Portfolio: Ekuinas and Al-Ikhsan

In the world of Malaysian sportswear retail, Al-Ikhsan occupies a special place. Founded as a single shop in Johor in 1993, the company has grown to encompass over 120 locations across the Malay Peninsula, and is deservedly classed as the only homegrown chain capable of standing toe-to-toe with overseas competitors like Royal Sporting House and JV Sports.

Al-Ikhsan’s success made it a natural investment prospect for Ekuinas – the government-sponsored private equity firm saw the company as exactly the kind of domestic institution that its financial and professional support could help move along the development curve. But convincing founder Tuan Haji Ali Hassan Mohd Hassan to bring in a significant outside backer for the first time was far from a sure thing.

“This company had grown with very little institutional help – it’s really depended on one man’s vision,” says Syed Yasir Arafat Syed Abd Kadir, CEO of Ekuinas. “It took us about five or six years to finally convince him to take it to the next level, because he felt very attached to the company, and he felt that the company’s DNA or positioning may change with a new partner coming in.”

Ali Hassan acquiesced in 2016, and since then Ekuinas has sought to reward his hard-earned trust with clear progress toward their mutual goal: the transformation of Al-Ikhsan from a domestic brand into a regional sportswear power.

Personal touch

Though Ekuinas and Al-Ikhsan are both landmarks of Malaysia’s corporate scene in their own way, their connection has always been based on the personal relationship between Ali Hassan and Syed Yasir Arafat, which began in 2011. At the time Al-Ikhsan was nearing its 20th anniversary and was on course to post record revenue of MYR278 million ($71 million) the following year.

Ekuinas’ chairman recognized Ali Hassan’s gifts as an entrepreneur – along with the natural independent streak that came with any successful company founder. The firm was already hoping to invest in Al-Ikhsan to help accelerate the growth of a homegrown success story, but Syed Yasir Arafat knew that Ali Hassan, who had started the company as a university student and built it up from nothing, would have to be sold on the benefits of such a partnership.

As a result, Ekuinas decided to hold off on investment overtures at first, opting for an advisory role instead. From this position on the sidelines, the firm could learn more about Al-Ikhstan and how its founder had developed the business, while simultaneously suggesting value-add measures and facilitating relationships with important financial institutions. Eventually their consultations bore fruit, with Ali Hassan recognizing that as an official investor, Ekuinas could do even more to help the company.

Despite Al-Ikhsan’s clear record of success to this point, Ekuinas believed that it faced inherent limits on its future growth that would be difficult to overcome on its own. Syed Yasir Arafat convinced Ali Hassan that if the company intended to grow beyond the domestic market, it would also need to reform its internal structure away from a reliance on a single person.

“We wanted an ‘accelerator’ so to speak, where their capabilities complement the existing management,” says Ali Hassan. “Ekuinas’ role is to work closely with Al-Ikhsan to build a performance-driven management team, as well as strengthen the corporate governance, improve business processes, and accelerate outlet expansion to drive overall sales growth and profitability.”

For Ekuinas, the investment came at the perfect time. Malaysia’s middle class incomes were rising, fueling growth in demand for consumer products, and the firm was looking for investments in the retail sector to take advantage of the country’s consumer market. Ekuinas also wanted to find undervalued Malaysian assets that it could build up to showcase their real worth, in keeping with its investment mandate.

Al-Ikhsan checked both of these boxes. The company had built a commanding presence in Malaysia’s highly fragmented multi-brand sports retail industry with a 36% market share, outperforming both domestic rivals and overseas competitors like UK-based Fitness Direct and Singapore’s Royal Sporting House. Its 115 stores stocked 30 sportswear brands including Nike, Puma and Adidas, in addition to exercise and sports equipment.

“They were dominant in footwear, in particular football: when people think about football they normally think about Al-Ikhsan,” says Syed Yasir Arafat. “So they are in fact one of the most important distribution channels for all the major brands, given that most of the retail stores that Adidas, Puma or Nike operate are typically focused on either casual lifestyle or running products, rather than football.”

Ekuinas also saw Al-Ikhsan as ready to take advantage of an anticipated boom in demand for sportswear in Southeast Asia. This expectation was partly based on a growing appreciation of sports and fitness, but also on the observation that sportswear was increasingly preferred for everyday attire among the region’s consumers, especially the millennial generation.

A 2014 study by PwC had projected Southeast Asia’s overall clothing market to be worth more than $90 billion by 2018 – over twice its value as of 2011 – and Ekuinas expected the sportswear subset to grow 8% year-on-year. Established retailers with a knowledge of the market and local consumer tastes would be perfectly placed to capitalize on the trend.

Impressed by this analysis, Ali Hassan agreed to the PE firm’s proposal to invest MYR68.6 million. In recognition of Ali Hassan’s importance to the company, Ekuinas took a 35% stake, leaving the founder with a majority holding to give him final say on decisions. But Ali Hassan could see that his new partners had a vision for the company as well, and intended to give them the freedom to put their industry experience to good use.

Brand awareness

The first move made by Ekuinas towards recalibrating Al-Ikhsan from a founder-dominated company to a business with a more formal chain of authority was to centralize control of sportswear brand AL Sports. AL Sports was already seen by many in the sportswear industry as virtually synonymous with Al-Ikhsan, since the brand was also launched by Ali Hassan the year after the retail chain. But until Ekuinas’ investment the two had no formal connection beyond their founder – whose attention was often too fixed on Al-Ikhsan to give AL Sports the focus it needed to develop a presence in the market.

“It was a really underpenetrated brand. Other than sponsoring certain state football teams, there hadn’t been any real, conscious effort to grow AL Sports as a strong, leading homegrown local brand,” says Syed Yasir Arafat. “So we saw an opportunity to build that brand beyond what it was at that time.”

As part of the formal Al-Ikhsan structure, AL Sports can now coordinate with the parent company on advertising campaigns, store displays and other measures to improve its public visibility, while Ali Hassan can leave hands-on management of the brand to others rather than covering every aspect himself. Ekuinas sees the AL Sports purchase that it facilitated as just the beginning: Ali Hassan owns other sports brands, and once AL Sports is fully integrated with Al-Ikhsan the firm plans to bring those into the fold as well.

In addition to the integration of related brands, Ekuinas has made strengthening Al-Ikhsan’s management structure a major focus. Within months of the investment, the PE firm had recruited a CEO and CFO, who took over those responsibilities from the founder. It has worked to fill out the rest of senior management as well, effectively creating a team that has assumed responsibility for day-to-day operations of the company.

“We have strengthened the management team across divisions including finance, wholesale, merchandising and marketing,” says Ali Hassan. “We also focused on operational improvement in areas such as incentive structures and standard operating procedures in retail, accounting and financial reporting practices, IT systems, enterprise resource planning, and business intelligence.”

Expanding the company’s managerial talent base has also provided an opportunity to improve the diversity of its leadership. Though Malaysia is home to a number of ethnic groups, most prominently Malay, Tamil, and Han Chinese, Al-Ikhsan’s Malay-dominated management has never reflected the diversity of its target market.

This bias was understandable as a product of a firm driven by an entrepreneur who gravitates toward people from backgrounds similar to his own, but as Al-Ikhsan transformed into a major retailer Ekuinas and Ali Hassan were determined to add a wider range of voices.

These personnel changes offer more than just public relations benefits. In a region that includes large communities of Muslims, Hindus, Buddhists, Christians, Sikhs and many more, a company that hopes to operate on a regional level must be able to adapt to different local communities. This requires expertise that is best found in members of those communities.

“Both the Eid holiday and Chinese New Year change from year to year, and consumer behavior differs because of that,” says Syed Yasir Arafat. “August may be a better month next year, because Eid is in that month, but the following year it might shift to July. So the retail calendar is very much driven by local culture and the local calendar. Retail knowledge can be bought – the value that we bring is in understanding the local context and spending behavior.”

Growth initiatives

Currently Ekuinas and Al-Ikhsan are gearing up for the company’s regional expansion. The teams are looking for strong local brands in foreign markets that Al-Ikhsan can use as a foothold. FBT, a Thailand-based sporting goods supplier similar to AL Sports, is one such candidate.

Al-Ikhsan is also focused on preserving and developing its domestic retail network, which it sees as its signature asset. In particular the company is intent on growing its reach to suburban and rural customers, a market it still believes to be underpenetrated.

This strategy is coupled with efforts to broaden consumer appeal. The company has launched a new line of stores focused exclusively on soccer, called Football Republic, with a flagship store in Kuala Lumpur, and it is looking into the development of other outlets focused on specialty concepts such as running and casual attire. Al-Ikhsan sees this evolution as the best way to stay at the forefront of a quickly developing market.

“The current key challenge in the domestic sportswear retail market is competition from international players and their aggressive outlet growth,” he says. “However, we believe that with Ekuinas’ support and Al-Ikhsan’s differentiated mass market strategy, we can compete with international brands and continue to appeal to our loyal and new customer base.”

E-commerce is another prominent theme. Al-Ikhsan is working on building a digital platform, which it expects to be useful in existing markets as well as in more developed countries such as Singapore. A key factor in its digital approach is finding ways to integrate the online platform with the physical retail locations, through in-store rewards or loyalty schemes.

Given its position in the company, Ekuinas sees an IPO as the most likely exit scenario. It would let the firm realize its investment after fulfilling its value-add plans, while giving Ali Hassan the flexibility to remain with the company or sell his stake and move on. Ekuinas also finds the idea of a listing compelling because of the strategic benefits that it offers as the company pursues expansion.

“An IPO serves a number of functions besides providing an avenue for an exit. It also provides a very good branding exercise,” says Syed Yasir Arafat. “Particularly if you want to go into other markets, having a listed vehicle can help in terms of creating that awareness.”  

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• Topics
• Southeast Asia
• Consumer
• Expansion
• Malaysia
• Ekuinas
• Growth capital