In Tharawat magazine's second FamilyBusiness2FamilyBusiness article, we present the case of NbR, CEO of the Gulf-based family business RAB, who faces the pressures of low-cost competitors and the changing competitive landscape and has to face the family committee with a new and innovative strategy. Tharawat magazine compiled thoughts and advice provided by Arab family business members to NbR's dilemma and shows how family business can bring strategic support and innovation to family business.
NbR, CEO and third generation family member of Gulf-based family business RAB, is sitting in a workshop on IPO. He is listening to an expert explaining that going public can allow an organisation to become more professional, applying international accounting, audit, and management standards. The workshop audience, which consists of around twenty family businesses from the Gulf and the Near East, starts an animated discussion during the coffee break. "Is this applicable to our culture?" asks one participant "It has nothing to do with culture!" replies another. Standing behind NbR is a smaller group discussing whether the local stock markets really are ready to support family business IPO.
While several family businesses from the Arab world have gone public successfully, NbR knows that IPO remains a critical topic of discussion. The stock market authorities in the region have, over the last few years, developed several new regulations to ensure that partial IPO is made possible, which allows family businesses to keep control while benefiting from the advantages of the process.
NbR's company RAB started, like most of the families in the Gulf region, in the commodities trade with Asia. During the transition to the second generation NbR's father saw a great opportunity in going into the food retails business and laid the foundation of what is today a very successful chain of supermarkets throughout the Gulf carrying the family name. The RAB competitive advantage has always been to offer products at affordable prices, whereby the family focuses on a product range that corresponds to the Arab consumer's needs. The RAB supermarket chains have an efficient supply chain for their multi-location supermarkets. They are known for their numerous farms from which they get fresh supplies. NbR's father decided to retire a few years ago and is now chairing the family council, which consists of his four daughters and two sons.
The family council meets twice a month and the family assembly, which includes the extended family, gathers three times a year. Despite the strong goodwill and brand equity built by the RAB family, recent competition has become very tough;
NbR knows that more than 90 percent of the Gulf region's food is imported. This has made the region extremely sensitive to price shocks in the food industry. NbR knows how price-competitive their industry is. Through WTO agreements signed by GCC countries and trade policies changing, the barriers to entry were lowered, allowing international low-cost providers to enter the region increasing competition even further over the past 15 years. Recently RABs have been worried by international chains penetrating the region, building bigger and fancier supermarkets. These chains are able to decrease their prices as they manage a large international network sourcing goods from Asia, Africa and South America.
In addition, a new type of competition has entered the region; international food retail companies have started partnering with regional family businesses that allow them to access the market more successfully. In this scenario the international provider gains leverage through the family business name, and the family business can exploit new business opportunities. This new joint venture format has entered the luxury shopping malls. a sector in which the RAB group is barely present.
During the last family council one of NbR's sisters, a specialised market analyst, presents the family with the results of her recent research and survey of the competition in various countries in the Arab world. She summarised the report in four points:
The family council wants to build the strategy for the next five years. They discuss several possibilities of external financing; using savings, borrowing from banks, reorganising the businesses, merging with foreign investors or food corporations, or by going public. NbR was asked by the Family Council to come up with a presentation in the next three months to discuss the family business strategy. He has already started discussing with consultants and listening to the experiences of other family businesses. He also consulted his management team and asked them to work on specific scenarios. He though that maybe by attending this workshop on IPO he would find out about more options for his presentation. As he sits in the workshop, he sees that there is a clear divide between the participants who see IPO as a way to expand their businesses and others that are hesitant about the impact of such operation on the family name and requirements it would pose on transparency and governance structures.
NbR knows that despite the family's good financial reserves, there are challenges; the family won't take the risk to invest its own savings to restructure the business. Also banks have become very conservative even with well-established successful family businesses such as the RAB group.
NbR also knows that his father would prefer the family to stay in control. IPO, as it was explained during the workshop, would allow the family to keep the majority of the equity and the control but it would change the governance rules. The fourth generation of the RAB family believes that it is the way to go, but for the time being they do not have the right to vote. NbR is keen to include them in the process as they are the future leaders. He is also evaluating the scenario of going into venture with part of the group to build a new strategic business unit with a new approach to the market and building on the know-how of the foreign partners.
Solution 1
NbD's presentation on the company's future should develop two parallel strategies:
The first strategy is to recommend the family to upgrade the current business infrastructure and to re-brand the current products. This could be done through new advertising campaigns and for instance through more practical packaging, which is environmentally friendly at the same time. In addition to that, the RAB supermarkets should reinforce its position as the neighbourhood supermarkets where Arab families can find the complete range of products for their traditional meals. Another contributing factor could be to reinforce the image and raise awareness of the consumer on locally farmed products. All these changes would put RAB supermarkets into an ideal position to develop a competitive advantage over others by providing their customers with a nostalgic experience: they could create a traditional market place atmosphere in their supermarkets, which is something that has disappeared from the current mega stores.
The second strategy that NbR could propose to the family would consist of the creation of a new venture where the family will establish a joint venture with a well-established international group in the food retail business. This would help in entering new market segments and compete with boutique supermarkets for international tastes. The JV would not carry the RAB name. The purpose of the new venture would be to become a market leader as a boutique supermarket where, in line with the RAB value proposition, clients would receive a unique experience in discovering a mix between international and traditional tastes. A new foreign partner would bring new know-how that could also be of benefit to RAB's core business in marketing and packaging.
To finance the new ventures banks could be attracted as the combination of a strong local player such as the RAB family and a big international brand name would undoubtedly present a great opportunity and risks would be quite limited. Moreover, the same venture could be a subject for IPO at a later date, as investors would potentially welcome this kind of alliance wherein two strong brands join efforts in creating a new value proposition.
Of course, for any of these strategies to take shape, the RAB family would have to adapt its management structure and would have to apply different rules of governance when it comes to their involvement in managing the new joint venture.
Abdelmonem Al Serkal
Managing Director
Nasser Bin Aabdullatif Al Serkal Est.
UAE
3rd Generation
Solution 2
It is interesting for NbR to closely review his sister's report and the discussions among family members. Despite the company's current success and its good cash flow, it becomes clear that current market trends require action. The entry of larger international companies in the markets and the formation of new joint ventures that can obtain lower rates are all factors that have started threatening RAB's market position, and may impede its development in the future, unless the owners take steps to change the company's activities in order to ensure company sustainability in the market. Therefore I think the following steps have to be taken:
1) RAB should consider introducing a new product range or develop the current ones.
2) Look for products with suitable rates and enter into competition with other players.
3) Open branches in high population density areas, and select prime locations in order to establish a stronger presence.
In my opinion the company should consider the possibility of chaning into a joint stock company, which will enable the family members to:
1) Manage and control the company within the company.
2) Proceed with the company's expansion.
3) Obtain financial resources necessary for the expansion process.
4) Identify a strong international partner who can obtain commodities with good prices.
Jamil Sultan
Director
W.J. Towell LLC
Oman
Solution 3
I cannot see how an IPO would make you more competitive! The generated capital may provide you with financial power to invest in new prestigious locations but you would still have to compete with the same super efficient branded mega brands that source inexpensive goods mainly from developing countries.
I think NbR should have a good look at his business before choosing IPO because there is no easy way back from it and you would spend the rest of your life serving the stock market and not your business. First, you should solve the real business challenges, build the future, and then do with the business what you want. In short, NbR needs to focus on assessing the business before undertaking any major equity restructuring.
Which are the major assets of the RAB group? They still have strong brand equity, a very good product range, strong customer loyalty (although it is under pressure) and they still own a good market share. NbR should focus the company's efforts on reinventing the business to meet new and emerging customer expectations.
I believe that NbR should direct efforts towards building a new shopping experience. Being the most price-competitive is great but not the only attraction for clients. The company has to re-examine its clients segment and see what they like about RAB. Why do they decide to come to RAB and not any other brand? How they see RAB serving them in the future? What is missing and what do they expect? The outcomes of such assessment should drive the company strategy in how to shape the future of the company.
RAB group has deep knowledge of the market and consumer behaviour; this is a great competitive advantage and should be exploited. RAB has also accumulated a great deal of experience, and if they just step back and see why they were successful over the past years, they will find the ignition for new opportunities and the drivers to a more competitive retail chain. It is not about being price competitive but about unique value propositions that your current and new clients will not find with the competition.
NbR in his efforts to reassess the strategy should stimulate the open innovation approach throughout the company; after considering feedback from clients he should push his staff to keep generating ideas.
RAB should as well leverage on Arabian cultures, and try to find features and characteristics that the company could use and employ to attract a much higher traffic than the existing one. The region has specific eating habits, lots of nice food and definitely lots of potential to improve and combine. RAB should drive innovation on how to integrate and combine traditional types of food to come up with new healthy and delicious mixes.
Arabs like to go shopping with their families. Could RAB super markets accommodate the whole family? I think there are millions of new ideas you could add to super markets to improve family shopping experience. It could be by creating kids playing corners and waiting coffee corners. They may also acquire many small locations at every corner or mega markets in premium locations.
Farm products are another competitive advantage that RAB should definitely leverage on and use much more heavily. All these imported food have the huge disadvantage of being transported for many days while RAB are offering them fresh. Due to the very strong new trend in the region, people are becoming very aware of the importance of fresh food for their health. Food is not really expensive in our region and people would be willing to pay a little more for something fresh, clean and very well presented. You would have to create a whole theme around this from advertising, redesigning your outlets (palms and greeneries rather than dry and hot parking spaces) and visualising your farms through TV promotion, to branding trucks and most importantly beautiful joyful packaging for your branded fresh products with some nice slogans.
RAB could also develop a new range of food brands for kids. Who wants to feed his children frozen food if they can find it fresh? RAB could develop special child-friendly branded natural products so that kids would want to eat it.
Another opportunity for the RAB group that could reinforce their positioning as ethnical food suppliers by establishing could be through offerings new food experiences and serve the oriental foreign communities in the region by offering Chinese, Indian and Japanese specialties.
Once RAB has re-engineered the brand and developed new range of products they will start sensing the success maybe first on a small scale. But this will allow them to measure the success of their new ideas and to start investing to expand the experience throughout the region.
The regain of confidence will certainly reinforce the trust of investors in RAB and the company will have more opportunities for raising capital from the markets through loans or through IPO.
Amr Kandil
CCO
Kandil Steel
Egypt
Since 1865
© Tharawat Magazine 2010
