Estonians Are Doing Very Exciting and Somewhat Dangerous Luxury Business in Exotic Peru
An Estonian, Mr Kristjan Sillaots (39), travelled to Peru thirteen years ago to study the local language and discover business opportunities. Life ahead was full of exciting incidents and luxury.
The rich and famous of this world have products of an Estonia company in their homes, private jets and yachts. The line of various distributors and designers is long and the creators of Alpaca brand do not always know where their products end up. Even if they do know, they are not allowed to disclose this knowledge (although they do mention the name of Kim Kardashian aloud). It is obvious that the Estonians manage a rare and somewhat dangerous enterprise.
Mr Sillaots’ wish to learn Spanish made him choose between two countries: Venezuela or Peru. As it happened, Venezuela – the home of telenovelas – was out of question at the time. As it turned out, it was for the better as the country’s economy was in a devastating state whereas Peru was just beginning to flourish. Mr Sillaots vividly remembers how he moved into the country and began intensively learning Spanish. English is of no use in Peru, even immigration services use only native language. He hired two private tutors who both worked with him one and a half hours a day. He watched subtitled films at noon and did homework prepared by tutors in the evening.
“It was a very intensive and tiring period but I learned the language in two and a half months so that I could freely communicate. People speak very fast here. When I sometimes watch Estonian news I am amazed at the slow speaking tempo,” Mr Sillaots is amused.
Mr Sillaots travelled far and wide during his language studies trying to find business opportunities. He was looking for his lifelong mission. Various metals hold a high position in this country and trading in metals amounts to 60-70% of Peru’s economy. He also looked into this and other areas until the moment when he saw and touched a hand-made alpaca skin rug at a local handicraft fair. It was unusual and utterly soft. When a person touches it, his facial expression automatically changes. It is a unique experience. He had found his life’s mission.
At the beginning, Mr Sillaots exported local artisans’ products to Estonia where his business partner Mr Are Kudeviita (40) ran a little shop. After a while, Mr Peeter Pappel (40) joined the team.
A Very Unusual Animal
One of the heroes of our story is the alpaca. Peru is its homeland. The wool of mountain alpacas is very special and unique. At high altitudes in the mountains, temperatures may vary by 40 degrees in one day and night, from freezing to warmth and back. Thus, alpaca’s coat of wool must keep the animal warm but also cool it down during hot weather. That is why alpacas raised in Estonia cannot compete in producing such wool. There are not many alpacas in the world. A rough estimate of their population is at 3-4 million. As they produce extremely good wool, they are not slaughtered. By comparison, there are 120 million goats producing best-known cashmere wool, and more than a billion sheep. How it is then possible to obtain alpaca skins at all?
Mr Pappel explains that about 20% to 30% of young livestock less than a year old perish in the mountains for various reasons. Their skins are perfect for high quality products – unlike the skins of older animals. Alpaca herds are of different sizes – from 50 to 10,000. Some communities have introduced high-tech programmes for efficient mating of suitable animals, but despite the efforts, there are few alpacas. They graze in the mountains and are not kept at farms thus are not looked after in the wilderness. Farmers mark them, shear their wool when the time is right, and then they roam free again. Some of them perish; others “serve” the farmer for many years. Their death is considered a tragic event.
Trading in alpaca wool, and especially skins and meat is a world apart from other businesses. There is not one collector or shop in Peru to sell this raw material. There are many providers and many purchasers but all deals take place in distant mountain towns far away from the capital. Mr Sillaots has been a witness to transactions, and this is partly inconceivable for an Estonian. First you must travel long hours by bus. You need to arrive the previous night so that you could take your stand at the cold and damp marketplace in the morning. Trading only takes place once a week and sometimes even less often.
“Then all the buyers have gathered there and it can get quite intense. You must know who can buy from whom, and who cannot. There are not many skins on offer. You may need seven or eight thousand skins a year but you can get 50 in one go. Not many alpacas die, and not many are born,” describes Mr Sillaots. The quality of the skins is often a problem as well. You let your stack of skins out of sight for a moment, and they switch the middle ones to skins of poorer quality. This entire market hubbub is like chaos within a chaos. At times, it can get very heated because the seller wants to get rid of all its skins, but Estonians only take the best ones. Nowadays Mr Sillaots does not do the purchasing himself any longer. They have established collectors who do the tough job of purchasing raw material for them.
Arriving Home in Underwear
Despite Peruvian rapid progress, it is still adventurous to do business there. By now, he accepts this business as usual but when he tells his stories to Estonians, they cannot believe their ears. Locations to visit are far away and dangerous. Payments are made in cash. You withdraw a larger sum from the bank and hope for the best. First, you travel to pay, and then you travel back with the goods. Robberies are quite frequent in Peru. Mr Sillaots has experienced it himself.
“They took my cash, but not much. Luckily, I didn’t have much with me then. But one day I returned home in my underwear,” he laughs, adding that it happened during his first months in Peru when he wasn’t wise enough yet. He was literally stripped.
None of these incidents have deterred Mr Sillaots from his path and his belief that what he does is right. Scarcity of raw material is one of the attractions of the business. There is no other source and it makes selling the products easy. Alpaca skin or alpaca wool rugs, pillows, throws and other products sell really well. Resellers and designers reach the end user. Retail price goes very high. Exclusivity sells.
Factory in Peru
Mr Sillaots set up a small factory in Peru in collaboration with an experienced local artisan. During high season there are up to 25 workers, usually 10 to 12. Peruvians have not seen nearly as strict quality check before as at Alpaka. Mr Sillaots has good words for his local team, saying that they are as industrious as Estonians. When he is away at a trade fair for a couple of weeks, everything goes smoothly as planned at the factory. No need to pressure the workers. Payday is every Saturday and the wages are very good. ALPAKA is a valued employer.
“Peruvians are not lazy. In order to reach middle class you need to succeed. Everything costs money – education, health services – state is a lousy provider of these services. Doctors are good and they have private practice as well, but their workload is enormous,” says Mr Sillaots.
An Almost Ideal Place
There are over ten million inhabitants in Lima, the Peruvian capital where Mr Sillaots lives with his wife and daughter. Millions are very poor but there are super-rich as well. Real estate prices are even higher than in Tallinn. He says that only 30% of the companies pay taxes, everything else is black economy. The same applies to labour market.
However, life in this country is like a dream. Mr Sillaots married a local woman and they have a daughter. He says with amusement that their daughter is like a coffee with cream.
It is also always warm in Peru and since the weather is so predictable, they do not have weather forecasts. The sun hides behind clouds maybe for one week during a year. The lowest temperatures are 14-15 degrees Celsius. Mr Sillaots wears a T-shirt then, and the locals have their cardigans and coats on. Locals consider the Estonian to be a half-witted then.
“Time passes very quickly here. In Estonia, people are always looking forward to spring, or to summer, or snowy winter. Here it is summer all the time.”
Nevertheless, Peru has a very high rate of corruption. Corporate income tax is high but labour taxes are very low: the employee pays 9-10% and the employer pays the same amount in addition.
Sales and Design in Estonia
Mr Peeter Pappel manages the Estonian branch of the company. Alpaka is not a new name as a company and a brand. It was launched in 2007. Mr Pappel says that the company did well before the financial crisis and the sales were great. However, sales decreased to almost nothing during the crisis. It was then that Mr Pappel joined the team. There was also an option for him to become an hotelier in Spain at this point. However, he decided to take on turning Alpaka international. Before going to the first trade fair, he took out a loan by mortgaging his house. Hardly anybody bought anything at the fair. Then they received trade fair funding from Enterprise Estonia and did not give up. There was a run for their products during the second trade fair. First respectable clients began to emerge – department stores, designers, retail customers. Big markets such as Great Britain, Germany, and Japan opened up. Mr Pappel is in Japan right now in order to forge new customer relationships.
Several competitors discovered Peruvian alpaca at the same time with Estonians. Today the wool is exported mostly to China and no one knows exactly what happens to it there. Competitors for skins can be counted on the fingers of one hand. Competing for small quantities is demanding and heated, and can get rough as described before.
The sales hub is in Estonia. Products are labelled, branded and packed here. Final quality check is also done in Estonia. Local and U.S. trade goes through the Peruvian factory. Design is entirely done in Estonia by Ms Anni Ilves, a designer educated and trained in Italy who has worked for them for a year and a half by now.
How Is the Company Doing?
ALPAKA’s annual turnover was about 700,000 euros in 2017. Mr Pappel says that globally it is a small amount. The profit is fully re-invested into development. They are preparing a website in Estonian, Japanese and German with a purpose of direct sales to end user. The margins are considerably smaller when using distributors. This does not mean leaving retailers and designers out of the process. It’s just working alongside using different channels. In the future, we will definitely see ALPAKA brand booths in department stores, and maybe even independent shops.
ALPAKA is interested in Chinese market and is intrigued by U.S. However, the world is too big to reach its every corner. Big markets are best approached by cooperating with big retailers. Estonians manufacture private-label products, too – for example for Marco Polo and textiles for Yves Delorme.
“When we see their retail prices and what their customers pay for their products, then we have room for increasing our prices. They are satisfied with the quality of our products. It’s well worth the effort,” says Mr Pappel.
Additional Funding Planned
In order to expand exports and launch direct sales channels, extra funding is planned. Hopefully, Crowdsourcing Fundwise campaign will bring 100,000 to 300,000 Euros. Last year’s Crowdestates brought 200,000 Euros in two hours. This shows people’s trust in their business model.
“Next five to six years should see our turnover reach several million Euros – still a small amount in global scales,” says Mr Pappel.
What Will Become of Alpacas?
There are few alpacas in the world – do Estonians worry about their fate? What could be done to increase their population? Mr Pappel says that they can make an impact by paying the farmers a fair price for the raw material. Chinese bulk buyers take all they have but at a low price. Estonians ask for high quality material at a higher price. This approach makes purchasing for Estonians an interesting job for their collector network.
Alpaca is a fascinating animal. On one hand, they need about a hectare of land to graze per animal; on the other hand, they live in herds. When they are alone they become sad and perish. They have stress-relieving qualities for others, though. There even exist special alpaca-therapies.
“Maybe this quality has somehow transferred into their wool fibres as well,” says Mr Pappel.