Executive Interview: Bharat Shah – Founder/Chairman, Kenafric Industries Ltd

Bharat Shah - The Founder/Chairman, Kenafric Industries Ltd

Kenafric Industries is Eastern Africa’s largest confectionery manufacturer. With a changing business landscape, the company has ventured into the general food side, with intentions to grow further in Kenya and the regional markets. The formerly family-owned company in 2017 sold a 40% stake in their packaged foods business to private equity funds Amethis Finance and Metier, while a younger generation are gradually taking over the day to day running of the business. Bharat Shah had an extensive discussion with Francis Juma about the giant’s start, growth and future.

Kenafric Industries ventured into the food business by selling sweets that retail in low denomination coins in Kenya. How did you think about this as a business line that has grown into such a huge enterprise?

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Confectionery, and especially commodity items in Kenya  have been in the KSH 1 range for as much as I can remember to date. The challenge is whether you can manage that KSH 1 price.

To sustain retail price at that position is not possible because currency changes, raw material prices always go up as well as other operational costs and distribution etc.

Therefore, it’s a very difficult route to maintain. This is the reason we are moving to premium products. Coin shortage is another challenge.

With all these in consideration, coupled with lack of reasonable margins, growth is an arduous task. We are now in a transformational journey that we started a few years and we are devotedly moving on with it.

How did Kenafric Industries come into being?

Something starts with a dream, and you either walk the dream or just stay in the dream. The dream gravitates around our family: we are four brothers all at a similar age with two years difference between each other.

Two were educated in the USA, myself in India and my other brother grew helping our father in the trading business from where we learnt a lot to grow into manufacturing.

Essentially, we were in trading which was started by our father and one of our relatives as a partner and other relatives supported us to start the business too.

We began from what you can term a semi-wholesale to wholesale then to distribution and finally to manufacturing. It is a growth story that has had its natural steps from A-Z.

By 1982, the same year I was getting married, in the same week, the coup attempt took place in Kenya, which ruined our business. We could have kept on crying, but we had to move on amidst that impediment. We learnt that shops were an easy and soft target by looters and plunderers.

We started pondering going into manufacturing. At that time, I had a furniture workshop where we were making ordinary furniture but I didn’t see the prospect in that furniture business at that time other than it having given me some flavor of manufacturing experience. 

Kenya, at that time was not as free as it is now, where you can use dollars to buy and sell goods. Back then we had forex restrictions. There was the Foreign Exchange Allocation License (FEAL) to contend with.

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To import raw materials or finished products you needed a license and that would depend on forex allocation, incentives given and so many other things. By going into furniture, I didn’t have to import anything.

All inputs were available locally including foam and resin that was made by a plant in Industrial Area. However, we had to sell the business nonetheless 4 years later after operating it from 1981-1984. 

In 1987 we acquired a running shoe factory that was making PVC shoes. PVC shoes were picking in the market and in a short time were the in-thing and one of the hottest selling items in terms of footwear.

We were about 17-18 players in PVC shoes manufacture, ourselves being the last entrants. We had two machines while the biggest manufacturer had 11 machines.

Believe it or not, as you say life is a struggle, we were running 2-3 days a week. Strangely, being an entrepreneur, when my brother travelled to Taiwan, he ordered another machine when we were not even running two machines well. He took a big risk.

However, as we got the machine, we developed a product that I remember we even framed it because it made our history. It was called “Dancing Queen”- a lady’s sandal.

It became a big hit that we couldn’t meet production. Other manufacturers copied the product and at that point we realized that we could not match the capacity of the biggest manufacturer.

They could reduce their prices because they had a wide product range. We had to go back to the drawing board.

We decided that in 3-4 years we had to be as good as number one in the game. And surely within three years we were at the top of the pile and within that time we hadn’t sold our business or thought with emotions, we were focused and only wanted to achieve our goal.

On the way we took-over 2-3 factories because competition had become so stiff that people could not earn and hence sold their businesses while others went into mergers and acquisitions.

By the time this competition fizzled out there were only 4-6 factories standing and later there were only 4.

One of the biggest one disappeared too over time. Of course, markets change with time as well as other factors and having started with footwear and having been in trading we were very much interested in confectionery.

During one of our family meetings and talks, my uncle told me that some years before, there was a product called ‘Dandy Gum’ from a factory that had existed in Kenya. The factory was on offer for sale, but we lacked the finances.

In 1991 we hit headwinds. In the late 80s building up to early 90s there was the Iraq-Iran war. Our footwear product having been oil-based saw the prices for raw materials skyrocket and they were no longer affordable due to the prevailing economic conditions that had also eroded the purchasing power.

Thus, the downside of the plastic footwear business dawned on us. This gave us the resolve and impetus to get into confectionery, starting with bubble gum and in 1993 went into hard boiled candy and continued expanding.

What has been some of the positives and challenges of working with family members, given that each member would naturally think differently?

This depends on the size of the business, your dreams, the challenge and how you manage the challenges. The lucky part was that the four of us were specialized in different fields, thus we became very complementary rather than compete with each other.

I have an accounting and finance background, my second brother has sales experience, the third is an industrial engineer and the fourth a marketing guru.

We divided our jobs accordingly and that’s how we maintained the harmony. But equally important is the sacrifice that you make. Every Saturday we used to have meetings in the morning or evening and sometimes the whole day.

In the meetings we channeled our views challenges and solutions. This made us soldier on solidly through the hinderances and obstacles.

On your food side, what are you currently handling in terms of products and where you sell them?

We are a packaged food and beverage company. The products we make are confectionery, culinary, biscuits and powdered juices. The confectionery side is big, with hard-boiled candies, toffees, lollipops, bubble gum, chewing gum and icing sugar.

Up to the year 2000, we were not selling outside Kenya, but our dream was to be an export-oriented company to balance our forex inflows and outflows.

Coincidentally, around 2000 or later the government introduced a scheme called Export Promotion Project Office (EPPO), where imported raw materials were allowed duty free and there was VAT exemption on exports for finished products. By 2005, our export sales had grown from zero to a staggering 70% of our total trade.

After EPPO, came TREO, which was similar to EPPO but with some further few changes, which paved the way for the East Africa Community (EAC) duty remission. We were exporting to 34 countries from 2005-2009 but the financial crisis that was hitting the world suddenly escalated transport costs followed by rationalization of markets.

Currently, we are exporting to 12 countries, with a plant in Uganda that is about a year old and five marketing offices within the East Africa region.

In this journey what have been the missteps, some strategies that didn’t work out and how did you weather them?

When you’re living, life is full of mistakes – that’s the beauty. People get worried about mistakes, but mistakes teach you something. There is a phenomenon called the 3Es, that the young people or anyone in business should know.

Experience, Experiment and Expectation.

In business just as in life, yesterday was experience, today experiment and tomorrow expectation. In life you must go through these stages.

We have had challenges and pitfalls because of lack of capital, lack of expansion space, thinking diversity of expansion plans, collection of money, forex during the formative years and challenges with government regulators. All these are a continuous parts of life. 

In the early year, foreign exchange constraints hit our business badly. In 1990, Kenya had something called a foreign retention account. The dollar to shilling was 76 at that time.

The government ridiculously, by order, confiscated the dollar accounts and gave us the rate of 46 shillings; a 30 shillings straight loss. Kenya is freer now, and I believe there is no any country including South Africa and Nigeria with a freer forex regime. These journeys have made us see the light at the end of the tunnel.

The same way our footwear business was impacted by a war elsewhere in oil producing countries, our confectionery one has also been affected by trade in sugar.

Sugar in this country is the most political commodity. Countless time I have had 18-20 government officers huff and puff into my office with closure threats demanding to see our importation papers, with threats to shut down the factory.

We have endured a lot of such threats and recently we had to sue the Parliament, a first in the history of Parliament, that gave us a reprieve after revoking our sugar importation permit. In business, you must be a fighter, you need to confront challenges head on – both on the government and regulatory sides.

On the business side, you have to develop your relationships with partners: suppliers, customers, your bankers, etc. When this forex problem manifested with the dollar account confiscation, there was no supplier willing to give us goods because payments could not get through.

However, there was one or two European firms that we had built a rapport with, which understood and supported us. Therefore, relationship building is one of the qualities of a successful business venture. Notwithstanding, with all the experience we have, we made wrong decisions too.

The worst or most impacting decision we ever made was to introduce a chocolate line in 2014. To introduce the products, we did a lot of research, had former guys from Nestle work with us, did psychology tests. We did everything!.

We invested more than US$ 6 million in the equipment and US$ 4 million in marketing and development – a US$ 10 million investment.

The challenge was the chocolate culture in Kenya and the affordability challenges by the consumers. For a KSH 20 chocolate product, we were losing money. The purchasing power was absent, though people liked and loved the chocolate. We couldn’t reach the economic volumes to sustain the business that was backed by a very high-tech processing machine.

We had a very painful decision to make and those two years were the worst in our lives because the fire in our belly had died out.

We couldn’t grow and decided to close the plant and look for a buyer and ultimately got one. We really took a hit and got out but since the space had been freed, we put up a biscuit line. With time we have overcome that phase, because as the fire died down, we needed to reignite the flames again.

The fire has come back but the economic situation in the country is a question that everybody is asking now.

What have been some of the key milestones for your business? When did you feel that you had overcome the earlier challenges and were on a strong path to growth?

I think when we were exporting 70% of our products, from 2005 onwards. With the growth potential we must have invested US$ 20 million between 2005-2012. Between 2012-2019, which is still an ongoing process, we are investing about US$ 8 million.

Of course, in the cause of life there is always a booster, and, in our case, it came in the form of acquiring a culinary division in a running factory called OYO in 2009.

In 2010 we started a stationery line, on which we have added envelops to and recently bags. We have two more new projects in the pipeline, which may begin at the end of 2019.

How have you managed this growth, especially when your export market sprung to 70%, you increased the value of investments?

We sometimes wonder how we managed! We started with 20 people, today we are at about 1800 people as a group. The good thing is that the banks had been watching our progress. We evolved over time to get out of the capital caps set by the Central Bank of Kenya and other financial institutions.

Our strength was in a strong balance sheet, favorable cash flows, clear goals, our achievements and a capable management team. For us it has been the overall health of the business and not much to do with the capacity to provide securities that worked in our favour in our growth path.

In 2005-2007 we took US$ 5 million loan from PROPARCO, a development financial institution partly owned by the French Development Agency (AFD), which is an equivalent of IFC in Europe.

This funding was expensive, we nonetheless took it and it changed our name and reputation in the country and region. When we finished paying back the loan on time, Proparco approached us to go for US$ 20-30 million and not another US$ 5 million. However, we didn’t have any project for that much money.

Today it is not an issue to get any kind of financing from a bank, we have surpassed that. This was the goal, by building on a journey to a strong reputation, credibility, focus, strong balance sheet and the like. This has been the basis of our success.

A few years ago you brought in some private equity funders into your food side. How did you arrive at that and how significant is that for the company?

I think for a family business that was the most significant step to take. Remember we had built from our foundation to this strong level in 2014/15. Our children who had opportunities elsewhere in the world were keen to come back to Kenya: it was their goal as they left.

The headache was, what were these educated people coming to do back here? We had a business, by Kenyan standards big in size. In our confectionery line, the key raw material is sugar.

One of our biggest suppliers took up one of my nephews to work with them for about a year to learn the ropes in sugar trade.

My son, an aerospace engineer, worked for a British Petroleum firm in charge of North Sea oil fields. After two years he decided to return home.

My son went into the production side of the business and my nephew joined strategic planning, finance and procurement but of course my brother Ketan is still handling the company’s procurement portfolio and all that.

As a family, we decided, sugar being a political item and having faced a myriad of challenges, it was apt to look at private equity.  Everybody from Helios to many more companies had been approaching us for years, but we were not ready. Thus, as a family we chose to hire two consultants to oversee the process. We did this for two reasons.

One was for the founding shareholders to create liquidity and cash their shares and two, to pave the way for the young generation to take over the lead and run the business. Private equity will not be interested in me running the business, they want young blood.

This was a long process with challenges, disturbances, lack of happiness at times within the family, but we had to come through that and settled on one among the many suitors.

The private equity investors were looking for growth and that is why we have started in Uganda and the reason for the expansion plan this year.

We will allow things to settle, then may be the next project will be in Ethiopia or West Africa. It is a process we are building and after a few years probably cash-in and go into something else.

What’s your take and advice to young businesses and entrepreneurs?

Looking at the history of Kenyan businesses, most have been family owned. The challenge has been continuity especially when the founders grow old or are no longer there.

The young generation may have divergent ambitions and dreams and may not want to enter the business, and this is the challenge I have come across. You have a vision, a dream and probably a product but you lack the financial muscle, marketing muscle, regulatory muscle and whatever other requisite muscle.

My advice to the youngsters is to look towards private equity, venture capital and all these available funds. But then there must be an exit plan with them. If these young businesses can get an investor locally to invest and guide them, they should consider it. That’s the favorable way to grow while remembering that failure is part of life.

FAIL actually means “First Attempt In Learning”. They should not get disheartened by failure. All the success stories have their failures, but they kept their goals and vision and remained focused. It’s of course easy to talk but managing the same is quite a task. 

They should be determined and plan their journey. As they say 5Ps: Proper Planning Prevents Poor Performance. This is an important doctrine. Emotions and thoughts are always fighting each other and how one makes a conscious decision to the right path is important.

But above all, young people must express happiness in their pursuits. Be fun going, create something and go on the journey for a journey is never ended quickly, it’s like a life journey. There will be stops, gaps, decisions to be taken and to this, there is nothing cast in stone.

With time a person’s thinking does change. We never thought we would go for private equity, tomorrow we could be a public limited company, so thinking keeps changing along the journey.

As you usher in the next generation into the business are there any strains? What are the lessons to be learnt? How have you managed the challenging part of working with family?

When you’re four brothers in a similar age-group and you’ve grown up together, you tend to know each well to manage yourselves. The challenges appear when the young Y-generation get into the mix and how you manage that transition is critical. We had our own goals that we focused on, we possibly achieved them.

The focus of the young generation is diverse: brand development, serious operational efficiencies, technology investment, power and overall cost reduction.

By the way we have won the Energy Management Awards (EMA) in Kenya for 5 consecutive years. We have made fantastic savings in energy and are now moving to water management. All these factors have enabled us to become more efficient.

We also have agro-based boilers since 2009, as we moved towards greener energy and reduced our cost of production.

The young generation is our business are multi-tasking people, they are digital, while we were analog, and their presentation skills are excellent, their persuasion and convincing power is great. They have their strengths and ambitions; we have given them opportunity and a free hand.

They seek advice when it comes to certain things and we assist them though we are still a part of it. They are in the business; we are on the business. They run the business, we oversee the business. 

There are many SMEs coming up in the region on the industrial and manufacturing sectors. You are involved with the Kenya Association of Manufacturers (KAM) and regional issues. What are some of the challenges and opportunities in regional trade?

For common external tariffs (CETs) & non-tariff barriers (NTBs) in EAC, there are challenges from time to time, hence the reason why we need a body that works with the government and counterparts to find solutions. The current problem in the region is in any sugar produced items.

We cannot currently export our confectionery products duty-free to Tanzania, which costs our business US$ 1.5 million per month in sales. We are waiting for verification from the Tanzanian authorities on this matter. NTBs will always remain but through perseverance, focus and patience we shall prevail, without expecting results overnight when dealing with governments.

To succeed in these trade challenges, you need to know how to build up your case. We should go to government with solutions not problems only. As KAM we take proposals, choices of solutions and reasons for the solutions. That is KAM’s advocacy policy. 

What is your take on Kenya’s Big 4 Agenda? Are we on track?

According to the Kenyan government, manufacturing is targeted to make up 15% of the GDP by 2022 but we have actually gone down from 11-12% to 8.3% currently. To achieve the 15% level, we need a 30% annual compounded growth in the sector, which is impossible. The agenda is great, but implementation is the major hindrance.

The costs are going up. For example, take the Standard Gauge Railway (SGR) railway: goods have been forced to use the SGR. A 20 feet container from Mombasa to Nairobi costs USD 780-800 delivered, emptied and sent back.

Today on the SGR it costs over US$ 1,000 freight, US$ 250 to clear goods from ICD to your warehouse and to send the empty container back a further US$ 130.

The SGR route is 50-60% more expensive, meaning the cost of production has gone up and besides that, the multi-agency operations carried out recently led to demurrages and port charges running into billions of shillings.

The cost of sugar, a key raw material, at that time went up by KSH 6-8 per kilo. You can imagine the impact it had on the cost of final products. These are the reasons you see all companies in the red now.

Whether we shall achieve the Big 4 Agenda remains to be seen. All proposals by the industry players have been accepted by technical committees, but the government has not been able to implement, although we are alive to the challenges therein.

If these proposals are implemented and a strict follow up done, we shall see the beginning of the rejuvenation of manufacturing in Kenya, although the growth will not happen overnight and could stagnate at 10-11% by 2022 at the prevailing conditions.

We have been hit so badly and you have to cover the past, maintain the current and hope to grow for the future.

Can one grow a company beyond personal growth and development? Which attributes have enabled you to propel your company to these heights in terms of education, philosophy and business acumen?

The most important attribute is entrepreneurial drive coupled with dreams for growth. But everything keeps evolving as you get along. So, the focus should be where you want to be, which segment, niche and such. You must understand that pitfalls will come, learn from them and avoid them at the next level.

What is your firm doing to stimulate and engage innovations from students?

We work with Kenyatta University. I appreciate that Kenyan entrepreneurs have brilliant ideas, but we don’t have a centralized bank of funds and information. The responsible ministry should identify and channel the funds from all over to an objective that is clearer.

The problem is that manufacturers and universities are both struggling financially, and no one wants to take up the extra financial responsibility at this time.

But if I am looking at the next few years and with Microsoft and other tech companies coming up with some of these incubation hubs and knowing that Kenyans are really advanced in IT and innovation, in 5-7 years there will be an explosion of ideas and funds to match the likes of India who have phenomenal success stories by young guys, some in their twenties.

What do you make of the recent changes in the Kenya retail market space that has seen several foreign brands trooping in?

The retail market in Kenya has been a roller coaster. We know what happened to a few of those retail stores. South African firms, in the likes of Shoprite, were here before in various forms but closed down because of incompatible business cultures.

Every country has a different way of doing business and a different culture and thinking for that matter. For Carrefour, it was a blessing in disguise. May be if Nakumatt Supermarkets was existent it would have been a different story, but now they have an open field.

The supermarkets here try to squeeze the much they can from the supply chain, and this diminishes the margins, with many delivery conditions and payment challenges. Most of the new ones are paying on time currently and we hope they will maintain that. Because of the space created they have a good score.

However, when you look at malls which house these stores, they are struggling. There are only about 3-4 malls that are working in this country – Junction, Sarit Centre and Village Market, etc.

Foothold in the malls is seriously down: you can see it, you can feel it. There are no buyers and our economy is on a downward spiral, the rents are down to 10% of what they used to be paid because the owners don’t want the space to remain empty.

The economy is on its knees, there is no cash circulation. On the other hand, there is a lot of VAT refunds and a lot of money is lying with the Kenya Revenue Authority (KRA) or Treasury.

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