The pound hit a record low this week — around 56 to the dollar. Measured in dollars, Egypt’s blue chips have lost more than a fifth since their September peak. Some companies are now buying back their own shares. Is the market a bargain or are some of these stocks cheap for a reason? The answer may come down to one question: who can raise prices without losing customers? Joining us is Ahmed Elleissy Nassef, international strategic management consultant, non-executive director at Eastern Company, and author. Good to have you back, Doctor Ahmed.
My pleasure.
Your book looks at why market leaders that seemed untouchable ended up collapsing. Two thirds of Egypt’s blue chips have fallen more than the index in dollar terms. How can an investor tell a company hit by a bad cycle from one that is starting a real decline?
There was a very interesting piece of research done by Harvard Business School. They went back to the 1960s and looked at how many of the Fortune 500 companies are left today. The very surprising thing is that it was actually less than 50 — which means 90% of the Fortune 500 are no longer there. When they looked at what happened to these leading companies, they came up with three key points. First — market share. Economies go up and down and it is very normal for a company to go down when the economy is in bad shape. But a cyclical company suffers with the market while a declining company consistently loses ground to competitors. Second — cash flow. Profit is an idea. Cash is reality. Sustainable cash generation matters much more than reported accounting profit. Third — management strategy. Strong companies protect their competitive advantage and invest through the difficult period. Weak companies focus on short-term survival. A falling share price does not necessarily mean a failing company. The real warning sign is when the company starts losing its competitive advantage — not just its market value.
With the pound down about 10% since September, what separates a company that can pass higher costs onto customers from one that has to absorb them?
That is the billion dollar question. Some companies approach it very simplistically — they just pass it on 100%, saying the pound devalued by that amount so let me increase pricing by the same percentage. That usually ends in a major failure. Whenever you make this decision, you have to examine your brand strength — how differentiated is the brand, how easy is it to be replaced by another brand that solves the same consumer problem. You also have to look at price elasticity — how much volume are you putting at risk if you increase your price. And very significantly — strong companies couple price increases with innovation and cost efficiencies. The idea of pricing is not just about being able to increase prices. It is about increasing the price correctly without losing your consumer. And that can take many different forms — not necessarily just putting the price up.
When margins get squeezed, the first things to go are marketing, training, and new products. How can an investor tell a company that is getting lean from one that is quietly damaging its future?
It is a common practice but not necessarily a good one. The brand building and the investment you put into your business down the road may be even more important than what you generate today. People look at whether a company is growing and investing in innovation. We all know the story of Motorola — they had an almost empty pipeline. Every time they went back to square one on their product cycle, they almost went out of the market. Today they are almost nowhere on the global mobile phone horizon. It is very important to look longer term and not sell the future for short-term gains.
If you were on the board of an Egyptian consumer company right now with the pound at 56 to the dollar — what is the one item at the top of the agenda?
Protecting shareholder value. We cannot absorb such aggressive cost growth. And it depends on how much of your components are affected — if you are importing 100% of raw materials that is one story, if you are 100% local that is a different story. But reality is always somewhere in between. The most important thing is to ensure you do not lose your customers — passing on the maximum you can while protecting your bottom line. And the answer is different every time. There is no one size fits all, even by brand, not just by company. Because the elasticity — how much the consumer can tolerate — is not the same across all brands as you are targeting different segments of the population.
Doctor Ahmed, thank you very much for coming on the show. It is always a pleasure having you.
The pleasure is all mine. Thank you.
