Diversified companies are often in efficient allocators of capital, as rarely will all of a firm’s ventures be market leaders or generate segment-leading returns. However, in small economies—where scale for any one business is limited—ambitious entrepreneurs have sometimes successfully diversified their ventures.
As economies grow and business units become globally competitive, gathering scale, the weaknesses of a diversified model become amplified. For many entrepreneurs, each new venture is a labour of love. Even an underperforming business unit can hold sentimental value because it’s ‘my baby’. Leading many diverse businesses distracts the leadership, and scarce capital is spread across many businesses instead of backing winners.
Expolanka Holdings’ five founders took a diversified group – with interests in agriculture, apparel, pharmaceuticals, food processing, BPO, recycled paper, tertiary IT education, travel and destination management, airline agencies, freight forwarding, and making pencils from throw-away twigs – public in 2011.
“We were doing everything possible for everybody,” says Group Chief Executive Hanif Yusoof.
Ahead of its IPO and listing, stockbroker research teams were enamored by the group’s diversified model. They forecast average annual returns on equity (ROE) ranging 24-28% in the four years after its 2011 listing. Expo’s diversified model kinks then became apparent. The group’s ROE lagged forecasts by half; ROE averaged just 12% in four years to March 2016.
Its winning business did not shine through: Expolanka’s core business, freight forwarding—with operations in 17 countries, and growing from half of group revenue to 84% in the period end-March 2013 to 2016—averaged 19% ROE during this period and could have been higher if not for global trade contracting to 13% in this period. Yusoof is now transforming Expolanka to focus on its core business to exploit the fast fashion boom in Asia. Fashion brands once busy scouting the region for cheap labour are now scurrying for retail market share, especially in China and India.
It’s hard for founders to let go of businesses they started and nurtured. In developed markets dominated by large institutional investors, a majority of founders give up leadership positions in companies they started when they go public for growth: sometimes willingly but often, to their surprise, forced out.
Yusoof, and Kassim brothers Osman, Sattar, Shafik and Farook co-founded Expolanka Holdings in 2003, bringing together the diverse businesses each of them lead. Osman Kassim was chairman of the holding company. He incorporated Expolanka Limited, initially exporting agriculture produce, in 1978.
Yusoof joined him later to diversify into fruit and vegetable exports. With Expolanka Holdings not meeting growth expectations, the founders decided to relinquish control in 2014.
[pullquote]“I pruned myself like a tree to grow faster; divesting my stake in Expolanka. You can’t be emotional about these things”[/pullquote]
“I have pruned myself like a tree so I can grow faster in the direction I want. This is why I divested my stake in Expolanka and shed off certain companies. You can’t be emotional about these things. What drives me is a burning desire to build a global company,” says Yusoof.
Beginning 2014, Yusoof and the Kassim brothers gradually sold a 67.5% stake in Expolanka Holdings to SG Holdings Global, Japan, a company specialising in warehousing and express delivery.
Since then, Expolanka Group exited several businesses or consolidated them. In 2013, the group comprised 42 incorporated companies. By end-March 2016, the number of incorporated businesses in the group fell to 28.
It’s not clear whether SG Holdings insisted on the divestments before taking control of Expolanka. “We got into several businesses because of our entrepreneurial spirit, which is still very much alive. I gave up my stake on the understanding that it wouldn’t be suppressed in any way,” Yusoof says. “If I see an opportunity, I will take it”.
For now, Yusoof is focused in growing the freight forwarding business.
The group’s average annual revenue growth was 9.8% over the last five years. He wants to now grow group revenue by 15% at minimum over the next five years, effectively doubling the size of the company.
“In five years, I want to grow as much as we did over the last 38 years,” he says. To grow its core business, Expolanka has been expanding capacity in countries where it already operates. “We want to grow our market share in China, South Asia and the US. That’s where our concentration is,” Yusoof says.
He set up a research and innovation team based in Colombo to look into new technology to manage costs and improve logistics services. A SWAT team spends time on customer acquisition, especially high-value fashion brands.
“Fast fashion is very important to us. Fast fashion has come in, will remain and will grow. This is why I am confident about growth for Expolanka,” Yusoof says, adding that the company already serves fast fashion brands Victoria Secret, Gap and Zara.
Expolanka’s largest clients in the freight forwarding business are global fashion brands sourcing clothing from Asia and Africa, where labour is cheap but infrastructure weak. “We operate in places like Madagascar, Mauritius and Kenya, delivering speed-to-market solutions to buyers in the US and Europe. We’ve proved ourselves as a company that thrives in difficult places,” Yusoof says. Being nimble enough to quickly respond to changing fashion trends is critical for any clothing brand investing in data analytics to preempt demand and improve processes to make clothes quickly.
[pullquote]”Fast fashion has come in, will remain and will grow. This is why I am confident about growth for Expolanka”[/pullquote]
Delivering clothes from factory floors to retail stores quickly is critical, and this is Expo’s specialty. Cross border trade within South Asia is probably the most difficult in the world. “India and Pakistan don’t talk to each other. Bangladesh and India don’t talk to each other. But all of them talk to us,” Yusoof says.
After four years of negotiations with Bangladeshi and Indian trade officials, Expolanka became the first freight forwarding company to use a single truck to carry finished goods between the two countries.
Earlier, the goods had to be unloaded for Customs clearance and loaded onto different trucks at the border. In 1982, Expolanka incorporated a freight forwarding business to handle shipping for its growing commodities exports. Freight forwarding is a business booking cargo space on ships, airlines, rail or trucks on behalf of exporters and importers. By consolidating cargo from several clients, freight forwarders can significantly reduce the cost of transportation, benefitting small and medium businesses. Freight forwarders plan routes, negotiating freight rates and tracking the movement of goods. They sometimes provide a range of warehousing services like pick-and-pack, storage and just-in-time loading.
Large global manufacturers and retailers may sometimes own their own warehouses and trucking, but benefit when someone else manages complex logistics for them. Because goods typically enter and exit several countries on their journey from manufacturer to buyer, freight forwarders manage the complexity of multiple laws and jurisdictions, taking on the paper work from Customs clearances, bills of lading and cargo insurance.
As Expolanka grew its network of relationships with global shipping lines and airlines, it offered freight forwarding services to other firms, including clothing exporters Brandix and MAS, two of Sri Lanka’s largest companies. Fashion retailers in the US and the UK were soon asking Expolanka Freight to collect all their clothing orders from different manufacturers around Sri Lanka for timely shipment. As the group’s capabilities improved, buyers asked if Expolanka could do the same in India.
Yusoof saw an opportunity to acquire new customers in India, but setting up operations there was not easy. He had to understand India’s complex trade regime and figure out how to smoothly navigate regulations and documentation requirements that differed from state to state. Expolanka also had to find warehouses and trucking companies willing to work with a small Sri Lankan company.
Countries in South Asia are protectionist and inward-looking when it comes to trading with each other. Breaking barriers is painstaking, but not impossible. “You must have a solution for a need,” Yusoof says.
It took four years for Expolanka to break into the Indian market, which already had enough freight forwarding firms from small domestic to large multinational operators owning warehouses, trucks, ships and aircraft. “We identified a logistical need that businesses anywhere would appreciate: speed. So we developed a solution and got partners onboard to deliver it.”
Today, Expolanka Freight operates 17 offices in India, employing over 650 people, second only to its Sri Lanka staff count of 1,450. The company has a reputation for breaking in and taming difficult markets in South Asia and Africa. “It is in difficult markets that businesses really need efficient services. So we went into these markets and got things done,” Yusoof says.
Over the last 13 years, Expolanka has set up operations in 17 countries, including the US and China, employing 2,800 people in over 50 offices. But the company is stepping on the brakes.
“There was a time my goal was to quickly expand Explolanka’s global reach,” says Yusoof. “Now, I want to grow faster.”
For Yusoof, growing group revenue 15% on average over the next five year requires two things.
First, Expolanka Group has to let go of underperforming businesses. Second, it is halting global expansion to focus on increasing sales in existing markets.
Expolanka’s diversification and global expansion strategy shifted in 2013 when Japan’s SG Holdings Global acquired controlling interest in the company. Former chairman Osman Kassim cashed in all his shares. His brothers reduced their holdings down to a third and Chief Executive Yusoof halved his shareholding.
Since 2013, the company divested several businesses that gave low to negative returns. “After years of entrepreneurship and getting into many businesses, it’s good to reflect and ask ‘are we destroying or adding value?’ So that’s what we have done. We’ve given up businesses in various fields that will not help us grow fast,” says Yusoof.
During the 2013/14 financial year, the group sold several companies in retail and wholesale distribution, BPO (Hello-Corp), destination management, bakery ingredients retail and private IT campus APIIT. The group made a profit of Rs600 million from the sales. The following two years, the group sold businesses in commodity, spices and tea export, plantation, a paper recycling plant, and a stationery manufacturing unit for Rs130 million in profit.
[pullquote]The group is halting global expansion. It wants to improve its visbility in the US and Asia to acquire new customers[/pullquote]
These divestments made a financial dent too. The group lost revenue amounting to more than Rs6 billion in 2015 (10% of group revenue) because these companies were now no longer contributing. But the benefits of letting these business units go were immediate. Growth in its core freight forwarding business offset the losses. That year, group revenue fell just 1% to Rs53 billion, with the freight business growing 17%.
From 2013 to 2016, the group has been expanding its global freight forwarding network. In 2013, the group had 23 companies incorporated offshore, increasing to 32 by March 2016.
Over the next few years, the group is not planning to expand its global network. It wants to improve its visibility in the US and Asia, which account for 70% of global trade, and to acquire new customers, mainly global fast fashion retailers attracted to Asia’s consumer spending growth. The company is introducing value-added logistics solutions and now wants to deliver goods direct to retail stores in India, and later China. Sri Lanka will be the hub. Expolanka invested Rs1 billion to set up a warehousing facility in Sri Lanka, its largest physical asset anywhere in the world. Here, it collects clothing made all over Sri Lanka for global fashion brands, sews labels and packages them for delivery to stores in the US and Europe.
Two years since it was commissioned, the warehouse is yet to attract large volumes and is expected to breakeven during the first half of 2017. But Yusoof believes it will pay off in the future.
The warehousing facility at the Katunayaka free trade zone also operates as a free port, allowing importers and exporters to add last minute value to their goods without the bureaucracy of Customs and other controls. Global brands can bring goods from different countries, mix and match them at the Expolanka warehouse, for final distribution in the Indian subcontinent or China. With the online share of global retail rising, Expolanka is also developing home delivery capabilities to serve e-commerce companies. The company is also rolling out cross-border house-moving services targeting expats.
“I always wanted be a leader in freight forwarding in this region. But in order to grow beyond that and embrace the world—in my lifetime—I realised I had to partner another global company to take me there much faster,” Yusoof says.
A few companies based in the US, Hong Kong and the Middle East showed interest in investing in Expolanka, but Yusoof felt SG Holdings was a better fit. It operates warehouses and trucking across 12 countries in East Asia and the US, but does not do freight forwarding. “Expolanka has an opportunity to plug and play its freight forwarding business on SG Holdings’ infrastructure,” Yusoof says. Expolanka does not need to invest in heavy physical infrastructure to acquire new customers and expand its business. “We will be asset light. We will grow globally, but be like a man carrying his possessions in a cart,” Yusoof says, laughing. But he is serious.
[pullquote]Yusoof wants to invest in startups here and overseas with potential to improve efficiency in Expolanka’s freight forwarding business[/pullquote]
According to the American Trucking Association, transportation companies are increasingly reducing asset ownership and becoming the darlings of investors with exposure in transportation companies. The asset light model frees up capital and reduces a range of costs from fleet and warehouse maintenance, depreciation, and salaries and wages. It also helps companies react faster to shifting trends in global trade. This helped Expolanka in 2015 when US west coast port workers struck off.
Its annual report for that year said its North American freight forwarding business boomed because of the port strike, because the company was quickly able to re-route client goods on aircraft. In 2015, the group’s air and sea volumes grew 16% and 18%, respectively, driven by operations in the US, India, Indonesia and Vietnam. That year, revenue grew 6% from a year ago to Rs56 billion, with freight contributing 84%. Before SG Holdings acquired a controlling stake, the group was segregated into four: international trading, freight and logistics, leisure, and strategic investments.
Early 2016, management completed most of the planned divestments and rearranged the group on three core verticals: logistics, leisure and ventures. Logistics includes the core freight forwarding business called EFL. The others are ‘add-ons’, Yusoof says.
The leisure segment includes Classic Travels, an inbound tour operator now focusing on growing outbound tourism. The company is exploring the option of managing hotel properties. This segment gave ROE averaging 35% annually in the four years to end-March 2016, but accounts for less than 10% of group revenue.
With Ventures, Yusoof wants to invest in startups here and overseas with potential to improve efficiencies in Expolanka’s freight forwarding business. This segment also includes a few more businesses the founders are probably struggling to part with. “We are looking at what we can do with them,” Yusoof says. Among them is Omar Kassim’s Expolanka Limited, the fruit and vegetables export business, proceeding listed Expolanka Holdings.
“That, we will keep. It’s our flagship company.”
The new owners, SG Holdings coming onboard in 2014 set out a plan to complete the divesture of underperforming business units within two years. Yusoof says it’s mostly completed.
“I have a fresh start,” Yusoof says. “We have seen so much transformation at Expolanka. We did things that I thought I would never be able to do, like letting go of certain businesses. We have clear direction now.”