Jun. 13, 2017
Family-owned businesses play a major role in the Kuwaiti economy. However, with many approaching the third generation of management, they are starting to come across unique problems that may pose issues for the greater economy.
In 2015, Mezzan Holding Co. publicly listed on the Kuwait Stock Exchange, one of the first third-generation merchant families in the country to do so. Mezzan was founded by Jassim Al-Wazzan in the 1940s, and grew to become one of the largest and most diversified conglomerates in food and FMCG production and distribution, with Kitco and Khazan as primary brands. Mezzan is now a third-generation company, and as its current CFO, Fares Hammami, indicated, “Many family-owned businesses face challenges in the third generation that hinder sustainable growth and sometimes mark a decline," adding that the Mezzan family now consists of five brothers and two sisters. The family members have incorporated their ownership under one entity and started bringing in foreign management in 2009.
Mezzan has done well and, according to Hammami, has attracted a large appetite from investors because consumer goods are a defensive industry; furthermore, due to decades of fragmented growth, there is a lot of potential in streamlining operations. This trend of opening up family businesses to investors, though quite new to Kuwait, has been practiced before in Saudi Arabia and the UAE.
The Al-Kharafis are another example of a third generation-run family business, with primary activities in retail and an estimated wealth of more than USD8 billion. However, its conglomerate was largely built through its shareholding's various enterprises, as opposed to growing via family business. The Al-Kharafis are primary shareholders in the National Bank of Kuwait (NBK), the largest lender in the country, in the telecommunications firm Zain, and in Americana, the operator of US fast food chains, which has now been sold to Dubai-based investors. Both Zain and Americana have grown to become well-known brands across the MENA region.
Kuwaiti family businesses have long acted as a foundation of the country's economy, and continue to play a critical role in the future of the country, with innovation and continuity being keys to the transitional stage Kuwait is in today. Key industries throughout all sectors of the economy have often been the brainchild of the families, and much of the country's employment has been based on the success and support of family-owned businesses.
Family businesses now face challenges coming from both the global economic environment and the transition into the third generation. If succession is not managed and structured well, family businesses could easily become fragmented. As the number of family members with ownership increases, the decision-making process becomes harder, especially when family ties are weaker and more diverse. Due to the average size of families in the region, a typical family business must grow at a rate of 15-20% per year in order to maintain the same level of wealth across generations. Family conflicts or feuds present other challenges, both within and between generations. As name lending is no longer favored by financial institutions, access to financing is increasingly becoming an issue. Kuwaiti family businesses, however, have shown a strong aversion to debt, leveraging on their balance sheets. Attracting senior executives from outside of the family is often a step to build continuity; however, retaining or empowering them is another issue. A solid succession plan, with families decoupling ownership from management issues, is something to strive for here.
Many family businesses have grown to become widely diversified conglomerates and some have managed to develop synergistic operations that are thriving with the current large-scale development projects that seem ubiquitous. Nonetheless, with the broad range of activities that are sometimes within one holding, inclusive management is another challenge.
Throughout the GCC, 80% of businesses are still either family-run or controlled by a majority and thus are still the basic fabric of society and employment. Most of these family businesses started in the early 1960s, which makes them relatively young from a global perspective. Through this decade and the next, many family holdings will reach the third generation, and tackle the associated challenges head on.