The Next 10 Years Acccording To Krishan Balendra
John Keells Holdings’ Chairman Krishan Balendra is excited about what’s in store for the company over the next ten years. Sri Lanka is climbing the economic middle-income league table. Tourism will boom led by India’s emerging affluence. “Even with modest economic growth of say 5% a year, all our businesses will grow,” he says. Balendra is so confident in the group’s existing portfolio—particularly in retail and hotels—that he doesn’t believe that there’s a need to enter any other significant new business sectors. He visions a boom in consumption and tourism that will have a transformative impact not limited to the group’s businesses in these sectors. The group has deliberately bound itself with the country’s economic fortunes.
Balendra joined JKH in 2002 and worked in several areas of business including corporate finance, hotels and supermarkets. In early 2019, he took leadership as Chairman of the board, where he holds an executive position which also combines the responsibilities of a group chief executive. John Keells Holdings is Sri Lanka’s largest listed company. The group employs over 13,000 people across 70 companies it controls in sectors that also include banking, insurance, ports & logistics. Despite the seeming dependence on legacy brick-and-mortar businesses, Balendra is conscious of the rapid technological change, shaping businesses the world over. The group is building capabilities around digital and data technology primarily to drive profitability across the group. JKH is data-rich and has the potential to command a valuation premium if it can leverage this advantage, Balendra says.
Excerpts of the interview…
If you take a ten-year view, how do you vision John Keells’ future in the context of Sri Lanka’s economic prospects in that period?
BALENDRA: I am excited! If you look at the group’s investment portfolio, we are linked to the Sri Lankan economy. Except for four hotels in the Maldives, all our assets are in Sri Lanka. In 2017, we deployed a five-year strategic plan to position all the group’s businesses for tremendous growth even if Sri Lanka’s economy grows at a moderate 4-5% during this period. When we developed the five-year plan, we looked at advanced economies in the region to learn from their past. For instance, Malaysia 15 years ago is where Sri Lanka is at present. From then, they experienced a surge in consumer momentum. We hope that will now happen in Sri Lanka. Sri Lanka’s per capita GDP is around $4,000. If that grows 5% annually over the next ten years, it will translate into significant growth opportunities for our businesses in retail such as supermarkets, ice creams, beverages and processed foods. That consumer momentum will impact our other businesses like banking & insurance, and condominiums too. We possess a significant land bank we can develop. Economic prosperity will lift our businesses. They will become significantly larger than they are today.
Sri Lanka has experienced similar growth in the last ten years. There are listed companies that have substantially changed during this period because per capita GDP grew from $2,000 to $4,000: when that increases to $6,000 over the next few years, that will be another leap for businesses. There’s no doubt about tourism’s potential and what that means for the country and the JKH group.
Sri Lanka is far below its potential with two million annual tourist arrivals. The little island of Bali attracts seven million, Cambodia, about six million and Vietnam gets 15 million tourists a year. Sri Lanka’s tourism numbers will grow; there is little doubt. I don’t believe hotel room rates will increase because the destination must be competitive. However, tourism has a multiplier effect on the economy. Currently, tourism revenue is about $3.5 billion, when that reaches $10 billion like it rightly should, it will have a transformative impact on the economy.
Sri Lanka is less than a two-hour flight away from half a billion people in India. Extend the flying time to three hours and that could be a billion people. An explosion of outbound tourism, similar to China’s over the last 20 years, is now gathering momentum in India. Indian tourists globally will more than double to 50 million over the next five years. Year to date, the number of Indian tourists to the Maldives increased by 50%, and Phuket has seen 380% growth. India was the fastest growing tourism market for us even after the 2019 Easter bombings. When the number of Indian visitors to Sri Lanka increases from the current 400,000 to 1.2 million that will have a significant impact on hotels, restaurants, shopping malls and apartments. Colombo is evolving as a city. The Colombo Port City, elevated highways, high-rise luxury hotels and condominiums will attract property investors and a considerable expat community. With Cinnamon Life, the group is positioned for these opportunities. It has three conference spaces that can accommodate 4,000 people in all, and the property includes an 800-room hotel. With a development like that Sri Lanka can become a significant destination for events. We are not just positioned to benefit from this tourism opportunity because of the hotels we have across the country, and the land bank we possess for new developments. When tourism drives economic prosperity, our consumer, financial services and real estate businesses will all benefit. In the retail space, modern supermarkets account for a fifth of grocery consumption in the country. In Thailand its 45%, and over 50% in Malaysia. Fifteen years ago, Sri Lanka had a few supermarkets, and now there is one every kilometre in Colombo. Over the next ten years, supermarkets’ share of grocery shopping will double, and we’re positioned to capitalise on that opportunity with Keells supermarkets. With per capita GDP growing 5% annually over the next ten years and tourism arrivals increasing from two million annually to maybe five million in this period, Sri Lanka and the John Keells group can look forward to exciting times.
There was a constitutional crisis in October 2018, and then the Easter bombings. These would have required you to recast budget across the group. How has this impacted JKH?
BALENDRA: We’ve experienced growing the group during a thirty-year war. You learn to adapt fast. Within weeks of the Easter bombings, we drew plans to cope with the situation. We looked at tourism hotspots like Bali, Tunisia and Egypt that had gone through similar crises. We took the view that that tourism would bounce back and adjusted our plans. Fortunately, recovery has been faster than initially expected, but it will take high-end properties a little while longer to reach previous levels. We expect occupancy levels will be near-optimal at out hotels during the peak 2019/20 winter season, but yields will be lower because we’re selling rooms at a discount. Revenue from the winter season is projected to be 15% lower than the previous year, which is not too bad given the higher losses forecast soon after the Easter bombings.
However, I believe the rest of the economy that depends on the tourism sector will not see a significant drop in revenue because tourists will still spend on other activities. The Easter bombing did not impact our other businesses much. There’s hasn’t been a consumer downturn because of it. Apart from supermarkets and consumer products, do you see opportunities in other sectors of the economy? Over the years, investments in ports, banking & insurance, consumer products and supermarkets have been big winners for the group.
If you take a long-term view beyond the period covered in the five-year strategic plan, which other sectors will bring the next significant opportuni – ties for John Keells?
BALENDRA: I believe we’ve locked on to tremendous growth potential with what we have so there’s no real need to distract ourselves with something new. Essentially, we are well entrenched to capture the country’s economic growth prospects. We’ve seen some setbacks due to political instability—some highway developments are delayed, the Colombo port urgently needs more added capacity—and the Easter terror attacks, but these are beyond our con – trol. For the most part, we are on track with our plans. We’re building data and tech capabilities primarily to enhance the profitability of businesses across the group. These initiatives could be significant revenue centres, but that’s some way down the road.
THE DATA ADVANTAGE WILL BE SIGNIFICANT OVER THE NEXT 2-3 YEARS.
The diversified group story has not been sexy over the last 20 years because of a conglomerate discount, and so on. But there is a massive opportunity in the new industrial order from digital technology and data. JKH is dominant across banking, life insurance, supermarkets, soft drinks, ice creams, processed food and many more customer touchpoints. The data we generate as a group presents a huge opportunity. No organisation in Sri Lanka would have the kind of data that JKH has across all verticals and hundreds of thousands of consumers. We started the journey 15 years ago with an SAP backbone that allowed us to capture data from multiple points across the group. Conglomerate discounts may no longer be the case. We will have a premium because of the value of the data we have access to which can be used to enhance profitability across the group with targeted marketing and cross-selling. The data advantage will be significant over the next 2-3 years. Other companies that have done this in the region have seen tremendous gains.
From the outside, JKH appears traditional in its structure. How can you gain scale in the digital space incombered by the brick-andmortar culture?
BALENDRA: The advantage we have as a legacy company is that the group is structured in such a way that there is always fresh leadership prepared for the changes shaping the world. That has helped the company to modernise because its ultimately about the people, not the assets or the buildings. We have a young leadership team that have a mindset about digital technology’s rapid evolution, and they ready for change. In fact, they want it. As a group, we’re not limiting ourselves to data, but we’re focusing on the potential of digital transformation. The group has software development and robotic automation capability. We launched John Keells X as an incubator for startups, and we are doing research in nanotechnology.
Colombo Port City and the Hambantota Port can be massive growth drivers for Sri Lanka. How does one start to strategise to unlock their potential?
BALENDRA: Apart from the opportunities for the port itself, Hambantota is well-positioned to be an industrial zone for companies looking for a hub to supply South Asia. Colombo Port City is a long-term play rolling out over the next 20 years. Colombo has a reputation for the being the cleanest city in South Asia without the congestion, overpopulation and pollution seen in other cities in the region. The Colombo Port City will transform Colombo into a truly stunning city with easy access from the airport. It has a private beach, waterways and a purpose-built marina at the heart of the city. Local demand won’t be able to absorb all that potential, but you need a few triggers for people to see the potential and they’ll start investing. Positioning it as an international financial centre is one way to attract foreign investments, but I believe there’s an opportunity to develop a market for luxury apartments like in Dubai.
THE COLOMBO PORT CITY WILL TRANSFORM COLOMBO INTO A TRULY STUNNING CITY WITH EASY ACCESS FROM THE AIRPORT.
Will JKH look for new opportunities around the port city and Hambantota?
BALENDRA: We’re already well-positioned in the hotels’ space, so I don’t think we will try anything new. If there is an industrial zone at Hambantota, we will be interested in opportunities for our existing business such as logistics. Large foreign companies that want those opportunities will see JKH as an ideal local partner, and they usually want to have local partners.
When you look at group’s portfolio of businesses and the sectors they are in, which ones are you optimistic about in terms of their ability over the next few years to deliver, or exceed, the hurdle rates of return?
BALENDRA: We always venture into a business with the expectation that it will deliver desirable returns. Some businesses give returns in a short period while others have longer gestations, so we need to get the balance right. But consumer foods, supermarkets and insurance are less capital intensive and generate higher returns.
How will the tourism downturn impact Cinnamon Life’s ability to generate returns on capital? Did you have to revaluate and re-strategise after the unfortunate events last Easter?
BALENDRA: No, we didn’t have to. Cinnamon Life will come online in 2021, and we took the view that tourism would have fully recovered by then. Cinnamon Life will be on track to achieve the desired returns. During the period 2021-23, I believe our other businesses would have scaled so Cinnamon Life may not have as material an impact on the group as you would think.
Do you see digital startups upending the traditional brick-and-mortar supermarket business model?
BALENDRA: It would be difficult for startups to venture into the grocery space because people still want to see the meats and touch & feel the fruits & vegetables. Unlike for hardgoods, supermarkets will not see an online take up any time soon. However, we were the first to introduce online grocery retail six years ago with keellssuper.com, and now we’re in the process of upgrading the app for better consumer experiences.