How Nurlan Smagulov acts in the crisis
The owner of Astana Group gave an exclusive interview to Forbes. kz
F: Nurlan Erkebulanovich, three years ago the tenge devalued almost twice against the dollar. How did this affect your business?
— If we talk about MEGA-centers, not only our visitors, but the majority of Kazakhstani people switched to saving money and revised their expenses. They began to give preference to affordable brands and approach their purchases more thoroughly.
In September 2015, after devaluation, attendance in the MEGA-centers decreased by 10−15%. The psychological factor worked: people did not have the mood to spend money. However, it lasted only a few months, and already in December 2015, the attendance was fully restored. And it grew by 20% in 2016−2017.
F: Did an average check in the MEGA shopping mall decrease?
— The purchasing power of Kazakhstani people also decreased, and it was reflected in the average check: it was reduced by 20%. In 2016, this indicator was restored to the pre-devaluation level, and in 2017 it grew by 25%. In 2018, an average check in tenge increased by 20%.
F: Taking into account this fact, was it a right decision, in your opinion, to introduce a free floating rate of the tenge?
«I do not want to judge whether it was right or not.” But the fact that Kazakhstan at the end of 2014 did not harmonize the weakening of the tenge with the ruble had a deplorable effect for the consumer market, especially for the automobile market. Remember, at the end of 2014 — early 2015, more than 200 thousand cars were brought from Russia to Kazakhstan: cars in Russia became twice cheaper due to the fallen ruble. And if in 2014 we sold 155 thousand cars, in 2015 we sold 88 thousand. In other words, sales fell almost twice.
In 2016, auto sales decreased by 73.6% compared to 2015 and amounted to 41.1 thousand cars. Today the market has not recovered yet, but starting from 2017, we see a steady growth, which was 19% in 2016. It is still early to talk about the full restoration of the market because 49 thousand cars were sold in the Republic last year. In 2018, sales are expected to increase to 65,000 cars;, there is an increase in sales of more than 30%, compared to 2017.
F: Now, some economists say that the tenge should be supported again.
— Devaluation itself has never been a pleasant phenomenon, especially for importers. After all, the entire consumer market in Kazakhstan is pure import. Weakening of the tenge is beneficial to exporters, whose profits increase due to exchange rate differences. But all this affects the consumers. Prices for imported goods, including cars, are rising. Even SKD kits, which are assembled in Kazakhstan, are bought for currency, but Kazakhstan’s content is not so big to keep prices low.
However, despite all these facts, we must accept a floating rate of tenge for economic reasons in order to avoid mismatch with ruble that will provoke currency distortions and expansion of Russian goods to Kazakhstan.
F: Did weakening of the national currency have a negative impact on your development plans?
— We are different from the market. Do not take Astana Group’s actions as a general trend in the economy, but we look at devaluation as a time for opportunity and expansion. The fact is that the competitiveness of market players decreases during a crisis, the cost of the «entrance ticket” to the market falls, and we fill empty niches, using this opportunity. So, during the crisis, we opened MEGA Silk Way in Astana, introduced H&M and Starbucks brands. By the way, the owners of these businesses have entered the market of the Republic of Kazakhstan directly, without a franchise.
In Astana Motors, we expanded the portfolio, obtaining the rights to sell Jaguar, Land Rover, and Volvo, and we build auto centers. There is a regular rotation of the brands in the market: some brands stop working with weak dealers and come to us.
For us, the crisis is a time for a breakthrough. Since the land is expensive in «tough” years, it is more difficult to buy it for building an auto center, and it is impossible to invite large retailers.
But do not think that we are just waiting for a devaluation or a crisis: during this time our indicators also fall, but we are in the market for more than 25 years, and I personally started doing business in the early 90s, so I know that every recession will be followed by a take-off.
F: Nevertheless, after devaluation of 2015, you had to sell the malls in Shymkent, Aktobe, and Astana.
— I would have sold them anyway, and it has nothing to do with the crisis. We are just growing in a quality manner. We are not rentiers who collect real estate. Therefore, those malls in which we did not see a great growth potential for ourselves, we decided to sell in order to create something new; we built MEGA Silk Way, the area of which is 140 thousand sq. m., and this is more than the total area of all three shopping malls, which we sold.
By the way, some time ago we sold all the companies in the agricultural sector. We built macaroni factories and mills. We were the first to bring the Angus (breeding cattle) to Kazakhstan. We imported modern equipment, and we were innovators. And when many people started doing business in this sphere, we lost interest in this business. Astana Motors also narrowed down the portfolio of the brands; for example, it refused to deal with Nissan. In a word, when business becomes a routine, we get out of it.
I like to engage in an emotion-charged business, but this model is not suitable for everyone, because it has a great emotional component. Many of you will say that this is wrong, and first of all, business should be considered as a source of income. Perhaps they are right, but our companies are structured differently, and despite the stereotypes they are successful.
But we have remarkable projects. Astana Group does not become smaller or more boring. Now, for example, in MEGA Alma-Ata, we are building a new 15-hall Chaplin cinema, the opening of which is scheduled for December 2018. There will be a concert hall with a large stage; there will be a hall for children with pillows and toys. We are building a new food court there.
In the middle of August, we opened a real professional gym in MEGA Park. By the way, this is a new trend for us of creating social sports zones. In general, we are constantly developing.
F: Is there any intention to sell a mall?
— No, we have kept interesting facilities. For example, 850 thousand people visited MEGA Park in July 2018. Soon we want to bring this figure to 1 million. And it’s cool because in the place where the mall is located, there has been no park or garden. We invest money to make an oasis from a historically industrial zone. Once we have decided that here we can build a shopping center without competing with anyone. And people are grateful for this decision.
As for MEGA Alma-Ata, I’m not afraid to look ahead in its future: this mall has existed for 12 years, and it continues growing, being renovated and upgraded. We will definitely work here for another 12 years.
MEGA Silk Way is a very interesting facility, and its attendance is constantly growing. In July, this indicator reached 1.1 million people a month. I think it will be popular and in demand for another 20−25 years.
F: Do you want to expand on a wider scale?
— At this point, we have decided to work only in Almaty and Astana, although we have proposals from the regions.
It doesn’t make sense to build another «Mega” in Almaty — we will start competing with ourselves. Now we are looking more at other markets; we believe that our concept can be in demand in the neighbouring countries.
F: People began to give preference to more affordable brands in the malls. And what about cars?
— An average check is reduced in each brand. If before Land Cruiser was a hit for several years among Toyota brands, now Camry is a best seller. As for Hyundai, inexpensive models rank first as well. But luxury brands are not hurt by devaluation because it is a very specific segment that in demand among 1−3% of the population; they buy cars constantly.
However, during the crisis, Astana Motors began to earn thanks to trade-in. If three years ago, we did not sell cars under this program, in July 2018 only, we sold 220 cars, and for this year we plan to sell 2,200 cars under the trade-in program. Today, 25% of the total sales volume comes from the sale of used cars, and we want to increase this figure to 40%.
Astana Motors is also constantly working on further development and expansion of the brand portfolio. In the first place, we are interested in famous and successful brands.
F: Do you have to reduce spending on your social projects during the crisis?
— We did not reduce the size of assistance, we just changed the emphasis. For example, currently we do not hold exhibitions in London and New York; we generally refuse to participate in such events. Now we have stopped supporting the Astana Pro Team, and we have focused more on supporting the Vino-Astana Motors continental cycling team.
After devaluation, we also gifted several minibuses to the orphanages and children’s villages in Kazakhstan, we support Mother’s Home in Zhezkazgan, we helped to build a new stage for the ARTiSHOCK theatre, and we offered Almaty residents a free visit for one month to the Kasteyev Art Museum. We reinforce our support of Kazakhstani projects, focusing on targeted assistance.
Charity is a constant value for us: we have helped all the time and we will help; and it is not because we are obliged, but because we understand our responsibility.