In countries where most have not touched, Food Empire has touched it, and constantly won.
How?
And more importantly, why?
Getting into Russia
Russia and Central Asia, are countries which you might think are far off and poor in terms of economic opportunities.
But it’s where Food Empire has consistently earned the bulk of their revenues over the past 20 years of their business.
As a business owner myself, I thought the Food Empire AGM offered useful thinking on how to run a business, but more importantly, how to sustain market dominance in a competitive business like the Fast Moving Consumer Goods (FMCG) section like instant coffee.
If you’re reading this you might want to hold on, because there’s vital information on why I think Food Empire is still worth investing in, even though it has hit a high over the past few months.
Look for treasure, where others are not looking
If you think about Russia, you might first think of wars, bullies, and Ukraine.
You might not necessarily think it was worth doing business there.
Yet that is the biggest contributor to Food Empire’s revenues today.
I think that’s smart. Because Food Empire has gone into a market that others have not dared to, and consistently innovated to win.
Today, they are the number one coffee brand in Russia and Kazakhstan.
And if you discount the effects of the declining Russian Ruble, you would have seen them booking an extremely substantial growth in their Russian business.
Mr Sudeep Nair, the CEO, pointed out that in Russia, coffee was a $2 billion market.
Of which they were only touching $150 million of the market.
Therefore, there is still room to grow in the Russian market.
What was interesting for me to hear was how they weren’t resting on their laurels, but were still actively fighting to gain a bigger market share of the market. In Kazakhstan for example, Mr Nair reported that they had 70% of the market share.
They still actively ran promotion activities there.
If you look at the above STARS model from Michael Watkins, you would quickly realise that Food Empire has been very good at scaling from 0 to 1, in a startup environment, during its early days in Russia.
But they have also been able to sustain dominance, which is even more remarkable.
What’s next though?
What’s next?
Sudeep Nair, the CEO, talked about how different Food Empire would look like in 5 years, with a deeper focus on its ASEAN business.
In Vietnam, they are currently ranked fourth, a considerable achievement considering that they were not the first-movers in the market.
They are throwing considerable resources into that market, and seeing the potential growth of the Vietnamese middle class as a booster to their future growth.
Focus on coffee
If you were running an instant coffee company, you might think that it would seem natural to expand your range of selections.
One shareholder did ask why they didn’t expand into other food types that might be complementary to coffee, such as tea.
He pointed out that Pepsi’s acquisition of companies like Frito-Lay had supercharged their growth.
Wouldn’t it seem natural to acquire a potato chip company, or some other snack company that might have complementary products to coffee?
I found it interesting that Mr Tan, the Chairman and founder of the company, mentioned about how they were focusing on their core competency in instant coffee (and tea) mixes.
Running a potato chip company is much more different to running an instant coffee mix company.
Which does bring us to the next point.
What are they going to do with all that cash on hand?
Multiple shareholders asked about the huge cash pile they had, and whether there were potentially better ways of spending that money and using it to yield better returns.
Both Sudeep and Mr Tan shared about how they had multiple opportunities for mergers and acquisitions (M&A) come through their doors, and which they eventually turned down.
There were problems with the companies they looked at, whether financially, or in the business operations.
It just didn’t make sense to throw good money after good.
The wisdom of doing nothing
That is a discipline in itself.
When there’s nothing to do, the most tempting thing is to do more things, thinking that will help the company.
But the intense focus on their core competency in instant coffee, has brought them thus far.
The discipline to do nothing, when everyone else shouts at them to do something, is admirable in and of itself.
Focus on their own company
That’s not to say that they haven’t been trying more to increase the visibility of their stock.
Mr Tan revealed that Food Empire had been actively going to roadshows in Hong Kong, trying to understand the markets there.
They were simultaneously exploring a dual listing in Hong Kong, to increase the liquidity of the stock.
Mano, the long-time retail investor activist, pointed out that this might be more problematic, given how multiple SGX companies had sought dual listings in Hong Kong and Singapore.
He observed that these companies had ended up finding few Hong Kong investors who were interested in their companies, given the vast visibility of other bigger, Chinese companies listed on the Hong Kong exchange.
He advised Mr Tan to reconsider that decision, which Mr Tan graciously said he would ponder about.
What Mr Tan didn’t point out, and which I suspect is the deeper reason why he’s exploring a listing in Hong Kong, is that Food Empire deals primarily with a Russian market, that might face institutional resistance from the likes of US funds.
I don’t doubt Food Empire’s ability to drum up support for its share, seeing how it has actively marketed its coffee in markets where it has no presence, such as Russia and Vietnam.
Thinking about the shareholder
If we look at Food Empire, it offers worthy lessons on what actually works, if you’re a small retail investor in Singapore. Many may choose to look at the large caps like DBS Bank, and think there are more opportunities there.
But I’d argue that small caps like Food Empire also offer value for money. It’s not just about being sentimental and ‘loving local’.
Rather, it’s recognising 3 things.
Firstly, the smaller nature of the company gives it the nimbleness and flexibility to pursue growth on its own terms, rather than what the capital markets want.
Thrusting a $700m market cap ship forward is much easier than moving an $80 billion market cap ship like DBS Bank.
This gives you, the retail investor, further opportunities to enjoy the upside in the stock.
But secondly, I think it’s worthwhile to see how these companies are taking a different approach to business. If we look at the larger companies today, with more resources, we see how they can afford to run businesses at a loss.
If you walk into a Cold Storage (owned by the DFI Retail Group) today, and go to its Reduced to Clear shelves, you would see just how much stock they are discounting (by up to 50%), just to clear it. It’s revelatory as to the amount of waste and inefficiency that exists in large retail groups like that.
But look at a mid-cap supermarket stock like Sheng Siong, and you would hardly see inefficiencies like that.
They are laser focused on trying to reduce costs, and make the most bang per buck.
That’s admirable and worth learning from.
But lastly, and most importantly, I think there’s beauty in backing a business that has strong focuses.
As I’ve spoken to more and more retail investors, the common complaint I hear is that listed companies often don’t know what’s next after reaching a sizeable market cap. They end up buying property, because they don’t know what else to do with their cash.
An example is the Popular Group, which went from selling stationery, to developing property.
It’s nice to own buildings.
But it’s not focused.
And over and over again, as a business owner, I’ve seen how focus on your core competencies can bring you outsized returns.
Don’t underestimate these small caps. You might just be surprised at the returns you get, when you back them to the hilt.