Costco in the Mist: Jim Sinegal on Investing in Rwanda
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A few years ago, an initial meeting with a couple Chicago-based investors led to Costco (NASDAQ: COST) Co-founder Jim Sinegal taking an interest in the future of Rwanda. Since then Costco not only has become a significant buyer of the country’s coffee crop, but Sinegal has used Costco’s success to encourage Starbucks (NASDAQ: SBUX) and Boeing (NYSE: BA) to develop Rwandan business opportunities of their own. The Sinegal Family Foundation has also worked with partners to use the last couple years to start a self-sustaining school for young Rwandan women which incorporates business activities into its approach.
Nick Slepko: How’d you get involved in Rwanda?
Jim Sinegal: Joe Ritchie and Dan Cooper with Fox River Financial called me up. They were investors in Costco and I met with them when they came to visit our home office. In the course of the conversation they told me they always invested on the basis of how they ranked the CEO of a company which was interesting – and I was flattered. So they showed me the whole thing and how they had ranked every CEO, and I looked at my name and they had six or seven categories and on “intelligence” they had left mine blank! I asked, “What the hell is this?” And they said, “Well, we didn’t really know you that well other than by reputation.” So I was about ready to throw them out of the office. [laughs]
As we talked, we started discussing Rwanda, and that’s how it all began. Later they asked if I would agree to meet the president of Rwanda [Paul Kagame]. Of course, he’s a head of state, what am I going to say, “no”?
Nick Slepko: At that point, what did you know about the president of Rwanda?
Jim Sinegal: Well, I knew more about Rwanda than I did about the president. I knew about the genocide. I knew the difficulties they had. I knew about the poor performance of the [United Nations] there. They described Kagame’s efforts and that he was the one that had liberated that country from that genocide because the UN had refused to do anything. So I met the president in New York for lunch. I liked him, and the reputation was that he was doing a very good job in his country, that he had virtually eliminated any corruption in the government – which is monumental when you’re talking about Africa. Rwanda had developed a lot of respect for women. As a matter of fact, it was a nation that had the highest percentage of women in parliament of any country in the world, I think some 54% of their parliament is female.
Kagame described for me his view of good and bad aid. Bad aid was when you just give money and it gets wasted. Good aid was when you help Rwanda and teach Rwandans how to do things to develop their country and a middle class. I discovered that they had a strong coffee growing climate and great quality coffee. So, we sent our buyers over there and they did a great job. Without any prompting from me, they set up a system to buy the premium coffee and make sure that the money was getting into the hands of the farmers and not getting diffused by going into the hands of three or four middle people. They also initiated a program to enhance the farmers’ production of the beans by setting up washing stations and pulling out the best beans. Today, I think we buy something like 25% of the premium coffee coming out of Rwanda.
Then I introduced [President Kagame] to Howard Schultz [Chairman and CEO] at Starbucks. Howard liked him so much, he had him come to his annual meeting, and Starbucks also started buying Rwandan coffee.
Later, in a moment of weakness, I promised [Kagame] that I would come visit the country – forgetting how far it was and how long it would take to get down there. I took my wife, one of my sons, and my daughter and two of her children …While visiting with President Kagame and his family outside the capital, his two sons (which are about the same age as my grandson and granddaughter) played soccer with my grandchildren for two hours. During our visit my daughter fell in love with the country – she had been wanting to do something in education and Rwanda presented a good opportunity.
Subsequently, President Kagame came to the United States and Howard Schultz had a dinner for him at his house which my daughter and I attended along with about ten others. Over dinner, Kagame asked me, “Did you know that the kids have continued to communicate and are e-mailing one another?” I thought to myself how cool was that? They have continued to stay friends and on a later trip, President Kagame brought his son who had his first sleepover at my grandson’s – and he returned the invitation when my grandson went back to Rwanda.
Later, I was able to introduce President Kagame at a fundraiser my daughter was hosting at my home for a new school in Rwanda [Gashora Girls Academy]. I invited the CEO of the commercial airplane division of Boeing and introduced Kagame to him. I think now they have delivered two jets to Rwanda and are helping them set up their airlines.
So that’s how the relationship has developed, and the school is now open – and I have to tell you that the school exceeded all my expectations. [NS: What did you expect?] Well, I don’t know. I think I expected nothing quite as professional as it turned out. [laughs] The two women who did this, my daughter and her partner in this school are both married and my daughter has three children and the other woman has four kids. They went out and raised all the money, drew up all the plans, bought the land, got pro bono work from attorneys and architects, and oversaw the construction of the whole facility.
The school now has young women from every province in the country and they wear uniforms because they didn’t want clothing to become an issue that divided the city and rural girls. And those young students are incredibly enthusiastic for the learning and their teachers.
It’s turned out to be excellent.
Nick Slepko: From your perspective which has been a more difficult undertaking, the coffee or the school?
Jim Sinegal: The school by far. Because [Rwanda was] already in the coffee business – and yes they were already in the education business too – but this school started from the most embryonic stages, including having to go out and get the land and everything else. Of course, they have been very fortunate because they have gotten full support from [Rwanda’s] president and first lady (they were at the dedication of the school).
The intention is to run the school for five more years and then turn it over to the community. You know, ultimately a project like this has to be something the community wants to embrace and maintain.
Right now they have a mix of American, Ugandan, and Rwandan teachers and things are complicated a bit because English was just made the official language of Rwanda [it used to be French]. Of course that’s kind of how they do things in Rwanda: Effective Tuesday this is the language. [laughs]
Nick Slepko: With the Costco coffee venture is it a mix of Americans, Ugandans, and Rwandans?
Jim Sinegal: No, it’s all Rwandans on the ground. We helped them set it up and we do have someone that roasts coffee for us that has joined in by helping set up [a training center] that advises on the washing stations and other activities that enhance the crop.
Nick Slepko: How does Costco deal with problems of consistency and ensuring a reliable supply in the amounts required by your warehouses?
Jim Sinegal: Yes, that can be a problem, but those aren’t major issues since we don’t sell their coffee year round, we sell it about three months out of every year. Along with three other countries (Ethiopia, Indonesia, and Papua New Guinea), we have a program in place that meets our needs year round.
Nick Slepko: Papua New Guinea is rough. Except for having a coastline, I would think New Guinea would be far more difficult than Rwanda. Where is Rwanda situated on the scale of elbow grease needed to make this sort of venture work?
Jim Sinegal: I think it’s in the middle, but things have gotten easier and better as time goes on. You’ve got a country, a president, and an administration that wants to build a middle class. You’re still dealing with a developing economy and there’s still a lot of bureaucracy along with language difficulties and cultural differences.
Overall, Costco has had a very good relationship with Rwanda that we are happy with and that Rwandans seem delighted with.
Any time you are setting up a new operation in a country it takes a bit of extra effort to get it started. Once it’s up and running and with the enthusiasm from the other end, especially in Rwanda, I think it works. It’s not without its challenges, but we’ve got a chance to develop a great product. We’ve gone through a similar situation with Uganda relative to vanilla. A major portion of the vanilla crop in Madagascar was destroyed and it is going to take them a lot of time to get back to where it was. So our buyers went into Uganda to develop quality vanilla with a co-op of thousands of farmers.
Nick Slepko: Did the president of Uganda show up on your doorstep too?
Jim Sinegal: No, no I think we were approached by the guy setting up the co-op.
Nick Slepko: When you introduced Starbucks to Rwanda, was that a personal connection from the Seattle area, or do you often source product for other companies in your spare time?
Jim Sinegal: We are personal friends, but Costco also buys a lot of Starbucks coffee. I know Howard well enough to know he would be interested in the Rwanda story and it was part of what we’re trying to do to help Kagame build relationships with American businesses and support his effort to stimulate commerce in that country. Kagame realizes that if they are going to get into the twentieth century (forget the twenty-first for now), they are going to have to start building their middle class first.
Nick Slepko: Has the Rwanda experience been profitable for Costco, as profitable as other options Costco can choose from?
Jim Sinegal: Nothing works unless it’s profitable. Any commercial enterprise doesn’t last very long if it’s not profitable. Otherwise, it’s just charity and there are lots of arms that deal with charity, but this is an effort to try to marry the two. We are doing something to help a country out, and we are doing something to help themselves out. We wouldn’t be buying from any of these countries if we didn’t think there was a pretty good return. Before Rwanda we sourced ground coffee from Mexico and a few other locations in Latin America, but Rwanda became part of our rotating premium coffee bean program that we set up as we improved what we had to offer our members.
Nick Slepko: Tell me about Costco’s Rwandan interns.
Jim Sinegal: I told President Kagame that if he wanted to identify some individuals that they thought had some entrepreneurial skills we would be prepared to take them on over [at Issaquah corporate headquarters] for three months. Last year, five came over (but one had to drop out due to family illness), and we rotated them through our business – not that we expected they would start a Costco over in Rwanda (although who knows that might be something that eventually happens), but just to teach them how American business works. How the purchasing aspect works. How the construction aspect works. How the customer service aspect works. So we rotated them through every department.
Now we’ve come to the conclusion that three months is too long for them to be away from their families and businesses. So when I was over there earlier this year, I interviewed the eight finalists that had been selected and we chose four. We chose them based on things like how long they had been in business, did they really have a viable business at the moment or was it just a dream, did they really have the experience and educational background. One participant we selected was only at high school level, but the others are pretty far along at the college level. Frankly, one of the major considerations in addition to what they were doing with their own businesses and their enthusiasm was certainly their English ability.
They are supposed to come over here the second week in April and this time it is going to be for six weeks. We will put them through the same rotation, pay them a salary, and give them jobs to do.
Nick Slepko: So, when is Costco going to open a warehouse in Rwanda?
Jim Sinegal: You know I don’t know if that’s something in the cards. Just because the type of merchandise we have probably makes it difficult. In addition, to go into a country where you can only have one building is very difficult for us. The infrastructure you have to establish makes it a very difficult process. As a matter of fact, we were doubtful as to whether or not we could succeed in Australia since it only has 18 million people...Scale is very important for us to generate enough volume to support the infrastructure that you need to set up in a country…Currently, we send a lot of goods into Central and South America…and our members in other countries take a lot of products into other countries…There may be something in the future through [Costco Export], you never know.
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