Jul 30 2008

The fifth generation game

July 2008
Adel Fakhro represents the fourth generation of a business that was started by his great grandfather in 1888 in Bahrain. Sitting at the helm of the successful business today as group managing director of Abdulla Yousif Fakhro & Sons, he tells Ehab Heyassat that doing business in the GCC has not always been easy.

There are not many four-generation businesses in the region. Tell us a little bit about how it all happened.
My children and nephews are now getting into the business, so we are already into the fifth generation.

My great grandfather started the business in 1888 and over the years, it has evolved and diversified in a big way.We started off as a traditional merchant house. My grandfather was at the helm of business from early in the 20th century until his death in 1952. He had five sons,and in the 1930s and 1940s, he had one each in India, Dubai, Bahrain and Iraq, and that was my father.

After the death of my grandfather, my father and uncles shared the companies and split up the business. My father ended up buying out most of the businesses from his brothers. I and my brothers helped him grow the group to where it is today.

At the moment, the group consists of 14 companies. We are always adding divisions and new initiatives in the group. Our major focus is now on building businesses in the Gulf. We have branches in Doha and Dubai, and we are in the process of building two others, one each in Abu Dhabi and Kuwait.

What activities are you involved in today?
The group is involved in several activities from restaurants to telecommunications to insurance, shipping, trading and car rental.

We are mostly focussed on the trading and services sectors. We have four companies in Dubai, one in Abu Dhabi and two in Doha. We have always felt that it was important for us to geographically diversify outside of Bahrain.

Our companies in Dubai today include a telecom equipment company, a telecom services company, a ship handling and supplies company, and a car rental business under our own brand. We also have a telecom equipment and services company in Abu Dhabi, while in Doha we have both the car rental and telecom services businesses.

Do you plan to have interests in Saudi Arabia in the near future?
We do work with some companies in Saudi Arabia, but we don't have our own presence on the ground there. We have plans to open in the Kingdom, but we have our limitations in terms of management resources. This is why we are expanding in a measured manner. We have to build it gradually; we will be there eventually. We would like to be in Saudi Arabia not today, but yesterday.

Will the business again split in the future?
That will never happen again. We will ensure that all our businesses remain as one group and are not broken up by individuals again. We have learnt lessons from that in the past.

What lessons have you learnt? Can you please elaborate?
As you can see, when a business owner dies, if the business is a sole proprietorship, it is inherited by his children, and then the business splits amongst them over time. But it certainly is not a good practice, as in the process the business gets smaller and fragmented instead of growing and expanding.

We have converted all our business divisions into companies with limited liability, or into closed subscribed companies. That way, it is ensured that the company will continue and not split up and get fragmented by the next generation. This is even more important now, especially when the new generation is coming to work in the group. In the future, they will all be working together, and this will be the case with their children. We will continue to remain as one entity.

How have you structured the group for that not to happen?
We have structured the main company into a BSC company. The law in Bahrain is not very clear on holding companies yet.

Have you organised your business with a board of directors, non-executive directors and a professional management structure?
We still have not. We run the group as a family business. But now we are planning for that to change. We have realised that over the medium term, we need to move to a professional management. When we have that structure in place, not all family members would be entitled to have managerial tasks in the group, though they would continue to own parts of it.

Do you intend to dilute the stake of the family in the future?
Right now, the answer is no. As you know, one of the primary considerations of going public is the need for cash for expansion. In fact, 90 per cent of family businesses in the region are not in need of cash. They are in need of opportunities to invest the excess of cash generated by their businesses. This is true for us as well, and so the justi.cationforustogopublicis lost there.

We also feel that there are many negatives of going public. Firstly, you lose control of your business after dilution. A second reason is that we as a family own assets that provide a reasonable return on equity, whereas if we sell it, the proceeds or the generated cash from it will not give us that kind of return. So, from an investment point of view, it is a bad decision. Also, diluting our share will only be a logical decision when advantages outweigh disadvantages. Right now, it's the other way around - we see more disadvantages. I do not see dilution happening in the short to medium term, unless there is investment rationale to support such a decision. But I also do not see it happening beyond ten years either.

At this point in time, people are confusing between good management and corporate governance and the need for diluting family businesses. Many feel that they can appoint the best managers only by going public, as then they would not be obliged to have family members running the day-to-day operations of the business. I think these considerations are the wrong reasons for going public. You can introduce best practices and corporate governance by engaging professional management even without going public.

You do not intend to enter real estate and financial services?
We are not a property development company. But we do have real estate investments, although these are not under the companies of the group. These are private investments and assets.

As for financial services,wehavebeenin the insurance business for about 55 years. We are insurance brokers. We have been recently thinking of increasing our footprint in the insurance sector and using that as a springboard to take us to other businesses in the financial sector.Wewantto bring the right management and foray into other financial products and services. I would say that in three to five years,we will be well established as a financial services company.

Will you mostly look at the retail side of financial services?
We will be looking at retail initially, such as distribution of third-party products, and then expand that into the wholesale sector.

How do you see in.ation?Isitaffecting your business?
Most of the products we sell are imported, so we are subject to the so-called imported inflation. Also, our government has allowed all sorts of companies to open up in Bahrain, resulting in prices coming under a lot of pressure. We maintained our prices in our McDonald's restaurants for the last 15 years. I don't think our competition managed to do that. That was phenomenal. But now with the fast rising of food prices, I don't think that will be possible any longer.

But you did raise prices recently, didn't you?
In December 2007, we raised the prices between three and four per cent across the board. There were exceptions where the increase was much less. By doing that, we wanted to give our customers the best value for their money, even as we absorbed as much as we could before passing on the rest of the burden to them.

You also have to understand that in this competitive landscape, you cannot raise your prices all the time. However, we were faced with a classic problem where we were losing key people. We had to raise the salaries significantly for our staff to adjust to the rise in the cost of living. I must also add here that if the price pressure continues, we will be forced to review our options once again later this year.

What do you think of the common currency? How will it help your business?
Without a doubt, the single currency will benefit all the GCC countries.Weallknow now that it is not going to happen by 2010. It was an aggressive timeline. But when it happens, it is going benefit everybody.

Are you planning to invest outside of the GCC?
Bahrain accounts for more than 70 per cent of the total revenue for the group. We have a diversified investment portfolio in other markets in the GCC as well, as I mentioned before. We are also exploring India; the two business lines we are looking at are insurance brokerage and car rental in that market. We believe in sticking to what we can do best to add value.

As you look at diversifying and growing your business, what are the challenges that you are faced with today?
We are part of the Bahraini business community. We have a buoyant economy, and we have a fairly good standard of living. Bahrain, as well as the other GCC countries, has also remained immune to regional con.icts.

I have to point out here that, as a business, many of our challenges are Bahrain-centric. The biggest, of course, is the political challenge. Legislation is a challenge; the lower house is driven by religious issues. The majority of members in the lower house represent religious parties from both sides. That is not entirely bad, but often they are not conducive to business.

We have a sectarian issue as well because of the regional make-up. So far, it has not affected the business as such; but it is a new phenomenon, something that we have not seen before.

Bahrainisation is another issue; we have to rely more on our people. The government has done little in this regard, and it's not enough. As a private sector, we have to work together to train skilled Bahraini workers.

Do you believe that the government, or at least some members of the government, are against reforms?
I think there is a bit of frustration pent up in some quarters of the bureaucracy that creates impediments in the implementation process of the plans of the government. Businesses do not like bureaucracy; we seek profit and profit is a function of time. We do not like anything that delays things or puts obstacles in the way, as it eats into our pro.ts.

However, as a business, we also feel very comfortable with the crown prince's approach in the recent months. Thanks to his efforts, we have an economic vision and a plan. I think it is a very good development. With such a clear vision, the country will recognise its strengths and weaknesses and will have the right approach.

Are there no challenges in doing business in the GCC?
There are challenges, of course. We have been limited by the obstacles that we face as Bahrainis in the rest of the GCC countries. I am very bitter about it, and I am saying this with all my heart. In Bahrain, we have opened up our market without any caveats. A quick visit to the Al Seef Mall will show you that a number of GCC companies are operational there. But we face obstacles in every market in the GCC that we try to do business in.

I reiterate that in the GCC, Bahrain is the easiest place to set up a business, while Qatar is the toughest. Dubai is a lot easier, but we still face restrictions like Dubai will not allow us to open a branch and we have to register our companies there in our names as GCC citizens. In Abu Dhabi, activities like car rentals are not allowed. In Qatar, we cannot own properties. We can own only one property for residential use. In Oman, you can't own agricultural lands.

In other words, all of the GCC is allowed to compete in our small Bahraini market, while we are restricted in the larger markets of the other member countries. I don't think that is a fair deal.

© MONEYworks 2008

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