Secrets of Kenya’s newest billionaire

Mr Paul Kinuthia, the founder of Interconsumer Products Ltd. Photo/DIANA NGILA  NATION

By VICTOR JUMA vjuma@ke.nationmedia.com
Posted  Friday, April 19   2013

IN SUMMARY

• Mr Kinuthia’s journey to the world of entrepreneurship began in 1995 while he was in pursuit of what he thought would be a modest source of personal income.
• Using the combination of guerrilla marketing and low pricing Mr Kinuthia managed to steadily grow his share of the cosmetics market gaining control of 30 per cent of total marketshare in a growth that was mainly driven by his flagship Nice & Lovely brand of shampoo.
• Post-listing, companies are required to report results periodically, hire external auditors, and maintain good corporate governance standards, among other compliance standards that significantly increase the cost of administrative operations.

Paul Kinuthia is no doubt one of Kenya’s latest entrants into the exclusive club of billionaires.

The businessman first burst onto the national stage four years ago when his company InterConsumer Products won the Business Daily’s TOP100 SMEs competition and captured the imagination of many enterprising Kenyans with his rags-to-riches story.

He was back in the limelight last week when he made a fortune from spinning off a section of his company and sold it to global cosmetics giant L’Oreal in a deal estimated to have been worth more than Sh1.5 billion.

Mr Kinuthia wears his success with ease and his demeanour does not betray the stature of a man who has recently entered the coveted club of Kenyan billionaires.

That is perhaps because the picture of his humble origins remains alive in his mind – even as he put pen to paper to sign off what could easily be one of the largest take-over deals in Kenya this year.
Mr Kinuthia’s journey to the world of entrepreneurship began in 1995 while he was in pursuit of what he thought would be a modest source of personal income.

The businessman says the company that he sold last week started with a capital of Sh3,000. He used the money to buy chemicals to make one of Kenya’s home-grown shampoos in a backstreet operation that was initially located in Nairobi’s downtown Kirinyaga Road before it moved to the city’s Kariobangi and Gikomba areas.

Initially, running a one man operation in which he was the only worker on the ‘factory floor’ and the chief salesman, Mr Kinuthia would package his products and walk from one salon to another, introducing them to prospective customers and pushing the idea that his unbranded shampoo was just as good as the branded ones they had in stock.

Interconsumer products slowly gained traction but it was not until 2001 that the business became a major player in Kenya’s cosmetics market.

“We broke even in 2001 and that is when I formalised its operations and hired professionals to help run the show,” he said.

Right pricing

The secret, he says, was right pricing. “Kenya is a price-sensitive market and the mere fact that we were able to supply our customers with quality products at relatively much lower prices did it for us,” Mr Kinuthia said.

“Before long, we were drawn into an all-out marketshare war with the multinationals who had dominated the personal care business for decades,” he said.

Using the combination of guerrilla marketing and low pricing Mr Kinuthia managed to steadily grow his share of the cosmetics market gaining control of 30 per cent of total marketshare in a growth that was mainly driven by his flagship Nice & Lovely brand of shampoo.

Interconsumer sold cosmetics worth Sh1.7 billion last year, earning Mr Kinuthia more than Sh200 million in net profits.

That was barely two years after he graduated out of Business Daily’s TOP100 SMEs Club – having crossed the Sh1 billion annual revenue threshold joining the Club 101 of the competition that is run in collaboration with consultancy firm KPMG.

Deal makers said Interconsumer’s large marketshare and the growing popularity of its brands in the regional market is what caught the eye of the French cosmetics giant L’Oreal.

Parties to the transaction that took more than two years to pull through did not disclose the price but most financial experts estimated it at between Sh1.5 and 1.8 billion.

Mr Kinuthia said sale of Interconsumer’s cosmetics unit wa in line with his long-term plans for the business he initially planned to take public but got discouraged by the complexity and high compliance costs of listing at the Nairobi Securities Exchange.

“I had planned to list the company by 2015 but the stringent compliance rules before and after listing were daunting,” he said.

To list at the NSE, a company is required to have made profits in three out of the past five years prior. Besides, such a company must broaden its shareholder base to at least 1,000 investors.

Post-listing, companies are required to report results periodically, hire external auditors, and maintain good corporate governance standards, among other compliance standards that significantly increase the cost of administrative operations.

People familiar with the deal however say that Interconsumer’s heavy debt load became a big bump on the road to the billions that Mr Kinuthia ultimately earned from L’Oreal.

The businessman solved the problem by hiving off the cosmetics arm of the business and incorporating it into Interbeauty Products Limited. It is this new debt-free entity that L’Oreal bought, leaving Mr Kinuthia with the nascent sanitary business that retained the debts under Interconsumer Products.

Mr Kinuthia’s restructuring of the business and subsequent sale to L’Oreal is the latest example of homegrown and lucrative corporate manoeuvres that was only reminiscent of billionaire investor Naushad Merali’s boardroom tactics that left him with billions of shillings in takeover deals involving international telecoms firms Vivendi and Celtel in 2004.

Mr Merali, who was one of the minority shareholders in one of the then two mobile phone operators KenCell, used his pre-emptive right to buy the 60 per cent stake that Vivendi of France had put up for sale at $230 million and within hours flipped it over to Celtel at a price of $250 million, earning a quick $20 million profit.

Mr Kinuthia says the L’Oreal deal not only gave him an opportunity to harvest his investment, but also the muscle to go big in the sanitary market he entered in 2008.

Interconsumer has been importing the products from appointed contract manufacturers in China but Mr Kinuthia said this will change later this year when local production begins at his new factory along Nairobi’s Mombasa Road.

The factory will be located near the Mombasa Road plant and premises he sold to L’Oreal and which produces the cosmetics.

Interconsumer bought land on which the new factory is to be built at a cost of Sh500 million and plans to invest another Sh600 million in construction of the plant.

Interconsumer is banking on the fact that local production will give it greater control of supply and quality chains, boosting its competitiveness in the sanitary care market currently dominated by Procter&Gamble.

“Demand for the products is high and is growing,” Mr Kinuthia said adding that his decision to go local manufacture is primarily driven by the desire to create jobs, noting that China remains a much cheaper manufacturing base.

“I will sacrifice some margins in local manufacturing but create jobs and increase access to diapers and pads that the majority of Kenyans have been unable to afford,” he said.

Just before Interconsumer was split, it had a total of 500 permanent employees and another 6,000 employed in its sales and distribution chain.

L’Oreal says it will retain the employees even as it stamps its mark on the business.

Mr Kinuthia cites difficulty in accessing finance as one of the biggest challenges he has faced as an entrepreneur – a reality that forced him reinvest most of the profits in the business over the years to grow it.

Like other local manufacturers, he has also grappled with high energy costs and inadequate technical skills that have seen some firms hire expatriates for specific functions.“Our energy costs are about ten times higher than Egypt whose products we compete with under the Common Market for Eastern and Southern Africa (Comesa),” Mr Kinuthia said.

Interconsumer’s Nairobi factory will serve the local and regional market, including Tanzania, Rwanda, and Malawi.

This story was first published in Business Daily Friday.