Olam’s Blueprint for success

Over just 24 years, Olam has grown into one of the world’s largest agricultural trading and processing companies. It has operations in 65 countries around the world but Africa, the original base of the company, remains central to its activities.

 The company’s remarkable growth can be attributed to a unique strategy devised and implemented by the group managing director and CEO, Sunny Verghese (below, right). In 1986, India’s 150-year-old Kewalram Chanrai conglomerate hired Verghese, then 26 years old, to establish a local raw material supply for their Nigerian cotton factory. He established sub-Saharan Africa’s largest cotton plantation as a nucleus and sourced additional production from the continent’s largest outgrower programme, involving 10,000 small farmers.

Asked by the owners to generate foreign exchange, Verghese formed an independent company called Olam (which means ‘transcending boundaries’ in Hebrew), in which he negotiated a personal equity stake. The company started by exporting cashews to India. This expanded to include cocoa, coffee and later a whole range of edible nuts and food crops from diverse countries. The company also moved from sourcing to production, processing and customising for its global clients, which include Nestlé, Kraft and Mars. In 2009, Verghese made a dramatic change of course, making several acquisitions and starting greenfield projects. It now has investments in farms, plantations and forest concessions covering products ranging from nuts to crops such as rice to palm and rubber. It is also involved in sugar cane and flour milling, and manufacturing biscuits and sweets.
Olam moved its headquarters from London to Singapore in 1996 on the invitation of the Singapore Trade Development Board – which is now called International Enterprises Singapore (IE Singapore). Verghese, who is by now a Singapore citizen, is chairman of IE Singapore.

How did this very young company, born in Africa, grow so large so rapidly that it is now taking on long-established global agribusiness giants and winning battle after battle? To find out,
African Business editor

Anver Versi entered into conversation with Sunny Verghese at the company’s headquarters in Singapore.

The Strategy
Olam started business in Nigeria about 24 years ago. Our initial objective was fairly modest. We were exporting raw cashews from Nigeria to India where most of the processing of those cashews took place.

From that, we moved into other adjacencies. We migrated into neighbouring geographical adjacencies and then eventually to value-chain adjacencies. So, from first sourcing, originating and exporting raw cashews, the value chain migration meant that we went into processing those cashews ourselves, first in India, then in Vietnam, then in Brazil and then in Africa.

Today we have processing facilities in Nigeria, Mozambique and in Tanzania. We are the largest African-origin processors of cashews today – in addition to processing in India and in Vietnam and other places as well.

Our strategy for pursuing profitable growth has always anchored around finding these near adjacencies. We define an adjacent opportunity, or possibility, where there is customer-sharing or supplier-sharing or cost-sharing or capability-sharing with our existing businesses.

If some of these criteria exist, we believe the risk of migrating into those nearby adjacencies is low. We moved from cashews and edible nuts, then to peanuts and from peanuts we moved into almonds and from almonds we moved into hazelnuts.

Today, we manage a supply chain for all of these four edible nuts and in the future, we will get into walnuts, macadamias, into pistachios because we don’t have to go and find new customers. The same set of customers who buy cashews and salt and roast them, also salt and roast mixed nuts.

The basic processing and blanching of various edible nuts has many similarities and there is significant customer sharing for many of the edible nuts. Because of all of that, the risk of execution of migrating from the cashew business to the peanut business and then to the almond business and then to the hazelnut business is greatly reduced. The whole growth has been modelled around finding these adjacent businesses and migrating into them. Today, we are present in 65 countries.

Cashews are grown in 19 countries around the world. We are probably the only industry participant present in every one of those 19 countries. Similarly, we are present in 90% of the cocoa-growing countries and 90% of the coffee-growing countries. Across our portfolio, in every commodity that we participate in, there’s one rule; that we should be in as many of those producing countries as possible.

The second rule is that we grow by migrating to adjacent businesses. The third rule is that we have to first differentiate before we scale. We will not allow any of our businesses to grow unless they have established some differentiation, some new angle, and then they can grow very fast. We really support them in growing those businesses. But till they differentiate, we don’t allow them to grow.

What ‘differentiation’ means
What do I mean when I say ‘differentiate’? In our business, for example, we differentiate in three ways. First, we are differentiated at the sourcing-organisation end because we procure our raw materials as close to the farm gate as possible. Most of our competitors will source at the port city. The port city can be 1,000-1,500 km from the arrival point from where the farmers produce it. So that differentiation at the grower end or the supplier end is what we call out-origination. We out-originate our competitors. 

That’s one point of differentiation. But to go and source at the farm gate, we need a very elaborate procurement system – and that can only work (because agricultural commodities are seasonal in nature) if you have cross-sourcing of multiple commodities. Otherwise, you don’t have a good cost position.

The second point of differentiation is at the customer end. In addition to providing the cocoa beans and cashew nuts and peanuts, we also offer customers seven or eight value-added services. We offer them, for example, traceability guarantees.

If a chocolate manufacturer wants guarantees that the source was from plantations in Africa where there is no forced labour, or no child labour, most of our competitors will turn around and say ‘We buy 1,500 km away from the farm gate point in the port city. We have no visibility or line of sight where it originates, so we can’t offer you that guarantee’.

But we can do so. We offer them customised grades and qualities. We offer them certified raw materials. We offer them organic certification, factory produce certification, Rainforest Alliance certification if that is what they want.

We offer them risk-management solutions. We offer them proprietary market intelligence, we offer them value-added ingredients. For example, if they want peanut paste fortified with vitamin A, or iron or something else, we can customise.
By providing all these various value-added services, we get some pricing power and we differentiate ourselves in the eyes of the customer because then we are not just offering commoditised, standardised cocoa beans, but we are offering all of these services. Therefore we get some stickiness with our customer and we get a larger share in his wallet.

That is the second point of differentiation. The third point of differentiation is that we are selectively integrated in the supply chain. Unlike our competitors, we are involved upstream with plantations and farming.

Today, we’ve got almond plantations in California and Australia, rubber and palm plantations in Nigeria, Ghana, Côte d’Ivoire, Gabon. We’ve got coffee plantations in Brazil, Laos, Ethiopia, Zambia, and Tanzania. We’ve got rice farming in Nigeria and Mozambique. We’ve got grains farming in Argentina and Russia. We have dairy farming in Uruguay and Russia.

Similarly, we are there at the supply-chain trading core, with our organisation, logistics, trading and marketing. We are also in the processing and manufacturing side. Today, we have around 130 factories around the world doing soluble coffee manufacturing, peanut paste manufacturing, tomato paste manufacturing, sugar milling and refining, cocoa processing and wheat milling.

The shape of the portfolio and the way we are integrated in the supply chain is also unique and differential.

The people
These are the three points of differentiation – but the ultimate differentiation is really our people and the way we hire teams of what we call global assignees. 

These are managers that we recruit on a centralised basis on a developed career path. They are all motivated on a centralised basis, deployed on a centralised basis because of the particular experiences that we put them through. We insist that all of them go live and work in tough geographies for three or four years.

This allows them to imbibe our DNA. They understand our business model inside out, they understand our risk systems, our control systems and they share our values and culture.  
Whenever we want to start operations in a new country, or move to an adjacency or migrated to a new value-chain adjacency, we have to have a critical mass of these global assignees to be deployed or available for deployment so that we can transfer our competencies into these new businesses. That has been at the heart of our success.

The strategy is management intensive and if we didn’t have the kind of management bench strength that we have, or management depth that we have, we wouldn’t have contemplated executing the strategy. Because of the quality of the people and how we treat them and prepare them and develop them, we feel that it becomes a competitive advantage for us in doing what we have done and that is evidenced by the fact that we moved from a green-field zero start 25 years ago to a business which delivered 14bn in revenues last year and with almost 24,000 employees worldwide and leadership positions in many of the businesses that we have.  

It’s a very unique and differentiated model because we are in an industry with incumbents, with very deep heredity who have been around for about 150 to 200 years.  

Taking responsibility
What we recognise is that it is easy for companies to go to a continent like Africa and get a licence from the government to do business there. But it’s significantly more difficult to get a ‘licence’ from the communities to do business there.

If they see you as a foreign company out there to exploit their resources, or not really vested or embedded there, you will soon be rejected. The only way to succeed in developing economies is for you to become embedded in local communities.

You have to transform and catalyse their livelihoods, create productive jobs, enhance capacity building, provide them market access, production inputs, extension training and advice on how to grow the crop better and improve the productivity. If you can do so, they really want you there because they see you as a catalyst and a change agent. So that has also been at the heart of our success.

We have something called a ‘Livelihood Charter’, which has eight principles on how we can help rural farming communities in the countries that we operate in. We have several programmes under that project. (See box on awards for Olam on following page).

Agribusiness in Africa
There is a conviction that with the rapid increase in the world’s population, food will be as valuable, if not more so, than oil. And more than 55-60% of the world’s arable land that is left is in Africa. But you need significant investments and infrastructure both in irrigation infrastructure as well as logistics.

It is very expensive today to move stuff from Africa because of the lack of infrastructure and only about 10% of African farming is irrigated compared to, say, 70% in China, 45% in India, and 95% in Australia.

Tractorisation rate is very low, as is fertiliser application. Africa is just moving from subsistence agriculture to more intensified agriculture.

To change the equation, governments have to realise the potential of African agriculture and that Africa can actually feed the world. Over time, there will be a growing imbalance between supply and demand for food and Africa has a pivotal role to play.

Government has to create an enabling policy, but at the same time it has to attract public-private partnerships. The government won’t have resources to make those investments directly.

The model has to be to engage large corporate-scale farms to service nucleus model farms. They have to channelise a large outgrower programme around the plantations. Millions of small farmers have to be co-opted to improve the farming practices using the nucleus plantation as a model farm. They come there to see what is happening and learn best practices while the company helps them migrate those best practices into the smallholding and then you can lift production.

You cannot have all large-scale farming – it’s not tenable and not right because it will displace farmers. So the sustainable model is to encourage nucleus model plantations around which you can create an ecosystem of small farmers linked to that supply chain. You cannot replace smallholder agriculture, but it should make the smallholder agriculture more efficient while, at the same time, there is a role for large scale farming. Both will have to co-exist.

For example, the average rice output in Nigeria is about 1.6 to 1.8 tons per hectare. In our farm, we get six and a half tons per hectare and in our outgrow programmes, where we support farmers around the farm, they get three and a half tons per hectare. With irrigation, we get two and a half crops per year.

Nigeria is a big importer of rice. It should not be importing a grain of rice. It can grow all the rice it wants efficiently.

The Gabon project
The Gabonese government has very wisely decided to broad base their economy because they were a uni-dimensional economy based on oil and gas and that’s a vulnerable position to be in.  

We got an opportunity to assist the government first in developing a special economic zone to attract foreign direct investment. In these economic zones, we can provide all the utilities and everything else, for example, one window clearance for licences, etc that are required to set up business and operate. We own 60% of the special economic zones and the government owns 40%.

We have also invested in three other big projects: one is developing probably the most sustainable and the largest palm plantation development in Africa. In phase one, we are developing 50,000 hectares fully RSPO-compliant plantation in Gabon. We started the project in 2011 and we will have planted 10,000 hectares by the end of 2013.

The second project is to develop a 27,000 hectares rubber plantations in a sustainable way. The last is probably the largest fertiliser project in sub-Saharan Africa. It will produce 1.3m tons of urea per annum. The major input will be natural gas.

Most of the gas associated with oil production in Gabon is flared off.  The country is self-sufficient in electricity and the small manufacturing sector is well provisioned on the power front. So there is no alternative use of gas.

The whole continent imports urea. We ourselves are heavily into plantations and farming. We have a significant captive load and captive demand from our own plantations. There is a huge opportunity to develop the African market for urea and urea fertiliser. There is also a large export market potential. The project, which we expect to come on stream in 2017, will serve probably about 25% of sub-Saharan Africa’s urea requirements, 20-25%.

On the risks of changing strategy in 2009
Changing strategy was like stepping out on a high wire with no safety net. The more successful you are as a company, the more difficult it is to change. But that is the job of a leader.