Revival of Almaty apples

Our MBA team (me, Akmaral, Yerlan, Saniya and Togzhan) had a great experience during Entrepreneurship course. One of exercises was to build a business case story about local entrepreneurs. We have choosed the story of Arsen Rysdauletov who is working in agricultural sector and revives kazakhstani apples.

Arsen Rysdauletov

It is middle of September 2015, Arsen Rysdauletov is on his way to the crop, and thinking about his plans for today and for the rest of the week. He was replaying in mind his ideas, tasks, meetings with customers, partners and potential investors. He springs out of his car and walks into an apple orchard near Almaty — the city of apples. He noticed, that fragrance of the orchard is special and unlike any he has ever known. He smells the ripening and rotting apples and thinks that this is something he always dreamed about and this makes Kazakh land so bountiful.

He founded Rais Baksha, a company which grows apples for sale and processes into apple chips. His love and passion to agriculture was born in childhood, when he and his family worked all summer at his grandfather’s crops and orchards in Karamker village near Almaty.

After years of travelling and studying abroad, he changed his mind about making business and thinks not only about how to make money, but also about the environmental component. He believes in a great future of Kazakhstan’s agriculture, that it is important business for all people in the world. At the same time, he has a lot of concerns regarding profitability and future growth of his company. All his family, including his grandfather, worked hard, took care of these trees, and Arsen has to make right and timely decisions to achieve sustainability and development of Rais Baksha.

The harvest needs to be collected within two weeks and then stored in a cool place till January, when apples can be sold at higher price. He has three months to establish network channels to distribute apples and to develop his project for further processing and adding value to the product. With marketing background, Arsen understands the importance of value proposition for customers, sales channels and new technologies to his company.

Alma-Ata — “The Fatherland of Apples”

Almost hundred years ago apples were the heart of Kazakhstan. Its former capital Almaty was called Alma-Ata, or “Fatherland of Apples.” The climate of Almaty was ideal for different trees, like apples, pears, walnuts, and apricots. Endless wild forests surrounded the city of Alma-Ata. Older citizens of Almaty with a touch of regret remember this marvelous gardens where apples and pears look down on you from the trees and beg to be eaten.

Almaty approved by the scientists as a birthplace of the apple. The apple’s ancestor grows nearby Tien Shan mountains, which borders China and Kazakhstan. But now, there is almost nothing left of the wild apples, and every day situation is getting worse. It’s important to save and protect wild apples, because “new” apples are plagued by disease and pests. Wild fruits can help to fight with these problems, because they hold original DNA. Wild apples can help to develop better quality apples which are richer in nutrients.

The most famous apple in Almaty is Aport. The first orchard of Aport appeared in Alatau Mauntains in 1850’s. This fruit was large, the taste was so beautiful like nothing else in the world — sweet and sour, sugary and musky. Since then Almaty city has been widely associated with apples. The suburbs of the city used to be famous for their apple gardens. The Aport apples that used to be famous all throughout the Soviet Union became almost completely vanish after the fall of the Union, and only a few gardeners now grow these apples in their private orchards.

Almaty is now more famous for its smog than its apples. The places where apple trees grew now are build up by houses, buildings, shopping malls, and hotels. The city expanded for hundred kilometers and residential use increased 125% since 1960’s.

During the Soviet Union, Kazakhstan served as a “breadbasket” that provided the former Soviet Union with products of agriculture and cattle breeding and saved from widespread famine several times. Now Kazakhstan decreased local food production and increased food importation. That have negative effect on country’s economic situation taking into account the tremendous decline in oil and gas prices.

Once famous Kazakhstan agriculture and gardening industry is not able to provide its domestic market with apples and other fruits. There is nothing left from the apple orchards, which surrounded Almaty. After the collapse of the state gardening enterprises, private entrepreneurs can not provide with apples even domestic market, not to mention export of products. And the number of apples produced is shrinking every year.

Apples are the second most consumed fruit worldwide, with about 70 million tonnes grown every year. The demand for organic apples is increasing rapidly and exceeds supply in many Western countries. Almaty has a great opportunity to return its former glory and honor as a city of apples and develop gardening sector of the economy.

Background

Arsen was born in a small village Malovodnii in 1982. After a while his family moved to Almaty, where he grew up. Both of his parents were musicians, despite this he was not accepted to a musical school. Nevertheless Arsen’s parents have not been disappointed. They knew musicians have always been poor: in the early ’90s it was hard to find a job, and they wanted their son to do something more substantial.

During 2000–2005 Arsen studied in Central Asian University and graduated with major of International Relations. The skill of professional communication and the ability to negotiate with anybody, that were learned there helped Arsen during his whole future life.

In 2007, he took finance courses in University of International Business (UIB). At that time, he was working in one company approximately 2.5 years without taking any vacation. Therefore, he decided to invest his unpaid vacation reserve (UVR) in agricultural business and planted an orchard together with his grandfather. The idea of cultivation of eco-products was not very popular in Kazakhstan, thus it was a good idea and opportunity to grow.

In order to finance this new project further, Arsen knew that he should take some actions. He could take a loan from a bank, or continue to work full-time. He pondered both options, and decided to finance it privately without any external debts. Therefore, he was working in a few international banks from 2007 to 2012. The main work was to issue credits to agricultural products. At that time, the planted apple-trees were growing and blossoming.

Arsen realized that networking skills and marketing skills are not enough to run agricultural business and decided to move on further. He explained:

“The most difficult gaps were in knowledge. To enrich the knowledge I decided to sell my apartment in Almaty and enter the University of Hohenheim in Germany. This moment was unforgettable as I changed my life drastically. I had doubts in the beginning. But now I am happy. I started write articles for the local media. I was involved in a different agricultural projects and researches in Kazakhstan. Therefore, I became self-made farmer and expert.”

In Germany, he studied Agricultural Economics (courses) from 2012 to 2014. This was a starting point for a complete change of profession. He became acquainted with the experience of small and large farmers in Germany, Turkey, Israel, Uzbekistan and Kyrgyzstan.

In 2014, he came back to Kazakhstan and was invited for the position of director in a small start-up company Alatau Fruits Engineering (AEF). The company was engaged in planting of apple orchards and provided a variety of agricultural services. In the same year, he was asked to be an expert on the project called Rural Development (RD) in Philip Morris Kazakhstan, in partnership with the University of Florida and an international non-governmental organization Verite. Within the project, the goal was to help small farmers of the village Chilik peacefully diversify away from tobacco-growing to vegetable crops. In particular, the cultivation of tomatoes and peppers. Arsen’s purpose was to build logistics, marketing strategy, financial planning and cooperation with partners. In 2015, 100 tons (out of 40 tons of vegetables planted) were distributed and sold to supermarkets.

In 2015, he was engaged in the project called Arba Eco Auyl. The main purpose was the cultivation of organic vegetables on the territory of 15 hectares. The company planted about 40 different vegetable and melon crops, which were sold in Almaty’s three retail shops. The project was widely supported by public and local media. There were a lot of visitors, who came with their families, including tourists and consumers. Some tourists helped during sowing and harvesting period.

Foundation of Rais Baksha

In 2007, Arsen decided to quit his job, as he thought “boring and pointless job”, in a bank. Together with his grandfather, he planted 2 hectares of apple trees and started looking after the orchard. This was a start of the project called “Alma Garden”. They spent 4000 USD initially on their orchard and 5000 USD to construct a small 20 square meters refrigerator without any business plan or business idea which he admitted later on to be a small mistake. He still worked in an international bank and gave credits to agricultural businesses to be able to finance his own business. In 2010, apple trees began to bear fruit, which spurred him on to leave his prestigious job in a bank to become a farmer. Many of his friends and family did not find that decision smart, and some even doomed him for failure. Nevertheless, Arsen believed that he should not give up despite the hardships he was facing.

Arsen strongly believed that in agriculture it is important to rely on professionalism, responsibility of workers and weather. He valued his workers highly and worked hard on developing a sustainable and trustworthy relationship with them. One year they did not have enough harvest of vegetables to cover all expenses. There was not enough money to pay Alma Garden’s workers. Without telling anybody in his family, Arsen decided to take money from his personal savings including his monthly earnings from working as a DJ and distributed it to workers. He spent 1000 USD every year to maintain the orchard. He continued researching the market and finding the answer to a question why agricultural sector was not as profitable as it should be. He found out that to be able to sell their products farmers needed to work closely with their customers and know their needs. He tried to convey the message that farmers need to research different new varieties of the vegetables that customer needs instead of growing the same sort every year. It is important to know what the customers are inclined to buy to be able to offer them what they want. Arsen is leading Rais Baksha to produce eco products using affordable new technology.

In 2016, 15 tons of apples are expected. They plan to plant 4 hectares more of apple trees. It is planned to plant a wide selection of apple tree breeds as aport, golden delicious, “stolovka”, lemon that are lately less grown by farmers. Arsen realized that a partner was needed in a processing business. Because of the difficulties with implementation, there is a need to have strong connections in different levels. Requests for partnerships and recommendations were coming in a lot but Arsen did not want just any partner. He had his rule to work with only balanced people. Finally in 2016 he found a partner with whom they decided to produce Apple chips and candy in Karakemer. In the beginning they as discussed they started their job. Each share in the company would be 50/50. Currently Rais Baksha is researching the market of snack and apple chips in particular through selling small portions in Almaty. The orchard’s yield is increasing by 2–3 tons every year and is giving hopes to Arsen for future growth. Rais Baksha is a family business and Arsen is planning to develop it that way in the future. Now they divided all of the trees in the garden between family members so they could all come and look after them.

In Kazakhstan, the production of apple is concentrated in three regions, which are Almaty, Dzhambyl and Southern Kazakhstan. For instance the Kazakh name for Almaty, Alma-Ata, means the “Father of Apples.” There is theory, which says that the “centers of origin” of a species can be found in places where you find the highest diversity of that species. Nikolay Vavilov, a remarkable soviet-era botanist, developed that idea. Vavilov studied the origin of the apple, and concluded that the domestic apple had developed from species of wild apple, which is originally from Southern Kazakhstan. It was proven by modern genetics that the origin of all domestic apples are mountains of Southern Kazakhstan.

According to Ministry of Agriculture, the demand for apples is not less than 230 thousand tons per year. It is about 13 kilograms per person each year. Local producers cover only 63% of demand, the rest is imported. Moreover, the fruit consumption in Kazakhstan is growing faster than production. The area of apple orchard had dramatically decreased since the collapse of Soviet Union; nowadays it is more than 30 thousand hectares. In order to maintain full demand, it is critical to develop the apple orchards.

One of the successful competitors in the market is company called Alma Prodex, which is a subsidiary of Raimbek Group. They produce different types of apple including RedChief, Golden Delicious, Gala and Granny Smith. The company plans to develop local varieties, including the legendary Almaty Aport. The program to revive apple orchards is providing a steady increase in the harvest. This year, the company has already delivered 300 tons of fruit to the market. Quality is assured by technologies developed for the intensive cultivation of dense orchards. Trellises are used for support and drip irrigation. There are 3,500 seedlings planted per hectare. Russia imports a large share of apples. However, the company will not be able to continue doing this unless it acquires more land for planting and meets local demand first. Therefore, the company is targeting to acquire land and plant apple using cutting-edge technologies. Alma Prodex’s corporate success can definitely be called a long-awaited economic benchmark in Kazakhstan.

The upcoming harvest season Rais Baksha is planning to collect 15 tons of apples. The company takes relatively small share of whole market. Because it is at experimental stage. Moreover, it has not worked out its distribution channels yet. Previously it sold apples in domestic market thru wholesale dealer with low margins. Potential increase in production volumes could result in direct sales. Additionally, during winter apples are being sold at much higher price generating more profit after appropriate storage in warehouse equipped with refrigerator.

The founder of Rais Baksha — Arsen is experimenting with apple chips selling it thru cinema networks. Apple chips could be easily differentiated from potato one because they are healthier. As a most viable product chips has a potential to growth.

Plans and opportunities for future growth

Export:

For the export purposes, the company can consider Kazakhstan’s neighbour and partner in Custom Union — Russia. Russia is importing approximately 1 million tons of apples a year and this indicator is constantly growing.

Given the geopolitical situation with trade embargo leading European importers faced ban to export to Russia. In the meantime, Kazakhstan only exported 761 tons of apples to Russia last year, which is less than 1% of whole Russia’s import pie.

A favorable environment for selecting main Russian export market is expressed by the following criteria:

· Low transportation cost
· Free trade conditions between Russia and Kazakhstan
· Eco products without harmful chemicals
· Closing access to the market the world’s major players (Poland, France, Italy, Netherlands and USA
· Huge market demand

Given the high level of demand, CEO plans to expand his current orchard:

“I’m planning to increase the size of land by purchasing 1–2 hectares every 2–3 years. Thus after 10 years I will have more or less big orchard. Last year I bought additional 1 hectare to plant Aport trees” — communicated Arsen

Sales in Kazakhstan:

Kazakhstan imports around 130 000 tons of apples per annum. Arsen’s orchard can produce 15 tons overall. Domestic consumption of apples equals 230 000 tons. Therefore, there is also an immense internal market for Rais Baksha Company.

Сurrently Rais Baksha is not experiencing any problems with sales. It seems that in the future such problems are also not expected:

“All my job experience is based in sales and marketing. I think it is hard to start new business if you do not have these basic things. After some years your connection helps you to find required people, suppliers, customers, sales points and etc.” — Mr. Rysdauletov says.

Products:

If it is possible, in a classic situation, business should not only produce and sell goods, but also add a significant value before introducing its product to the market. If we take fruits, apples in particular, they can be used as an ingredient to other tasty products.

Apple Popcorn Balls, Applesauce, apple cider vinegar, Apple cider, Apple candy, Apple Jam, Apple Jelly, Apple Juice, Apple Pulp, Apple Concentrate, Soften Brown Sugar, Make Dried Apples and Apple Chips

After obtaining a stable level of apple yield will be a question of processing and production of new products:

“I need a partner in a processing business. There are more difficulties with implementation, and you need to have strong connection in different levels.” — explains Arsen.

Networking is an important part of every entrepreneurial journey. Finding appropriate partners and colleagues is not an easy job, but Arsen has his own secret for this area:

“Usually partners occasionally find me or somebody recommends me. One of my rules is to work only with balanced person. I had some experience working with hysterics and “drama queens”. I do not want to repeat that mistakes.
When it comes to managers whom I offer a job. It also works only with recommendations.”

Starting 2014 the program “AgroBusiness-2020” started its implementation on the investment subsidy of intensive apple production, aimed at compensation of up to 40 percent of the costs for the purchase of machinery, sowing materials, drip irrigation systems.

Unique experience, passion and governmental support could upgrade Arsen’s business to a new level.

“For the next one year I see that we have to purchase processing equipment. The time goes by and others can occupy your place. My research goes very well. The results are better than I expected. So I realize that at the moment we need only good investment to implement my ideas.” — Arsen shared plans.

Conclusion

Now that Rais Baksha turned from just a job to a lifestyle and passion Arsen had a lot of questions unanswered and problems to solve. It was not clear enough whether the processing would be successful and should the company produce apple chips in large amounts? Are there any more products that Rais Baksha could process apples into? Should they buy new plants and expand? Is this the right moment or should they wait?

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