NON TRADITIONAL, LOW CAP PRODUCTS: KEY TO SME GROWTH & SUSTAINABILITY

This subject may sound very simple, everyday kind of debate, but the fact remains, most SMEs fail due to this very reason. Everyone wants to be in business, and also in fast moving products, so there are no issues of finding buyers, however what we tend to forget, is the fact that all major corporates deal in similar products, which are far better in quality & packaging, and they spend tons of money on brand building, much much more than SMEs total business capital. I can relate this situation to one incident happened in early 90s, Coke was relaunching itself in Pakistan, we used to have returnable glass bottles. Coke, instead of pumping millions into advertising, they knew that all they had to do is to make the product available across the country. What they did? they bought all glass bottles of their competitors including Pepsi, they broke all bottles & made sure their own product was available, not just on the shelf, they even went on to let customers have free drinks in all affluent restaurants for weeks

What I am trying to make SMEs understand, is that there are multiple risks in getting into high consumption products – a) competition from giant competitors, b) high production cost together with less impressive quality/packaging of SME versus very low cost & high quality presentation of large companies due to their volumes, c) weaker distribution network, and d) virtually zero marketing budget

I also want to present another scenario, lets assume we go ahead & develop a few fmcg products, say anti-bacterial soap, what are the pre-requisites? minimum production quantities, minimum production volumes of packing material, give atleast 30 days credit to distributors which means we need to have atleast 3 months inventory in respect of investment, we need liquid capital for marketing, deploy sales teams. Now comes the most critical factor, pricing structure, it is imperative for us to dish out much more discounts to distributors & retailers for them to trade our products, which could result in negligible income for the SME. Its important we relate this ” low income” to the actual costs because it may not even be enough to sustain, meet all costs input due to low volumes

Solution? its a bit challenging, we first must accept our ground realities, not in negative sense, we must be realistic and plan accordingly. Lets see how fruit & veg vendors operate! they make money with their meagre seed capital, selling from small kiosks, they remain happy, because they make better profits, enough to recycle full capital, save a bit and at the same time, eat from profits

Non-Traditional products bring much better profits, we would not pay a cent more on a soap knowing another equally good brand is being sold cheaper, however we wouldn’t question if someone is selling a smartly packaged, reasonably good quality picture frame for $10 because no one would question us on the actual cost, so this frame could be costing us not even $3 and yet we end up making very good return on our small capital

SMEs offer best growth potential but for us to be on a sustainable road, we need to come up with creative ideas, sell items no one or less people are selling, to avoid getting into serious competition, knowing things may get nasty like what we witnessed in Coke re-launch strategy

All the best!

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FULLY ASSET BACKED REAL ESTATE COMPANIES: Lessons to be learned from Dubai’s recent real estate industry Crash Landing

I feel its important if I explain what asset-backed security is, so all readers would have a better understanding of the subject being written. In the past 30 odd years, financial markets have not just grown, they have ventured into many directions, to enable investors choose from a diversified mix of opportunities – while I am making readers understand the concept of asset backed investment, it may not be a bad idea to also look at one of my earlier blogs re MARGIN TRADING, which would give a very clear picture as to how one should differentiate the 2

Very briefly, margin trading is a facility, that your broker usually facilitate to make you trade with a significantly bigger number compared to what you have as your own investment. For example, if I have $5,000 of my own, and I wish to invest in property or go to the stock market, I could easily trade with assets worth upto 10 times of my money, that could give me a trade size of $50,000 – well, it does look too good to be true, but there is another side of the coin too, downside is, if your asset goes down 10% – you lose your entire capital – no in all fairness, lets agree, not to use the terms “profits & losses” – it is only fair, if we restrict ourselves to use “winning or losing” – my humble request to small investors, please don’t gamble your savings – margin trading is only good for people, institutions with deep pockets who have capacity to take delivery in the event market crashes – in case of small savers, we resort to squaring the deal in panic and end up losing our equity (partly or fully)

Coming back to asset backed securities – as the term is suggesting, we get what we pay for – meaning if we have $10,000, we buy assets worth this much only, again, it is critical that we must know/ensure if an asset does exist before we put in our money – let me give couple of examples, what if I buy shares in a company at the stock market, whose share is trading at $1.50 a share, now, this could be genuine reflection of company’s worth or could be result of smart play by brokers, irrespective of company’s actual book value – so this is a bit tricky for new comers in the stock market

As far as real estate industry goes, it is rather straight forward, we can see if the project is actually on ground or not, and if the developer’s company is over-leveraged or not (this is a completely new subject which I will explain in a separate blog) – we have to look at 2 scenarios, a) physical position of the project being looked at, in respect of civil works, various government approvals, builder’s financial standing, his name’s general reputation, past projects delivered etc, and b) we try to dig deep to find out if builder has fully paid for the land, check if the land title is free from claims, and if he has lined up financial resources to fund the construction, rather than depending on only investors money, because if he has not put in his share of capital in development in addition to his capital in the land, it gets risky to remain afloat in this situation

Asset back situation, in real estate is that we have complete match-making scenario, meaning there must be a tangible asset against each cent being invested, so there is no erosion of seed capital in a crisis situation, unlike what we had witnessed in Dubai and neighbouring small emirates like Ajman, where people were investing in high rise offices, flats, exchanging files in speculative trades, merely on a piece of land where the builder has not even started digging for foundation. Now the question is, are we going to blame the market, the broker, or the builder? lets be honest! investors knew it was a gamble, their greed at the cost of losing their livelihood, as most of them had borrowed money from banks against their salaries. Thousands of small investors had even left the country, leaving behind their cars at the airport! this is most tragic for their families, children losing their homes, schools, friends – no matter how harsh we could get on their parents

 

 

Going Public: SME’s highs & lows

Companies go public for 2 reasons – a) raise fresh capital and b) maximize shareholders value

Small-Medium size Businesses, due to lack of knowledge in respect of financial planning & structuring  often fails to plan and invest in gaining expertise to develop this equally important aspect of their business, which is to implement balanced mix of growth & income strategies, which would give regular inflow of revenues as well as long term sustainable growth –

SME companies, in most cases, try to save money for obvious reasons, but they fall short in realizing the need to employ right expertise in gaining the much needed ability to think ahead, establish present & future needs, not just from meeting competition head-on, but also to realize the future work force within the family (owners & employees combined)

One of my objectives to gain from this writup is to gain attention of our bankers and stock brokers – please exercise caution while handling small cap companies – they are not equipped to be tested against rough trading & speculative, shortlived strategies – because for this very reason, small caps are shying away, and in the process losing out to gaining control over their capital situation – even from stock markets perspective, it is critical that we put money on small caps rather than going after, rather queing up behind handful of so-called market movers –

I also take liberty to protest politely to regulators, that they devote time & money in developing secured environment, that encourages small cap companies to come and play their part in development of capital markets, as their cumulative impact is far greater & bigger than blue chips – its time if see this as an integral part of our risk management protocol

Another known reason for small caps to go public, is to maximize shareholders value, being on this road, companies may not really need significant amount of new capital but to gain strength in terms of asset valuation based on present & future business outlook – however, there is another aspect to look at, which is to consolidate by way of mergers & acquisitions – we can either acquire non listed private companies through exchange of our listed shares to shareholders of private ownerships and broaden the capital base, similarly we have another area to look at, are opportunities of merging with other listed or non listed entities and be able to strengthen business – I feel we need to build on this subject so we create much needed awareness for small caps to look upto capital markets, not just as a platform to raise money but also to create opportunities for private small investors and other vibrant & motivated outfits