointed dealers have access to the cigars. Because Habanos has a monopoly on cigar exports and a joint agreement with Altadis, new entrants may be subject to exportation difficulties.

Government Policy

The Cuban government can restrict or place barriers on companies entering the Cuban cigar industry. Because Cuba’s government controls the production of tobacco, it places a restraint on new firms entering the industry. Cuba’s Union of Tobacco Enterprises also places limitations on production further hampering a new firm’s ability to enter into making Cuban cigars. Tabacalera, who has a strong relationship