'My new role reflects positively on Nestlé Pakistan as an entity', Outgoing CEO Nestlé Pakistan

Magdi Batato is the outgoing Managing Director and CEO Nestlé Pakistan. He has been the Market Head. He is a Swiss national with a PhD in mathematics and physics from Ecole Polytechnique Fédérale de Lausanne and an MBA from INSEAD.
Magdi joined the Group in Switzerland in 1991 as an engineer. His factory and production management experiences took him to Germany, Lebanon and South Africa. In 2004, he was transferred to Malaysia as Executive Director of Production and, in 2009, he moved to Nestlé UK and Ireland as Head of Group Technical. In May 2012, Magdi Batato was appointed Market Head of Pakistan.
After rewarding three years in Pakistan as the MD and the CEO, Magdi is now leaving the country for his new role where he will be serving as the Executive Vice President in charge of Operations at Nestlé S.A., Nestlé Headquarters. With different roles and responsibilities over the past 24 years, Magdi Batato has acquired wide-ranging technical skills and business experience covering both emerging and developed markets. His strong leadership, including in challenging social and economic conditions, make him uniquely suited to lead Operations
Before leaving Pakistan, Magdi met with BR Research and shared his experience, suggestions, thoughts and memories. Following is an excerpt of Magdi's exit interview with BR Research:
BR Research: Tell us about you experience in Nestlé Pakistan.
Magdi Batato: It was a wonderful experience; I loved my job, my people, the overall networking and the opportunities I had in Pakistan. I also welcome the business challenges we faced, which made this job interesting as there was never a dull moment. It is also important to mention here that after the tough challenges, there are always moments of celebration, and I had several of those moments. The journey is like a sport where there is a bit of coaching, team building, and teamwork; there are tough times but then the success comes which glues the team even better together. That's what happened with me.
Overall Pakistan was an amazing experience. The country offers a lot of opportunities. Although we consider ourselves as a young company in Pakistan, we have been in the country for more than 30 years plus. Longevity is part of Nestlé's DNA, and Pakistan is one of those markets where we will strive to contribute to the country, economy, and wellbeing of the people through focus on the consumers, value proposition, and health and nutrition drive.
BRR: How do you see growth in Pakistan in the next ten years particularly for Nestlé?
MB: As I have said before, the country offers immense opportunities: It's a young country where more than 55 percent of the population is also young. The urban segment of the population is growing tremendously. Today it is around 37 percent, but it will be growing as we speak.
Although the packaged food industry is there and very well distributed, the market is only around 10 percent of the total food consumption in the country. And this shows that there is room for growth and opportunity. And from the health, hygiene and protection perspective, we see work that needs to be done here. That would mean additional expansion and investment at some point in time. We have already invested around 100 million dollars two years back in form of a milk powder drying facility at Sheikhupura. It is the biggest factory in the country, and it is among the ten biggest factories in the Nestlé world.
Part of Nestlé DNA is to believe in the country and invest for the consumers of the country. When investing in any country, we look at the return on investment on a comparative basis. We also look at the structures and systems that would encourage us.
BRR: What are your views on the taxation system in Pakistan versus the global peers?
MB: There is a general need in the country to broaden the tax net. I appreciate the efforts that have been started to be put in place, as I believe increasing the tax net is the right move forward. However, it is not easy as it sounds and there have been problems in the drive to get new people and businesses registered. I wish the government good luck in this journey because ultimately structuring is important, otherwise playing with the tax rates is like knocking on the same door.
Recently in the Budget we were very happy that the dairy sector continues to be protected with zero rating on the liquid milk because it is about nutrition. Whereas, we were a bit puzzled and we are trying to understand the reason why 10 percent tax was levied on full cream milk powder; from the product's point of view, the two products ie full cream liquid milk and full cream powder milk is eventually the same. This is the first time in my career around the world I have seen that there are two taxes for the same product category. I think there might be some kind of perception that the full cream milk powder is for the wealthy people, and hence the tax on it. Unfortunately, this is not true; so far we have not been able to pass the full price of the powder milk to the consumers, and we are absorbing the cost of the whole ten percent, because people will not buy it. I think the drive on some items is very good and in line with the other countries, while we are trying to comprehend the rationale behind the others.
BRR: How does the recent slowdown in stock and commodities effect Nestlé globally and locally?
MB: When it comes to commodities, it depends on which ones you are talking about. Globally when your cost of goods sold goes down as a company, of course it is positive because you can improve the margins, and invest more behind your brands. So reduced input cost is good news for Nestlé.
In case of Pakistan, it was assumed that when the oil prices went down, people would start spending more on food, which was not seen. So while the oil went down, consumer spending did not increase much. As far as the dairy sector is concerned, in Pakistan the price of milk is not linked to international milk prices because the dairy sector here is managed and monitored differently. 95 percent of the market is loose milk and undocumented. All packaged milk industry put together seems a lot, but it is only 4.5-5 percent of the dairy industry. So what really rules segment is not Nestlé? Engro, Halib, Good Milk etc but the loose milk, the unregulated segment that is not registered, does not pay taxes and does not have the same quality standards.
Besides, the prices in Pakistan are linked to many local factors like demand, how the farmers manage their farms, and how cost is attributed. So while the international milk prices have come down, the local milk prices have not due to the reasons I've just mentioned. So for us, international milk prices do matter affects our recipes that use that grade of milk, but globally for most of the products that we produce, it is not linked to the local prices.
In an ideal scenario, the milk economy should have been documented and regulated from quality perspective, and this would have led us and the others to invest and expand milk processing in the country.
BRR: Nestle has a huge portfolio of products world-wide and there has been quite a shift in consumer behaviour in Pakistan. How is Nestlé geared in increasing its portfolio in Pakistan in the coming years?
MB: That's part of the opportunity that we will seize in the coming years. I think we are ready to continue to grow as we have a good industrial footprint. Although young from Nestlé's perspective, we are over 30 years old, and one of the oldest in the country. We have factories, set-ups, loyal customers. So it is easier for us to expand. We have been watching consumer needs and how they are evolving very closely. And we have the research, innovation and capability to respond and anticipate accordingly.
Over the last ten year, you can see that we have expanded our portfolio, and we will continue to do that based on our assessment of the market requirements and consumer needs.
We do not tent to copy and paste our business models across the world. Obviously, we inspire ourselves from what we have been doing and then we localise as consumers are different.
BRR: Do you think the conversion from loose to packaged milk will continue and the demand will rise in the coming times?
MB: It is very difficult to say if the demand is rising or not, and whether the conversion rates are inching up without any real data, especially when the documented milk market is only around five percent. Yes, relatively the packaged milk market has grown over the years, but the undocumented segment still makes up 95 percent of the total, and it is also growing simultaneously. And if you look at the last 10 years, you don't see a notable surge in the packaged milk demand because the markets share always hovers around 4-5 percent.
I think it depends on how we regulate the industry. The Turkish model can be a good example for a country like Pakistan. Turkey was forced to change their business model because they wanted to join the European community. 10-12 years ago Turkey was similar to Pakistani milk economy with around 80 percent loose milk and 20 percent documented segment. Because they had to put in place systems and collect more taxes, they structured an incentive system whereby they gave incentives to those farmers who would supply milk to the regulated and documented industry. The other thing they did was pass a minimum pasteurisation law that ensured minimum quality standard.
While they adopted many other practices as well, these were the key changes which currently put the country's documented industry at around 70 percent, with loose milk at only 30 percent. By doing so they also increased their tax revenue. Such incentives and laws can also help Pakistan document its milk segment by providing a level playing field and minimum quality standard.
BRR: What is your forecast for the group's financial performance in the country over the long term?
MB: Our financial performance has been improving. The whole idea behind increasing the margins is to invest behind our brands, and precisely to make this growth sustainable. To be able to continue to invest, innovate makes this growth sustainable and create shared value. Sustainability will be our focus as I earlier said that we look at the long term, without neglecting the short term deliveries that we have to do to satisfy the shareholders.
BRR: Tell us about your new role as Executive Vice President, Head of Operations.
MB: My new role would be about heading operations in the company world-wide. I will also be responsible of investments for the whole company which we call capex in our jargon. It's a big role as operations include the entire supply chain including people.
Career planning in Nestlé is a lifetime thing where we manage people in the long term. It is about believing in people and developing them over the years. My appointment to this new position is something built over the years. Similarly, all appointments and roles are based on the long term performance. It is the fruit and result of years of preparation and hard work. This preparation is two-pronged: sustained contribution from the employee, and sustained coaching and development from the company.
I feel very proud of working in Pakistan and getting picked up for this new role.
It reflects positively on Nestlé Pakistan as an entity as it will highlight the importance of this country and its recognition that this market is a significant and a challenging one.