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[SINGAPORE] Lollipops. Instant noodles. Tomato paste. All consumer products that one would not normally associate with Olam International.
But the agri-commodities trader, like many of its peers such as Wilmar, has in the past nine years moved downstream to build a packaged foods business.
In countries such as Nigeria, Ghana and Mali, it now generates sales of US$350 million, and aims to be the Unilever or Nestle of Africa.
"When we started off, we really didn't see this exploding into this kind of opportunity engine at that time," the packaged foods business global head Ramanarayanan Mahadevan told The Business Times in an interview. "I'd like to say we had all the vision, but really, no. But we knew that this was an opportunity, this was white space, this was virgin territory, and the rest of the world was not looking at Africa at all."
The firm started with selling imported tomato paste to Nigeria, where its chief executive Sunny Verghese first set up the firm in 1989. Today it is the second largest player for tomato paste, biscuits, candies in West Africa, and is the market leader for MSG seasoning, said Mr Mahadevan.
Along the way, it has also built research and development, manufacturing, marketing and distribution capabilities. "Now this business is over and beyond what we imagined at that time," said Mr Mahadevan.
It has two R&D labs in Bangalore and Singapore, as well as 10 manufacturing plants in Nigeria and Ghana, which produce 85 per cent of what is sold in the region, from less than 20 per cent two years ago.
Besides improving margins, the manufacturing presence helps the firm to be more responsive to changes in consumer needs as well as cut down the amount of time for a product to reach the market, said Mr Mahadevan.
Eight of the plants were acquired, with three arising from the US$167 million acquisition of Titanium Holding in February last year.
Titanium, which owned the second largest biscuits and candy franchise under the "OK" brand, had a turnover of about US$162 million in 2011.
Four months later in June, Olam announced the US$66.5 million acquisition of Kayass, a Nigerian maker of dairy and beverage products. Kayass operated two plants in Lagos: a dairy products and beverages manufacturing plant, as well as a milk powder packaging facility.
The acquisitions helped to accelerate the growth process, said Mr Mahadevan.
"Today in Africa the rate of opportunities is growing and others are seeing these opportunities. Every year delayed, the cost of entry and of acquiring grows manifold. The faster the position you get there, it makes a huge difference in the long run."
Referring to the Titanium acquisition, he added: "If we had to start up from scratch and build to the scale that they had, itd have taken 7-8 years. And 7-8 years, the market would have run away from us. 7-8 years is a lifetime in Africa."
In total the business unit has spent US$300 million in fixed capital.
While the firm has said that investments in the packaged food business are not yet fully yielding, Mr Mahadevan explained that it is because the investments are still new.
"As part of our thesis we knew there was a certain trajectory; it's going as per thesis."
In the strategic review Olam conducted after the attack by Muddy Waters in November last year, the packaged food business was designated as one that the firm would expand with strategic partners, in a bid to streamline and simplify its various business segments that many have criticised as making the firm too complex.
Already, one has appeared in the form of Sanyo Foods, which is investing US$20 million in cash for a 25.5 per cent stake in a joint venture that will house the instant noodles business in Nigeria.
Olam is working with the Japanese noodle manufacturer in three aspects: adapting local dishes into the seasoning, innovating on the noodle cake, and making noodle consumption more convenient.
The firm expects to launch the first product crafted with Sanyo in three to six months.
Asked whether the business is still looking for more strategic partners, he said: "We will do it when we think we will get the right value. This is a business we see tremendous value going forward. Every year it grows in value because the business is growing at such a rapid pace.
"Sanyo gave us 3.5 times sale as a multiple. They believe that the growth is an ongoing story and they thought that this is a steal entering at this stage. If somebody believes in that, then we will be open to it."
The food staples and packaged food segment made $7.7 billion in revenue and $589.3 million in net contribution, or sales minus costs and expenses, in the 2013 financial year.
The packaged food business had been expected to contribute at least US$100 million to Olam's previous goal of US$1 billion in after-tax profit by FY2016. The firm has now let go of the target in favour of more sustainable growth, and will stop giving earnings targets.
Mr Mahadevan declined to reveal the 2013 profit figures for the packaged food unit, but revealed that industry benchmarks range between 6-18 per cent.
"Normally across the industry there is disproportionate value and profitability as you grow closer to leadership. The number one and two players will be significantly more profitable than number three and four. That's the nature of this beast, so today we're already number one and two in four categories.
"So our aspiration in the next four years is simple, to get to leadership . . .
"If you don't achieve in this period, it will be much harder later."
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