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How Calamitous Export Red Tape Spurred Unlimited Growth for Keedo

For a time, 70% of Keedo’s revenue was derived from exports to the US. When a customs debacle almost killed the business, Keedo’s Nelia Annandale and David Robertson realised they had to spread the risk.

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Vital stats

  • Players: Nelia Annandale and David Robertson
  • Company: Keedo
  • Established: 1994
  • Visit: www.keedo.co.za

Just 12 years after starting children’s clothing label Keedo from her home, Nelia Annandale was supplying over 100 boutique stores across the US. She’d created a strong business with a loyal customer base.

But a customs delay of two clothing shipments at a US port almost killed her business, and made her realise the risks involved in running a business so heavily dependent on exporting her product.

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Determined to mitigate those risks, Annandale and her business partner, David Robertson re-evaluated the way the business was operating, putting paid to the slogan of ‘local is lekker.’

The Early Years

The seeds of Keedo began when Annandale starting sewing clothes for her twins after struggling to source suitable baby wear. She was recovering from a serious skiing accident, and decided to put the time to good use.

Today the business employs more than 200 people, with a factory in Paarden Eiland, Cape Town, and has 20 retail branches across the country.

The clothes Annandale created showed clear influences of a childhood spent on a farm, inspired by her love of nature and brightly coloured African clothes. Her vision caught on, and within a few months she opened her first store in Cape Town’s Tyger Valley Shopping Centre.

The Growth Challenge

keedo-clothing-company

Having started the business in 1994, Robertson and Annandale were among a number of business owners who began taking advantage of South Africa’s restored trade relations with global markets.

They paid careful attention to local trade and export/import legislation as well, and when it came into effect in 2000, Annandale and Robertson positioned their business to benefit from the African Growth and Opportunity Act (AGOA) which allowed products made in Africa to enter the US duty free.

A cornerstone of AGOA was that for a product like a T-shirt to qualify for tariff-free access, it not only had to be made in Africa, but also had be produced using yarn sourced and grown on the continent.

This was done in an attempt to support African imports without opening a door to cheap Asian imports. However, in 2005 South Africa and a string of other countries removed quotas on clothing imports, resulting in a flood of cheap Asian imports into markets across the world.

US authorities were concerned that Asian exporters were unlawfully trying to make use of AGOA by shipping clothing via Africa to the US. This would ultimately impact the businesses that AGOA had originally been designed to promote.

US customs authorities tightened inspections on all textiles coming into the US from Africa. This is what led to two shipments of Keedo products being flagged for inspection, and held up in a US port.

A Customs Debacle

It was no small deal. At the time, about 70% of the company’s sales were generated by exports to the US, mostly to boutique stores. And it wasn’t a quick delay.

The customs delay, says Robertson, ‘effectively killed’ Keedo’s sales to the US by stretching out clearing times from a matter of weeks to months, and leaving eight Keedo boutique stores (run by independent operators) and numerous other outlets that were sourcing from the clothing company, red in the face. Many of the Keedo-branded stores had to close after the debacle.

“I aged 20 years in those eight months,” recalls Annandale. The worst part of the situation was that it was completely beyond the control of Annandale and Robertson.

Luckily the founders didn’t have to foot what would have been a hefty legal bill. Eight months after the initial delay, 100% clearance was granted at US customs after a New York law firm was commissioned by AGOA to inspect Keedo’s business and manufacturing plant to prove the origins of the product.

Adjusting the Business Model

But, the damage had been done and Annandale and Robertson were forced to downsize in South Africa following the customs incident. As a result of the seasonal nature of fashion, they were also left with stock that had lost its appeal in the US market because it was no longer suitable to clothing currently in stores.

“We had to bring all those garments back to South Africa and clear them in the local market at huge discounts,” Annandale recalls. “The upside was that they were right for our local season, and we inadvertently introduced a whole new market to the quality and designs of Keedo clothing.”

More importantly, the customs incident forced Annandale and Robertson to review their business model. “We came up with a strategy to never again allow any individual customer or market to account for such a large portion of our business,” says Robertson.

The Domestic Market

Keedo dress south africa

At that time they had only six local stores. Unlike the US set-up – where independent operators used the Keedo name on their stores under license – Robertson and Annandale opted to roll out company-owned stores.

At the same time, they set out to diversify the number of export destinations they served by contacting buyers in Europe who had expressed an interest in the product in the past and then calling on them with sample ranges.

In the domestic market, their plan was to open stores in main economic centres as a wholesaler to clothing stores in smaller towns. Last year the company opened six additional stores.

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Robertson says they looked at a franchising model, but decided against it given their operational limits at the time. “We would have just been bad franchisors, and that wouldn’t have been good for the growth of the brand, or our prospective franchisees. We were new to retail, and wanted to control our growth while we learnt the retail business.”

Branching Into Retail

In rolling out stores, Annandale says their two main challenges have been securing the right location and hiring suitable staff.

To ensure good customer service, they have invested in customer retail management (CRM) software which provides data on the performance of sales of each product at each store, helping to achieve the right product mix in stores. It also enables the company to keep track of each customer’s buying habits – such as their buying cycles and preferred price points.

“We focus on mining the data that is available to us and using it to guide our buying and stocking practices to ensure that we are meeting customer needs,” says Robertson. This, says Annandale, has helped to create a more personal experience for their customer.

The Export Market

Keedo red fox outfit

While these initiatives have supported the development of the local operation, the main focus of Robertson and Annandale, along with Peter Colombo, the company’s third director and chief executive, remains on export markets.

Annandale runs international buying conferences twice a year, usually in Amsterdam, as it’s a central location for the overseas markets she’s targeting. These are aimed at customers sourced through trade shows and company stores that have approached Keedo with the idea of selling its products overseas. Annandale believes that by conducting its own buying conferences, the company garners more buy-in from customers.

“When I go to our conferences, I don’t only showcase the clothing we make, I also show customers video clips and marketing material of what we do with our different charity projects,” says Annandale, who points out that many of her customers are mothers themselves who often take an interest in how the product is produced and by whom.

Annandale uses her various charity initiatives (such as Zippy Grow, a Stop Hunger project jointly conceived with former Miss South Africa Joanne Strauss which provides meals to needy children) to market her products and remain relevant in an increasingly competitive children’s clothing market.

“I think many people really want to do good, but they don’t necessarily know how,” she adds, “and becoming involved with a product that does facilitates this need.”

Seven years after the start of the global recession, the US economy is growing again, but this does not necessarily translate into instant growth opportunities for Keedo, as the US imposes onerous safety requirements, which increase the costs of exporting to the country.

“The standards themselves are not onerous, but the costs involved in testing and securing certifications can be. For example, each button on children’s clothing must be tested and you have to supply proof that it’s nickel free,” says Annandale.

Currency Volatility

The volatility of the South African currency is another risk factor, even more challenging than competition from cheap Chinese imports, says Robertson because it makes it difficult to project the cost of raw materials, such as yarn, that have to be sourced offshore.

In some ways the European Union is a less onerous export destination than the US. Clothing imports into the EU benefit from preferential duties and unlike the AGOA requirements, the yarn doesn’t necessarily have to be African, provided that the T-shirts are made in Africa.

Today, Keedo exports to 22 countries, most of these in Europe and Africa, and total exports account for only 10% of total sales, proof of how well the brand has done in the local market.

With their sights set on opening 15 more local stores in the near future, Annandale, Robertson and Colombo are aiming for solid future growth.

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“The number one thing I did that I think was wise was to get, through some of my advisers, was a Chairman; basically someone who was a very experienced business person, an industry veteran — Bart Swanson, who had been at Amazon and then Badoo. Then, myself and Bart really started finding people and growing the team.”

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Brendan Kennedy worked on job sites as a carpenter to pay his way through university, with his eyes set firmly on becoming an architect, until the allure of Silicon Valley changed the course of his direction. While working at technology start-ups Kennedy began thinking about the possibilities that medical marijuana provided.

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Scaleup Learnings From Our Top Clients – What The Most Successful Entrepreneurs Do Right

So, how do our successful clients move through these constraints to scaling up? We see four key drivers of success, and they are: people, strategy, flawless execution and finance.

Louw Barnardt

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You’re out of your start-up boots, staff is increasing, your client base is growing, revenue is up and you’ve proven your case to the market. Now it’s time to scale up. The challenges of this vital growth phase are different and it’s a time that demands different mindsets and different actions. In a world littered with small business failures, it helps to be well-prepared for scaling up using a proven methodology. At Outsourced CFO, we get an inside look at the success factors of our clients who are mastering the transition.

On the one hand, scaling up is a really exciting phase; this is what moves you into real job creation and making an impactful contribution to economic growth. On the other hand, it is really hard to scale up successfully. We see three major constraints that limit companies’ transition from start-up to scale-up:

Leadership

The business has to have the leadership that can take it to the next level. When you start scaling up, especially rapidly, the founders can no longer do everything themselves. The team must grow and include new leadership talent that can take charge and execute so that the founders are working on the business instead of in the business.

Infrastructure

The processes, procedures, networks, systems and workflows of the business all need to be scalable. This is imperative when it comes to your infrastructure for the financial management of your business. You’re only ready for growth when your infrastructure can seamlessly keep pace.

Market access

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Businesses that build a market conversation and a compelling brand narrative during their start-up phase are better positioned to have this kind of market access when they need to scale up.

People

It is critical to have the right people on your team. Our successful entrepreneurs have what it takes to attract, inspire and retain top talent. A strong team of smart, ambitious and purpose-driven people who love the company and want to see it succeed contribute greatly to a world class company culture. They are adept at communicating a compelling vision and establishing core values that people can take on. These entrepreneurs are tuned into the aspirations of their people and focus on developing leaders in their teams who can in turn develop more leaders.

Strategy

It is planning that ensures that the right things are happening at the right times. At successful scale-ups strategies and action plans are devised to ensure that the most important thing always remains the most important thing.

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Flawless execution

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Finance

Everyone knows that growth burns cash. A rapidly scaling business faces the challenge of needing a scalable financial infrastructure to keep the company healthy. Our successful entrepreneurs pay close attention to finance as the heartbeat of the business, ensuring that everything else functions. They look at the tech they are using for financial management and for the ways that their financial systems can be automated so that they can be brought rapidly to scale. The capital to grow is another vital finance issue.

The best way to finance a business is through paying clients on the shortest possible cash flow cycle. However, when you are scaling up and making heavier investments in the resources you need for growth, it is likely that you will need a workable plan for raising capital. Our scale-up clients know the value of accessing innovative financial management that provides high level services to drive their business growth.

Navigating the scale-up journey of a growing private company is one of the hardest but most rewarding of careers to pursue. Having people in your corner who have been through this journey before helps take a lot of pain out of the process. No growth journey looks the same, but there are tried and tested methods that will – if applied diligently – lead to definite success. Happy scaling!

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