Co-founder of HD-group: «Market share is not the only measure of business success»
Mind.UA, 22 JANUARY 2020
HD-group, formerly known as the Group of Companies «Hlibodar», is the permanent leader in the food market in the Zaporizhzhia region. Two years ago the company began a large-scale transformation, changing not only the processes and approaches to its management but also the place of residence – from Zaporizhzhia to Kyiv. The main purpose of the relocation has become known only recently: HD-group has begun to actively absorb new enterprises, forming the status of a national player.
Mind talked to the co-founder of HD-group, Serhii Chekalskii, about business, political ambitions and investment in the future.
– You are a «hereditary» entrepreneur. When did you first become interested in business and when did you start working?
– «Hereditary» is not a very accurate word. The Soviet Union did not teach business. It taught the exact opposite: money, personal wealth, private property – all were perceived negatively. It was common to think more about public, rather than personal.
I started working at the age of 12 during summer vacation, in a packaging storage. I packed crates and loaded them onto cars. The payment was piecework, 3-5 kopeks (pennies) per box, and as a result, I could get a whole fortune – 125 Soviet rubles. It was a completely official workplace, with all the restrictions imposed on me by age – a teenager was not allowed to work more than four hours a day. Nevertheless, I wanted to earn and so I did.
In my freshman year at the Institute, we were already trying to establish some kind of trading operations – we went to Chernivtsi, bought olive oil for a dollar there and then resold it in Zaporizhzhia for two. Afterward, we turned to supply industrial enterprises with flour. When the supply volumes increased significantly, we decided to become the owners of these enterprises. Fortunately, everything was available. The shares were freely sold. I remember that time very well, so when I hear about opaque privatization or that citizens were «robbed» – I just understand that a person is simply out of context. We made a mathematical calculation: an average shareholder who owned at least 0.0001% of the shares, even if the dividend policy was perfectly correctly followed, could count on 6 kopeks of profit per share. And to make a transfer of 6 cents, it was necessary to spend 65 cents. For several months I worked at an investment company that bought up industrial enterprises throughout Ukraine. There I had the opportunity to study and analyze all the procedures as well as processes from the inside.
– Given that you have already worked since the freshman year, didn’t you feel as if you were simply wasting time in dusty auditoriums?
– Now I, probably, would. But I entered the university in 1991. I had absolutely standard goals – studying, getting a diploma. The idea of looking up to, let’s say, Steve Jobs, just never ready crossed my mind. I simply did not know who that was.
I entered a law school, believing that this profession would help me in life, regardless of what I would do. It turned out to be not the case as Ukrainian business happen to live in such a reality that one should be its own lawyer and, in fact, a very good one.
– Was the lawyer’s experience useful in the 90s?
– These were very strange times. Business categories did not exist. The USSR collapsed, enterprises became joint-stock companies with shareholders scattered throughout the country. But at the same time, the regional governor signed the plan for the supply of flour to the bakeries and determined which companies would close this contract. Why, on what grounds? Now it would definitely be recognized as corruption. But then it was very common: they held meetings in the RSA, everything was completely official.
It seems to me that Ukrainian business as such emerged in the 2000s. Before that, there was wild speculation, without the slightest understanding of the prospects. Corporate, managerial culture was typical only for individual enterprises, usually large ones – for the record, most of them exist to this day and I think that this is not a coincidence. But still, most worked intuitively, day by day, being bought and sold. There was too much fear after the collapse of the Union, that all this was not for long, that the enterprises that you bought and privatized could be taken away. So we lived in a moment. Only in the 2000s did it finally become clear that we have a market economy, a capitalist country and we can think about prospects.
– What qualities were decisive for success in such «business»?
– 50% is up to intuition.
The absence of fear. More precisely, the absence of fear of doing something that no one else has done in this country over the past 70 years.
Willingness to learn. The latter, however, is relevant to this day. Every day I do things, I did not do yesterday.
The company was founded in 1998 and the first six to eight years was a period of formation. We were learning to lead. People were still Soviet.
Only in the mid-2000s, we could say with absolute confidence that we understand this business, all its details and technology, know the market as well as our place on it. Not to mention that during this time some kind of team was already formed.
– How did you distribute the authority with your business partner? Is collective decision making possible?
– Boris (Boris Shestopalov – co-founder of the GOC «Hlibodar». – Mind) and I managed the company in turns. We have completely different management styles, but this difference has benefited the business. In 2-3 years business acumen may weaken, you get tired. Yet, we had a rotation, updating, new approaches. All of these provided movements forward.
– The fact that you are younger did not form the paradigm of the senior/junior partner?
– No, nothing like that happened.
– In 2017, the company underwent a global transformation: clustering, a change in management approach, etc. Why did such a need arise and who initiated it?
– It was initiated by time. We live at such speeds that a business plan or strategy becomes obsolete while still being added. It is important to deal with strategizing, even though your strategy can change 180 degrees in half a year. And there is nothing wrong with that, provided, of course, that you are flexible enough.
Various reasons led to the company’s transformation. In Zaporizhzhia, the environmental situation deteriorated, and with it, the demographic situation. People were leaving and the personnel problem became very acute. We realized that the office had to be relocated to Kyiv, a place that attracts all young ambitious people.
We were ready to grow and we understood that managing should be done from the center. To effectively manage a new business, we built a new system. Today there is not a single bread company that is as rationally structured as ours. Mentally, this transformation ended a year ago and, thus, the company recognized itself as a national player.
– At the same time, you have a rather local regional market
– Not anymore. Our Holding has a plant in Dnipro producing toppings and jams. Apart from that, at the end of 2019, we acquired Shevchenkivskyi plant of food products (Brovary) that produces 28 types of products (cereals and flour). 90% of them are realized in private label format for retail («Velyka Kyshenia», «Silpo», «Metro Cash&Carry Ukraine», «Billa», «Eco-market», «Auchan Ukraine», «Tavriya-B», «Rukavychka», «Ekspansiya», «Furshet») and 10% is under their own trademarks («Every day» and «Poprobui»). Not to mention, that by the end of this month, we also plan to complete the purchasing of a manufacturing enterprise in Chernivtsi.
– Did you get bank loans for these acquisitions?
– Yes. These loans are in the national currency. They are expensive, yet enable us sleep soundly at night. We cannot ignore currency risks, since we are sold on the domestic market and any devaluation hurts us. We cannot compensate promptly by raising prices due to the sensitivity of the market.
Actually, the fact that we were able to attract financing and make those deals is the best confirmation of company’s effective transformation from a regional into a national player.
– But this competent structuring did not transform into an increase in market share. Isn’t this indicator a measure of success?
– Not always. In many ways, the current scale of the company depended on its starting opportunities. Business performance is better characterized by EBITDA per tonne of product. Unfortunately, there is no such pivot table. But if it existed, I am sure that we would in the TOP-3 in the industry.
– Does the relative proximity to the demarcation line impose some peculiarities on the operational activity?
– No. During the first two years, it stopped us from investing. We did not understand whether there would be a breakthrough to the Crimea, in which case Melitopol and Berdyansk, where our sites are located, would be under attack. Not to mention that Zaporizhzhia would certainly be affected too. But when we understood that there would unlikely to be a full-scale war, we started investing money.
Complicated land tenure relationships
– Does HD-group have own land bank? Do you grow grain for your needs?
– We used to have, several thousand hectares. But we adjourned working in that direction. You see, the lands were in the zone of risky farming. Given the dramatic climate changes in Ukraine, to maintain an optimal level of productivity, millions had to be invested in irrigation..
Therefore, we buy grain in the market, although it is quite uncivilized.
– Is it «uncivilized» due to «shadow transactions»? There are estimates that unaccounted grain in the market is up to 40%.
– In my opinion, the estimate of «shadow transactions» is greatly exaggerated. Actually it is up to 10-15% depending on the area. In the places, where we work, the problem is not excessive. The market is «uncivilized» in the sense that sometimes the real problem is to communicate with a counterparty via a smartphone. Calls, text messages. Recently, however, they are gradually turning to instant messengers.
– If the land market to be open, will you acquire land?
– No. First of all, I am a sincere opponent of the land market. I am against the sale of land as such – for Ukraine, it is one of the main resources, as for the Emirates is oil.
A positive example is provided by Norway, where the National Welfare Fund was created, in which all national wealth was contributed. The capitalization of the fund is more than a trillion. On behalf of the Norwegian people, it is managed by a non-state corporation. Ukraine could create an analog, a non-state corporation, adding land, water, subsoil, forests to the authorized capital. It should be managed by a hired management, preferably international, and bring income to all citizens of Ukraine. Even now, not at the best stage for the economy, the minimum capitalization of such a corporation would be $ 500 billion. The main thing is to keep politicians away from it.
– But do you agree that this is an undervalued asset?
– Yes, undoubtedly. That is why, if the market is to be introduced, then to cut off speculators at the start, it will be necessary to establish a mandatory indicator at the level of, conventionally, $5000 per hectare.
– Nobody will buy at such a cost.
– Well, let it be so. As soon as it grows to $5000, they will start buying.
But I would like to draw attention to the fact that the Constitution of Ukraine determines that land is our common heritage. Therefore, if there is a rush to allow people to sell shares, then the state needs to redeem them and keep them in their ownership, and then contribute to the conditional national welfare fund. Under no circumstances to take the land away. Let them use it, rent it out. And if they still decided to sell it, sell it to a non-state corporation.
– What is the ratio of revenue to the domestic market and export?
– Export generates no more than 5-7% of revenue, but the indicator is growing. Directions mainly include Israel, Europe, the USA, and the Middle East. Consumers are the so-called «Russian street», former citizens of the USSR.
We connect export growth potential with the cereal segment and the African market. But the key to these markets is the Red Cross tenders and getting into the regional quota. It is assistance in such negotiations, lobbyism of the interests of Ukrainian producers, in my opinion, should be the main task of the state in the agricultural sector.
– Do you have a separate business apart from HD-group or maybe there were attempts/ wish to initiate such a project?
– Hundreds of projects. Even in «Hlibodar», we collaborated with a group of very prominent programmers. I suggested them to create a system in which we could control the procurement of incoming raw materials in electronic form. In such a way people would be able to do business not via phone by writing down all the bids in a notebook but go to the online platform, set the price, and bargain. Now, this is the usual marketplace, but then we were the first ones. We had to make titanic efforts to change the mentality of our counterparties. After all, everyone agreed at first, but then again they would take phones and try to complete deals in an old way..
We developed this platform, promoted it, attracted third-party players. After a while, the total turnover of transactions on it reached $10 million per month.
Then we sold this product for $2 million to a large international holding. It, by the way, also owns the Ukrainian platform Prom.ua..
– Do you not regret selling such a promising asset?
– In business, there is no place for sentimentality. If you are a small and, let alone, a non-core player and you are offered to sell, then just sell. The most you can do is to leave a minority stake for yourself. Technology is changing so fast, so what’s the point of being proud of something you came up with yesterday?
We are promoting this platform and are now using a more modern one.
Policies for the future
– Do you expect your children to work for a family company? Do you engage your eldest son to business?
– Before the final year at university, my son took a gap year. The money that was supposed to be spent on education – that is several tens of thousands of dollars – I redirected to his projects in IT. We have decided that it would be better for me to invest this money directly in him and his experience – even if the projects fail (although I am certain that it will not happen), the money would not go to waste.
I act as a mentor – offer advice, correct if possible, take him with me to share the experience. Perhaps later he will pass exams externally and just get a diploma. But now he is learning more, just by being around me.
– Do you have political ambitions?
– In the traditional sense of the word – no.
My ambitions cannot be called purely political, they are much wider. I am concerned that Ukraine as a state does not have a clear positioning, a portfolio that could be of interest to external partners. If possible, I would like to contribute as much as I can to change that.
– Within the framework of the «Charter of the Future» that you have formed, there was a thesis made that the state system in Ukraine does not want and will not change itself. Therefore, one has to think about the future – about changing the system itself, replacing it with a Social Agreement. Do not you think that what is happening now in Ukraine is basically close to global changes in the system?
– Changes are occurring, but too slowly and are usually undertaken in the existing paradigm of «The Cabinet of Ministers–the President–the Verkhovna Rada». However, traditional methods will not provide the state with a «quantum leap» in its development. Even under the most optimistic scenario, the Ukrainian economy can grow only by 7% in 2020, whereas developing countries are growing by 15%. Every year we widen the development gap.
There is no way to accelerate the process of state development other than transform the very system of managing it. Replace archaic authorities filled with bureaucrats by specialized national agencies, pump them up with money and hire young people.
Approaches to public asset management also ought to be revised.
You should not fear global changes. The whole world is in a crisis of governance and it is doing the same – it is searching for a good alternative to the existing system. Democracy was created to sweep away autocracy, but it is not a model of infinite development. Having existed for about 200 years, it has exhausted itself in many ways, which has led to current crises – whether it is waves of migrants or demonstrations of «yellow vest’ protesters». Therefore, if Ukraine decides to adopt a new innovative Constitution or Social Contract, replace representative democracy with competency-based selection, introduce cluster management and national programs that will last longer than the electoral cycle, then it will truly be in the global trend.
But for this to work, one must begin with education, upbringing, consciousness-raising – this is a long way that could take a period of up to two generations. However, we are yet to start.
– Is education the focus of the Foundation for Future platform that you are a founder of?
– Yes, but we put an infinitely broader meaning in this concept of «education». Our «Foundation for Future» brings together philosophers, futurologists, urbanists, architects – people of different professions who are involved in social life. We meet, exchange opinions, discuss and create. The results of these discussions have partially become the basis for the development of such national programs as «Dnieper River», «Carpathian Forest» and «Amber».
The most urgent changes are connected with managing of the Dnieper River. It is very polluted, the tributaries are drying up, and the transport potential is used at 2%. Private initiatives for its development are welcomed, but they are just «a drop in the Dnieper». If nothing is done, in 5 years the consequences will be irreversible. We can simply lose the main waterway and, together with it, a significant part of the agro-industrial complex. Apart from all of that, the railway is already unable to cope with the transportation of crops and we critically need new transport routes. The Dnieper River is our responsibility towards other countries. If something happens, it will directly affect the Black Sea and turn into a European-scale problem.
We need environmental studies, large infrastructure projects, bridges, hundreds of thousands of jobs, which will entail the development of the economy, science, and education. Billions of dollars will come into the country from environmental funds that are constantly looking for such projects around the world.
Owing to national programs, the news agenda will change. New faces, new topics for discussion will appear on TV and this will push petty political fuss to the background.
– Is it more about vision or is it also a business for you?
– Both. When you intellectually grow and develop, then your projects grow. And I prefer to work in the win-win model.
Maybe there won’t be a place for me in these projects. That is not a big deal. But if the country develops, the EBITDA multiplier will grow, my business will be capitalized or I will get access to cheap resources. That is also my interest.
– Is there any feedback from the authorities on these projects?
– They haven’t heard us yet. But this does not mean that we need to shout louder. It just means that those to whom we are appealing are not yet ready.