Ramco Group: Print, Hardware, Manufacturing, Office Supplies, Services and Real Estate in Kenya and East Africa

Interview with Hasit Patel, COO of RAMCO Group

What is different about being a family business?

In our journey, the one thing I have figured out with family business, and especially with those who still have the founders in them, is that they are usually very nimble businesses and they are run with absolute trust. There are usually multiple family members in one organization. In this part of the world, they manage specific functions. The ones that they normally overseeing are the procurement, finance, and the overall strategy. Those are generally quite tightly guarded amongst the family. It is what has led to the success of family businesses here. The founder mentality is more along the lines of growth and getting the organization to a certain level. It has been a mixed bag with family businesses. Some continue to remain the same size. In our case, our ambition was growth. The number of organizations that we have quickly outgrew the number of family members that we have. We had to move away from the model of hands on management to more hands-off. We were not quite hands free because it is quite difficult to run that way in this environment. But we had to find a balance. With family businesses, conglomerate or not, those who manage to get that correct are the ones who are now growing strong. The region is growing so there are not many businesses here who have not grown over the last 10 years. We have had a good run. Also, now that consumer tastes are changing and demand is changing, family businesses are starting to have to compete with imported products in more ways than just price. Family businesses are now starting to become more professional, not just in the way that they are managing and running their businesses, but in the way that they are bringing in research and development which were not traditionally roles that family businesses here would even embark on. What we would normally do is look at the more mature markets, see what they are doing with their products, then try to bring those products here and manufacture them here. Now, people are addressing Kenya specific problems. In the field of packaging, we are now starting to look at Kenyan weather and the Kenyan supply chain; whereas in the past, we would look at what a product would look like in markets that are similar to ours such as India or the Far East. We would look at that structure and bring it here. That is where things are starting to change. When I look at family businesses that are embracing that, I see huge growth in their markets and in their products. For those that do not, they remain the same size and they are under margin pressure now because margins are the only way they can remain relevant. It is an interesting ecosystem that we have here in Kenya. We are at the beginning of what can best be described as a teenage phase of life. We are growing, but teenage years are turbulent years. It will be interesting to see four or five years down the line what that pressure actually does to many family businesses.

What sectors are you active in? What is your competitive advantage?

What we love about Kenya is that it is an entrepreneur country and people make things happen. What excites us the most is that most of the new entrepreneurs that we see here are busy solving Kenyan problems that may not be as relevant to the rest of the world. The more of those problems we can start solving, the better we can grow as a country and as a people.

We categorize ourselves into six sectors. Printing and packaging is the first. The traditional family business and the one that my grandfather started is hardware and building materials. We do anything related to the office and stationary such as supplies and equipment, everything from a paper clip to a large server farm. We have a general manufacturing side which includes anything that we are good at selling in the hardware and building material side. We integrated backward and started cable manufacturing, tanks, pipes, etc. Then, we have the services side which is where travel and finance and those organizations sit. Also, the things that we are centralizing rather than keep as an overhead in a head office, we prefer to turn them into a P&L company that has to fight for business. If it is relevant and able to fight for that business, then it will be relevant in our organization. That is a growing sector on the services side. The last is the real estate. We own a lot of the real estate that we operate in. In some cases, the company that owns the real estate is not necessarily the company that is renting it, even though they are both our companies. We also have apartment blocks and a shopping mall. We are also busy trying to restructure that and looking at that in a very careful way because that ties into this whole family business issue. A family business would look at real estate as a long-term play. We see real estate being a disadvantage right now when it comes to the costing of the product. We as a family would rather strip the real estate of the family side of the business and let the organization pay rent and remain cost effective. But we will develop that real estate to make that organization a bit more competitive. That is an example of where we see in the future family businesses that may not think like this may find themselves in a bit of trouble. We understand why you would want real estate in your manufacturing business because of the security of it and because real estate grows value wise in this market. We are set to compete with organizations that do not have that mentality so we need to stay in that space. Having real estate is sometimes more of a disadvantage than renting because the rental model here is cheaper than the ownership model. Our Group has added strength in size. This is not so much in how many people we employ or the turnovers, but in that when we do a strategy like real estate, we have the ability and the finance to strip off assets because that has a huge cash flow implication. We are in a slightly turbulent environment when it comes to legislative processes. The plastic ban is a great example of a legislative directive that effectively wiped out 40 to 45% of one of our businesses’ turnover. There are not many businesses that can take that kind of a hit unless they are supported by other organizations. In our case, it was other organizations within the Group that could provide short term cash flow as well as the ability to shift the manufacturing model to a different segment altogether, either through acquisition or just bringing in new machinery. That ability for us to quickly restructure is one of our strengths. In that example, a lot of our competitors who are family owned businesses had to eventually shut down whereas we are still running. Then, there is whatever comes with larger groups such as better systems and the ability to own professionals that we can use to split the cost across multiple organizations. A single unit would never be able to afford some of those services or human resources. We also leverage off that. IT is a great example. We run IT systems that no one company would ever be able to afford. But we see the competitive advantages that some of these systems bring in. Because we are made up of so many organizations, an organization like Seidor would not look at us as a small client but a massive client even though each individual company may not be as big. It brings a lot of advantages to us. We often get visibility on new technologies and new directions that technology companies are taking their products so we can prep ourselves ahead of time for what is coming. Other smaller businesses do not have that advantage.

What are the priorities now for the Group?

We went through a fairly aggressive growth stage where growth happened predominately by acquisition, specifically, in the print and packaging and on the services side. We are now taking a step back and looking at how we can reorganize some of our organizations. If you look at the office supplies and stationary side, we have three retail companies. It may make sense to have three brands, but not three companies. We are in that consolidation phase now where we want to make sure that the strengths of what we have acquired remain distinctively in the Group but that we have restructured where we are focusing each area of the business in a specific organization through a consolidated way so that we reduce the back end costs, the overhead, and the management side of things. We are seeing this in two ways. The first is simply, for example, the combining of our three retail outlets into one organization. More complexly, we have acquired a few businesses and maybe 10% of one business is overlapping with 30% of another. How can we strip that 10%, consolidate it with that 30%, then strip that off and make one of the businesses primarily managing that slice of the pie and give that organization a different slice? This is interesting because it is not as straightforward at times because each organization has its strengths in the way that it has grown that business. We do not want to lose that, but at the same time, we know that bringing those two together is bigger market share, bigger purchasing power, etc. Then, we have economies of scale and we can start structuring capital investments that support both organizations because it is quite likely that they are both investing in the same machines. That will be the next two to three years for us. If it is a massively strategic advantage to do something, then we will do it. But at this stage, we are not in the growth phase anymore. We are now in the consolidation phase.

Four years ago, you joined with a private equity partner in printing and packaging. What is your strategy going forward?

When they came in, we were 8 organizations. We are now 13 organizations. The growth has been both in terms of number of companies and topline has been quite significant. In this consolidation phase now, the mentality is different. When we were smaller, it made sense to combine the two organizations because the base of everything is printing even packaging. But now, as we are seeing all these organizations grow and we are restructuring them, we are seeing a clear distinction in how we should look at our research and development as well as where the organizations and the industry are heading. We see them as being quite divergent. We are starting to look at whether there is a good case for splitting these two into separate organizations and offering each one to a different market. When you look around Africa and the world, there are conglomerates of printing companies and conglomerates of packaging companies, but not really many conglomerates of both together. They would have grown to a certain size and split anyway. That is in the forefront of our strategy and we are shaping that now. The way that print as an industry is heading in this market and the way that packaging as an industry is heading in this market, they need completely different strategies. It only makes sense for us to either look at it as two separate divisions in a holding company or just split them. That is something we should be doing in the next year.

What is your international reach?

We do not have many bases outside of Kenya. We are in Uganda, Tanzania, and Rwanda. The scale of those operations compared to the scale in Kenya is quite small. We have not really tried to go internationally. In the packaging market, Europe and the US are two potential markets for us, especially because we are starting to prep our packaging organizations locally to meet the standards that are required for these two markets. But, our reach in terms of Africa wide is better. We export to the middle belt of Africa quite a lot which includes north of South Africa but south of Uganda, Zambia, Zimbabwe, Malawi, etc. That is where we want to continue to play for a bit longer. The model we want to use there is more as a distribution or where the main manufacturing happens here and the finishing happens in those countries. If we can find a group similar to us that we can replicate our current model in Kenya across that region, it may not be a bad idea to look at them buying into us and us buying into them. That could be a good strategic fit. Then, we would control printing and packaging across the entire middle belt of Africa. We see Africa as a market where there needs to be a strong operating model. That is why a lot of multinationals are sometimes struggling to buy out companies and then effectively operate them here. The model is different here for many reasons, from politics to local economics. That means that we are also cognizant of the fact that if we bought out a printing press in Zambia for instance, it would be naïve to expect to run it the same way we do here. It would be better to partner or have a minority stake in that operation and the security that we bring that partner is a backup solution that we have over here. More importantly, the economies of scale we can spread across the entire Group. That is a potential way of the PE partner exiting and another conglomerate coming in to take a minority in us and vice versa. Our intention Africa wide is stronger than Europe the Middle East and America. We enjoy duty free status with the US which makes the market good, but we have not explored it. We need to get our house in order first before we start approaching those markets in a more constructive way.

What major challenges are you facing in the development of the Group?

Over the last year, the biggest challenge we have faced is the liquidity in the market. A lot of our manufacturing is reliant on the construction industry or the FMCG food industry. Both these markets have seen increased competition from imported products. We have also seen a general drop in demand. Part of it has to do with the liquidity issues that the market is currently facing, but government spending has also not been very significant over the last two years. That has created a general cash crunch. The lending policies of the banks and the imposed interest cap have really slowed down the average person’s ability to borrow just to run a business. That has created problems of its own. The market has been quite stagnant and we see this across the entire Group. We are not sure how quickly that will turn around once the cap is repealed. The big question right now is do we prep for this low margin, low volume business and do we take that as something that will not change over the next two years? You prep your organization very differently if you start thinking that is the way forward. Or, do we look at this as just a blip and assume there will be a bounce back at some point? We are not sure. When we start leaning towards one position, we see signs of the other. We will have to make a decision fairly soon, though. We have been through 2 years of subpar growth which means that we need to now rethink whether we should prep ourselves for a wider reach or wider market in Africa or hope that with the caps being repealed that we will see increased liquidity and maybe the domestic market will be good again. That is the gamble that we will have to take. Right now, the government is doing the right things, but executing them may be a big challenge. Certainly, the signs are there. We are quite optimistic as a Group that the next year will be better and we are prepping our organizations through consolidation to bring markets together and be a bit more aggressive in the way that we are expanding our market share.

What is your vision for the Group in three years’ time?

At the moment, we employ between 3,500 to 4,000 people. If an average family is 5 people, simple math will tell you that we are touching 20,000 lives. For us, it is how many more we can support and touch. Our overall target is to be that billion-dollar family run business in Africa. There are not many, maybe not any. Education is at the forefront of what we want to get involved in. Education is not just building schools, but more about making sure that the youth have the right mindset for growth and providing the right resources for them. The challenges the youth face in this country are more related to their belief of whether they can be successful or not, their belief of whether there are opportunities in this country or not, and that is what we really want to change. What we love about Kenya is that it is an entrepreneur country and people make things happen. What excites us the most is that most of the new entrepreneurs that we see here are busy solving Kenyan problems that may not be as relevant to the rest of the world. The more of those problems we can start solving, the better we can grow as a country and as a people. That is our ultimate aim. We want to grow new businesses well and sustainably and allow people to grow off the back of that. Our family is small so we will always need people to run our businesses. We want them to be run by Kenyans and be successful 10, 15, 30 years from now.

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