Hayleys’ agriculture revolution

The group is expanding farming in Bangladesh and Myanmar because there’s not enough land in the country—Sri Lanka will be the innovation hub

A shortage of land in Sri Lanka is forcing listed Hayleys, a Rs111 billion revenue group of companies, to expand agriculture production in Bangladesh and Myanmar for processing and packaging here.

This strategy will grow export revenue more than six-fold to Rs18 billion in three years. “We’re getting more orders, but can’t find the volumes we need in Sri Lanka. We have little choice but to look elsewhere,” says Rizvi Zaheed, a Director at Hayleys.

The company markets canned and bottled fruits, vegetables and spices in various forms. Its bottled pickle exports reach over 42 countries. The group accounts for 45% of the country’s processed fruits and vegetables exports, and Hayleys can’t cope with the demand.

A Chinese retail chain needs 10 container loads of hass avocado a month. The company is conducting a trial crop in a 50-acre plot. It will introduce the plant to its out-grower network and convert low-yielding rubber plantations to hass avocado orchards. But, there’s still not enough land.

For the past two decades, Hayleys farmed 50 acres in Bangladesh for the domestic market there. Now, it’s introducing export crops there for processing in Sri Lanka, and will get 200 acres more. The group will also get 1.2 million acres in Myanmar.

In 2018, the company hopes to harvest 30,000 tonnes of gherkins in Bangladesh. In a good year, only 15,000 tonnes can be grown in Sri Lanka because of land restrictions. In Myanmar, the company will first grow mangoes for its dried fruits export business.

Land is not the reason Hayleys is expanding abroad. Productivity is low in Sri Lanka. A bell pepper plant usually yields up to 5kg in Bangladesh, but is about half the amount here. Bangladesh offers cost benefits and higher yields. It costs up to Rs40 to grow a kilo of gherkins in Sri Lanka, but Rs20 in Bangladesh.

“Hayleys has set a goal to triple profits to Rs20 billion in three years, by 2020. To achieve this, the agriculture business has to triple its profits to Rs5 billion”
– Rizvi Zaheed

Introducing new cash or high-yielding varieties is cumbersome. “In Sri Lanka, you need to visit more than a dozen departments for approval. In Bangladesh, it’s one,” Zaheed says. Irrational ad-hoc policy here also hurts the industry. The government’s glyphosate-based pesticides ban is a problem. There aren’t alternatives in the market, he says.

Expanding farming in Bangladesh and Myanmar is not enough either. Hayleys will invest Rs1 billion on research and development over the next few years to improve margins. Export earnings growing six-fold depends on this strategy.

“Average value addition is about 30%,” Zaheed says. “We have to maintain this margin or do better to recover investments in R&D.”

Hayleys supplies processed fruits and vegetables to brands like Burger King, Heinz, McDonalds, Nestle, Subway, Unilever and Ajinomoto. Canned dehydrated banana, mango, papaya and pineapple are popular snacks abroad. It also exports a range of coconut products in the form of oil, flour, desiccated and cream. Popping a coconut oil or moringa extract capsule a day is good for one’s health and complexion. These are available at wellness retailers like The Body Shop. Sterilised black pepper is the final touch to sizzling beef steaks in the US. Carnivorous plants that eat flies and mosquitoes sell at Walmart. The group is holding trials for aquatic plants for export to the US, a lucrative market. These are a few examples of innovations out of Hayleys’ labs.

The agriculture cluster is a significant component of Hayleys group. Its performance is noteworthy given the state of the sector it operates in.

Group revenue grew 21% to Rs111 billion in the year to end-March 2017. Profits amounted to Rs5 billion, down 3% from a year earlier due to higher finance costs and taxation. The group’s construction materials business grew 20% in 2016. Its hotels and resorts business (Kingsbury and Amaya), here and in the Maldives, improved 24%.

The logistics cluster, including shipping and freight forwarding, grew 53%. It was the highest contributor to group revenue in 2016. The consumer goods business declined 7% that year. Tea and rubber plantation firms saw combined revenue grow 11%. A gloves export business, listed Dipped Products, supplies 5% of global demand. Activated carbon producer, Haycarb, has a 16% global market share.

Hayleys’ agriculture business is growing and increasing its share in group revenue. It’s doing this while the Sri Lankan agriculture sector’s importance to the rest of the economy declines.
Agriculture’s share of GDP is 7.5%, down from 12% in 2010. The sector employs a third of the population and is beset with challenges. Arable land is scarce, so is water, and farmers can’t scale up—agriculture doesn’t attract much investment for these reasons. Farmer incomes are also shrinking as costs rise and yields fall.

Hayleys’ experience with agriculture is quite the opposite. In 2010, agriculture contributed less than 3% to the group’s Rs38 billion topline. Seven years later, that share increased to 12%. Agriculture is the third-highest contributor to group revenue. It is also Hayleys’ second-fastest growing cluster, after logistics.

“You have to grow to a market, whether local or global. Hayleys follows this credo. That’s why we’re successful,” Zaheed says.

According to him, Hayleys has set a goal to triple profits to Rs20 billion in three years, by 2020. To achieve this, the agriculture business has to triple its profits to Rs5 billion. “That’s the challenge, potential and aspiration we have for agriculture.”

The share of food exports to total agriculture revenue amounted to 22% in 2016. The rest was sales to the domestic market and revenue from fertiliser, seeds and agriculture equipment. By 2020, food exports’ share will be more than 60%.

Hayleys’ agriculture production growth rate in Sri Lanka will be flat. Bangladesh and Myanmar will deliver growth. In terms of value generation, Sri Lanka plays a critical role.

In 2016, Hayleys invested Rs4 billion on acquisitions and expansion across the group. Half of this was agriculture-related. It includes a Rs1.4 billion tea extraction plant in Dickoya.

The tea extraction plant will create opportunities for vertical integration. The bulk of Sri Lanka’s tea is exported without value addition. The extraction plant offers the group’s tea plantation companies an opportunity to ascend the value chain.

The group secured a contract to develop a tea-based health drink for Coca-Cola. “If we’re successful, we may have to build another extraction plant,” Zaheed says.

For the past two decades, Hayleys farmed 50 acres in Bangladesh for the domestic market there. Now, it will get 200 acres more, and 1.2 million acres in Myanmar

Tea extracts are already used in flavoured tea beverages exported to Japan. The facility will begin moringa extraction for The Body Shop products as well. The group will distribute a million plants to farmers in the North to develop the supply chain.

Hayleys will continue to incubate cash crops and high-yielding varieties in Sri Lanka. Farmers will get seeds for a papaya-sized eggplant, hass avocado and a new variety of moringa. These crops can give farmers 30-40% better returns.

The group is investing to improve productivity as well. Hayleys invested around Rs300 million to develop a slow-release fertiliser. This will cut urea consumption by half. It’s expanding its 500,000 sq.m greenhouse to grow crops under managed conditions. “We’re doing all this because we believe in sustainable farming. It also makes sense because yields will improve,” Zaheed says.

Hayleys’ model is a tried and tested one. Sri Lanka’s apparel industry has evolved from labour-intensive clothing makers. Today, they’re innovative, sophisticated and technology-driven companies. They invest in the best talent in the country. Companies like MAS, Brandix and Hela Clothing are investing in Africa and Asia to scale their businesses. Teejay Lanka, a listed fabric maker, is investing in India for the same reasons, where land, water and electricity are available. But, Sri Lanka remains the R&D hub for all these companies.

As Hayleys, and others, build capacity for innovation, it promises to scale up skills across the sector. A third of the population that is stuck in agriculture will get new opportunities, and relevant education and skills development will be provided. Farmers will be savvy and productive. Technicians and scientists will be imaginative. Sri Lanka will be able to grow more with less.

Hayleys isn’t investing in processing facilities in Bangladesh and Myanmar. Zaheed says doing so means duplicating resources. Sri Lanka has the capacity to absorb crop growth in Bangladesh and Myanmar, for now.