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Case Study - Would You Have Invested?
Imagine you are a finance provider and you are approached with this proposal seeking investment ...
We are based in India and import cashew nuts. Sales last year were GBP 1.7m ($3m) on which we made a pre-tax profit of 1.31% of sales. We have a vision to become the first global, fully integrated supply chain manager for commodity agricultural products and food ingredients and we are seeking investment to enable us to realise that vision.
Would you invest? - commodities, Indian, tiny profit margins - it would be very easy to decline the proposal wouldn't it?
I was privileged recently to share a platform with Sunny Verghese, the very impressive CEO of Olam International and he told a fascinating story.
Last year Olam achieved an annual turnover of nearly GBP 1bn ($1.8bn) and a market capitalisation of GBP 700m ($1.2bn). They have 5100 employees in 42 countries and are known as "the brand behind the brands". They operate an integrated supply chain for 14 products including sheanuts, robusta coffee beans, cocoa, sesame and cashew nuts, from 12,000 collection points in 40 origin countries delivering these to over 3,300 customers in 50 destination markets.
Olam is a world leader in many of these commodities with the overriding, and unique, philosophy of "farm gate to factory gate".
Without doubt Olam International is seen by everyone as a very impressive, highly successful company.
In 1983, however, Olam was seen very differently. It was an Indian based importer of cashew nuts with a turnover of GBP 1.7m ($ 3m) and a return on sales of 1.31%.
Sunny and his colleagues however had a very clear vision for the future potential of the business and one in which they passionately believed.
Traditionally the market for agricultural commodity products was governed by, in the supplier countries, local buying houses and in the industrial user countries the commodity futures markets. The result was generally poor returns for farmers and poor continuity of supply to users. Sunny and his colleagues’ vision was to cut out both the local buying house and the futures markets and to provide guaranteed supplies to the factory gate of industrial users whilst at the supply end, dealing directly with farmers. In this way they believed they could ensure the quality and continuity of supply at acceptable prices for all.
This was a brave vision - one which, if successful, would turn on it’s head the traditional routes to market and be likely to upset well entrenched interests, including powerful people like third world governments and City institutions!
This then was the proposition that Olam started putting to finance providers all over the world. As you'd imagine they suffered a lot of rejection until finally Temesek Holdings, the Singapore government investment vehicle, became interested and had the courage to invest in Olam’s vision.
In the years that followed Olam has grown both sales and profits at a truly remarkable compound annual growth rate in excess of 50% and their market capitalisation has been transformed from around GBP 120k ($215k) to GBP 700m ($1.2bn).
In February 2005 Olam floated on the Singapore stock exchange and the investors were able to realise an impressive return on their original investment.
Behind the figures, of course, are many other fascinating stories about how Olam approach their business and manage their people. One financial figure that I find particularly interesting is that Olam are proud of the fact that they have grown their Return on Sales from 1.31% to 2%. Many of us have got into the habit of laughing at such poor returns and to dismiss such a business but of course the financial ratio that should be in the front of all our minds, as a measure of the returns to investors, is the Return on Investment and for Olam this is a very satisfactory 35%.
So what are the lessons we should learn from the story of Olam International? For me the belief, passion and courage of Sunny Verghese and his colleagues shines through - their proposition was bold and transformational but carefully thought through and they never gave up in trying to convince finance providers that it was both viable and exciting. Eventually they found an investor who was also prepared to be bold and give them the support they needed. Both parties have now been well rewarded for the risks they took.
So - are you being bold enough?
What's your opinion?
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