Weathering the Storm – a Very Omani Dilemma

No, not cyclone Gonu. Thankfully that is behind one of the worst natural disasters that befell Oman in recent times.

What I’m talking about is a rather interesting beginning to 2011 as the country has witnessed, for the first time, otherwise unseen protests by Omani citizens calling for economic reforms and an improvement in labour conditions. In a quick and early response to quell the protests, the government has implemented an increase in the minimum wage from OR 150 (USD 388) to OR 200 (USD 518), and introduced a five-day work week. An additional reform was also introduced in the form of unemployment benefits of up to OR 150 per Omani citizen over a three month period beyond which if he/she continues to remain unemployed, the government will find a suitable placement. This of course has added another element of cost to the local dairy and beverage trade, in a country where government rules have already increased cost considerably in recent years.

You may remember that, in a bid to increase the employment rate among its citizens, the Omanisation drive had already been fairly forceful in placing Omani youths into jobs in the private sector. One vehicle for this was a decree mandating that all owners of bagalas (the ubiquitous small grocery shops) and all delivery drivers were to be Omani citizens. A worthy attempt, of course, to redress the balance between Omani unemployment and a burgeoning expat labour force. However, given the lack of vocational training, Omanis found themselves struggling with the hitherto unfamiliar grounds of the private sector.

A shift in channels

Omanisation of bagalas, ironically, led to the closure of a significant number of stores on the one hand, giving strength to the development of modern trade on the other. New Omani owners of bagalas found themselves unable to cope with the vagaries of supplier credit, stock keeping, shelf off-take and the like, and quickly got themselves into financial difficulty. Modern trade, seeing an opportunity, has since been expanding rapidly in Oman, with Lulu and Carrefour at the forefront.

Another consequence has been the disproportionate rise in recent years in the number of small cafeterias (reaching over 3,000), run now by those Asian expatriates who were displaced from running bagalas (this cafeteria sector is not part of the Omanisation drive – yet). In one fell swoop, manufacturers and distributors had to adjust to new distribution realities fairly quickly – a demanding modern grocery retailing sector on the one hand, and a growing fragmented food service channel on the other. Key account management had to be introduced, new routes to market planned, merchandising functions to be expanded… All factors attracting cost.

Is it on the Shelf?

If that wasn’t enough, Omanisation of delivery drivers opened up another, possibly even more severe issue for the sector. Deliveries of short-life products, both dairy and beverage, have been affected especially, as staff turnover among Omanis is very high vis-a-vis their formerly Asian counterparts, impacting the performance of companies who are heavily reliant on time-bound deliveries (e.g. Milk, Laban, Yoghurt, Juices, etc.) Irregularity in attendance and lack of professional etiquette has been a cause of concern as companies question the reliability of their delivery staff and are forced to maintain a backup of additional drivers, in case of low turnout or absence. The role and duty hours of the Omani staff is also limited in that there is a hesitation to cover sales and merchandising as part of their responsibility, and to work beyond eight hours of the day. This is in sharp contrast to previous practice as companies were traditionally used to hiring Asian labour for lower wages, longer hours, more days and greater responsibilities. Consequently, companies are retaining some of their former Asian workforce to accompany the Omani driver during trips to cover the earlier responsibility of sales and merchandising – and perhaps to introduce an element of subtle staff training – but costs soared once again as a result of course.

Through the Roof?

Operational costs have increased significantly for dairy and beverage suppliers, and of course all in addition to increases in raw material, packaging and production cost. Many saw themselves forced to restate their prices and pass on the increase to the trade and consumer in early 2011. However, retailers, and especially modern retailers, have been quick to react and rejected these price increases, acknowledging the popular protests. There has been a mini-standoff in many instances where suppliers tried, in a concerted effort, to force through price increases by boycotting supply to particular retail chains. But the fight seems lost – the reaction by retailers such as Lulu and Carrefour was mirrored by the government as it declared an indefinite postponement of price increases and urged companies to return to their earlier price points. A double whammy of government intervention now has suppliers sitting between a rock and a hard place – high operational costs they can’t escape, and an inability to pass them on to the trade and consumer. Seems like the supplier margin will be the main victim here for some time….

Industry Jitters

Not so sure about cause and effect, but the Omani dairy and beverage industry has had some storm damage recently. There were of course the infamous closures of the former stalwarts Oman National Dairy (2006) and National Beverage Company (2008) that caused a massive shift in supply. Sure, it was not only operational issues that played a role in their closure, with rumours of financial malpractice abounding. But structural issues in the industry haven’t stopped – 2010/11 marked key acquisitions in Oman, be it for the purpose of salvaging a struggling company or achieving synergies to maximize distribution and reach while amalgamating cost. Of these, key takeovers have been that of Dhofar Beverage Company by Dhofar Cattle Feed, and the acquisition of distributor Fairtrade by Matrah Cold Stores.

What does the future bring? Well, regional companies are certainly not waiting in the wings. The Omani beverage and dairy industry has already taken a hit and both Saudi and UAE suppliers, both well-versed in dealing with a demanding modern trade of their own acquaintance, seem to be taking firm control of the Omani market. However, even they are of course not immune to the fact that it costs a lot more to distribute products in Oman than elsewhere in their sphere of influence. I believe it will probably be those brand owners and distribution partners who can create consumer pull, while paying attention to distribution staff training, rationalising routes to market, introducing a level of automation in deliveries and staying on the right side of the government. A nice tightrope walk in those gusts of wind….

With best wishes to all of you active in Oman- Thorsten

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