EPI Investment Case Study: Competitiveness of Georgian Agriculture – Marneuli Food Factory

Established in 2007, Marneuli Food Factory (MFF) is a classical story of an old Soviet factory brought back to life through the establishment a proper supply base and massive investment in new products, modern machinery and mallnagement. Yet, it is also a story of a unique friendship and business partnership between two families: the family of Avtandil Svimonishvili and his wife Nino Ramishvili, on the one hand, and that of Thomas Diem, a Zurich-based Swiss psychologist, on the other. The two stories are so intertwined that it is impossible to fully appreciate the business success of MFF without understanding the human and ethical aspect of this venture.

The Swiss-Georgian Margebeli Holding, of which MFF is a part, includes four subsidiaries: Tskhali Margebeli (producer of Nabeghlavi mineral water), Marneuli Food Factory (manufacturer of canned food), Marneuli Agro (producer of agricultural raw materials), and Engadi (food distributor, including own products and imported goods such as mustard and olives).

MFF was built on the foundations of a defunct factory that was a key supplier of canned food, brandy and wine to the Soviet Union. When it was purchased in 2007, none of the old machinery at the plant was suitable for production. Thus, the bulk of initial investment had to be made in renovation of the factory shell and new equipment, including a tomato paste line from Italy. Lack of a stable raw material supply base was quickly identified as a key constraint for the business. This bottleneck was addressed through the establishment of a sister company, Marneuli Agro, and direct engagement of Georgian suppliers, including both farmers and traders.

Since its inception in 2007, MFF has captured 30% of the domestic market of canned and bottled preserves, and it is a major buyer of fresh produce from throughout Georgia. Based in the rich horticultural districts of Marneuli and Gardabani, in southern Georgia’s Kvemo Kartli region, MFF is partly vertically integrated with Marneuli Agro, which accounts for 40% of its raw materials, while also maintaining longstanding supply relationships with more than 150 small and mid-sized farmers.

More than US$25 million has been invested in MFF and Marneuli Agro since inception, including purchase of land and agricultural machinery, renovation of physical assets and installation of new production equipment. After a number of start-up years, the company was able to generate positive earnings (EBIDTA) in 2013. Most importantly, however, the wide range of essential products it places on Georgian shelves provides a revenue and market base beyond bottled water, which is still a luxury for the majority of Georgian households.

MFF’s success demonstrates the viability of import substitution as a business strategy for investors in Georgian food production and commercial agribusiness. Its cooperation with the holding’s distribution and agricultural production arms (Engadi and M-Agro, respectively) point to vertical integration as a useful mechanism of overcoming deficiencies in market support systems, which in Georgia include a highly fragmented supply base and weak business services.

Based on the findings of this case, our main recommendation to the Georgian government is to proceed carefully in the implementation of EU-style food safety requirements, for which Georgian producers are far from being ready. The Government should also repeal the ban on foreign investment in farmland, offer tax breaks and other appropriate incentives to compete with rival FDI destinations, and reform VAT administration to reduce its impact on companies’ cash flow, The GoG should also reform welfare regulations to strengthen incentives for formal seasonal employment conforming to Georgian labor legislation.

Our main recommendations for foreign investors are to seek reliable local partners to develop and secure their assets, consider a vertically integrated structure combing processing with commercial production base and in-house distribution; and manage payment risk by maintaining a mix of large, mid-scale and small-scale retail customers. Large retailers can be enticing, but a good customer is one who pays his bills.