Egypt, new dimensions, new frontiers

Mr. Mohamed Sadek Ragb, Chairman and Managing Director of ECS
Egypt -

"Confidently entering the new millenium"

Interview with:

Mr. Mohamed Sadek Ragab
Chairman & Managing Director

Cairo, April 12th, 2000
You have stated that the sixth of October industrial complex is the most important project since Eastern Company was founded in 1920. Could you tell us about the construction and financing of this new plant?

To a great extent, we are trying to avoid the negative working capital, and manage the cash inflow with the expenditures through slowing down operating in new projects.

We are moving step by step towards a new location with investment based on intensive studies which enables us to fully utilise evacuated old locations. We are in favour of splitting the projects to several stages to spend less amounts on one location and investing in its resources until it can support new investment with high profit margins, keeping the production and distribution stabilised.

For now we are not in favour of new locations to utilise, but to invest in a location for the future, where finding the site will be more difficult. That is why we are getting ourselves prepared for the new expansion of the century with a land of one million and four hundred square meters, so we can say we are not only expanding but we are immigrating. Eastern Company, as one of tobacco producers has a very promising future to maintain its new procedures of production line with machinery placements according to the layout of the machinery placement plan and not the location limitations.

Did you recently introduce new brands, packages or a new launch for the company?

Yes, we introduced a new menthol Cleopatra. We know that menthol smokers in Egypt are not a high percentage of total smokers, although we have another menthol brand, "Port-Said" which has a good market share. When Cleopatra menthol was introduced to the market, the market share of menthol brands increased. This increase did not translate to an increase in the amount of smokers, but a shift towards menthol brands rather than normal brands, as many find that the pack design is more appealing and the quality is better.

Our Matinee brand was introduced to demonstrate that Eastern Company is not only a company that produces price-saving products but also a company that has diversified line of price-saving and luxurious products. Matinee was also introduced to create loyalty of the brand and satisfy the reasonable percentage of smokers and not to loose any market share. With Matinee we introduced a dual filter, to retain higher tar and nicotine.

Our Corona Cigar is a proof that Eastern Company is a manufacturer of quality products. Quality cigar smokers agreed that its quality is as good as the international cigar brands.

We are trying to decrease the additives of tobacco with a very slight percentage of flavours.

Eastern company is heading towards reducing more and more of the additives. Since all of us at Eastern Company care for quality and expert opinions, we are all doing sampling with different flavours, and even I myself, since I was previously a tobacco expert have tested various flavours.

In 1998-1999 Eastern Company recorded net profits of 243 million Egyptian pounds, compared to 161 million in 1997-1998. Is this related to the liberalisation methods introduced by the government regarding price, or is it due to the rationalization of costs?

We can say that both factors were reflected in an increase in our profit margin. We had been lobbying for a raise in prices for seven years, and the government did not permit us to do so. We had to deal with reducing our costs. Fortunately the non-permission to increase prices set a challenge to achieve profits based on cost reduction. So when we had the permit to increase prices, this was an additional factor for the high profit margin.

For Eastern company's exports, besides tobacco production there is a shift towards exporting spare-parts for machinery and filter, and you are currently investing in a new industrial plant in Alexandria focused on export production. How much focus are you intending to put on exports, and what would you advise companies which still have problems with their export production?

Exporting is a very hard job, as you have to introduce really good quality with a very attractive price. Accordingly there are different parameters to calculate the cost of exports with reference to variable costs and the constant cost which is paid whether you export or not. When you are exporting, quality is priority, then comes cost and market share.
We are also importing materials such as tobacco and cigarette paper filters, etc. We are trying to know the needs of our suppliers of our products and establish a win-win situation. They supply our needs and sell our products abroad.

You have mentioned that you import one third of the tobacco from COMESA countries agains LE 7,00 as custom tax. A year ago tarifs were decreased for the COMESA area - what sort of impact is this going to have on your profit margin?

It will increase our profit margin and improve the trade balance between COMESA countries. This will enable a broader exchange perspective rather than a limited one if no Egyptian products was introduced. Now Eastern company is doing some efforts in exporting of medicine, tires, fertilisers, etc.

If Comesa countries become more involved in the purchasing of Egyptian products then this will enable us to export more tobacco and take advantage of the tax exemption for Comesa countries.

What was the most successful part of your diversification strategy? Moreover, what is your advice for the national tobacco companies in the region, and also to European companies that can benefit from their cooperation?

One of strategies we applied a few years ago was used as a case study in one of the multinational tobacco companies in the world; it specified the policy of purchasing tobacco, since tobacco is an agriculture crop which varies from one season to another in quality and price - it must be operated through production, consumption and world wide stock reflected upon the increase in price with the demand and reserve.

A way of operating tobacco purchase is through tenders. You get your required quality with low prices in satisfactory quantity. Then you seek other suppliers where the same quality is demanded but at higher prices. So with this you reach a bargain with the price indication that you had earlier from the tender, when you get a lower price than the tender offers. If the season's price was high you can skip to another season with lower price.

In the last years we witnessed how national tobacco companies are positioning themselves internationally to compete with the international market. What are your plans in terms of international alliances?

I will not mention the plans, because I have to stick to the government polices, but I notice the trend everywhere - every small company is trying to manage to merge with a bigger one, in banks, car manufacturing, medicine production and elsewhere, this is how to benefit the maximum you can from the profit of two independent companies. Even huge industries go for merging as you have to predict and inspect the market.

That is what Eastern company is trying to reach for, getting into filter manufacturing, tobacco manufacturing, tobacco dealers as shareholders in a strategic plan through resolving conflicts in the market.

From your point of view, how can you convince our readers to try your company's tobacco?

I need not to convince. Take the Matinee brand for example: it has a dual filter, the best flavour, offering the chance of choice. All you have to do is to smoke Matinee. You will find that there is a variety of taste. It is new, luxurious and unique.

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© World INvestment NEws, 2000.
This is the electronic edition of the special country report on Egypt published in Forbes Global Magazine.
August 7th 2000 Issue.
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