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COMPETITIVE STRATEGY
Building Barriers to Entry: Origin Capabilities
We possess strong origin skills as we buy from the lowest level of aggregation possible directly in the producing countries, process such produce into intermediate products, manage the logistics and various risks in these countries and export products of a consistent and reliable standard on time to customers.
We have a direct presence in all key producing origins that account for at least 80% of world production of the various agricultural products. Our farm gate sourcing allows us to exercise control in the supply chain and appropriate higher value. Cross-sourcing of multiple products in each country provides us with cost advantage and scalability. Our field operating systems have been developed to manage the supply chain complexities in challenging origins. In addition, we have put in place highly experienced teams on the ground at the origins with strong local knowledge of the operational conditions as well as strong relationships with local buying agents and growers.
We believe these are the critical factors behind our origination capabilities, which have been the effective barriers to entry to competitors, particularly the global trade houses, who normally operate from the port cities and commercial capitals in the producing countries and rarely extend their operations to the farm gate. They would buy from port-town suppliers, agents and origin exporters, rather than set up a farm gate buying model given the complexities involved in up-country operations and barriers to entry.
Building Barriers to Entry: Strong Market Capabilities
In all of our operations, we have established strong relationships with end-customers including multinational corporations, which own internationally recognised brands such as Cadburys, Nestle, Lavazza, Mars, Tchibo and Planters. We believe that these strong relationships are built on our leading global market positions, for example: -
- We are the largest supplier of raw cashew nuts in the world;
- We are one of the largest suppliers of Robusta coffee in the world;
- We are one of the three largest suppliers of cocoa worldwide;
- We are one of the largest suppliers of teak wood in the world; and
- We are one of the largest suppliers of cotton in the world.
- We are amongst the top three global players in rice.
As market leaders, we have a detailed understanding of our customers' product requirements, which enables us to offer differentiated products, supply chain solutions and value-added services, including product traceability, customised qualities, VMI and risk management solutions. We have a strong customer base of over 4,500 customers in over 60 end markets with a network of offices in all key destination markets. Through our direct end-customer relationships, we have a high demand visibility. Given our origination, processing and logistics capabilities, we are able to deliver our products on time with consistent quality. We believe that our customers value us as a reliable counter-party and a long-term business partner.
We believe our market capabilities have been effective entry barriers to competition, particularly the origin trade houses. These origin trade houses are primarily port town suppliers and agents and indigenous origin exporters or importers based in destination markets who rarely operate in multiple countries and would normally sell their products to trade houses. As a result, they generally lack access to end-customers and market skills, which include market research and analysis, developing privileged relationships with customers, distribution and logistics capability, hedging and risk management skills.
Deepening Unique Competitive Position
Our unique competitive position stems from our capacity to combine origination and sourcing capabilities in the producing countries with trading, marketing, risk management capabilities in the destination markets concurrently.
At the sourcing end, we seek to differentiate ourselves by out-origining our competitors by buying at the lowest level of aggregation possible, right at the farm gate. This entails buying from distributed collection points up-country at the point of arrival of these products, often under very challenging conditions. At the marketing end, we seek to differentiate ourselves by offering various value-added services to our customers.
We continue to extend our competitive advantage period by replicating our business model across new products, and geographies..
GROWTH MODEL
Olam’s growth model is driven by a clear definition and focus on our core business and a systematic and repeatable formula for adjacency expansion based on that core. We have defined that core business as “supply chain managers of agricultural products and food ingredients”. This means that we provide an end-to-end supply chain solution between the farm gate in producing countries and the factory gate of our customers in destination markets.
We had, over the past 17 years, grown our business without acquisitions. Our organic growth has been propelled by a business model which is both scalable and replicable. We have grown by taking advantage of adjacent opportunities in businesses which share geographies, products, customers and supply chain capabilities with our existing businesses. We have pursued this adjacency strategy to evolve from a one product and one country business to a global enterprise operating in 14 products in 52 countries.
Growth through Geographic Adjacencies
Olam has built a reputation of providing superior delivery and fulfillment capability from challenging producing countries and in volatile price environments. Our expansion into new geographies is determined by our ability to source existing products or replicate existing supply chains in these new countries. We started by supplying Cocoa from a single producing country in Africa to cocoa grinders and chocolate manufacturers in Europe and the USA. The same customers, satisfied with our services, asked us to source and supply cocoa for their special needs from other countries as well. We were thus able to expand into other cocoa producing countries at relatively low risk and with attractive economics.
Today, we are present in every key cocoa producing origin. This approach of geographic growth in product areas where we have an existing customer base and a proven capability has guided our expansion into a global business which now operates successfully in 52 countries. Cross-sourcing of products has also enabled us to amortise our costs in any one country across multiple products and larger volumes.
While building the team and capabilities in origin markets, we have concurrently expanded our presence and built our marketing, trading and risk management skills in the consumption markets. Our ability to establish, replicate and scale up a successful model across origin markets in Africa, Asia and Latin America as well as to penetrate the developed markets of Europe and America has created a unique competitive advantage for the company today and into the future.
Growth through Value Chain Adjacencies
Together with our strategy of product and geographic expansion, we have pursued a strategy of value chain expansion by combining various value-added services along with the physical products that we supply to our customers. This has allowed us to enhance our margins in the businesses that we participate in.
At the heart of our competitive advantage is our origination capability, particularly our procurement reach in the producing countries where we buy from the lowest level of aggregation and as close to the farm gate as possible. This implies buying at distributed upcountry collection centres at the crop arrival point, which increases complexity. Our rigorous field operating systems and good quality people on the ground in these remote locations helps us protect the integrity of stocks (quantity and quality) lying in these distributed collection centres and effectively managing this enhanced complexity. This is a significant barrier to entry for most of our competitors.
The industry is beginning to recognize that origin processing is capable of yielding products of an acceptable quality with significant cost savings. Furthermore, by processing at the origin, we can avoid the costs of transporting the portion of the product which is later discarded during processing.
In the case of Cashew Nuts, we have built on the success of our processing operations in India, Vietnam and Brazil to set up processing facilities in East and West Africa. We have set up coffee processing facilities in East and West Africa, South East Asia and South America.
We are also investing in infrastructure such as warehousing and logistics/transportation facilities in those countries where we have sufficient operational scale and captive volumes to achieve cost savings by owning and managing the facility ourselves.
Our diversified customer base is becoming increasingly sophisticated and willing to pay a premium for value added services. We are using our knowledge and competitive strengths to develop specific solutions for our customers like offering customised grades and qualities, organic certification products, fair trade practice certification, vendor managed inventory solutions, customised risk management solutions and proprietary market intelligence.
Taking the “offering” to the customer beyond just the physical product has enabled us have very high levels of customer loyalty and retention and contributed in a large measure to our ability to continuously grow our customer base.
Growth through Product Adjacencies
Olam has grown as a result of moving into various adjacent new product opportunities and leveraging our existing competencies into these adjacent product areas. Our expansion into new products has been shaped by our ability to either source the product using the existing supply chain infrastructure in the origins where we are present, or supply a new product or set of products to our existing customers. Our customers of cashew kernels, for example, had a requirement for other edible nuts such as peanuts, hazel nuts and almonds. A number of them wanted us to source these items for them from the origin countries where we were present. This led to the cashew business expanding into a much larger edible nuts business.
Through repeated adjacency moves, Olam is today a global leader in the supply of various agricultural products and food ingredients. Our customers are major multinationals such as Kraft, General Foods, Sara Lee, Nestle, Lavazza, The Nut Company and Mars, amongst others. From one product, we have today grown to 14 products organised into four segments: Edible Nuts, Spices & Beans, Confectionery & Beverage Ingredients, Food Staples & Packaged Foods and Fibre & Wood Products.
We have identified future adjacencies in virtually all areas of our operations, into which we will continue to invest in the future.
GROWTH STRATEGY
We have identified four key strategic pathways for growth in the coming years. These are to:
- Scale up volumes in existing products
Our first priority is to achieve the full potential of our existing core businesses and grow volume in these products to capture the full benefits of the increased scale. We will consolidate our leadership positions to remain or become a number 1 or 2 player globally in products where we are already a profitable leader. We will invest to strengthen our leadership position in products where we are a profitable close follower. In areas where we are currently an unprofitable follower, we will consider exit, unless we are able to increase profitability and scale. Finally, we will systematically reduce SG&A as a percentage of sales for all businesses every thereby extracting operating leverage.
- Migrate into selected higher value added services in areas where Olam has a leadership position
We will extend our value chain participation into higher value added areas to capture incremental margins. We have identified seven value added services that we intend to provide our customers, including customised grades and qualities, organic certification, fair trade produce certification, vendor managed inventory solutions, risk management solutions, proprietary market intelligence and secondary processing.
- Enter attractive related new product areas
Expansion into new products will be determined by the proximity of the potential new product to our existing core operations and will be focused on existing origins and markets. We will select those products which have a high degree of sharing in customers, costs, channels, or capabilities with our existing priority products. We have identified seven new product adjacencies on which to focus our growth plans.
- Pursue cross product initiatives in the existing supply chain across products
We have identified three cross-product initiatives that will help us capture additional value, mitigate risk and reduce costs in the existing supply chain. These three initiatives include primary processing investments, port handling improvements, and shipping efficiency improvement.
We strongly believe that our organic growth model, combined with our strong competitive position, provides significant room to grow and create value over the coming years. We plan to invest in capital expenditure projects, which are targeted at opportunities in all product areas and in key origin and destination markets. They will be evaluated and prioritised by both their financial and strategic attractiveness. We will maintain our asset light growth and operating model. This planned capital expenditure program will not change our asset light character and our ratio of fixed assets to total assets is still expected to remain low.
While continuing to pursue our ambitious organic growth and investment plans, we believe we can further enhance the prospects for our business by exploring attractive opportunities for additional growth through an acquisitions programme. Going forward, we will be reviewing all opportunities for growth, organic and inorganic, which can enhance shareholder value. For the next phase of our company’s development, we will look carefully at selected acquisitions and strategic alliances as an integral part of our core growth strategy.
While inorganic growth will be a complementary and integral part of our growth strategy going forward, it is only a tool to support our strategy and is not a strategy in itself. Each of our businesses develops two three-year strategic plans with specific and actionable growth initiatives. Based on these plans, a master list of potential targets in each business is developed and these targets are directly aligned to its strategy.
Our M&A framework is based on a “string of pearls” approach, targeting a series of related potential transactions where the sweet spot deals is expected to range between 5% and 10% of our market capitalisation. In a single year, our total transactions would not exceed 15% of our market capitalisation. Rather than time the market, we would make acquisitions throughout economic cycles where opportunities arise. In addition, we seek to do deals where it is possible to acquire a controlling stake or management control. We would not enter into deals purely based on “price-earnings arbitrage” opportunities.
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