Focus on SERBIA 2015

Featured content from the current report

October 15th 2015

www.mkgroup.rs

Serbia 2015: MK GROUP

Interview with Mr. Miodrag Kostić President of MK GROUP, Serbia

MK Group is one of the largest and most successful business groups in Serbia, with 35 affiliates employing over 4,500 people. Over the past 30 years, the group has grown into a powerful and diversified holding with activities predominantly in agriculture, and the sugar and meat industries.


How would you assess MK Group’s contribution to Serbia’s economy today?
Miodrag Kostić: MK Group was founded in 1983. At that time we were one of the first private companies in Serbia. I graduated from the Faculty of Economics the Department of Information Technology, which was the first IT course of its kind at the university. My last exam was to devise the implementation of an IT system in the sugar refinery in my home town. Twenty years later, I bought that sugar refinery and actually implemented the IT system I had developed when I was a student.

When I finished university, Serbia, which was part of the former Yugoslavia, was a developed socialist country. Compared to Poland, Czech Republic, Hungary or Romania, Serbia was ten years ahead of them. Today, we are ten years behind.

MK Group has been developing in synchronisation with the progress of the economy. From 1983 until the 1990s, there were no private companies in Serbia, only small workshops with up to five employees. The company had 100 employees by 1990. We had a lot of hope in the 1990s before Milosević took absolute power. Serbia was the most promising Eastern European country, opening up to the world; everything was booming. At that time the revenue was 190 million Deutsche marks and generating profit about 10 million marks a year. Then the war broke out in 1992 and I decided to leave the country for the U.S., where my two children were born. Between 1992 and 1996, I lived between the U.S. and Serbia. In 1996, I was invited to join the Democratic Party, and from then until 2000 I was mainly involved in politics. I was a candidate for different positions in the Government, but eventually I came to the conclusion that politics was not for me, and I decided to devote 100 percent of my time to business.

In 2000, I resumed my business when sanctions against Serbia were lifted, but the country was lagging 10 years behind other countries in the region. At that time, Prime Minister Zoran Đinđić really instilled hope in the people of Serbia, and during the three years when he was in power, a lot of progress was made – privatisations, major support gained from Germany and other countries, etc. The international community saw the positive changes in Serbia. A lot of Serbs who had left the country returned, but in 2003 Prime Minister Đinđić was assassinated. As a consequence, the progress of Serbia again slowed down. In the past number of years Serbia has experienced a constant stream of ups and downs.

Despite the general circumstances in Serbia my career has only been going upward. Today we have a conglomerate of 35 companies with over 4,500 employees in different fields. Sunoko, a member company of MK Group, is the most efficient producer of sugar in Europe – not the biggest one, but the most efficient one. Our market share in Serbia is almost 60%. We are also present in the meat industry, with Carnex, which has been recognised as a leading brand in Serbia. MK Group is active in private banking as well. AIK Bank has about 1.5 billion euros in assets and 500 million euros in capital. In the agricultural sector we are the absolute leader – with 20,000 hectares in Serbia, and 30,000 hectares of land in Ukraine. Our trading unit is trading about 1.1 million tonnes per year, which is 25% of Serbia’s total grain exports. Besides this, we are active in a number of other business areas, such as renewable energy, where we have a joint venture with an Italian partner for the construction of wind farms. Our brokerage company M&W Investments has also been one of the largest in Serbia for the last 10 years. MK Group is also involved tourism, with the four hotels that we possess. Our goal is to build 10 four- or five-star hotels – which would give us a comfortable position from which to compete with the bigger international chains. However, our hotel business is considered big in the region, which makes us highly competitive with the other hotel groups.

For the past 32 years, our strategy and motto have remained the same – first of all, efficiency, equity and organic growth. Our work principles are the same across all our businesses, and that is why we even saw growth during the time of the economic crisis, and it also explains why MK Group is today one of the leading companies in the region.



What is your key strategy for further growth and market penetration today?
Miodrag Kostić: This is the next step for the group. We aim to be number one in each sector. Bearing in mind that the Serbian market is too small, we only have a couple of options: go regional, go international or bring an international partner on board (i.e. joint venture).

With the know-how we have in agriculture, we can expand into any country in the region. All we need to increase our business is sizeable land – which is available in countries like Romania or Ukraine. As opposed to farmers in Europe we are managing the agricultural sector. What we aim to do is maximise EBITDA per hectare. Usually farmers are highly subsidised – or they are trying to reduce production costs. In our case, we try to maximise investment and produce as much as possible – the focus is on ‘profit per hectare’. However, we are a socially responsible company, which means that we maximise profit using cutting-edge, environmentally-friendly technology (such as in Carnex and the sugar factories, etc.).

World Trade Organisation member countries have already agreed to reduce subsidies all around the world. And if they do so, we will all be on the same page. Only the most efficient producers will survive this, or we will see consolidation in the agricultural sector. Don’t forget that 35% of the average European farmer’s income comes from subsidies. In Serbia, farmers don’t get anything like this.

Our revenues in Serbia stand at about 700 million euros, but our influence spreads far beyond that and affects all other sectors with a domino effect. We have over 4,500 employees, but there are 55,000 workers who are directly or indirectly dependent on the success of the MK Group. In the grain industry alone, there are 3,000 companies working with us by selling their products to MK Group. We are transporting 5 million tonnes of products per year – that’s 2,000 trucks every day. That is the impact and multiplying effect MK Group has. All sectors are connected – trade, agriculture, fertilisers, banking, etc.

What are some of the key challenges today to develop Serbia’s agricultural sector?
Miodrag Kostić: The Government has 470,000 hectares of arable land in its possession and is bringing in about 50 million euros in revenue a year from it. This represents an asset of something like between 3 and 3.5 billion euros. If you were to put this land in the hands of some investors they would produce 100 tonnes per hectare compared to the 50 tonnes produced today. It would be better for Serbia if the Government were to place this land on the market. Obviously, MK Group itself cannot buy the 470,000 hectares of land because we don’t have the 3 billion for it, but if we could privatise this land and bring in 50 or 100 investors, tomorrow all industries in the country would be booming. The prerequisites for all industries are cheap commodities, and efficient and sustainable production of commodities.

Serbia is still undiscovered. The opportunities available are huge. If you introduced German discipline, long-term finances, and food and processing expertise to Serbia, set up a base here, manufactured a product or semi-product, and then marketed it as a European product with a good name, you’d be assured of success.

Which sectors in Serbia do you think host the most potential for investors?
Miodrag Kostić: The agricultural sector definitely offers huge potential and opportunities. Water, food and energy are the cornerstones of society today. With increasing populations all over the world we need to increase our food production.

Serbia is a non-GMO country, and due to the economic crisis, we have used much less fertiliser than is the case in Europe which has resulted in a lot less polluted land. For instance, farmers in southern Serbia are almost using no fertiliser at all. So I believe Serbia has the perfect conditions for the development of organic farming in Europe.

The tourism sector also has a good outlook, as people are travelling more now than ever before. Today with low cost airlines and the vast range of travel options available, almost everyone around the world can travel. This is the reason why MK Group is investing in tourism and in holiday resorts. We can easily attract people from China here – as long as we have airport facilities nearby. The spa sector also has a promising outlook. There are currently 10 spas and wellness resorts up for privatisation in Serbia. Due to costs in Serbia being five times cheaper than in Europe but the service provided remaining excellent, we have a strong competitive advantage, and can promote Serbia as a world-class spa destination. As populations all over Europe age, Serbia is a country which offers a variety of age-appropriate tourism options.

How is MK Group involved with local communities?
Miodrag Kostić: MK Group is a socially responsible company and its corporate values integrate and highlight the significance of corporate social responsibility in all 64 local communities in Serbia where it operates. Social responsibility of MK Group is reflected through numerous donor, sponsor and humanitarian activities. The whole business system in Serbia and Ukraine allocates significant funds for numerous socially significant campaigns, through projects of institutions and associations whose work is supported by MK Group, primarily in the field of education, healthcare and social welfare. We pay around 1,5 million euros annually for contributions and taxes.

What is the achievement you feel the most proud of in your career?
Miodrag Kostić: I feel very proud of our sugar factory and the nickname that I got: “King of Sugar”. Today we are recognised in Europe as the most competitive sugar producer. There is a lot of privatisation going on in this sector – in 2002 there were about 15 sugar refineries, while today there only three. Not only did we buy these sugar refineries and save them from bankruptcy, we also turned them into the most competitive sugar producers in Europe.

I’m also very proud of MK Mountain Resort which was founded in 2009. It has become a unique resort in Serbia with a four-star hotel complex (three hotels in Kopaonik) and a four–star boutique hotel in the center of Belgrade. The aim is to possess 10 four-star hotels in total in order to be more competitive both in the region and abroad.

How are you raising your reputation and credibility internationally?
Miodrag Kostić: In 2008 we had intended to raise an Initial Public Offering on the London Stock Exchange. We spent a lot of time preparing the documentation and all was ready, but then the economic crisis hit in September 2008. We had plans to raise an additional 400 million euros to invest in Ukraine, which had just opened up and was offering some of the best potentials in the world for agriculture. But the economic crisis reared its head and we got a capital input of 50 million euros from the European Bank for Reconstruction and Development instead.

MK Group is not listed yet, but our governance practices and transparency level in MK Group are like any other company on the London Stock Exchange. The only reason we are not listed on the LSE now is because investor appetite is not up to our expectations, so we are holding out a little. We are a heavy asset company, evaluated today at approximately 1 billion euros and between 6 and 9 times EBITDA. In the U.S., companies are listed with 40 times EBITDA, but I believe this to be an over-evaluation which creates a bubble on the market which may collapse in the future.

What kind of direct message would you like to give our German readers today?
Miodrag Kostić: The fact that the German company Tönnies is investing 420 million euros in Serbia is a great testament to Serbia’s potential in the agricultural sector and beyond and will bring a lot of positive publicity. I invite German investors to come and take a closer look at Serbia.