Sarfaraz Ahmed Rehman laid the foundations of Engro Foods in 2005 and served as the firm's CEO for the next six years. He subsequently moved away from the commercial operations' side of the business in 2011 and got involved in CSR endeavours, but returned as Engro Food's CEO to guide the firm through troubled waters. BR Research recently sat down with Rehman and had a candid discussion over Engro Food's recent past and future plans. Below are the edited excerpts.
BR Research: How is the journey going at Engro Foods? Your recent financial results were not very encouraging. Sarfaraz Rehman: Our main issue was margins and that is a recent development. The international milk powder prices shot up to the second highest ever level. We were not able to compensate by increasing our prices at the same pace. Fortunately now, prices of late have softened a bit. Why our numbers looked comparatively lesser is because our competitors have so many different legs, and this variable does not affect them at the same magnitude.
Ice cream is only 12 percent of our mix, and we have had good margins in ice cream, but that cannot compensate for the margin lost in 88 percent. At the moment, Olpers is the biggest packaged milk brand in Pakistan. And Tarang is the biggest liquid in Pakistan.
BRR: You faced some issues with your Omung brand. What exactly happened and where does the brand stand now?
SR: Omung is a variant which we have put in the market and that is not milk by definition. By Pakistani law, milk is 12.4 percent solids. Omung is not that, but it is a dairy-based liquid, which is far superior to what majority of Pakistan drinks in the form of loose milk. We were trying to find space at the bottom of the pyramid, and others also followed us.
The Punjab Food Authority said we were selling it like milk, but we contested and maintained that we were selling it as a dairy liquid. Eventually, we had some sort of an agreement, but they continued raids, which had an impact on reputation. We have now registered it as a dairy drink at the federal level, as it is a federal territory. We had won a very similar battle on Tarang and are hopeful that we will go through this as well.
BRR: What is the total size of the UHT milk market at present?
SR: It becomes bigger in the summer but generally it is around 8 percent. This includes UHT, powder and some pasteurised milk. Pasteurised is the leader in developed countries, even in hot countries. It is preferred because of its taste, but the shelf life is 6-7 days, and the electricity problem in Pakistan has not allowed pasteurised to flourish. Overall, the pasteurised market in Pakistan is not even 1 percent; there is still a long way to go.
UHT has potential and that is why we have entered in Karachi, through retail model of Mabrook. It was a tough start and has a different science involved. The volumes have now started coming after three months of initial struggle.
Over 5.5 million tons of milk comes to Karachi every day, even if we can grab 10 percent of that market, it can change the game for us. And that could be as big as Olpers, in just one city. We do not advertise it as pasteurised as there is no understating there in the market. It is sold in the same price range as loose milk.
In a couple of years, we are confident we will be able to take 10 percent of the market, which would naturally mean many more stores. We are right now close to break-even. It is a franchise model, but we ensure quality and standards. If Karachi gives us good results, we will move to Lahore and other cities. Lahore may be easier as the acceptance for pasteurised milk there is more there than in Karachi.
BRR: The UHT market has nearly doubled its share in the past seven years. How do you see the growth in the years to come?
SR: Ten years from now, this industry should grow rapidly and pasteurised is likely to be the major gainer. UHT may be around 7-8 percent, whereas pasteurised can have a 5 percent share. Powder milk will also grow, so you can well imagine Engro Foods and our competitors have a bright future ahead. And we probably will not be the only ones, there may be many more players.
BRR: Moving away from dairy, how is your ice cream line doing?
SR: Ice cream has grown substantially and we have taken share from the market leader. This is a waiting game; we have changed the way we were waiting. We can't hold on for indefinite periods, so we are now pushing for growth. But we are still waiting for the electricity to come back and whenever it does come back, this business is going to triple very easily.
Breakeven has been achieved and we will keep growing steadily, but the real game-changer is surely going to be electricity. The margins are very high in ice cream business and the potential is tremendous. We have one of the lowest per capita consumption of ice cream in the world.
BRR: What lessons have you learnt from the bitter experiences of recent past?
SR: I would not say bitter but yes we had troubles, partly because we went overambitious and then the distribution system came apart. Our value chain is end-to-end, and therefore a collapse here means trouble. If your business hurts, the farmer who supplies will also be disturbed, and that's where the chain disrupts.
We have come a long way and things are looking up. We are selling what we are collecting and we have capacity to sell more.
BRR: Where do you see Engro Foods in the times to come in terms of market leadership and size?
SR: I firmly believe we can be the biggest FMCG in Pakistan. The market will grow and we will grow along with the market and add layers after layers of capability.
We will be in powders as well. We will also be in the beverages business. We are already leaders in liquids, then the yoghurt line also promises a lot.
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