Q&A with Vice President of Kraft Foods George Logush who talks about the virtually oligarch-free food industry.
While doing business in Ukraine can be full of hardship, some sectors are easier than others.
With Ukrainian titans having a lock on heavy industries, telecoms and energy, other business people find comfort in the more competitive food sector.
The reasons are simple: the nation’s richest and most powerful have thus far largely ignored food production in favor of powerful oligopolies that rake in much of the nation’s industrial wealth.
So the virtually oligarch-free food industry is one of the few bright spots of Ukraine’s economy.
It has lower entrance barriers, wholesome competition and hefty margins. It is also resistant to crisis. After all, no matter what the economic outlook is, people eat.
All of this sounds like great news to George Logush, an American of Ukrainian roots who serves as vice president of Kraft Foods, the global food giant with a strong presence in Ukraine.
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Plans include adding a biscuit factory and a new logistics center to its existing operations in Sumy Oblast.
The Kyiv Post talked to Logush about his views on the food sector.
Kyiv Post: Many experts we’ve talked to claim that the food industry is the place to be in Ukraine. Is that so?
George Logush: As I think of it now, this is the industry that has probably the lowest entry barriers, and the least need for capital. Also, the food industry is less cyclical. It has its own cycles.
But the industry is quite stable, because people have to eat, and the world is growing hungrier, not only physiologically, but also because people want to eat beyond subsistence, better quality food, as incomes are rising.
So, not only is domestic market attractive, but also the export market is very attractive. There are estimates that through its exports Ukraine could feed more than one billion people.
Not feed them completely, but in terms of their import supplement. So, it’s a very, very exciting industry.
It has its own problems, of course, as it is subject to a lot of regulation, excessive by world standards, controls, bureaucratic red tape and abuses that are also excessive.
But all in all, Ukraine is a great place to invest, and it’s probably the best kept secret. Investors who come to Ukraine and are successful tend to stay quiet.
The ones who have trouble trumpet about it from every tribune. That’s what makes the noise and creates an impression about doing business in Ukraine, which keeps away investors.
But those of us who are successful and don’t want much competition tend to be quiet.
KP: You’ve just mentioned the excessive abuses…
GL: If you run a clean business, it tends to minimize the problems.
KP: That’s not what we have heard from Rinat Starkov, the head of ArcelorMittal Kryvyj Rih, whose company is subject to several inspections per day, is owed billions of value-added tax refunds and is forced to pay taxes in advance.
GL: That’s not the food industry.
KP: So, why is the reason the food industry almost a safe haven? Is that because the domestic oligarchs are not heavily involved?
GL: It’s a relatively neglected area. [Owners of] large financial-industrial groups rose in the heavy industry. For them, agriculture is a complete antithesis. They don’t understand it at all. It’s impossible for them to think of vertical integration.
They don’t understand farming well. It’s not very manageable.
And if you want to be in the whole value chain, the best part is at the end of it, when you get into fast-moving consumer goods.
FMCG is a frightening industry for industrialists. Instead of having 10 customers, you have tens of millions of them.
Kraft’s Logush says foreigners need to adapt to local realities.
You have no way to enter into direct negotiations with them. You have to find indirect ways of influencing them, so that they buy your product. You have to go into advertising, which is a very creative process, based in psychology. So, they tend to keep away from it.
The few experiments that took place, for example, one group that owned Sarmat [a Donetsk-based brewery currently owned by SABMiller group but formerly owned by Ukraine’s richest man, Rinat Akhmetov] ended in disaster.
Another industrial group that has a food company is now looking to sell.
KP: Are you talking about Biola, a Dnipropetrovsk-based food and beverage producer, reportedly linked to billionaires Ihor Kolomoysky and Gennadiy Bogolyubov?
GL: Veres [a Kyiv-based canned food producer, co-owned by Russian businessman Vadim Novinski’s Smart Group]. It’s too complex, compared to industry.
Of course, when I look into industry I find complexities there. It’s like the opposite side of a coin. I wouldn’t want to have just a few customers, I’d rather have tens of millions of them.
When you have few customers, you can get into difficulties with them, and you have oligopoly, oligopsony and so on.
KP: Isn’t it close to what happened in grain trading this year when the export quotas were introduced and a single company, Khlib Investbud, received the largest share?
GL: If you are in this business of buying and exporting grain, the complexity of harvest uncertainty is then compounded by the uncertainty of how government will react to the potential food shortage or high food prices. So, it’s an indemnifying part of the business. Everywhere in the world, grain companies run into government intervention.
KP: But still comparing agriculture with the food industry makes the latter seem to be much more attractive and trouble-free, so to speak.
GL: Let me give you an example. A company, which is the worldwide supplier of french fries to an international fast food chain, came to Ukraine. I met with their business development representative to give some advice and two months afterwards he came back to me and said: “I found an ideal partner.”
One look at that partner and you knew that there was a problem. I asked: What is the particular advantage of him? And he said: “He could solve any problem. He has great contacts, great ways and promised things will be smooth and I wouldn’t have any problems.”
I suggested that he’d better look for another partner. He didn’t and stuck with that partner, who ended up cheating him.
Then [the foreign investor] sued him, claiming that he stole all the agricultural equipment from him and locked it into a warehouse. And even though he won in court, he couldn’t get the court to get it back. So, this international company never got on the ground in Ukraine.
Then, there is the problem of theft. We load a truck with five tons [of potatoes]. It arrives with 4 tons, 920 kilograms, and the driver claims they must have dried out along the way. We followed the truck and saw that it made an unauthorized stop and unloaded some of the potatoes. We had to install convoys to follow every truck.
On another occasion, we saw a bunch of people unloading potatoes piled up in the field into a sack.
The whole family was doing this. We called the police and they ended forcing us to lie on the ground. It turned out that the guy who was stealing was a policeman.
But you can solve all these problems. If you make a big issue out of it, claiming that the corrupt police has raided us, go ahead. The simpler way is to sit and talk to people and say: guys you can’t steal potatoes. What’s going on?
I think many investors, when they come to Ukraine, think they know better, as they are coming from a different world and their job is to teach. And nobody takes that condescension of people talking down to you.
Foreign investors should put themselves in the place of these people. They do things differently than you do.
Come to an agreement with them on how you do things. Work together, learn together. If you have that open attitude it removes a lot of problems.
Compared to grain traders, our problems are more complex, because we are at the end of the value chain.
But we are less subject to intervention and a force majeure. Export quotas suddenly imposed is like a tsunami, whereas we have to deal with rain and tides, but not a tsunami.
Kyiv Post staff writer Vlad Lavrov can be reached at [email protected]
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