Arafa Holding

Abstract

Labor intensive industries, such as apparel, tend to migrate from developed countries to developing countries in search of cheap labor. For Egypt, a country with a population of 84 million, the apparel industry, in addition to providing new job opportunities for low to medium skilled laborers, represents a good starting point for an export-driven industrial development. Egypt offers a good migration option for apparel companies due to the relative competitive advantages of operating from Egypt: low cost of production, access to major markets (e.g., USA, and EU) through many trade agreements, industry base, and good support from the government. The government prior to 25 January 2011 revolution had a focused reform program aiming at increasing the base of exporters and promoting backward integration. As a result of that, during the period from 2006 to 2008, Egypt witnessed major investments in apparel and textiles, local companies were expanding their capacities and many foreign investors (Turkish and South Asian) were starting new investments in Egypt, and buying offices for major retailers or brands starting to source out of Egypt.

Operating from a developing country, such as Egypt, poses a set of challenges that might be different than operating in a developed country. Despite operating in a less-than-favorable environment, some apparel and textile companies from developing counties have managed to compete effectively through innovative business models for operations and supply chain design. In this paper we present a case study on such a company operating in Egypt, Arafa Holding. We study and analyze the core operational competencies that Arafa Holding has developed and the supply chain strategies that they have followed to grow from a family-owned business to a vertically integrated group with retail distribution channels in the USA and Europe, and to flourish in tough market conditions and under the current non-conducive environment in Egypt. Some of those strategies and core competencies developed include a focused operation on tailored men’s wear, vertical integration and in particular forward integration into retail groups in Europe, proper management of financial risk resulting from global operations, and the human factor. We will also discuss practices that Arafa Holding has adopted to manage the knowledge accumulated through partnerships and joint ventures with many premium brand owners. New challenges were brought by the 25 January 2011 revolution, including security, the shortages in fuel, and labor strikes. We will discuss how Arafa holding has dealt with those challenges. We conclude by discussing the outlook for the company.

Questions for Review and Discussion

• 1. What are the advantages and challenges of the vertical integration business model that Arafa Holding is adopting? Can the current supply chain design be easily adjusted for changes in the environment, e.g., to mitigate the risk of the current recession in Europe, or to take advantage of the rise of affluent retail in developing economies such as India and China?

• 2. Manufacturers typically integrate backward (upstream) into their suppliers. Arafa Holding opted for integration forward (downstream) by acquiring retail distributors in Europe. Can this model work in the case of developing countries, mainly China or India, where the retail distribution structure is less developed? How can Arafa adapt this model for potential new markets?

• 3. Arafa is expanding its foot print into shirt manufacturing. Do you see this as a dilution of their focused operations model? Would that compromise the efficiencies that they benefited from?

• 4. In Italy, labor for luxury apparel is usually highly skilled with very low turnover, which is not the case in most developing countries, and Egypt in particular, where labor is low skilled and there is a high turnover rate. How did Arafa handle this issue? Do you have any suggestions for improvement?

• 5. As indicated in the 2005 Wall Street Journal, the appeal of the brand “made in Italy” is very strong in the luxury apparel. This is a fact in operating in this vertical that Arafa had to deal with. How did they handle this issue? What is missing?

• 6. The aftermath of the January 2011 revolution and the current unrest brings many new challenges for operating from Egypt. Would Arafa holding still be able to attract potential joint ventures and partners to operate or source from Egypt? What would Arafa Holding need to do to respond to these challenges?

• 7. Arafa Holding depended on its supply chain design, and in particular the network of partnerships and acquisitions, to develop a resilient operation that was able to withstand the current turbulence in Egypt. What are the lessons that could be applied in the international context?

• 8. The choice of luxury tailored men’s apparel and the strong export orientation of Arafa Holding afford it to pay higher salaries to its workforce. This might be a very critical sustainability factor in the aftermath of the January 2011 revolution and the higher demands of the labor force. What would Arafa need to do to prevent potential erosion of profitability? Is it possible to improve the productivity of the workforce? Any other suggestions?