EXCLUSIVE- Food manufacturer Domty is launching this week a USD 2 mn milk products production line, marking the company’s first investment to add milk products to its portfolio, Vice Chairman and Managing Director for Planning and Supervision Mohamed Damaty told Enterprise.

It’s all about finding a way to grow, even with the pandemic: The new production line, which will add to Domty’s current portfolio of cheese, juices, and on-the-go bakery products, comes as the company works on expanding its footprint — and found itself needing to adjust its growth plan to fit within covid-19 circumstances.

We had a (virtual) chat with Damaty about the new investments. Edited excerpts from our conversation:

The production line is going to be added to our existing facility where we produce our bakery products. The USD 2 mn investment cost includes the production and processing of the product, and we’ve been working with Tetra Pak for one year on setting up the production line. This will be our third entry with Tetra Pak, on top of our juice and cheese products.

We're starting a full range of milk products, starting with normal UHT milk. Then, we’ll follow that with a new product launch each month, starting with flavored milk, followed by whipping cream and cookies and cream.

The new production line is designed to continue growing the company’s portfolio, after starting out as a cheese manufacturer and then having expanded into the juice and bakery segment. We have a vision of making Domty a real food company and we’re eager to lock down a bigger portion of households’ grocery expenditure. And I think we’ll do that.

We’ve definitely shifted our expansion strategy since covid-19 began. If you had asked me a year or a year and a half ago where we would expand, I would have said our main focus would be on-the-go products, given the success we’ve had in the bakery segment and with the cheese sandwich product we launched. But the situation now — especially with schools and universities either being closed or operating on a hybrid learning basis throughout the past year — required a change in strategy.

We’re shifting back again into products to be consumed at home, and we’re in talks with Tetra Pak again to add some other products for at-home consumption to our portfolio. There’s been a lot of uncertainty and we believe we’re going to have to live with covid-19 impacting our lives in the same way for at least this year and next. Unfortunately, our on-the-go products had brought us great success, but current circumstances mean we have to shift away from them for a bit. Before covid, we had invested a lot in our three bakery lines, two of which we had fully utilized before the pandemic hit.

Of course, when things go back to normal, we intend to bring back our investments in on-the-go products, which I think are much more profitable in Egypt — and the room for innovation is much bigger. The success we had with our cheese sandwich was a testament to the potential that consumer level holds. It’s a really, really big market so we’ll come back to it when things stabilize and normalize again.

Capex borrowing is attractive now, but the market demand isn’t there yet to justify it: Domty is working with Tetra Pak on a facility for the new production line, which includes them giving us the machinery. Overall, the interest rate environment now is very attractive for capex borrowing, but the market is not attractive. The banking sector in Egypt is doing a really great job, and the Central Bank of Egypt has successfully brought down interest rates over the past two years and continues to give support to the industry and the business environment. But unfortunately, the pandemic just means the market is still not great for new investments.

It’s a popular myth that being an FMCG player means that a slowdown isn’t going to affect your business. It’s true that people don’t stop eating or drinking in an economic crisis, but we’re already playing on very slim margins, so when you have a decline in sales — even if it’s something like 5 or 6% — it has an outsized impact on overall profitability. It’s still by and large a “safe” sector, but the smallest decline in sales can really be felt.

Export markets have also had their own set of challenges: We export around 6% of our total output — mainly cheese to Arab countries, Africa, and Europe, where Egyptian expats are living. Our main export markets are Libya, Jordan, Saudi Arabia, and Russia. All of these countries have their own challenges right now.

Part of the problem with exports is also that we as Egyptian companies have a problem with marketing our products abroad. All the food companies in Egypt are focused almost entirely on the local market, but the local market dynamics have changed significantly in the last 10-12 years, between the 2011 revolution to the EGP float and now covid-19. So these changing dynamics mean that export markets are a secondary option, which means that companies aren’t really investing in proper marketing or setting up a real sales fleet on the ground like we all do here in Egypt.

Of all the problems that industry faces here in Egypt — some of which have existed for years — I think FMCG’s biggest problem is the idea of imitation. There’s no proper mapping from the government on where to invest, or how. So new entrants to the market just see what’s successful and decide to imitate it, and the end result is that some sectors in FMCG are really crowded, while others are a bit lighter. Four or five years ago, we had two companies that IPOed on the EGX — one of which was Domty — and we had maybe 12 brands of white cheese in the market at the time. After these two successful IPOs, we now have 24 brands of white cheese, just because other companies saw the success of these companies in making it to an IPO.

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