Liga.net interview with TEDIS head

29 Nov

The 60 billion empire: how the tobacco (non) monopolist works. Interview with the head of “TEDIS”. The first interview of the new CEO of the largest tobacco distributor. Taras Korniachenko on the tobacco market and relations with the AMCU

The first interview of the new CEO of the largest tobacco distributor. Taras Korniachenko on the tobacco market and relations with the AMCU

The biggest player in the Ukrainian tobacco market – the company “Tedis Ukraine” – often gets into high-profile stories. The Office of the Prosecutor General’s Office, the Antimonopoly Committee’s investigation, the accusations of deputies of undue influence on the market are just an incomplete list of his adventures in the last two years.

Despite many informational motives, the company has avoided open communication with the press for several years. The last interview with the former CEO of the company Ivan Bey is dated March 2016.

This summer, Tedis is headed by Taras Korniachenko. He came to the tobacco market from retail – worked for seven years on the Watsons network.

In an interview with LIGA.net, the new chapter explains why Tedis is not a real monopolist, what tabachniks are saying to Volodymyr Zelensky, whether the company will pay the AMCU billion-dollar fine and how the latest initiatives of Servants of the People will affect the market.

WHO owns TEDISOM

– Tedis has long had Russian roots in the Megapolis company, then Boris Kaufman entered the business and is still unknown to British citizens. Could you explain who the shareholders of Tedisa are now and who are behind them?
– Since my arrival, the ownership structure of the company has not changed. The main beneficiary is Boris Kaufman, who is a public figure. We had a personal meeting with him. It was necessary to compare what is written about him with who he really is. And Boris Rafailovich was very charismatic, mega-energetic and interesting. This became the driver of my decision to come to the company, I was interested in working with such a person.
Two more shareholders – two Richards from the UK – Richard Daxbury and Richard Dorian Fenhalts, each owning 23.51% of the shares. I met with them three months after joining the company. These people are business owners but do not participate in operational management.

– How much do you, as a top manager, be independent of shareholders in operating decisions and often meet with Kaufman?
– We meet quite often. At the same time, I, as a manager, have sufficient authority to make independent decisions.

– Do you have KPIs?
– We have a KPIs system built. The key ones are profit and revenue. There is also an indicator of people’s engagement. Overall, my main goal in this post is to further develop the company’s potential to grow further. In fact, you need to increase the capitalization of the company.

– But you are so huge. Tedis is a kind of haystack in which you can hide and not find many small things.
– My past experience in retail helps me here. In fact, there is no limit to excellence in any company. Even in a haystack, straws can be arranged as it might not seem. But today, Tedis is a system company, it is the first company in my practice where job descriptions are not just pieces of paper, but real requirements for the employee. Therefore, this haystack is already quite structured. We can at any time calculate the efficiency of each employee, the cost per point, any indicator that is needed.
On the other hand, the potential of the company is not revealed, we are distributors in the FMCG sector, so there are enough products that we could still sell. We regularly calculate all options, assess risks, explore other categories for the company to grow. We look at how this will affect profitability and capitalization.

– Tedis is a billion-dollar company. Do you plan to increase the company’s turnover in 2019 compared to 2018?
– This year we expect revenue of about UAH 60 billion. This is slightly less, the percentage of 9-10, than last year. The reason for the decline in the tobacco market as a whole.

– What is the share of tobacco in the Tedis portfolio?
– Tobacco is by far the main product in our portfolio. Its share is about 95%. In addition, we sell tobacco related products: matches, lighters, and other goods.
USEFUL DATA. Tedis Ukraine (formerly Megapolis-Ukraine Trading Company) is the largest cigarette distributor in Ukraine. The company’s regional network consists of 35 regional divisions. The company is incorporated into four Cypriot companies: Metropolis Ukraine Investment Limited, Ebromar Industries Limited, Leadertano Holdings Ltd. and Placido Holdings Limited
ABOUT THE MONOPOLY POSITION IN THE MARKET

– You just said that you sell mostly cigarettes. What is the share of cigarettes distributed by Tedis? In the days of Viktor Yanukovych, it exceeded 90%, but what is it like now?
– About 60% of all sales.

– That is, you admit that Tedis is a monopoly, and the AMC is not in vain for berating you?
– Let’s explain it. In my opinion, what we are accused of is not true. I do not agree with this. We are the biggest player, but as far as the other components of the monopoly are concerned, this is not about us.
Today, the tobacco market sells about 50 billion pieces of cigarettes. They are produced by four international companies (Philip Morris, JTI, BAT, Imperial Tobacco), which account for 80% of the market. There are two other local producers – Lviv Tobacco Factory and United Tobacco with a total share of 11-12%. And the cancer of the entire tobacco industry is an illegal market, which accounts for 8-9% and is actively growing.
Further from the manufacturers of cigarettes move to the consumer from retail. These are about 60,000 outlets and about 30 major retail chains. About 30% of these retailers are key customers of manufacturing companies. At the retail of cigarettes come from wholesalers. We are also a wholesaler, we have a wholesale license, as well as 111 other companies that are officially registered with the DFS. Ukrainian factories still have their trading houses. That is, options for the distribution of goods many.

– You work with both key customers and retailers and wholesalers. And at the same time, your share of the entire market is at least 60% in your own words.
– We are big, but we do not try to dictate market conditions. We can’t do this because we work with a huge number of key customers who work independently from us, directly with the manufacturers. In fact, we simply buy cigarettes and do our best to deliver them to the consumer as soon as possible.
Some lawmakers believe that Tedis affects the price of a pack of cigarettes (this is explained in the explanatory note to Bill 1049 – Ed.). Cigarette prices seem to rise from being a monopoly player in the market. But it is not. Cigarette prices are set by the state through excise policy and by manufacturers who set the maximum retail price independently. You can see this price on every pack of cigarettes. In fact, we are one of hundreds of companies operating in the wholesale cigarette segment. The market is open, anyone can enter.

– At the same time, not everyone can compete with you.
– Our advantage is scale. There is no such distributor in the FMCG sector in Ukraine today that can deliver goods throughout Ukraine in record time. Within a week we can completely cover the territory of Ukraine, introducing a new brand, a new product to the tobacco market. And in this our advantage, we do it with the level of cost that no one in Ukraine can repeat.

– But there are also failures. Remember, a few years ago, there was a shortage of cigarettes in Ukraine? Back then, Megapolis was blocked by activists, and security officials had many questions about the company’s activities and shareholders. At what stage are those criminal cases and whether the charges are dismissed?
– All past criminal cases are closed. There were no grounds in principle for their violation. Right now we have some tax disputes in the courts. But there is no influence or pressure from security forces and tax officials.
And in case of force majeure, like in 2016, we have developed a special algorithm of actions to prevent the consumer from being hurt. We have 35 warehouses for rent, but our transport is all ours – it is 420 trucks that deliver cigarettes from our warehouses to retail – every week at 40,000 points.

– In addition to violating the rules of the game in the market, the AMCU charges you with another charge – conspiracy with multinationals. This is the reason why the company was recently awarded a multi-billion dollar fine.
– The story that manufacturers allegedly do not sell products to other wholesalers is, to say the least, strange. Today, manufacturers have many direct contracts with retailers, that is, no one forbids manufacturers to cooperate not only with us.
But the question is that tobacco is a low-margin product: about 80% of the cost of a pack of cigarettes is cost and taxes. Everyone – from manufacturer to retailer – remains at 20% of profits. We get only 4% of them. Unfortunately, some of the players in the market today are most interested in obtaining products and playing with them in tax optimization. That is how they create a competitive advantage.
We are in the top 10 taxpayers, in 2018 paid 1.8 billion taxes. For example, in Pervomaisk and Romny our distribution centers are budget-forming. We only paid retail excise to local budgets for about 850 million UAH.

– Will you pay the fine imposed by the AMCU?
– No, we will not pay.
– But part of the former fine, 300 million, you paid.
– Yes, but I would not pay. And why he was paid is a separate story, even before my appointment. We do not agree with the position of the AMCU, we consider it absolutely wrong, and we challenge the first case in the courts, work out all possible logical arguments. And we will also challenge the second case.

– What is your relationship with the AMCU President Yuri Terentyev? There is a version that he drops the Tedis case on the brakes. Although it was in 2015 that he began investigating the work of the Metropolis.
– I personally – exclusively business. I receive inquiries from the AMC and, together with my lawyers, I prepare answers to them.

– Often write?
– There have been several appeals from them recently. And we always answer, so the law requires.

– Recently, a lot of attention and summit meetings have taken place in the tobacco market. Tobacco workers meet with President Vladimir Zelensky, Prime Minister Alexei Goncharuk, Economy Minister Tymofiy Milovanov. How do you comment on this?
– There were a number of events. At the last meeting we were invited to discuss the situation in the tobacco market. It was attended by Milovanov, Terentyev, we, manufacturers, retail. In fact, it was one of the first attempts to figure out what the problems in the tobacco market were and how to solve them. Each participant of the meeting could provide recommendations on how to improve the market situation. And we are grateful to the authorities for such openness, and for our part we only welcome such actions.

– And what are your recommendations?
– First, we support the open market, but it is necessary for the state to develop the right mechanism for regulating it, in order to avoid the growth of the shadow market and tax minimizers. It is a system of tracking goods throughout the supply chain, as well as regulating the receipt of wholesale licenses.

– How do you comment on the post of the ex-authorized AMCU, and now the Deputy Minister of Economic Development, Svetlana Panaiotidi, about how the AMCU is finding guilty of the situation in the tobacco market? It cited Terentyev’s letter to Minister Milovanov, which said that it would be the ministry, not the committee, to deal with the situation on the tobacco market. In addition, there is information that Zelensky allegedly instructed the tobacco workers to reduce the share of Tedis to 35%.
– I would not like to comment on speculation. None of the meetings we attended were discussed. From what we are discussing with you right now, we can only be accused of being big. But this is not a violation. There is experience in many European countries – France, Spain, Italy, Portugal, where there is one big distributor, but all the others can also get a license and enter the market. Issues in the efficiency of logistics infrastructure. The situation is similar in both Sweden and Hungary – distribution is monopolized by the state.
And WHEN DO YOU SEPARATE?

– “Tedis” is the object of envy of oligarchic structures. In particular, they say that Igor Kolomoisky does not mind taking part in the tobacco market, where he has not yet been introduced. Do you not feel pressure in this regard and do not associate the AMCU’s actions with the interest of Igor Valerievich?
– Yes, there are different rumors, talks about interests of different groups, but we do not feel direct pressure. To me personally there were no requests or attempts to talk. Therefore, I cannot say that we are interesting to anyone. But if some groups of businessmen have an interest in this market, then I believe that they have all the opportunities to act in a completely civilized way and to enter it legally. We are not afraid of competition, it is in our hands.

– Do you have offers to buy a part of Tedis from international investors?
– Periodically, such requests arise. There is interest from both local and foreign investors. So far, there has been no substantive negotiation of any specific process.

– Would you personally like to buy a shareholding in Tedis?
– (laughs). In two years I have not yet had time to earn it.

ABOUT THE ILLEGAL MARKET

– All tobacco people complain about the growing shadow segment. You also mentioned the illegal market. What is the role of Tedis in the Ukrainian gray cigarette market?
– The position of our company was, is and will be such that we do not cooperate with companies that are in any way related to the illegal cigarette market.

– That is, you do not work with Lviv Tobacco Factory?
– I cannot say that the Lviv factory is connected with the illegal market. But we have no contract with them. They work a little differently – through trading houses, through their own branches.

– Previously, the main suppliers of illegal cigarettes were the Russian Dontabac, Belarussian manufacturers and Moldovans. Our factories, Ukrainian factories and handicrafts were supplying counterfeits. Have the sources of shadow changed and what makes the gray market grow?
– This market is developing on its own, there are many sources. And the key factor here is the price, illegal cigarettes are cheaper. We are trying to counter this by meeting consumer demand for cigarettes.

– According to the KPMG study, Ukraine is the largest supplier of illegal cigarettes to EU countries. Can you confirm or deny this information?
– We are not participants in international relations. But the press reported that one of the tobacco giants last year paid a gigantic fine – more than £ 15m – for the illegal production of Ukrainian products.
I can tell how we struggle with the shadows – we have an internal system of scanning each block of cigarettes at the stage from manufacturer to consumer. We have a separate scanner for each manufacturer. This information is collected in a database, which allows you to monitor in real time where, how much and what products, at what price. Merchandisers can check this information regularly.
ABOUT TOBACCO CONTROL

– In the last few months, the turbulence of the tobacco market has added legislative changes. Dubinsky-Kholodov’s amendment to Bill 1049 could result in at least two manufacturers leaving the Ukrainian market and reducing two suppliers at Tedis. Have you considered such a scenario?
– Well, it is Holodov or not Holodov, is there his interests, I can not say, the amendment is not submitted on his behalf. Schemes in their journalistic investigation professionally answered this question – yes or no – I do not want to comment. But the amendment, in my view, is incorrect. Because, on the one hand, the state wants to understand the situation on the market, on the other – some authorities make anti-market amendments. After all, setting some mark-up limits is absolutely anti-competitive. We will face a decline in consumption and the transition of the market into a shadow. And this will reduce budget revenues.
Deputies expected that the amendment would pay retailers more taxes. But what prevents them from paying taxes now is a rhetorical question.
Officially, the situation with the fix has not yet been resolved, and I, as a Ukrainian, would adhere to the rule “don’t say hop until you jump over.”

– Another scandalous story is the amendment to the Tax Code of Draft Law 1210, which provides for a one-off rather than a gradual increase in excise duty on cigarettes to the European level. This rule could increase the price of cigarettes and therefore affect your results. How do you rate it and how much you can no longer worry?
– If they do, we will again face rising prices, a decrease in legal cigarette consumption, an increase in the shadows. The volume of goods we can sell will decrease. We will lose in circulation. And the state will lose in taxes and revenues to the budget.

– Today, tobacco manufacturers are striving to create a smokeless future, the so-called smoke free generation phenomenon. In Europe, factories are converting to produce stacks for alternative cigarette products. What will happen to Tedis if he stops buying cigarettes in Ukraine?
– First of all, our main priority, our partners – international tobacco companies. Therefore, our task is to be as flexible and efficient as possible, to meet their needs. We are ready to distribute the products of the new generation that they bring to the market. In addition, we are working on expanding the non-tobacco range.

– Do you sell wipes?
– We do not have any Vapes today because the market is not regulated today. And now the trade in nicotine-containing goods and liquids carries risks, including reputational ones. In addition, we do not understand the level of demand for this product, the exact number of consumers of wipe has not been investigated.