Wednesday, July 29, 2015
Sunday, July 26, 2015
Buying a brand-new car, that’s painful,” says James Hind. He is trying to make it a little less so.
Mr Hind is the 28-year-old founder of Carwow, a marketplace for new vehicles and the motor industry’s answer to Expedia.
Then follows the sometimes awkward process of debating added extras, discounts, service plans, trade-in deals and financing with a car dealer, who is often a skilled negotiator.Many would agree that buying a new car isn’t easy. Customers are presented with a dizzying range of models (BMW had 37 at the last count) and a vast array of variants. The popular 3-Series saloon comes in 37 different engine and trim configurations.
“You’re buying this beautiful piece of metal with all this amazing technology, then you end up dealing with a salesman who haggles in a dreary dealership,” Mr Hind says. “It’s not the way it should be.”
Carwow — which has raised £5.9m in funding from investors including Alex Chesterman, the founder of Zoopla — does things differently.
It helps buyers select a car and sends out an alert to more than 1,000 registered dealerships. The dealers then contact the customer with their final, best offer and handle the rest of the transaction directly.
Carwow takes a flat commission of £250 per transaction from the dealer. Almost all of the process can be carried out online.
Mr Hind is trying to shake up a sector that has proved stubbornly resistant to the ecommerce revolution. Online shopping has transformed almost all sectors of retail, from bookselling to groceries. But it is still difficult to buy a new car online without having to go into a dealership.
This has done little to harm the market for new cars. Registrations reached a record 1.38m vehicles in the first half of 2015.
But many are warning that the vast traditional dealership network faces upheaval. Research by AutoTrader, the classified car advertiser, this month said that footfall at dealerships in the UK had gone from 30m in 2010 to a forecast 15m this year. By 2018, that is expected to fall to 7m.
Used car websites are common, but the new car market has fared less well.
CarsDirect, founded in 1998 and now owned by private equity group KKR, was an early pioneer in the US and the first company to sell cars to customers online. A European equivalent failed to catch on. In the UK, Virgin Cars and Jamjar.com have each come and gone.
Manufacturers have experimented with alternative ways of selling. Vauxhall.com trialled online purchases in 2000. Fiat Click, a franchise, found some success in 2011-12 with a sales website and what it called an “Apple-esque” store, but it was replaced by a traditional dealership.
Dealers say that car retail and ecommerce do not entirely mix because consumers want to “touch the metal”. “Can you replicate the drive of a vehicle online, the emotion,” asks Daksh Gupta, chief executive of London-listed Marshall Motor Holdings.
The financial process is also more complicated than other transactions. More than 75 per cent of new car purchases in the UK use credit agreements and can involve part-exchange deals, where customers get a discount for trading in their old car.
Carmakers are also thought to be wary of distance-selling regulations, which say customers who purchase online are allowed to return a product within 14 days of purchase.
Moreover, dealers’ relationships with carmakers can limit their freedom to innovate. “The manufacturers control so much of the retail experience in terms of showroom standards, defined processes . . . and bonuses, which are built around a standardised, traditional process,” says Steve Young, head of ICDP, a research group.
Still, many dealers would argue that the internet has revolutionised motor retail. The process is much more transparent, they say, as customers can compare prices easily. A recent report by EY found that buyers spend more time online researching a car purchase than any other product, including consumer electronics.
Still, about three-quarters of consumers still prefer to transact inside a dealership rather than online, according to EY.
Simon Dixon, the man behind Jamjar.com, disagrees. He now runs Rockar, a Hyundai franchise in Kent’s Bluewater shopping centre. The 2,200 sq ft store again mimics the Apple store format and employs product angels rather than salesmen.
Customers can transact every part of the buying process online, which he says is a first in the UK.
In 2015, its first full year of operation, Rockar expects to have had 200,000 store visits — more than Hyundai’s entire UK network of 158 dealers. It is on track to sell 1,000 units and has made £4.2m in sales since launching in October.
Crucially, about 50 per cent complete the transaction online, including some, Mr Dixon thinks, who have never visited the store. “It bewilders me that it’s taken so long,” he says of the drive to go online in the motor industry.
The multichannel format has found favour with non-traditional buyers. Some 18 per cent of Rockar customers are under 21 and more than half are women, which is unusual for a car dealer.
Mr Dixon says manufacturers and larger franchises have been slow to embrace online retail because of the massive amounts of capital invested in dealer networks up and down the country.
But gradually they are coming to a stark realisation, he says: “People don’t want to come into showrooms; and they don’t want to talk to salesmen.”
Sitting in an open-air restaurant just round the corner from his home in Bangalore’s start-up hub of Koramangala, Nandan Nilekani is full of beans. The billionaire co-founder of outsourcing giant Infosys remains perhaps the most recognisable face of India’s technology sector. But having stepped down from the company in 2009, and following an abortive foray into politics last year, he now seems to be revelling in a new role as elder statesman of the city’s flourishing internet scene — and Bangalore’s re-emergence as a globally significant tech hub.
“Even start-ups that launch somewhere else are moving here,” he says with enthusiasm, painting a picture of Koramangala, in the south-east of the city, crawling with new online businesses, all pursued by eager foreign investors. “There are more start-ups here, more VC [venture capital] money here, that virtuous cycle is in full spate,” he says. “These entrepreneurs are very young, very ambitious, changing the world kind of people . . . And where I live is the epicentre, so it is good fun.”
Koramangala is a major tech cluster, but there are others, notably Whitefield and a group of business parks on the city’s Outer Ring Road. “You see this second coming all around you,” says Naveen Tewari, the founder of InMobi, a fast-growing mobile advertising start-up that competes with Google andFacebook, and boasts a valuation above $1bn. “The number of ventures, the amount of money, the pace at which things are happening. Every space is being disrupted.”Bangalore has long been synonymous with India’s rise as a technology power, housing myriad giant outsourcers, call centres and high-end research facilities for western multinationals. But over the past year this teeming southern city of 10m has enjoyed what some dub a “second coming”, amid rising excitement over the country’s mushrooming internet economy.
That word — “disruption” — comes up quickly in discussions with Bangalore’s buzzy tech entrepreneurs. It is a Silicon Valley cliché. Even so, the notion that start-ups in cities such as Bangalore might shake-up large swaths of India’s economy is far from fanciful, especially given the dilapidated condition of sectors from retail to urban transit.
Koramangala’s quiet, leafy streets hide India’s most potent collection of technological talent, beginning with ecommerce champion Flipkart. Founded in a nearby bedroom in 2007, the company is scrapping with Amazon for domination of the country’s fragmented online shopping scene. Flipkart’s next funding round could value the group at close to $15bn.
Taxi-hailing app Ola is just round the corner. On the fourth floor of an office building, dozens of young workers cram on to tiny desks two-at-a-time, hammering away at laptops and ignoring the various beanbags and table football game. With backing from SoftBank of Japan and a valuation north of $2bn, Ola is presently outrunning US-based Uber in India’s booming ride-hailing sector.
These companies are just two of the neighbourhood’s start-ups, which also include local language news aggregator NewsHunt and online health group Practo. Venture groups cluster here too, from local Helion Venture Partners to larger US-based players like Accel Partners . “Companies like Ola and others in Bangalore are definitely on the radar in Silicon Valley,” says former Vodafone chief executive Arun Sarin, who recently joined the taxi-hailing group’s board. Mohandas Pai, a local entrepreneur and angel investor, says: “A tsunami is brewing here, one that will end up washing around the world.”
Bangalore’s second coming stems from three main factors. The first is rising internet use, especially over mobile phones. India has roughly 150m smartphones users. But that could rise to around 750m by 2020, making it comfortably the world’s second most populous online economy, after China.
Money is the second factor. Not long ago, big name Silicon Valley venture capitalists were packing up their Indian offices, complaining of regulations and infrastructure. Those that remained, however, are investing with renewed vigour. A new generation of funders has also turned up, from Asian giants like SoftBank and Alibaba to New York-based investor Tiger Global. Half a dozen secretive hedge funds are pitching in, many flush with cash from China’s internet boom. All this pushed Bangalore up to fifth in the league of global technology investment by city last year, according to Crunchbase.
The effects of this influx are visible: roadside adverts are dominated by start-ups. “All this money means even small companies can compete with Google on salary,” says Anshul Rai, co-founder of Happay, a local mobile payments group. “If you are in Starbucks, you can assume half the conversations are about setting up a start-up, and the other half are about hiring.”
The people holding these conversations provide the third reason for Bangalore’s renaissance. The city has one of the world’s richest pools of coding talent, lagging behind only Silicon Valley, according to Vivek Prakash, co-founder of HackerEarth, a local software developers network. Many of those launching new ventures began their careers in Indian software groups, or the local offices of tech multinationals such as IBM or Google. This has helped strengthen the calibre of Indian entrepreneurs notes Subrata Mitra of Accel Partners. “That is a big shift, the people now are bolder and have better exposure.”
Perhaps more than anything, though, is the ambition permeating Bangalore’s new tech scene, one that is based on a rejection of the country’s heritage as a hub for outsourced software development. “Some of those IT services entrepreneurs are respected, but the outsourcing companies they built are not,” says Sharad Sharma, co-founder of Indian technology think-tank iSpirt. “Many of the new guys resent the fact that for this older generation of companies, the nirvana was to be the back office of the world. They think India should dream bigger. They want to take over the world.”Bangalore’s new tech scene stretches beyond ecommerce, to include cloud-based software groups like Freshdesk or social analytics venture Frrole. More familiar internet names play a role too. Twitter is planning a new research and development centre in the city. Chinese smartphone maker Xiaomi, is setting one up too, along with more traditional companies including Britain’s Rolls-Royce. Elsewhere, Goldman Sachs is building its largest office outside New York, housing sophisticated software development and back office support.
While Bangalore’s start-up community is thriving, there remain problems.
Anyone leaving its gleaming international airport will soon find themselves shocked both by their stuttering mobile internet connection and the city’s dreadful traffic.
Reasonably priced, modern office space is hard to find. Software companies complain talented programmers are scarce, and expensive. Public transport is hopeless. Bangalore’s urban politics are as grimy as anywhere in India.
There are business worries too, most obviously the fact that India’s ecommerce buzz shows signs of bubblelike conditions, which could in time pop.
Those hoping that Indian start-ups will quickly match the extraordinary growth of their equivalents in China may also
be disappointed. Despite its growth, India remains much poorer and less
well-connected than its larger northern neighbour — a factor that will take a decade to change, limiting the potential of start-ups such as Flipkart.
There is something incongruous about watching a Tuscan chef get excited about frozen pizza.
But that is exactly what Riccardo Landi is doing. He beams as he removes Nestlé’s latest creation from the oven. He is just as excited when he presents a packet of chilled ravioli he has developed to have a much higher fresh vegetable content.
“The frozen food [industry] is not going so well, so we need to invest for success,” says Johannes Baensch, Nestlé’s head of R&D. The issue really matters to Nestlé, because its foods account for a third of the US frozen aisle, or a quarter excluding ice cream.The chef is serving up his dishes at Nestlé’s new $50m research and development centre for frozen and chilled foods, which opens on Wednesday on the outskirts of Solon, an affluent Ohio town. Mr Landi’s enthusiasm encapsulates what the US’s biggest frozen food company wants to achieve. It is betting on reviving a stagnant industry through innovation.
Frozen — and the food business in general — is facing tough times in the US amid a consumer revolution in eating habits that has helped trigger a wave of consolidation in the sector. Earlier this year Kraft was swept up into the Heinz family, creating a combination of frozen and processed foods. In Europe, Nomad Foods is devouring frozen food companies including Birds Eye owner Iglo, and it is in talks over the European assets of Findus.
Americans are filling their shopping trolleys with more fresh produce and vegetables and rummaging in freezers less than in the past. Frozen’s share of the entire food manufacturing business fell to 4.8 per cent in the US, or $32.9bn, from 5 per cent in 2010, according to Ibisworld data. And with average profit margins expected to be 5.9 per cent for frozen this year, compared with 6.8 per cent for all food, the frozen sector has to work harder for its earnings.
Consumers want healthier and organic options using fewer ingredients – and ones that they would find in their kitchens, not in a chemicals factory. But they tend to lump frozen offerings in with other processed food. Sean Westcott, head of Nestlé’s R&D centre, sees changing this negative assumption as one of his biggest challenges.
This shift has also led consumers to shun diet products, such as Nestlé’s Lean Cuisine brand, which has experienced a sharp sales drop. Consumers now associate such foods with undernourishment rather than wholesomeness. So far the company has opted to reinvent the line, despite speculation that it might be put up for sale.
At the same time, Americans are for the first time spending more on eating out than on groceries, government data show. But they are not necessarily holding restaurants to the same levels of accountability. With a few local exceptions, restaurants are not required to disclose exactly what each dish contains.
All these changes mean that Nestlé needs to innovate differently from the past.
“It’s not just about reducing fat and salt anymore,” says Mr Westcott. “We need a much deeper understanding, it’s a richer story. What we’re seeing is a pivot in way consumers expect us to make products.”
This is where the new R&D centre comes in. The company is changing how it gathers consumer feedback, by bringing people to a custom-built room to taste test products instead of taking the food out into the field. The results can be examined immediately in a nearby room by food technicians who work on solutions to problems and cut the time it takes to alter products by about 20 per cent.
In the new centre’s experimentation rooms, food technicians will create roughly 2,500 dough recipes and 2,500 sauce recipes annually to find the right combinations.
One of the other significant challenges facing Mr Westcott and his team is to maintain the taste and texture of the food through the defrosting and reheating process. In the past this may have been done using what Mr Westcott calls “industrial” ingredients, these days ingredients have to be natural.
When it comes to keeping pizza dough tender after reheating, Nestlé has turned to the brewing industry and started adding germinated cereal grains to the recipe.
Nestlé says it has also developed technology working with dairy proteins that uses less fat to produce the same level of creaminess. Mr Westcott says that its tests have created recipes using 20 per cent less fat without consumers tasting the difference.
While the frozen industry is stagnant as a whole, there are certain segments that are growing, and they are not all ones that are perceived as healthy. Though the biggest categories of frozen food are main courses, pizza, ice cream and seafood, the fastest-growing lines are fruit, dips, pizza bases, soup and breakfast sandwiches, according to Nielsen.
“Indulgence is still going on but it has to taste good,” says Todd Hale, a consultant to Nielsen. “Taste and convenience still matters. If you can leverage both components it’s working.” He adds that the challenge to boost sales is not easing, but what is crucial, is to “peel back the layers of the onion and see which segments will grow”.
Back in the kitchen with Mr Landi, Mr Westcott says that consumers want Nestlé to take pizzas back to their Italian roots, with simple and fresh ingredients. If the new test kitchen achieves this, perhaps in the future a Tuscan chef’s delight over frozen pizza will become the norm.
Saturday, July 25, 2015
Gold investors had high hopes for China, believing not only that its emerging middle class would be big buyers of the precious metal, but that the emerging superpower was quietly stockpiling its own version of Fort Knox in the vaults of the People’s Bank of China in Beijing.
But an announcement last week shattered that illusion. China’s central bank had bought only 604 tonnes of gold over the past six years — a sizeable chunk but nothing like the predictions of at least three times that amount that had been believed by many in the market.
The revelation that the amount of gold China’s slowing economy holds had actually fallen relative to its foreign reserves triggered an aggressive sell-off when markets reopened on Monday. For the pension funds, university endowments and savers who have all bought the metal in the past decade, as prices marched towards $2,000 a troy ounce in 2011, it may have been the moment when gold finally lost its charm.
In a matter of minutes almost $1.7bn worth of the precious metal was dumped after electronic and physical exchanges opened in New York and Shanghai, driving gold to a five-year low approaching the psychologically important level of $1,000 a troy ounce after months of trading in a relatively narrow band. Short-sellers, traders said, were trying to force increasingly nervous investors to capitulate.
“They’re basically saying we don’t believe the buyers can come out and defend their position,” said Joe Wickwire, manager of the Fidelity Select Gold Portfolio. “[They’re saying] we’re going to spook the market.”
That sinking feeling
The attack was well timed. Gold has been on the slide for several years. After hitting a record $1,920 in 2011 it has now slipped by 40 per cent. Half the gains it accrued between 1999, when the rally started at just $250 an ounce, have now been wiped out. This year should — by some accounts — have been good for gold. But despite the sort of bad news that would typically boost gold, including the Greek crisis, there has been little interest in what is supposed to be the ultimate haven investment.
“Gold has been the dog that did not bark,” says Matthew Turner, analyst at Macquarie in London. “It has always had a dual nature as a currency and a commodity. [But] at present it is not desired in either form.”
Investors have instead looked to the US dollar and Treasuries as safe places to park cash, driving the dollar to its highest level in 12 years.
After Monday’s sell-off, gold did not bounce back, eventually slipping at one point on Friday to a five-and-a-half-year low of $1,077. Traders are now questioning whether gold could fall back into triple digits for the first time this decade. An increase in US interest rates could sap demand for the metal as it increases the so-called “opportunity cost” of holding a non-yielding shiny rock. Goldman Sachs, one of the most influential banks in commodity trading, cautioned this week that it expected gold to fall to below $1,000 a troy ounce. Frederic Panizzutti, rated the most accurate forecaster last year by London’s bullion market association, estimates it will bottom at $950.
Others believe it will fall further. “As the Fed leads the way back towards normality, the gold price might return to levels of about $850 seen at the end of 2007 before the global financial crisis,” says Julian Jessop at Capital Economics.
For savers and investors who bought gold, the metal’s promise as a safe haven looks tarnished. But for the gold mining industry the decline looks even bleaker: it threatens its very existence.
“There’s enormous pressure on the industry at these gold prices to deal with this now,” says Mark Bristow, chief executive of FTSE 100 gold miner Randgold Resources. “The industry has not been profitable for a while.”
The start of gold’s 12-year rally can be traced to a sale. Gordon Brown, the then newly installed UK chancellor of the exchequer, decided in 1998 to sell more than half of the country’s gold reserves. The metal had averaged less than $370 a troy ounce since the start of the decade and Mr Brown saw an opportunity to raise much-needed cash to fund the newly elected centre-left government. He was following the lead of other central banks who had been sellers of gold.
The UK chancellor soon had reason to regret his move. At the start of the new decade a series of events helped trigger a multiyear rally. European central banks agreed to cap gold sales. The September 11 attacks set off a new era of heightened uncertainty in the world. And the enormous population of China underwent rapid industrialisation.
By the end of 2006, with the US running a large deficit to fund conflicts in Afghanistan and Iraq, gold prices had almost tripled to $750 a troy ounce. The following year it broke through $1,000 for the first time ever, rising 30 per cent that year as the opening stages of the financial crisis unfolded. Gains averaged 15 per cent over the next four years until in 2011, buoyed further by the eurozone crisis and Arab Spring, the metal hit a record $1,920.
Hundreds of thousands of small investors had bought into the metal through the rise of so-called Exchange Traded Funds, which let a new breed of traders buy and sell small amounts of the metal. John Paulson, the hedge fund manager who made billions predicting the US housing crash, decided to denominate a large chunk of his assets in gold rather than dollars, making him one of the world’s largest owners of bullion. He argued that central banks’ decision to engage in quantitative easing, or “money printing”, would ultimately lead to the debasement of paper currencies and trigger Weimar-style inflation.
But the idea that bullion would keep on rising proved false. With the $2,000 level in sight, gold suddenly stalled. Then it fell by $400 in little over a week in April 2013, the kind of move that would normally play out over a year, after Mario Draghi, the European Central Bank president, said he would do whatever it took to defend the euro. Traders initially said profit-taking was to be expected, but the market has never fully recovered. For the past two years it has settled into a relatively narrow range from $1,150 to $1,400, before this week when it dropped towards $1,000 for the first time since 2009.
Finding the bottom
Predicting where the gold price might bottom is difficult, says George Cheveley, a portfolio manager at Investec Asset Management. This is because gold is not like metals such as copper and zinc, which have industrial uses.
“With other metals you can talk about production costs and fundamental demand. When it comes to gold it is a bit like a currency or a share — it is investor led. And that means it can overshoot,” says Mr Cheveley who runs the $220m Investec Global gold fund.
Gold bugs are, however, finding reasons to be positive. China, they believe, is not being truthful about how much gold it has bought because it wants to drive down the price and add to its reserves on the cheap. Some observers estimate its real reserves are closer to those of Germany at 3,400 tonnes and not the official number of 1,658 tonnes.
“The bears have bitten on gold like a horse with a bit,” says Peter Schiff, who runs Euro Pacific Capital, an investment fund that specialises in attracting money from those betting that the US dollar will collapse. “Once people perceive that the dollar is more flawed than the yen or the euro, or any of the other currencies then where else can you go but gold. Gold will shine again.”
The World Gold Council, the industry’s lobby group, rushed out a statement after the sell-off that claimed Chinese retail demand was still in “good health” and the growth trend intact.
But the evidence on the ground is less conclusive. The country’s stock market rally has tied up a lot of investors’ cash.
But the gold bugs are not for turning: Texas-based former stockbroker Bill Holter believes it remains a buying opportunity.“Over the past year, our physical gold sales in branches have not been very good,” says an employee at one of China’s largest state-owned banks in Shanghai, who asked to be called Mr Chen. “Gold prices had a big fall, no aunties have come to buy,” he adds, referring to the middle-aged women who were big buyers when the price last posted a big fall in 2013.
“I can calculate on the back of a napkin that China is buying more gold,” says Mr Holter, adding that import data supports his view. He also believes that gold will have its moment again when the world’s current build up of debt pops.
“Mathematically it’s guaranteed to happen, it is just a question of when,” he says. “You cannot try to time gold. You just buy it and close your eyes and you know time is on your side.”
Entrepreneurs in Hong Kong are developing innovative ways to help inhabitants of tiny apartments as the Chinese territory embraces a micro-living trend that is catching on in London, New York and beyond.
From suitcase rental to external goods storage managed by smartphone apps, businesspeople in Hong Kong have established a range of start-ups designed to capitalise on the lack of living space.
As they struggle to afford decent housing, young professionals from London to Hong Kong are increasingly opting for micro-apartments that range from ill-fitting conversions to slickly designed buildings with shared facilities such as gyms and lounges.Hong Kong has the world’s most expensive residential property after Monaco, according to estate agents Knight Frank, with tiny 20 sq metre apartments on sale for as much as HK$4.5m ($580,000). Three-quarters of apartments in this densely populated city of 7m people have no dedicated storage space, according to Colliers, another estate agent.
“Prices are rising all the time and apartments are getting smaller by the day,” says Rachel Cheung, a former public relations officer who launched Hong Kong’s first suitcase rental business in October. “A suitcase takes up a huge amount of space at home but doesn’t get used that often.”
Her company, Rent-a-Suitcase, leases upmarket Rimowa suitcases from HK$68 a day and she has served 300 customers so far as she looks for investors to help expand her business.
Norman Cheung, a former investment banker, has got much further with his micro-storage start-up, which has raised $8.1m since January from some of Asia’s best-known investors, including the founders of Ting Hsin group, the world’s biggest maker of instant noodles.
Mr Cheung’s company, Boxful, offers a much more flexible version of the traditional self-storage model, where customers have to travel to a distant warehouse and hire large amounts of space for fixed periods.
Boxful’s staff go to the customers, providing standard-size crates, and offer an on-demand pick-up and drop-off service from HK$49 a month.
Boxful, like US counterparts Boxbee and MakeSpace and London’s SpaceWays, has an app that allows users to photograph their belongings and generate an electronic inventory.
“Most of our customers have never used self-storage before and that is unexpected but very encouraging because we’re creating a new market,” says Mr Cheung, whose company stored 3,500 boxes as of April, with growth accelerating month by month.
Stuart Cerne, who co-founded Boxful’s main Hong Kong rival Spacebox, says the business model will generate economies of scale as individuals outsource personal storage and the companies buy warehouse space in bulk.
Spacebox is also working on a new service that will allow customers to share boxes of their belongings, whether they contain baby clothes or electronics.
Mr Cerne says his company, which has 500 users and is targeting 5,000 by the end of the year, is not just about storing goods but “using technology to unclutter your life”.
Boxful’s Mr Cheung is convinced the service will take off around Asia as property prices rise sharply in developed and developing cities alike.
“We’re thinking about expanding internationally from next year and we’re looking at Shenzhen, Shanghai and Beijing in China as well as Singapore, Jakarta, Manila, Bangkok and Tokyo,” he says.
Unilever plans to challenge L’Oréal and Estée Lauder in high-end skincare while pushing deeper into China via ecommerce, as the consumer products group plots new paths to growth.
Paul Polman, chief executive the Anglo-Dutch company, laid out the scale of its ambitions in skincare on Thursday, as it reported half-year results, saying the group had acquired “critical mass” following four bolt-on acquisitions this year, including the Dermalogica, Dr Murad and REN brands.
Mr Polman has been shifting Unilever’s axis from low-growth food into faster-growing personal care, a business which includes Axe deodorant, Sunsilk shampoo and Dove soap.“We will be a major player right away now in that prestige segment,” he said. “We are rapidly approaching €500m [in sales] — €400m-plus at the moment. And this builds on a very strong personal care business.”
The division now accounts for 56 per cent of sales, up from 46 per cent in 2008, soon after Mr Polman became chief executive.
“Our personal care business is now the second biggest in the world after L’Oréal, and is obviously very well-performing,” he said.
But Ildiko Szalai, beauty and personal care analyst at Euromonitor International, said Unilever was likely to find it hard to build up its skincare acquisitions.
“All the brands they have acquired have a narrow geographic focus and target a niche consumer base. Competition will be significant from the global premium brands, such as Lancôme or Shiseido.”
Mr Polman was speaking as the maker of Dove soap, Magnum ice cream and Persil detergent, reported a 14 per cent drop in pre-tax profits to €3.6bn in the six months to June 30. However, last year’s profits had been boosted by €1.3bn from food disposals; excluding this, pre-tax profits rose 13 per cent.
Sales of €27bn in the first half of the year were €300m higher than analysts’ expectations, driven mainly by price rises rather than volume growth. This was 12 per cent higher at current exchange rates and 1.8 per cent higher at constant rates, compared with the same period last year.
Emerging markets sales growth picked up to 6.5 per cent in the second quarter — the highest in a year.
“We took the top decision quicker than others, may I say, to really adjust our inventory levels,” said Mr Polman, adding that he expected growth in China to accelerate in the second half of this year.This was helped by a return to growth in China — the group’s third-largest market — where sales had dropped 20 per cent in the second half of last year, after which the group decided to ditch products that had not sold.
Unilever this week signed a distribution agreement with Alibaba, the Chinese ecommerce group, that will see it reach rural customers in China, outside its affluent larger cities.
Mr Polman said there was a rapid shift away from traditional retail to online in China. “The agreement with Alibaba allows us to extend our products into the rural areas, which is definitely our next frontier and also at the same time work with them to attack the continuous issue that we have there with counterfeit products. So, I think it’s a major breakthrough for us.”
The Dutchman reprised his downbeat outlook at the start of the year, saying consumer demand remained weak. Emerging markets were “subdued” while growth in North America and Europe — where the group makes 40 per cent of its sales — was “negligible”, he said.
“People sometimes call me a pessimist but we want to be realistic,” he added. Emerging markets had failed to make the most of “easy money” during the boom times, he said. In the US, wealth was concentrated in the hands of “some people at the top but it’s not trickling down fast enough — the middle part of the economy isn’t growing.”
Unilever has enjoyed less rapid sales growth than rival Nestlé, the world’s largest food company by revenues, in the past few years, partly because of its greater exposure to low-growth foods such as spreads.
Nestlé is also pushing into skincare, having last year bought out the 50 per cent share of Galderma, the dermatology business, that it did not own, from L’Oréal.
Unilever’s foods business — which includes Ben & Jerry’s ice cream, Knorr stock cubes and Hellmann’s mayonnaise — reported flat sales in the second quarter and a 1.4 per cent rise in the first half.
This was against a first-half sales increase of 9.9 per cent in personal care and 5.2 per cent in homecare brands.
In the heart of Addis Ababa’s old Italian quarter is a wood-clad restaurant resembling a private members’ club. In one of its rooms, my Ethiopian dining partner offered me a revealing, if acid, insight into his countrymen. “An Ethiopian can sound like he’s flattering you,” he smiled at me over marinated vegetables. “But really he’s insulting you.”
That one dark remark helps unlock the complicated, closed politics of this authoritarian country. Characterised by transformative growth, Ethiopia is hankered after by donors and foreign investors alike. But doublespeak features deep in its soul. “Twenty per cent of language here is said; 80 per cent is understood,” my companion went on. For him, shadowy language is ticket to a greater truth: “There are monopolies, secrets everywhere . . . this place is tight.”
It also restricts foreign investment in banking and telecoms, runs a pervasive security apparatus and restricts free speech, despite claims to the contrary. Detractors call Ethiopia a police state. Journalists are regularly locked up, human rights activists decry torture in jails and the opposition — some 78 assorted parties — are mostly concoctions of the ruling Ethiopian People’s Revolutionary Democratic Front. In May’s elections, the EPRDF and allies won every parliamentary seat.While Ethiopia was only recently ignominious for the “biblical famine” that afflicted millions in 1984, today it delivers development like no other country in Africa. The World Bank forecasts it will be the world’s fastest-growing country in the four years to 2017, at 9.6 per cent a year. It has built 35 universities for 500,000 students. It will have the first urban metro in sub-Saharan Africa. It even aims to build the world’s biggest hydropower dam, with a $5bn price tag, which the country refuses to believe it cannot afford. Landlocked and poor, the nation of coffee growers wants to reach middle-income status by 2025.
“It’s a dictatorial kind of government,” opposition stalwart Beyene Petros told me at his party HQ. “The EPRDF . . . is kind of a mafia group which does everything to make sure that there is a victory.”
Western donors including the US, EU and UK nevertheless keep giving billions of dollars in aid. Despite a statist economy that sometimes seems to punish the private sector, foreign investors want in. Like China and Singapore before it, Ethiopia is plumping for economic growth led by a strong-arm state. In multiple visits, I’ve been confronted time after time by what both developed and developing world officials describe as “this paradox”: astonishing progress delivered by a restrictive regime.
I’ve come back to delve into the anatomy of a country that marries development and authoritarianism in a land of 90 million people still emerging from brutal communist rule.
At the Red Terror museum beside Meskel Square, guides describe torture under the Derg, the communist dictatorship that ruled Ethiopia for 13 years from 1974. In the effort to rid Ethiopia of feudal serfdom, the pendulum swung in trenchant fashion. Sergeant Mengistu Haile Mariam took charge following a coup that deposed emperor Haile Selassie and went on to take bloody aim at the country’s intelligentsia.
It was a regime so brutal it charged mothers of students it shot dead for the cost of the bullets. Land and almost every business was nationalised. Ethiopians often realised only years later the extent to which the intelligence network kept watch on their lives: a Sunday school teacher here, a cousin there. Even today, French historian Gérard Prunier compares the ruling EPRDF with the Bolsheviks in Soviet Russia. Soviet-era Lada cars still form the city’s taxi fleet. One road is named after a communist hero: Josif Tito Street. Insiders describe a governing politburo whose collegiate self-criticism could weary a Stalinist. “Ethiopia is a strongly hierarchical society, totally centralised,” says Prunier.
The EPRDF that demolished the Derg was dominated by bush fighters from the mountainous northern Tigray region who grew up in the Marxist-Leninist mould enamoured of peasant revolution. They held economic policy seminars in caves as rebels and donned simple suits in victory. They relied on secrecy and control. “In the jungle, popularism and liberalism were bad connotations . . . not tolerated in any way,” says an analyst.
Several former guerrillas are ministers shaping Ethiopia’s future, and still revered. One government employee in his thirties keeps two pictures stuck to his office wall: one of a bare-chested Putin in a tank; the other of Ethiopia’s bush fighters crouched low, including Meles Zenawi, the intellectual, rebel and eventual prime minister who shaped the country for 21 years before his death in 2012.
In the most candid of three interviews with former bush fighters turned ministers, deputy prime minister Debretsion Gebremichael told me of the emotional suppression involved in dedication to the cause. “We were ready to sacrifice ourselves. I considered myself dead already [when I joined]; it wasn’t my life any more,” the 54-year-old said one evening in his ascetic office. He left university at 18 to join a struggle that lasted 17 years.
Disguising feelings runs deep. There is even a national form of poetry, semna werk(wax and gold), dedicated to doublespeak. The idea is that the greatest elegance consists in compressing meaning into the fewest words possible, layering in hidden messages. As a land that has cast gold jewellery for millennia — legendary home to King Solomon’s mines — the image of wax moulds melting away in the fire resonates.
In the poetry, the wax is the cover — the superficial polite meaning that melts away to reveal the true, valuable meaning. The “gold” hidden in the couplets regularly offers disguised insults — whether of a host’s poor feast or the direction of political leadership. Opposition figures relied on the tradition to go undetected by censors but it meshes deeply with culture too: wax and gold is told from pulpits, debated in artists’ studios and hewn into the school curriculum. Meles was among its masters. “It is more than just a literary system; it is an expression of a way of thinking,” says Mohammed Girma in his 2012 book on the subject.
Many Ethiopians see their country as distinct and chosen. “Ethiopia shall soon stretch out her hands unto God,” says a prominent roadside sign quoting a biblical psalm. The country’s leaders also pride themselves on exceptionalism in matters of state, security and economics. Ethiopians are “bad students” of IMF orthodoxy, smiles Arkebe Oqubay, former bush fighter, minister and architect of the country’s industrial policy.That way of thinking is encapsulated in what commentators call “Ethiopian exceptionalism”. When 100,000 Ethiopians fought back 15,000 Italians on narrow mountain routes in 1896, Ethiopia became the only African country to triumph against European colonisers. It has a unique cuisine, language and dance. With a line of emperors dating back to the ninth century, some of the oldest remains of human ancestors and the world’s largest Orthodox Christian population, it answers to its own experience. In the 1600s, it even banned foreigners.
“What we are interested in is a state that is committed to a grand vision to bring the country to catch up,” says Arkebe, who appreciates the development experience in South Korea, among others. Even so, officials bristle that they might follow any rule book but their own: “We have no model, we’re doing it our own way,” Berhane Gebre-Christos, a state minster who fought alongside Meles, told me.
The IMF repeatedly cautions Ethiopia to claw back on prodigious spending for grandiose infrastructure projects that suck up 15 per cent of GDP a year, and make more room for the private sector. But even the most liberal orthodox institutions cannot deny the results. “For anybody objectively observing what is transpiring in Ethiopia over the last decade, one has to agree that this model has developed good results for them,” says Guang Zhe Chen, outgoing World Bank country director.
Demis Degef is a university graduate turned factory worker. If the Ethiopian government has its way, there will soon be millions of him. “At that time I thought: ‘Oh, I am a graduated guy, why am I making these shoes? This work is terrible for me,’” the 24-year-old says during a shift at Huajian, the world’s largest shoemaker, in a Chinese industrial park outside Addis. When Demis started, he earned $48 a month. Today he is a low-level manager, earning 10 times that.
Like Ethiopia, Demis, one of nine siblings, owes his big chance to China. Ethiopia is counting on a domestic industrial revolution spurred by rising wages in China that are forcing factories to relocate. China may shed 85 million jobs over a decade as a result. Ethiopia, where wages are 10 times cheaper, wants some of them. “We want to develop manufacturing in a massive way,” says Arkebe, of plans to create two million jobs from a 10-year, $10bn investment in government industrial parks.
Factories from Vietnam, Turkey and India are also relocating. But several have found the new workforce less uniform than an authoritarian state might hope for. When Huajian started in 2012, absenteeism rates were high. “There was a big absence,” says Helen Hai, a former Huajian manager who spearheaded its entry into Ethiopia. “People never worked from morning till the evening; physically they’re just not used to it.”
Ethiopia is counting on an industrial revolution spurred by rising wages in China that are forcing factories to relocate.
Hai says that, thanks to extensive training schemes, the factory achieved 70 per cent efficiency compared with China after one year, and 80 per cent after two. Huajian now plans to grow to 40,000 jobs from 4,000 today. It even sent Demis to China to learn Mandarin and management for a year. “Chinese guys are disciplined. Maybe in Ethiopia in one day work [lasts] eight hours; in China maybe 11 hours,” he says, standing in front of a banner that reads “Strive for industry” in English and Chinese.
On the factory floor behind us, workers in straight lines are bent over sewing machines, pumping out 7,000 shoes a day. There are more red banners strung up high: “Punctuality is integrity”, “Absolute concentration”, “Civilisation and high-efficiency”. Outside, new recruits to the factory are marching in dishevelled but enthusiastic lines.
At Huajian’s base in Dongguan, an industrial city in China’s Guangdong province, everything ran like clockwork. Demis not only studied in a disciplined manner, he exercised in a disciplined manner twice daily. “We had marching, running, push-ups, Chinese exercises especially — they know how to kung fu,” he says.
Hai claims such discipline is key. “If you can do exercise as a group in a systematic way, when you go to the production you can be the same,” says the 38-year-old dynamo. “If you cannot do it during exercise, trust me, you cannot make it in the production line.” Demis is not alone. The Chinese embassy in Addis estimates 1,000 Ethiopians go to China every year for training. About 80 are on Chinese state scholarships; the rest, like Demis, are sponsored by the private sector.
Links with China are growing. Addis is home to a new Confucius Institute. Bilateral trade is up 13 times in a decade, to $3.4bn in 2013. Chinese labour in Ethiopia — numbering 70,000 workers — has built expressways, the new metro, sewage systems, a windpower farm and the first electrified railway. It supports the state telephone network and efforts to build the world’s biggest dam.
“Thirty years ago, China was more or less the same as Ethiopia,” says La Yifan, China’s ambassador to Ethiopia, attributing the comparison to “industrious people willing and ready to work hard even for very small pay”, which has lifted, in China’s case, 660 million people out of poverty. He says Ethiopia can progress from shoes and shirts to computer assembly and “gradually climb up this industrial ladder”.
Despite dissent, Ethiopia faces little risk of violent political and ethnic rupture, for now at least. “What makes industrialisation, investment, all these things happen, is the predictability Ethiopia offers,” says Carlos Lopes, head of the UN’s Economic Commission for Africa, of its “unbelievable” progress. “That predictability comes from the way they’re organising their political system.”
But aping China’s industrialisation is a long shot. Ethiopia’s manufacturing industry is still a small part of the coffee-dependent $50bn economy, at $1.35bn. Manufacturing accounts for only 0.4 per cent of growth. “The success of Huajian, unless you have 100 of it, will not make a difference in Ethiopia. And even 100 of them is only, what, 300,000 jobs,” says the World Bank’s Guang Zhe Chen. “They may have exaggerated some of its success.”