The FINANCIAL -- The ongoing devaluation of the Georgian Lari is having an impact on Georgian businesses. As one of the leading Georgian food producers, Nikora is continuing to maintain its existing prices, by reducing its interest margin. However, if the exchange rate reaches GEL 2.50 to USD 1, then the company will be forced to revise its price policy, Nikora’s CEO has said. The company plans to invest EUR 3.5 million in production in 2017.
“We are not increasing prices yet, because this would have repercussions for customers who already have limited resources, and we are also oriented on the volume of sales. We are trying to decrease our interest margins, but maintain the size of our sales. However, everything has its limit, our resources too. So, we think we will be able to sustain prices till GEL 2.50 becomes USD 1. If and when that happens, we will be in a position of needing to review our price policy,” Irakli Boqolishvili told The FINANCIAL.
The FINANCIAL met Irakli Boqolishvili, Chief Executive of JSC Nikora, to talk on evaluation of the current year’s sales, the consequences of currency rates, responses of the company and to discuss the future plans of the brands unified under the joint-stock company.
Q. Despite the fact that there are still two months left till the end of the year, how would you evaluate the sales trend thus far?
A. 45% growth of sales was planned, but according to the report of the first 9 months this was not reached, however we have had 35% growth, which is a huge number for sales. The reasons for not being able to reach our planned growth are varied, but mostly due to the economic environment and currency rate.
Q. How did the change in currency rate affect Nikora’s brands and business development in general?
A. There is no permanent rate in the world, it varies in almost every country. In the first half of the year, we had a certain process of stabilization, the lowest rate was in June; but from that time on depreciation of the Lari started again, which has been reflected in the purchasing power of customers.
All the liabilities of the businesses as well as customers are in foreign currency; revenues are in Georgian Lari, therefore less money is left for people to cover their needs and for businesses to grow and develop.
The thing which matters the most is currency fluctuation, the exact rate is not important, because the economy and people get used to the reality. It is impossible to predict beforehand, so businesses are prudent towards launching a new project and people try to save more money.
90% of raw materials are imported as well as 75% of liabilities being nominated in a foreign currency, accordingly, devaluation of the Lari is a huge problem for our company. However, we have not increased the prices of our products. We are trying to sustain them by decreasing our margins.
Q. A few years ago Nikora was associated with meat products only, so what was the reason for developing the supermarket chain?
A. It was the result of natural development. 17 years ago, when Nikora was founded, the main mission was to create stable trade points. This took the company to opening brand shops, where only meat products were sold.
Subsequent steps were connected to increasing production, including milk products and fish, which were also introduced to our shops.
There were two reasons for the transformation of our stores. Firstly, despite the fact that it was an amazing convenience for customers to know that they could buy high-quality meat products at Nikora; it was at the same time an inconvenience that they were not able to buy other commodities in the same shop. That was the first argument for increasing the variety of our production as well as cooperating with other companies to transform our chain into a supermarket.
Secondly, at that time there were no organized supermarket chains. You could only find markets catering for the respective districts, which were not in line with any particular standards. We saw the market niche and started developing accordingly. Nowadays, our supermarkets are standardized according to international demands.
If our products’ share of sales was 100% from the beginning, now it is around 30%; while the remaining 70% of products sold are distributed by different companies.
Q. The Nikora supermarket chain is growing and developing, can you please tell us how the situation is changing for the chain of Nugeshi and Hypermarket Libre, which are owned by Nikora? Did they meet your expectations?
A. When Nikora decided to buy Nugeshi and Libre, at the time it was one of the biggest operations. I cannot remember a bigger process of amalgamation in Georgia, excluding in the banking sector. Accordingly there were complications, like standardizing all markets in terms of service, comfort for customers, interior design, technical and quality standards. In spring we managed to finalize the process and now you can get the same quality service and products in Nugeshi and Libre as there is in Nikora.
It was not our goal to merge these three companies and change the price politics of Nugeshi and Libre. For instance, the Nugeshi chain is mostly oriented on the segment with less income, which is crucial in Georgia nowadays. What’s more, some of the Nikora supermarkets (because of their specification and location) were merged with Nugeshi and continue working under that brand name, but we have examples of the opposite happening too.
As for Libre, it is a large size supermarket and offers a huge opportunity for development, which we are going to take advantage of. We think that in the following year we will open four or five new markets with the same name and format.
Q. Nikora is one of the first companies to be issuing bonds on the Georgian market. What potential do you see in this field, if we take into consideration that the capital market is not quite developed in Georgia yet?
A. Nikora was really the first company non-affiliated with Bank of Georgia, who issued bonds on the capital market. Commonly, for a company it is better to have as many instruments for getting money as possible, because it grants freedom in decision-making. One instrument for that is shares; there are ordinary shares and preference shares. Our society is perhaps not aware that Nikora was the first company and maybe still the only one to provide preference shares for the capital market.
The next step was issuing bonds. What is a bond? It is slightly more expensive money than a bank loan, but has preferences like terms and paying conditions.
We do believe that the process of issuing bonds was successful for the company, in addition I can say that for companies the issuing process takes about two weeks, whereas for Nikora the time from announcing till selling was only five days, which meant for us that we could provide even more bonds. We are already working on it and planning a new emission at the end of the year or in the beginning of the following year. Money will be used for developing the company as well as restructuration of our liabilities towards banks.
Q. Your production is developing simultaneously with the supermarket chain as well. You are present on the market with a wide variety of products and brands. What was the reason for focusing on your own production and which products would you highlight?
A. Our milk production this year managed to produce two different types of cheese - Sulguni and Mozzarella. Both of them gained popularity with customers and subsequently, sales are growing rapidly. We plan to continue working and to create a wide assortment of cheese over the next year.
We also have production of baked goods. This year we started the process of re-equipping. Cumulatively EUR 3.5 million will be invested in the field, we are waiting for new machines and equipment, which will give an opportunity to Nikora to provide customers with high quality baked goods, dried crusts and frozen pastry products.
There is one more field which we are thinking of working hard on - the production of fresh salads and ready-prepared meals. We are planning serious investments in developing the sphere. Currently the market is absolutely empty and relies on handmade goods. Our plan is to found a production, ideally corresponding to ISO standards, which will produce high quality goods. In the beginning we will distribute among our markets, and afterwards they will be available to customers in the branches of different supermarket chains.
This is the main framework for the next year, but of course we will continue running the production of meat products, which is constantly being updated and re-equipped.
Q. What are customers’ relations with national products? Is Georgian production in competition with imported goods and if foreign ones are more popular, which countries are a priority for Georgian customers?
A. Generally, Georgian customers are very loyal towards national production. This is stipulated by 2 factors, first of all citizens everywhere have patriotic feelings for their country and therefore its high quality production.
Secondly, if goods are made here, and are not in need of transportation, their periods of expiration are shorter, which means that they are healthier, as there are no preservatives or stabilizers added. So, as well as the fact that they are not bad for the health, they are not products which are meant for frequent usage.
There is a huge difference between sour-cream with an expiration period of 7 days and 21-22 days. The same goes for meat products, except raw smoked meat, which has a naturally longer period of validity. As for our best-selling products, different types of sausages have only a 3-4 day shelf-life, which guarantees that they are always fresh and high quality.
There is competition in pricing, because in terms of Nikora, meat products are made with pure meat, and meat price does not depend on us, but for imported goods there may not be the proper quality meat, as well being supplemented with different preservatives to make it keep longer. However, I do believe that the field of meat products is dominated by local production, made not only by us, but by companies who produce normal quality goods.
Q. It is crucial to correspond to food safety standards. How do you keep up with all the regulations in your factory and how are meat, milk and fish products preserved?
A. Let me start from the beginning. When raw materials are imported almost every single container is checked by the National Food Agency in cooperation with customs for biological and chemical contamination. So the raw material which comes to the factory has already been checked.
Besides, we have our own microbiological laboratory, which ensures food safety on every level of production, starting from raw materials and ending with the final product. As for our equipment and the factory itself, it is being disinfected according to official standards.
Prepared products are tested in our laboratory, as well as by other certified laboratories, every month. We choose ten different types of products monthly and send them to different laboratories for examination.
More than 100,000 customers visit our markets daily; a little mistake in production could lead to terrifying results, which is why we have different safety control mechanisms in place.