"We are not worried about competition" asserted Managing Director of Nestle Pakistan, Ian James Donald, in an exclusive interview with BR Research. Donald contended that the market for packaged food and beverages is expanding at such a blinding pace that the real challenge, being faced by the firms manufacturing these products, is raising production in line with spiraling demand.
"Milk production this year is the highest; it has ever been so. Guess what, we still can't get milk enough," said Donald, highlighting the mushrooming demand for packaged milk and other dairy products. However, the current energy crisis in the country and unstable political scenario are impediments to growth in the economy which in turn hamper people's ability to spend on consumption. "Packaged food consumption is linked to GDP," said Donald. Highlighting that at the moment only 10 percent of all food and beverage consumption is made up by packaged products. "Just imagine what volumes you would see in this industry if this proportion doubled to 20 percent," he questioned rhetorically.
Despite these economic challenges, this market has witnessed volumetric growth of about 15 percent, year on year. Donald is confident if the law-and-order situation improves and the energy deficit is narrowed; growth can surge dramatically.
Instead of feeling threatened by intense competition from Haleeb, Engro Foods and other emerging players, the managing director insisted, "healthy competition is great for the industry as a whole and for us". He cited that there is a huge need for increasing health awareness and for improving farming techniques in the country. For this reason, it is beneficial for the economy as a whole that multiple large corporations should join hands with the government, development agencies and most importantly, local farmers.
Growth and challenges "Quality is non-negotiable," said Nestle MD. "Over the years, consumers have come to trust our products and this is the most important aspect of our relationship," he added. However, stagnating economic growth has put pressure on disposable incomes and consumers are becoming increasingly price conscious as a result.
"We buy milk from farmers and convert it to UHT milk and that price of buying milk from them is 18 to 20 percent higher than what we were paying last year," he said adding that under the circumstances, this increase in costs cannot be passed on to consumers. As a result, the company is working on ways "to be more efficient; cheaper packaging, efficient distribution networks to try and absorb the inflation". Donald added that the company has cut its margins on some products to ensure that volumetric growth is not compromised.
Packaged milk is 10-15 percent more expensive compared to loose milk, explained Donald adding that this differential tends to be higher in rural areas where loose milk is in abundant supply while transportation and storage costs drive up the cost of packaged milk.
He said that since pasteurised milk tends to be even more expensive, its market is limited, given low and stagnating real incomes. "There are cultural hurdles to the popularity of pasteurised milk, besides the fact that it is relatively more expensive," said Donald. However, he is confident that the market will eventually evolve to accept pasteurised milk as perceptions change and real incomes rise.
Mushrooming demand in rural areas Donald asserted that demand for packaged milk is on the rise, even in rural areas. "Mothers want to ensure that their children receive a balanced diet, for this purpose our 'Nido Bunyad' is gaining popularity for being wholesome, nutritious and affordable," he said. Similarly, tea whiteners have also been received well by urban as well as rural markets.
The Managing Director attributed the rising demand to growing health consciousness among consumers. "Demand for packaged milk will probably rise to more than double the current demand by 2020" he contended, adding that a big challenge for FMCGs involved in this business is ensuring adequate supplies of milk.
"Many areas of Punjab and northern Baluchistan are not yet developed for milk collection, and then the output from existing dairy farms can also be increased significantly, if the farmers improve the fodder and water for their cattle," he said, highlighting the potential for increasing the supply of milk in the country.
Corporate farming and farmer education "There are many dairy farms all over Punjab with 200-300 cows each and for the first time there are guys working towards building capacity for 1,000-2,000 animals," highlighted the Managing Director. He asserted that Pakistan can become a major exporter of dairy products if larger size corporate farms emerge.
"Given constant water supply, good fodder and the right climate, the average milk production per cow can rise to as high as 30 liters per day from the current production of 8-10 liters per day, from buffaloes," contended Donald. Nestle is working in collaboration with UNDP, Pakistan dairy association, rural development foundation and USAID to improve farmer awareness. Highlighting the company's efforts to improve dairy farming techniques in the country, he said: "We employ dairy development managers who go from farm to farm, teaching farmers the fundamental basics of good nutrition, hygiene and general animal husbandry."
Nestle Pakistan has also established two dairy training farms-Sarsabz and Urinala-where farmers receive training. Milk yields are monitored at different farms to assess the success of training imparted to farmers. Animals need water 24 hours a day but most farmers tie their livestock and only give them water a couple of times each day. Donald asserted that just changing this practice can help boost milk production, significantly.
New products, markets Ian James Donald explains that Nestle Pakistan follows "properly positioned product strategy, which means getting the right product price for that consumer." Historically the company has been primarily focusing towards middle and higher income tiers in urban areas. However, encouraged by rising popularity of packaged foods and beverages Nestle Pakistan is aggressively targeting lower-income groups and rural populations.
Products such as 'Nido Bunyad' and 'Everyday tea whitener' and 'Unda Maza' are priced affordably and are thus gaining popularity in mass markets. Donald revealed that the company is also confident that sales of juices in rural markets will soar in the near future. "Health consciousness is spreading and people are demanding quality products that are nutritious and healthy," he said adding that the company is well poised to cater to such needs.
Chocolates have huge growth potential in the local market; however, the electricity shortage acts as a disincentive for shopkeepers as the product may be spoilt due to excessive heat. Still Donald asserted that both usage and occasions for use are on the rise, aided in part by well-structured marketing campaigns. "Any new products cannot be added, simply to boost sales. We have a commitment of providing quality and nutrition and that promise has to be fulfilled by all existing and new products," he summed up.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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