Allowing free market forces to work is way to go

Al Ghurair Foods (AGF), the largest supplier of grains in the UAE, is against price regulation. The company, which is about seven per cent of the total Al Ghurair Group turnover, believes allowing free market forces to work is the right way to go.

"The government tried to enforce it and asked us not to increase the flour prices. I refused," Essa Abdulla Al Ghurair, Chairman of AGF and Vice Chairman of Al Ghurair Investment LLC told Emirates Business. "Give the people a choice to buy. There is zero duty on flour so if I keep my price high, people can import from outside. I will be killing myself if I keep my prices very high."

The Dubai-based family conglomerate, which exports its flour and grain products to the GCC, Philippines, Singapore, Malaysia, Vietnam, India and China, is also not worried about an upcoming law which may allow free zones to benefit from a duty-free trade with GCC states.

Currently only those wholly or at least 51 per cent owned by UAE nationals or by GCC national enjoy such privilege.

The company is not working on any expansion projects. It is rather focusing on "fine tuning" its existing portfolio.

"We will focus on reaching maximum capacity on our plans. And based on our performance this year, we will decide what and where will be our investments next year," he said. AGF saw seven per cent growth in revenue last year over 2008 to Dh2.5 billion and is looking at a 20 per cent increase this year to Dh3bn.

Al Ghurair said the company does not have huge leverage and is only faced with paying small debts for operational expenses. "There's no need to roll over because they are small and we can repay," he said.

Your company had lot of expansions in past few years. How much have been funded by bank loans and are any of the loans maturing in the next 12 months?

Our loan is very small. It's just for operational expenses. There's no need to roll over because debts are small and we can repay them. However, if you repay it, there is a little problem in your cash flow. But we are paying on time to all the banks.

We are a very conservative when it comes to these things. The company has stopped expanding and last year we only had one project – the oat milling plant – which does not involve a big amount of money. We were lucky that we had already smelled a typhoon coming and now we have no problem.

When will the oat milling plant start production?

It will begin to produce 40,000 tonnes per year of oats in April this year with a plan to ramp up to full capacity of 60,000 tonnes, depending on the market demand. The oats will be exported to GCC, India, Pakistan and Africa.

Your company also has a 140,000 tonne Grain Silo Storage Port facility, with ship unloaders, in Algeria. When will it be completed?

It is set to be completed in the fourth quarter of this year.

Two years ago, most investors were investing in stocks and property markets and they were ignoring food commodities because the turnover was minimal and the margins small. Has that scenario changed now?

Yes, you now see more people looking at the food business because it is more sustainable. In this industry, you have to take a long-term and not short-term view. In stock markets, you can buy and sell but here, you have to put up a factory, you may lose for a year or two but then after that you make money.

How big is AGF in the whole Al Ghurair Group?

We are six to seven per cent of the company in terms of turnover.

The Al Ghurair Group is also big in financial services and stock markets. Do the profits made by the food division substantially help mitigate the losses on those segments?

The group is putting all resources in one basket and it cannot let just one of its units suffer. We are one of the gems. I don't want to take all the credit.

You are in the basic commodity business so the sector you belonged to is relatively safe from the recession. But how were you impacted by the downturn?

The number of people in the country was reduced last year. Because of that the intake of flour was reduced. But now we're back to the normal percentage. This year we will go back to the 2008 level.

How did you perform last year and what are your expectations this year?

We saw seven per cent growth in revenue last year to Dh2.5bn compared to revenues in 2008. We are looking at a 20 per cent increase this year. Last year, AGF's local flour sales reached 220,000 tonnes per annum, while branded oil touched 5,000 tonnes per year. We hope our turnover this year will reach Dh3bn from Dh2.5 last year, with the growth coming from the increasing domestic and re-exports market.

Is the margin ratio in flour business constant?

It is small and it goes up and down because prices of raw materials keep changing.

One of the threats in any business is the change in government regulation. At this moment, are grains regulated by the state?

No. I'm against it.

But some food items are already regulated by the government. Is it is not unlikely that grains may also be regulated?

I don't agree with them.

Is it because the move will push the margin down?

It is not because of the margin going down. Give the people a choice to buy. If my product is of good quality and I don't mix grains, then my price will be slightly expensive. Some people buy a product because they trust the brand. For example, the milk powder Nido brand is more expensive than the milk from a Co-op brand. If there's only one product on the table, it is a problem. But here there is a variety, so let the consumer decide what he wants to buy. Do not kill the initiative.

Family businesses are often asked whether they would go public. Few ventured into this because family-run firms used to get easy financing through their name or reputation. But now banks are looking for the underlying assets. Will this trend continue?

Both are important. You have seen what happened in Enron. They have all the auditing and all those things but what happened? You have to put the two together. Now the banks rely on the audited balance sheet. Before we didn't give that, now we do. We have been giving the audited balance sheet for four years now. So the secrets in a family business are no longer a secret.

Are you looking for acquisitions?

Now we have to focus on our industry and refine it, have a fine-tuning and tighten the screws and make better of what we have. Our goal this year is to increase our capacity to the maximum.

Your expansion plans this year are pretty much stagnated but what about next year?

We will be looking at investing more and where to invest. Our territory is from Malaysia to Morocco; and from Iran to Tanzania. So it's Mena up to Malaysia. We are working on a very narrow band. We are not planning to go outside it because we want to be in the area where we are competitive.

Are you looking at farming as well?

That is our weakness because a farmer is better suited to farm than ourselves. We are better in shipping and distributing goods than farming

How will you fund that expansion for next year? Do you plan to tap the debt such as bond market or stick to conventional commercial banking?

In bonds, there are so much disclosures involved. Therefore, it is better to go for conventional or Islamic banking financing.

Have you already been dealing with Islamic banks?

We are dealing with local Islamic banks here for financing our commodities but we have not yet done project financing.

Do you intend to go for project financing?

It depends on the market situation and it's about their cost compared to conventional or Islamic financing.

Are you in talks with the government regarding building strategic reserves?

Yes. The government wants to work in this area. I think they will take initiatives this year. We can expect something in 2010.

Will it be a JV?

The method is still under discussions. The problem is they buy the wheat. How they could store it is the problem. They need us to grind and distribute them. They have the money but they don't have the expertise and technology.

How big could this be?

The government is looking for at least six months storage.

Your facility has 300,000 tonnes capacity or equal to three months supply of the UAE so it means you would have to double that?

Yes, we have to do something to double the size. Until now we are still in discussions.

PROFILE: Essa Al Ghurair Chairman, Al Ghurair Foods

Essa, who has extensive experience in managing industrial manufacturing businesses, shows a special interest in the manufacturing and trading of foods and food grains in international markets. He is also vice-chairman of Al Ghurair Investment, which is one of the leading international conglomerates in the Middle East with many successful businesses in diverse sectors, including construction, food, property and commodities; with additional partnerships and joint ventures in printing, retail and energy sectors.

As chairman of the foods and commodities divisions, Essa oversees the diverse business activities, which includes the manufacturing and marketing of flour, edible oils, pasta and noodles and in the trading of food grains, oils and meals. The manufacturing facilities of the foods division are located mainly in the UAE, Algeria, Lebanon, Sri Lanka & Sudan; while its trading and business activities span the globe.

Essa is also heavily involved in developing and directing the businesses of the ETA Ascon Star Group, which is a highly diversified business conglomerate with interest in 16 industry segments including property development and management, construction materials and services, and turnkey construction project management. Essa, which has been the main driver to encourage the group to invest in the energy and petrochemicals sectors, is now leading the group's initiatives through TransAsia Gas International to develop projects in the oil and gas, power generation and petrochemicals sectors; mainly in the Middle East and North Africa region.

Essa holds the following main positions in the group and its joint ventures:

Chairman, Al Ghurair Foods & Commodities Division

Vice-Chairman, Al Ghurair Investment

Vice-Chairman, ETA Ascon Star Group of Companies

Chairman, Al Ghurair Giga Gold Refinery DMCC

Director, Al Ghurair University

Director, National Cement

Director, Bossy Cereals AA, Switzerland

Personal

Date of Birth: August 2, 1957

Education: Graduate in Business Administration, San Diego State University, California, USA

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