Why Sameer made U-turn on its tyre business

AfricaPress-Kenya: Faced with the option of selling the trademark of the iconic Yana tyre brand, Sameer Africa opted for a comeback.

The tyre business, which the listed firm exited less than a year ago, is estimated to have led to losses of Sh1 billion in the last two years.

And it was a painful exit. The tyre venture was one of billionaire Naushad Merali’s – the majority owner of Sameer Group – passion projects and Sameer Africa’s core business.

It marked the end of an era for what was Kenya’s only tyre manufacturer that once employed more than 30,000 people both directly and indirectly.

Sameer Africa Managing Director Peter Gitonga, who has been at the firm for 35 years, described the exit as one of the most heart-wrenching business decisions

Very passionate

A decision, however, that had to be made despite dedicating a huge part of their lives and billions of shillings into growing the business.

“Merali was very passionate about it … all of us were,” he told Financial Standard in an exclusive interview.

“We came here very young, got married and raised families.”

Merali entered the tyre business in the late 1980s after acquiring Firestone, which was incorporated in Kenya in 1969.

To observers, the closure of the tyre business added to the growing heap of failed ventures by one of Kenya’s shrewdest deal makers.

Merali, whose net worth is Sh39 billion ($370 million), according to Forbes 2015 Africa’s Richest report, is famed for making quick divestitures from businesses showing weak financial performance.

But what has informed the surprise comeback? How will Sameer make the business profitable again?

After exiting the tyre business, the firm shifted focus to its property portfolio.

Gitonga talks of a four-year plan, riding on the success of turnaround efforts achieved last year.

After four years, they’ll review progress and if the business will have picked up, they might even reopen the local manufacturing plant that was shut in 2016 as production shifted offshore.

“There’s also the demand for the Yana tyre brand,” he said.

“We’ve come a long way to reach that decision. We had said no more tyres, but the demand became too high.”

Investors at the stock market, however, remain sceptical. Before the announcement, Sameer Africa shares were trading at Sh2.91 but have largely been stuck at Sh3 since.

The firm is also starting from zero tyre stock. Back when they had a manufacturing plant, 55,000 tyres hit the market monthly, but following the closure, the figure came down to about 20,000.

The return to the business is to be done in phases. Sameer Africa will do offshore manufacturing to supply both Yana and Summit brands, hoping to regain market share and grow sales volumes.

The infamous partnership with Bridgestone – the world’s largest tyre maker – to distribute their tyres locally was terminated even before Sameer’s exit from the tyre business.

Yana was one of the most marketed tyre brands in Kenya with the tagline, “Built for African roads”, and promising to “get you there”.

“This is a unique product built and designed for this market, so there was actually a real demand,” said Gitonga.

He said requests to buy the brand after they exited the local market started flooding in, with consumers also enquiring about what had happened.

“Some called, saying ‘now that you’ve pulled out of the business, can you then allow us to continue with the brand?’ We felt like this was not the right thing to do,” said Gitonga.

Unfair competition

He pointed out that giving away the brand would have been akin to “giving away a better half of Sameer Africa’s heart.”

The firm cited three main problems in deciding to shut down the tyre business – unfair competition from cheap imports, heavy cost structure attributed to retail operations, and disruptions in the supply chain.

Gitonga said the new business model has a different “value proposition” and has relooked at how to engage with customers, its products and services.

The previous business model comprised of both retail and wholesale, with the firm focusing more on retail, which was capital intensive, according to Gitonga.

“Our new model will include a distributor model covering the entire East Africa market. During the four years, the company will also leverage digital platforms to enhance market reach.”

The company will focus on the digital marketplace and push products through social media to reach the youth. The firm previously heavily relied on traditional advertising channels.

The firm closed all retail centres and exited East African markets, and now only has one retail centre at the Sameer Business Park on Mombasa Road.

Gitonga’s main worry, as with most business leaders, is the performance of the economy ahead of next year’s elections.

“If people have money in their pockets, they will pay you on the spot,” he said.

For the business to pick up, Sameer Africa needs to sell large volumes and is betting on the government – one of the big buyers – to increase orders.

Gitonga had been acting MD before being confirmed in January.

Sameer’s property portfolio provides annual returns of Sh300 million, which Gitonga hopes to grow in line with the four-year strategy.

He said the real estate business will focus on industrial property development in both greenfield projects and value addition to existing properties.

The firm also owns and generates rent from the Sameer Export Processing Zone (EPZ) Ltd and Sameer Industrial Park on Nairobi’s Mombasa Road.

Sameer Group also has a lot of prime land, a bulk of which is along the capital city’s Mombasa Road. It is also targeting the growing market for A-grade warehousing.

“We are looking at real estate in two ways. Where we have developed property, we can redevelop or enhance. Where there’s none, we can start new developments,” said Gitonga.

Renting an A-grade warehouse costs about $6 (Sh640) per square metre, which is almost double that of the predominant current stock of older units that lack modern design features, such as cross-docking and intermodal facilities, observed Knight Frank in its Africa Horizons report.

With a booming sophisticated road network and the Standard Gauge Railway, Kenya has become East Africa’s top logistics hub, shoring up the demand for warehousing and storage spaces.

On the property front, Sameer is not worried about the industry slump.

“Property developers in commercial offices and housing are the ones suffering,” said Gitonga.

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