BR Research recently sat down with Mr. Nabeel Abdullah who is director at the Sapphire group of companies. His diversification into the Sapphire retail clothing brand has paid off for the group and is enjoying impressive growth. We talk about his success story as well as Sapphire's other business segments and the group's expansion plans with Mr. Nadeem Abdullah, Nabeel's father and mentor.

<B>BR: The response Sapphire got when it launched its retail brand was quite impressive when compared to other similar brands. What is the secret behind it?</B>

<B>Nabeel Abdullah:</B> Historically we have primarily been a textile manufacturer. We are integrated from yarn to the end product. This has always helped us in the export market in terms of offering a consistent product for our customers as opposed to always buying yarn from different suppliers.

So the first advantage we have is being a manufacturer. The second is being invested heavily at the back end. Before launching our brand, we spent two years investing in digital printing, rotary printing and a new finishing plant, so that we will be able to control the quality. With digital printing, we were able to do shorter runs and more variety. All these brands are very old and much more established and there are excellent brands but, before us no one was selling a digital printed kurta for Rs 2400 in the market.

As for retailing it is a mentality shift from being a manufacturer where you first sell the goods and then produce them. Whereas in retail it's the other way around where the goods are produced first and then sold. We are getting used to that different way of doing business, but otherwise it's going great. We have got a 13000 square feet store at Nishat Emporium that is coming up, another 18000 square foot store planned at Packages Mall. In addition, we have stores lined up for Allama Iqbal Town in Lahore, Faisalabad, World Trade Center in Islamabad, Lucky One mall in Karachi and Bahawalpur so in total we are coming up with 7 new stores.

I think so far we have had a great response and the key thing that we are working on is the product. It is about constant innovation. When we started we had digital printing at an affordable price as a unique selling point (USP). Gradually more and more people have followed that path; now we are trying to re-invent our self.

<B>BRR: How effective has your marketing campaign been? Also what is your advertisement budget?</B>

<B>NA:</B> We have been advertising very aggressively; there has definitely been an increase in the customer base. We have started using billboards as a big form of advertisement. Social media was our advertisement tool form day one.

Our annual budget on marketing is 6-7% of the aggregate sales throughout the year. It might peak during lawn season for example and then in September to October we will spend less.

<B>BRR: How many products have you launched?</B>

<B>NA:</B> Currently we are doing women's' stitched and un-stitched. We are also making men's stitched and un-stitched but it is a very small range right now. We want to expand our men's wear and I feel it has tremendous opportunity. We are going to keep launching new products. Our belief from day one is that if the product is strong nothing can go wrong.

<B>BRR: What is your plan for your home textile division?</B>

<B>NA:</B> For home textile we have got a really strong base in terms of export market and we have had manufacturing capability since 2001 actually. That is a segment which can be tremendous value addition for the market from our side, both in terms of design and product. It will be the textile and home décor side and hopefully in a couple of months we will come up with something.

<B>BRR: Within two years you have had great success in Pakistan. Any plans to go abroad?</B>

<B>NA:</B> Not for the moment. Yes, maybe in the next 5 years. But we would like to have a strong foundation in Pakistan. Consolidate, build our systems within the organisation and once we are confident that we have achieved that, and then we will expand internationally as well. But not right now.

I think Dubai, Bangladesh and India would be good potential markets. I would like to stay more in this region then the west as our product range suits this region. Also all these countries have similar product lines to ours.

<B>BRR: How much employment has your brand generated?</B>

<B>NA:</B> This whole operation must have created around 2000 direct jobs.

<B>BRR: Moving on to Mr. Nadeem Abdullah now, how is Sapphire's forte textile manufacturing business doing?</B>

<B>Nadeem Abdullah:</B> As you might be aware of, predominantly we are a textile manufacturing group with about 90-95 percent of our revenue coming from this sector. Out all of what we produce, 70 percent of it is directly exported globally with the biggest chunk going to Europe. The GSP plus status gave us some breathing room but even now we are facing a lot of challenges with rising costs.

It is a very tough business and especially last year we had a particularly difficult time. We are trying our best, but in my opinion the import policy should be changed. If you want to grow your exports, you have to actually be strong in the domestic market first. The exporting countries are already subsidising their manufacturers which are why the domestic market is pretty much taken by foreigners. For example, in one of our neighbouring countries, they have recently unveiled a pro-textile budget, which creates jobs using textile manufacturing as well as gaining market share. In the international market we have to compete against them. In addition, the tax burden on the manufacturing sector is increasing.

Although I have a lot of faith in entrepreneurship in Pakistan, but there are certain things beyond our control. For example, I mentioned about the finished goods sector which has a very attractive growth policy across the border. I can compete with entrepreneurs anywhere in the world, but I cannot compete against governments. There are complicated issues and no easy solution. But your manufacturing sector creates jobs so you really have to focus on it.

<B>BRR: It all comes down to value addition in the end but there hasn't been value addition so far in the country, when it comes to the major groups. Don't you feel there is a vacuum and that is why imports are coming in?</B>

<B>NA:</B> If you look at it in terms of competitiveness, you have to first realise how to create it. Starting from raw materials to transportation, conversion, quality, productivity, labour training; you have to become competitive in every area at a national level, built and sustained over a time. Look at Bangladesh; it has prioritised it as a national agenda and worked on it for successive decades. Even if we want to strengthen our textile manufacturing, we would need to start from seed, fertiliser, and soil and then proceed systematically down the value chain.

Secondly as far as value addition is concerned, look at Denim which is doing extremely well, but not at the scale on which it should be done. You will find people who are doing it. I cannot say that there is no value addition in Pakistan. Even Sapphire started with spinning and gradually we have transformed ourselves in to making finished products; so the effort is there.

<B>BRR: Let's talk about your other businesses. Your presence is there in the energy sector and in dairy farming as well. Please tell us about those.</B>

<B>NA:</B> To help out in the energy crisis we have chosen to go with renewable energy because you do not have to import oil for it, and there is no foreign exchange burden. In addition, the technology is constantly evolving helping push the capacity factors up while at the same time bringing the costs down.

We have made significant progress when it comes to the drafting and standardisation of concession documentation. Today we have confessional projects that are acceptable to all lenders. The tariff for wind power projects started from almost 14 cents and in the next tariff it might come down to around 8.6 cents. So wind power has one of the cheapest tariffs and is also clean renewable energy.

We are also thinking of innovating by adding solar panels to wind farms, which will increase the overall plant capacity factors as both sources do have their limitations. What happens is that in the first projects that come up, there is a lot of development research. But gradually this might become a standard and the costs will automatically come down. Personally, I am very excited about the potential opportunities in the renewable sector and we plan to explore them.

<B>BRR: NEPRA recently announced that they are going for competitive bidding for renewable tariffs. Do you think it is the right direction?</B>

<B>NA:</B> Yes, I think ultimately you have to create that positive and healthy competition and that is the way to go. But for that the framework should be very well defined. You have to get the process streamlined from concession documents to the bidding process to facilitate investors.

<B>BRR: In the future what kind of potential do you see in the wind energy sector of Pakistan?</B>

<B>NA:</B> I think people have underestimated its potential so far. Internationally, companies like Tesla are working on large scale batteries, which will eventually allow us to store more of renewable energy. With the way technology is progressing, wind could eventually become a base load option as well.

This might take time but it will ultimately happen. When we came into the energy sector in 2006-7, the belief was that wind power plants have very low efficiency and can never become base load energy supply. But since it was kick started in Pakistan, the technology and framework continues to improve rapidly. You will see a lot of improvements in it that will surprise you and the possibilities are endless.

<B>BRR: Tell us a bit about your dairy project as well.</B>

<B>NA:</B> I think it is a good place to enter the food business in Pakistan. We have started a sizable project near Raiwind, Lahore and are using imported breeds for premium quality milk. We are thinking about expansion but the exact plans are yet to be formed as to which specific segment to target. But we will come up with something soon.