Olam is first S'pore firm to make leadership list
THERE'S no better way to describe Sunny Verghese, Mr Olam, than business-like. Not in the turgid, management-speak spewing way - he says 'going forward' just twice in the entire, 100-minute and 9,364 word-long interview, for instance. But because Olam's founder - who is also group managing director and chief executive officer - is frank, to the point, knows his many numbers (and locations - Olam is in 60 countries and a bewildering array of markets) and is relentlessly practical. Everything he says is as organised as a Powerpoint slide - to the point and in numbered order. There are three ways to participate in this business, he says and there are also three ingredients to scale and replicate this business; and we are not positional, directional, proprietary commodity traders, each adjective flying on like bullet points and screeching to a halt in the frontal cortex of his interlocutor.
To analysts, bankers and reporters he's known for his extremely detailed presentations at quarterly results briefings; one wit calls them 'state of the nation' addresses because they touch on every relevant thing. That level of engagement has won him a number of followers among the analyst community, who praise the company for the depths (and lengths) of its disclosures.
Which is needed, because Olam's business is easily characterised but not always as well understood. It's the market-leading supply chain manager for 20 products - cocoa, coffee, cashew, sesame, rice, cotton, wood and many others - is present in 60 countries and supplies to over 10,000 customers.
It does the unseen work of sourcing all these products from the farm gate, then shipping them to factories to be turned into chocolates and sweets and confectionaries and thousands of other things by the people with the brands we see on the wrappers.
It's likely we eat Olam every day from breakfast to supper, and never realise it.
What the company is not, Mr Verghese is always quick to say, is a positional, directional, proprietary commodity trader.
That means Olam doesn't take bets on which way prices of its products will go. It doesn't reward its traders for making bets, especially using borrowed money, but only for risk-adjusted returns.
It has high debt, but
almost everything it sells is secured, sold forward or otherwise hedged, and
it makes money from an accretion of small margins.
It's like picking up pennies, except the steamroller isn't coming.
Which is why the company responded vigorously in March 2008 when investment house Merrill Lynch issued a report urging investors to sell the stock. 'Olam has become dependent on leverage for growth which, in our view, is not sustainable,' its analysts said then.
When the word got out, Olam stock crashed 14 per cent in one day.
'The biggest lesson that I've learned in the last 20 years is you must first differentiate your business before you try and scale it. If you don't, you will always struggle for profitability. We said, let's go and buy from the lowest level of aggregation possible. If our competitors are sitting in the port city, we buy at the farm gate.'
Mr Verghese remembers the episode well.
'The concern at that time was that we were overgeared. But we were stress-tested during this crisis. No bank pulled any line from us.'
Why didn't they, when all banks were frantically trying to shrink loan books to square their drastically reduced balance sheets? Here the bullet points come again. 'Because we were not positional, proprietary, directional traders, the quality of assets we had met their criteria,' he says.
Olam's physical agricultural inventory is as close to cash as you can get.
Four reasons: it's easily sold, it's not perishable - most can be easily stored for half a century - it can never be obsolete, and it's almost all hedged and sold forward. 'We had US$1.7 billion in inventory in June 2009, US$1.6 billion met all those four conditions. I could convert that into cash in a week's time. Most people don't understand it but the banks do, very well.'
The markets were reassured and Olam has bounced well since; though its share price was badly hurt in the crisis, at one point dipping below the dollar mark, the company stayed remarkably profitable - in February, it announced its highest ever profits for the October to December quarter and for the first time declared an interim dividend, of two cents a share. Since June, the company has raised in total close to US$2 billion in equity and long term debt on what some say are remarkably favourable terms.
This successful business model is the legacy of an opportunity that burst open 20 years ago, in Nigeria in 1989. At the time, the young Mr Verghese was managing India's Kewalram Chanrai Group's textile milling operations in the country. He wanted to leave to start his own business back in his native India (he is now a British citizen and a Singapore PR) but the group chairman offered to sponsor his startup, if only he would stay in the group. The only question was, what would he do?
At the time the agricultural industry in Nigeria was going through a big shakeup. The government-owned commodity boards, which had a monopoly on the sourcing and export of agricultural products, had been deregulated and small indigenous merchants had swarmed in to take their place. But when it came time to deliver on their contracts to the big foreign buyers, if the commodity price winds went against them the only risk management that the little firms knew was to default. Mr Verghese, with his experience setting up Kewalram Chanrai's textile milling business in Nigeria, had the expertise to do better. 'We sensed a big opportunity to set up a reliable supply chain infrastructure right in the producing regions.'
To have any hope of success Olam had to prove itself a reliable deliverer of products to its customers, blow how the price winds would. Starting with just Mr Verghese and US$100,000 in capital, it cracked the Nigeria to India cashew nuts export market in two years, acquiring a 47 per cent share of the trade. But there wasn't much room to grow. A commodity business, by definition, sells the same thing as its competitors. 'The biggest lesson that I've learned in the last 20 years is you must first differentiate your business before you try and scale it. If you don't, you will always struggle for profitability,' Mr Verghese says.
The Olam DNA
So how do you differentiate a commodity business, an oxymoron if there ever was one? 'We said, let's go and buy from the lowest level of aggregation possible. If our competitors are sitting in the port city, we buy at the farm gate,' he says. The trick was to go deeper, farther into the bush where the squeamish dared not. 'The farm gate and the port city can be a thousand kilometres apart. Most of our competitors say this is too difficult. But two-thirds of the profit pool is from the farm gate to the port city,' he said.
But larger profits generally entail bigger risks. What happens when the company invests in a long, thick supply chain all the way to the farm gate? Farm products are seasonal so fixed costs sit idle many months of the year.
The solution was to start hopping to what Mr Verghese calls 'adjacent' products - from cashews, to peanuts; from peanuts, to shea nuts, to cocoa. 'We looked at the cropping calendar,' he says. 'What else could we buy, using the same warehouses and the same people? We can amortise that fixed cost of setting up such an infrastructure across larger volumes. And we build a differentiation and an advantageous cost position.'
Scaling its now differentiated business model has been its strategy for the best part of the past twenty years. That has informed the way the company has grown and the way it develops its people. New staff are handed a field operating system, a bible which tells them how Olam buys, what documents it needs, and takes them through the entire flow chart of what then happens, how to control the risk, and how to shift its products seamlessly from point to point.
But it isn't a mechanical process. Working in strange geographies demands a peculiar breed of worker to handle the challenge - savvy and decisive, yet equipped with the latest business and accounting expertise. Mr Verghese has spent the last twenty years developing a way to get the right people and the system works - last year Olam was placed among the top 25 Global Top Companies for Leaders list created by human resource consultancy firm Hewitt Associates to mark companies with the best commitment to developing talented people and building a pipeline of leaders. It was the first - and only - Singapore company on the list, right up there with the likes of IBM, P&G, General Mills, and McKinsey, and Mr Verghese is rightfully proud of the accolade.
He describes what he calls the Olam rite of passage, which everyone from senior management down has gone through, and it starts from the ground up, with a harsh initiation into the realities of working for a company like Olam in the countries it operates in.
'First they will all go out and live and work in tough geographies for three to four years, so that they understand the risks from the ground up. Without exception. I lived and worked in a village, as have all my senior leadership team,' says Mr Verghese. But more important than process is getting the right person in the first place. He is blunt when he talks about his hiring philosophy - more precisely, the type of people he would never hire.
'The most important thing is selecting for fit,' he says. Olam isn't a place for those who want a terrific quality of life, with golfing and thirty-hour work weeks. 'If you're looking for work as a way to get a great quality of life, we're not the company for you, don't join us.'
Instead, the people Olam wants are those who enjoy long periods away from the comfortable parts of the world, people who in centuries past might have been missionaries, colonists, prospectors or South Sea traders. 'If you're not willing to live and work in Macassar in Indonesia or Medan or Ouagadougou in Burkina Faso or Wakore in Nigeria - you want to live in New York, London and Singapore, we're not the company for you.'
The right plan, the right people
Mr Verghese admits that maybe just five in one hundred people they interview fit the bill, but those are the kind of people that stay and build long, successful careers at the company. Olam has now built a core 'Global Assignee Talent Pool', with 430 leaders carrying 'the Olam DNA', and with intimate understanding of the business model, the operating and risk systems and its values and way of life.
And with the right business plan and the right people, Olam is now embarking on a third leg of its strategy. 'We were an asset light company, now we're moving selectively upstream into plantations, products-wise and geographically.'
Olam's model is to go where the profits are. Its global supply chain network - and the proprietary market knowledge it is able to glean from it - lets it squirrel out arbitrage opportunities in worldwide supply chains. Since its strategy was launched it has gone into almond farms in Australia, tomato processing in the United States, coffee plantations in Laos, and peanut farming in Argentina. It most recently spent US$108 million buying a wheat miller in Nigeria, and is investing US$31.5 million to set up a greenfield wheat mill in Ghana.
'In the almond example (in Australia), we found that in the supply chain place where we started out business, only 10 to 15 per cent of the profits was there, whereas 55 to 60 per cent of the profits was appropriated by the plantation owner,' Mr Verghese says. 'The world's biggest almond producers couldn't see these arbitrages. We can see the global supply chain arbitrage opportunities, and we can then select where we want to be.'
The interview ends as it begins - with a reminder that Olam is relentlessly practical at negotiating some of the absurdities of modern corporate life. One is the sensitive subject of corporate social responsibility. Mr Verghese isn't afraid to take a gimlet eye to the subject, even though Olam is in many poor countries where the aid and charity industry is vociferously active.
Says Mr Verghese: 'We used to build rural schools, tube wells and paved roads, but to be honest, the larger motivation at that time was to inventorise all the good deeds we did and put it in an annual report and score public relations brownie points.'
He soon realised that was more than a little silly. Olam had no expertise in building roads, schools or tube wells. So the company changed tack. 'We should always be able to make a business case for our social work,' he says.
What the company was good at, was at improving productivity. 'So we run multiple such programmes. We run one in Nigeria along with USAID (humanitarian organisation United States Agency for International Development), where we've got 7,000 to 8,000 farmers enrolled today. They've trebled their rice yields. We have a 22,000 farmer programme in Sulawesi, where we help them to produce quality cocoa. We've increased their incomes by 47 per cent.'
By upgrading farmer productivity and providing micro finance, 'we create tremendous goodwill from our supplier base and therefore they want to supply their products to us, so we increase our volumes and our business, it's a win-win situation,' Mr Verghese says.
Then there's a second, perhaps more philosophical motive. 'I have no right to use shareholders' money for causes that I want,' Mr Verghese says. Some want to fund religious causes, others developmental aid or cancer research or old age homes - what right has the CEO to choose? 'We strongly believe that we cannot usurp the right of the shareholder in deciding which causes are dear to them.'
Very sensible, very rational. Which is what Olam has always been about.
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