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Food Empire on track for growth

It expands its business in the main core markets and enters new Asian markets.

Mr Nair says the 2014 crisis "taught us the importance of diversifying geographically to provide us with a more balanced portfolio that allows us to be resilient in any future crisis".

FOR any business, to focus on just cutting costs cannot be the only way to ride through difficult times, says the chief executive of a large home-grown business which has experienced many ups and downs over the last two decades.

"While cost cutting is always one of the solutions, it is not the only and definite solution to riding through difficult times. It is important to understand the nature of the issue or problem and address it accordingly," says Sudeep Nair, group CEO, Food Empire.

When a company is suffering losses and managing cash flow is an issue, the top priority for management should be to identify high costs that are not resulting in high sales and unproductive costs in general.

"Such costs must be cut on priority to sustain the business. Cash crunch could also be the result of poor inventory management and/or accounts receivables so these become core areas of emphasis to manage during difficult times," says Mr Nair.

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"We work closely with management in our markets during difficult times and set clear goals for each market with certain targets to be met even while we optimise our business. During a severe crisis our main goal is to sustain our business and hence we cut only those costs that we believe will result in lesser damage to revenue. We try to cut only those sales that are coming at very expensive costs."

"The top priority during difficult times is to get back to reasonable gross margins for products and if that's not possible, then to relook the portfolio of products and launch new stock keeping units (SKUs) as a longer term solution. Cost optimisation is always explored to see where we can cut cost without affecting productivity," he adds.

Mr Nair, 47, was appointed as the group CEO of Food Empire in 2012 and has been on the company's board as an executive director responsible for Russia and CIS countries since 2005. He has been working for the group since his mid-20s and has nearly 23 years of experience in setting up and managing its business in Russia and CIS countries in various capacities which included being the country manager and an executive director for the group and its subsidiary companies.

His responsibility as the group CEO over the last five years has been to ensure that the core markets return to profitability and the company expands its business in Asia using the experience of Russia and Eastern Europe, which are its main markets.

MacCoffee - the group's flagship brand - has been consistently ranked as the leading 3-in-1 instant coffee brand in its core markets of Russia, Ukraine and Kazakhstan.

Mainboard listed Food Empire is a branding and manufacturing company specialising in the food and beverage industry. Its portfolio of products includes instant beverages, frozen convenience food, confectionery and snacks.

Instant beverages

It produces a wide variety of instant beverages such as regular and flavoured coffee mixes and cappuccinos, chocolate drinks and flavoured fruit teas. It also markets instant breakfast cereal, assorted easy-to-prepare frozen foods, and snack items such as potato crisps. In addition to consumer retail products, Food Empire sells raw ingredients such as instant coffee and non-dairy creamer to other food manufacturers under its B2B arm.

Food Empire has 24 offices worldwide, and operates six manufacturing facilities (Russia, Ukraine, Vietnam, Myanmar and two in Malaysia) and three production facilities (two in Malaysia and one in India).

The company's proprietary brands include MacCoffee, Petrovskaya Sloboda, Café Pho, Klassno, CafeRite, NutriRite, Hillway, Hyson, OrienBites and Kracks.

"Our products are sold to over 50 countries, in markets such as Russia, Ukraine, Central Asia, China, Mongolia, Indochina, the Middle East, Africa, Europe and North America. Our key markets are Russia, Ukraine, Kazakhstan and CIS markets, and Indochina," says Mr Nair.

As Food Empire has been around for some time, it has been successful in riding through economic cycles. "Upholding a strong brand equity over the years has allowed us to establish lasting relationships with our customers and retain a stable and sizeable market share in our key markets. We believe this creates a strong competitive advantage for us when we have to navigate through challenging times," says Mr Nair.

The company's commitment to uphold and create greater brand equity is reflected in the numerous accolades and awards it has received over the years. Last year it was recognised as one of the "Top 100 Singapore Brands" by Brand Finance, a leading global independent intangible asset and brand valuation consultancy. On Nov 16, 2016, Food Empire's MacCoffee was named Product of the Year within the coffee mix category in Russia, underscoring the hard work of the team behind MacCoffee to continually innovate to deliver the best quality coffee to consumers.

"It is also important for us to remain relevant to the market, to be ahead of the curve so that we are prepared amid evolving consumer consumption trends and preferences," stresses Mr Nair.

Looking back, he says that the worst times for the company were the 1998 Russian default crisis after the Asian crisis, the 2008 global financial crisis and the major devaluation of the Russian rouble.

The most recent blow came after 2014 when worldwide oil prices crashed and as a result the rouble devalued against major currencies and in the second wave the Ukrainian economy collapsed and also brought down its currency. All other bordering countries too devalued their currencies in line with the Russian rouble since Russia is the biggest economy in that region. This crisis was one of the most difficult periods for the company because of several reasons.

"In the core markets of Russia, Ukraine and Kazakhstan where our brand MacCoffee has been the market leader in the 3-in-1 coffee mix segment and the favourite choice of consumers, we had to continue selling in local currencies to compete with MNC brands so as not to lose market share. But this meant that we were incurring forex losses if we are not able to increase selling prices in the longer term.

Consumer price increases could be done only gradually and we did that because of our brand strength and depth in managing distribution in these countries," says Mr Nair.

At the same time, as part of the strategy to expand into vertical integration of the company's business in previous years just before the 2014 crisis, it had already embarked on building greenfield manufacturing units in Malaysia and India to manufacture non-dairy creamer and instant coffee respectively.

Also it was decided to set up a snack manufacturing unit to produce stacked chips in Malaysia. Another decision to restructure the operations involved a shift of its packing facility to a new unit in Klang, Malaysia.

"All these projects involved larger capex and we had already initiated these projects before the crisis and they were proceeding as planned. When the crisis struck us we had on the one hand our core markets generating forex losses and on the other hand we had these new projects coming online and incurring fixed expenses and yet to build up client network outside group companies. Any new greenfield production unit usually needs about 12 to 18 months to normalise operations and optimise production levels. Unfortunately, the timing couldn't have been worse as most of this was happening during the peak of the crisis in 2015," Mr Nair recalls.

Bank loans

These projects involved taking up project loans from banks. Traditionally, the company had very little debts before this period and it was geared up for the new projects but no one could foresee worldwide oil prices crashing and the subsequent turmoil in the core markets.

"The financial institutions were always concerned every time the rouble dropped, even though we have proven experience of managing such crises in the past. . . But our team did a great job of managing the crisis well. Within markets, the local heads were prudent to cut down on expensive parts of sales that were coming at a high cost by cutting on promotions, and kept increasing prices when industry allowed. These plus prudent cash flow management and close monitoring of account receivables allowed us to be in control of our business during the most difficult times," says Mr Nair.

"Due to our past experience in handling several currency crises all the way from 1998, 2008 and 2014, we must say that our management team is well experienced to handle these situations and we have retained our brand leadership positions in these core markets."

However, the 2014 crisis proved to be a transformative learning experience. "It taught us the importance of diversifying geographically to provide us with a more balanced portfolio that allows us to be resilient in any future crisis. Over the past few years, we've been venturing outside the Eastern European bloc into Asia, as well as pursuing vertical market integration," says Mr Nair.

During the recent downturn, Food Empire has not only managed to retain and grow its business in the main core markets but it has also succeeded in penetrating new Asian markets using the experience of Russia and Eastern Europe.

The company's FY2016 results were strongly bolstered by its geographical diversification beyond the CIS region. Significantly, sales in Indo-China increased by 36.2 per cent, from US$29.4 million in FY2015 to US$40.1 million in FY2016.

"Staying focused on our strengths to deliver high quality and affordable products which resonate with consumers, we have managed to carve out a niche in our Asian markets, despite stiff competition from well established local as well as global players," says Mr Nair.

Food Empire was listed in 2000. "Being listed on the Singapore Exchange has enabled us to successfully enhance our brand image as well as credibility. This is important to us as we seek to develop a global brand and further extend our market reach locally and regionally. Our listing status has also provided us with diversified financing options for us to fund our future growth," says Mr Nair.

For the year ended Dec 31, 2016, the group swung to a net profit of US$13.8 million from a net loss of US$131,000 for the previous year. Revenue rose 4.2 per cent from a year ago to US$242.2 million.