Can you tell us about Dubai Refreshment Company's presence in the UAE, and how the company has positioned itself here to work across markets?
Dubai Refreshment is one of the oldest manufacturing companies in the UAE. It was established in 1959, and we signed a contract with PepsiCo in 1962 to become the exclusive bottler, manufacturer, and distributor for beverages. At the time the contract covered the Trucial States of Oman, which was before the establishment of the UAE. One of the reasons for the company's success was its establishment as a joint stock company, meaning from the beginning we had many shareholders and most of the established trading families in Dubai were represented in the company. They continue to be shareholders to this day, with some of the shares passing to younger generations. We first had 32 shareholders and now we have over 100. We focused for the first 50 years on soft drinks, and we also launched Aquafina water in association with PepsiCo. Eight years ago, we made the decision to expand the facilities, finishing this factory in 2016. We moved here, and the idea was to expand the capacity to diversify the product portfolio and use it as a stepping stone to expand the business into other categories of beverages and snacks. It also allowed us to start expanding geographically and expand our relationships. We have identified comparative strengths in manufacturing and distribution, in addition to a good reputation and strong relationships with customers. We have good cash flow to venture into other product categories, either through organic growth or through acquisitions or mergers, and we have already begun this Journey. We believe one of the great things about our business is stability; however, after we have built this factory and made this large investment, we were surprised by an excise tax that targeted cigarettes, energy drinks, and carbonated soft drinks. Because the tax was targeted at very narrow group of products, the rate turned out to be is extremely high. The tax is about five times the global average, it is 50% of retail price.
Do your operations here serve only the UAE or GCC market?
Our contract with Pepsi is for Dubai and the northern Emirates, we have what we call an exclusive bottling appointment. We are also exporting products to several neighboring countries. They are usually countries that do not have a Pepsi operation, and we sell to traders who supply them. We also occasionally supply other PepsiCo bottlers with products or packages that they do not produce themselves.
What is your strategy for the export market and use Dubai as an export base?
Export for us cannot be a substitute for the local business, it is opportunistic sales from our point of view. We leverage the unique UAE location and significant shipping and export infrastructure advantage to drive exports to neighboring countries. Buyers come to the UAE because of minimal regulations, ease of doing business, connectivity, quick exporting procedures, and stable currency. Recent developments with VAT and increased regulations has made exports more difficult however, once people get used to the new system and once some of the new barriers are ironed out, I expect the UAE to regain its position in exports.
How is your solar project evolving?
The solar power generation project was completed in March 2019. The new building has 50,000sqm roof, and was designed from the beginning to carry solar panels. UAE Energy Strategy target to generate 44% of the country energy needs from clean sources by 2050. It is quite an ambitious goal, and the government is translating that vision into specific programs. One of the programs that they made available for industry is the Shams Program. It allows Solar installations to connect to the grid and receive credit for power generated. Users do not have to invest in batteries to store the energy, and that makes the project viable. The positive effects on our margins of this project were immediate. Our entire factory here is Silver LEED certified, largely due to the substantial efforts we make in electricity and water conservation and reuse. This is excellent for the environment, but it is also profitable for us. We are now generating about 35% of our energy needs from our rooftop solar plant.
Over the next decade, what is the most important step that DRC has to make to maintain its long-term financial sustainability and market position?
We have to do two things that are critical. First, we have to expand our geographical footprint in the GCC and the Middle East in general. There are too many beverage manufacturers, particularly in soft drinks, so I expect there will be some consolidation. It is important to benefit from maximizing the use of this new facility and expanding geographically will help generate efficiencies and will increase our ability to withstand shocks. It will allow us to also expand the portfolio more easily. In addition we need to expand beyond the beverage portfolio and create new verticals. The beverage business is more mature now, so unless we find growth opportunities in new verticals, our growth will be limited.