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Building an empire on 3-in-1 instant coffee mix

THERE is an old saying "nothing ventured, nothing gained" that is applicable to Singapore-listed Food Empire Holdings. Its chief executive officer Sudeep Nair spent most of his life turning the group's fledgling 3-in-1 instant coffee mix business into a familiar brand in Russia, a nation of traditional tea drinkers.

In 1994, Mr Nair, then a young executive from India in his mid-20s, took a leap of faith and followed Food Empire's Singaporean founder, Tan Wang Cheow, down the road less travelled and headed for Russia. Neither could speak Russian, but with luck and plenty of tenacity, the duo eventually gave Russia, and subsequently the Commonwealth of Independent States (CIS), an early taste of 3-in-1 instant coffee mix.

Food Empire was previously Future Enterprises. It was set up by Mr Tan in 1982 to distribute personal computers and PC-related products. By 1989, the company was selling everything from car alarm systems, television sets and other electronic goods to Russia. But thinning margins from its consumer electronic distribution business forced the group to leverage its Russian contacts to kickstart its food and beverage business. The first representative office was opened in Moscow in 1995.

The decision proved fortuitous. The Soviet Union had just collapsed in 1991. Former Soviet republics were transitioning into market economies, opening up an untapped market of 250 million consumers, compared to a population of about 3.5 million in Singapore in the mid-90s. Foreign investments were welcomed, and foreign produce regarded as a novelty.

"The change from everything being owned by the state to the market economy was too big and too fast, thereby creating lots of chaos and opportunities as well,'' Mr Nair told The Business Times on Friday.

"We stayed positive on the opportunities created by the opening up of these countries, where there were limited products and services during Soviet times. By the mid-90s, consumers were open to trying out new products and services," he said.

After 1994, Food Empire diversified its product range to include regular and flavoured coffee mixes and cappuccinos, chocolate drinks, instant tea and confectionery under the MacCoffee, MacChocolate, MacTea and MacCandy labels. In 2007, it bought domestic coffee brand Petrovskaya Sloboda, which had a following dominated by elderly Russians. Its snacks and frozen convenience food products were launched after 2000, under the Kracks and OrienBites brands.

Today, its core brands, including MacCoffee, Petrovskaya Sloboda, Klassno, Hyson, OrienBites and Kracks, are sold in more than 50 countries, in markets such as Russia, Ukraine, Kazakhstan, Central Asia, China, Indochina, the Middle East, Mongolia and the US. The group has 24 offices worldwide, and operates manufacturing facilities in India, Malaysia, Myanmar, Russia, Ukraine and Vietnam. Sales volumes of its flagship MacCoffee have grown exponentially to more than 10,000 twenty-foot equivalent container units (TEUs) annually, from only about two TEUs per month in 1994.

For the year ended Dec 31, 2017, Food Empire generated a net profit of US$14 million on revenues of US$270 million. Russia, Ukraine, Kazakhstan and CIS markets accounted for 65 per cent of total revenue.

Compared to its initial public offer price of S$0.13 a share, Food Empire is now trading around S$0.63 a share, which values the company at more than S$330 million. The Salim family, one of the richest in Indonesia, holds a 24.73 per cent stake in Food Empire. Mr Nair himself has a 7.09 per cent stake.

But the road to success was not easy. Eastern Europe was in disarray after the collapse of the Berlin Wall. Legal frameworks were non-existent and regulations were constantly evolving. Sales and marketing professionals were also rare.

Fortunately for Mr Nair, expertise came in the form of a young Russian colleague Irina, who later became his wife. They have one child.

"We had a very small setup and I was assisted in translations and in sales by very few people who were bilingual. During my third month, I met my wife at work. She became a very key person in our company. She helped me in negotiations and in running the office. She was also involved in consumer insights and helped me to work on the first few marketing campaigns in Russia in 1995.

"We worked together for three years and when we decided to start a family in 1998, we mutually agreed that she would quit to have a better balance of life. Our daughter, Anastasia, was born later in 1999," said Mr Nair, who is now comfortable speaking Russian after being based in Moscow for more than two decades.

Looking ahead, Mr Nair, who became Food Empire's chief executive officer in 2012, expects future organic growth to come from a mix of its core markets and new ones.

"We expect our core markets to continue to grow and contribute while our newer businesses in Asia would grow at a faster rate due to a smaller base. The main products will remain instant coffee and beverages,'' he said. The strategy is to retain and strengthen market share as well as add new products and enter new markets.

Armed with cash and cash equivalents of about US$43 million, Mr Nair believes the group "definitely" needs funds to execute its growth strategy. He is not ruling out potential mergers and acquisitions "to increase our pace of growth and diversify our base if and when a good opportunity arises and that would need more funding requirements".

Expansion into other markets will be done judiciously, noting the lessons learnt from its South Korean venture and early attempts to break into Vietnam.

The group's associate in South Korea, Caffe Bene, recently filed for a court-led corporate rehabilitation process. Mr Nair said Caffe Bene - which has a network of more than 600 domestic franchise outlets, and a further 100 in Malaysia, Taiwan, Mongolia, Saudi Arabia and the US - was an opportunistic investment. But its local management failed to turn around the company, and lost valuable time.

"Being a minority shareholder and not having control over the management didn't help. The management was too slow in a cash burn crisis situation to react and ultimately the company had to face cash flow issues."

In Indochina, the group is trying to replicate its proven business model in Russia and CIS by building brands. The market accounts for about 15 per cent of total revenue.

"It's something that we know and have been doing for over 24 years and is our core business.''

Mr Nair assured investors that Food Empire would take calculated risks and evaluate the risks/rewards before venturing into the next stage.

"It's a long and time consuming process to build brands organically, but it remains our core business and we have the experience to continue exploring more in years to come,'' Mr Nair said.