'We plan to produce infant formula in Pakistan and export it, too,' Chairman, Morinaga Milk Industry, Japan

Through a newly-formed joint-venture named Nutrico, Morinaga from Japan will - along with its partners - assess the feasibility of setting up of a facility to manufacture infant formula milk in Pakistan. BR Research recently sat down in Islamabad with the top management of Morinaga -which has entered into an agreement that could lead to a JV with ICI Pakistan and Unibrands, Morinaga's long-time trading partner in Pakistan. Initially Nutrico Pakistan will continue to import, market, and distribute Morinaga's range of quality infant formula products. The partners have in principle agreed to conduct a feasibility study for this project and as such specific details are unavailable at the moment, but the mood seems certainly optimistic among the partners.
Manufacturing infant formula in Pakistan
Starting off, BR Research asked Akira Ohno, Chairman, Morinaga Milk Industry Co, Ltd Japan, about the idea behind the venture. "For the past 36 years, we have been exporting Morinaga's infant milk formula to Pakistan. Our local partnership with Unibrands has been highly successful and with the addition of ICI Pakistan into the JV we have a local presence from which to further grow our business. Now we want to transfer the knowledge and technology to Pakistan for the health and benefits of consumers here. For our products, we see Pakistan as a gateway to the West. If we succeed here in this market, we can start exporting to neighbouring markets as well," said Mr. Ohno.
The Chairman mentioned that besides Pakistan, Morinaga has business in Indonesia, where they have been manufacturing for a while and have become a top infant formula in the market with per annum growth in high double digits. He said that Pakistan was on the cards for Morinaga's next overseas expansion. Except for infant formula milk for special needs (eg for allergic babies or for lactose intolerant babies), Morinaga is planning to manufacture all other portfolio variants here in Pakistan.
While Mr. Ohno exuded confidence in the local market's potential, he was careful in highlighting that the JV has to make an intensive study of the market first. "We have to find out more about raw materials such as milk availability, water and electricity, and the processes like logistics, packaging and drainage. We realise that there are some ingredients that we will have to import, like protein and lactose. But as much as possible, we would like to utilise the local milk and other raw materials."
It seems that Morinaga's envisaged entry into local manufacturing in Pakistan has at least as much to do with Pakistan's favourable demographics as with the strength of local partnerships they have built over a period of nearly four decades. When asked why Morinaga has not had a manufacturing presence in India, despite that market's huge potential volumes, Ashok Patel, Advisor to the Chairman, seemed to affirm the impression that local partnerships are the key:
"For some reason, we never really got started in India. In Unibrands, we found a good partner in Pakistan and the business just prospered. We have been very happy with our presence in Pakistan. Now we view Pakistan as the starting point to leapfrog in all of the western markets, such as the CIS countries, the GCC countries, and eventually extend the presence to the East coast of Africa. The opportunity from Pakistan is quite significant for us - not just for business in Pakistan but also for business in all the neighbouring markets."
Mr. Patel asserted that from the outset, Morinaga's infant formula production in Pakistan will be of "the same superior-quality as is the imported Morinaga product," while emphasising that the product will then be "available and affordable to a much wider population base. Right now, the imported product is costly after including import duties, which make it difficult for mass market to consume it. We will be seeking the highest quality raw material in Pakistan - and we have to investigate about that. But our offering will be second to none."
He highlighted that as the fourth-largest milk producer in the world; Pakistan's challenge is getting most of that milk to the market and to manufacturers for processing. He hoped that in time, cold chains will develop to an optimal extent and dry milk powder will become available for the company to start sourcing locally.
The advisor mentioned some of the two-way benefits of the planned investment. "Firstly, we hope to make Morinaga products accessible to a lot more people. Secondly, some creativity and innovation will result as a consequence of this venture. When we come in with highly sophisticated technology for infant formula, in the process, we are going to develop local talent. That is going to open up a set of new opportunities. We intend to stay the course and continue to offer superior-quality products compared to the competition."
Infant formula market in Pakistan
From the investor's eye, how does the infant formula market look?
Mr. Patel noted that "roughly four million babies are born in Pakistan each year, and as economic conditions improve and as middle class grows, the number of people that can reach out for infant formulas grows. Estimates suggest that the number of babies with access to infant formula is growing north of 15-20 percent in Pakistan. You project it out and the story speaks for itself. Then there is continuing usage of infant formula, which is an added market."
Asif Jooma, the Chief Executive of ICI Pakistan Limited joined the conversation at this point. "The market is not insignificant. It is currently estimated at about 18,000 tons per annum - roughly less than half of which is imported. When we talk about formula milk, the definition actually goes beyond stage 1 to stage 2, with stage 3 you expand your consumer by a factor of 3 as you cover consumers from 1 year to 3 years. If you look at the 1+ age-category, infant formula providers have just touched the tip of the iceberg. The 0-12 month market is a restricted market because infant formula is not preferred at that stage, with mother's milk being the recommended nourishment for babies."
Morinaga is ideally-placed to reap this market through the upcoming production facility, said Mr. Patel, noting that in partnership with Unibrands, Morinaga has marketed a variety of infant formula products in Pakistan, making it the market leader in imported category despite a fair amount of competition.
"Our product, our formulation, and consumer loyalty built over 36 years are all our assets. We have actually met mothers who said 'I had Morinaga infant formula when I was a kid and now I am giving that to my baby'. That's a wonderful endorsement of our product and its integrity," he said.
Joint-venture and investment timeframe
Morinaga and Unibrands have been partners for long, but BR Research was curious how ICI Pakistan - which did not have any prior experience in infant formula trading or its manufacturing - ended up in the pack. Mr. Patel responded that was, in part, due to ICI being a "conglomerate with good business ethics and standards". Rest, he said, was explained by ICI's own realisation that in a country that has the sixth-largest population in the world, the conglomerate needed to be in the food business as well.
"Mr. Jooma, ICI Pakistan's CEO, has some experience in the infant formula business and that was the hook that got him into considering this business. We at Morinaga feel that ICI Pakistan is capable of handling this business, and they will make good partners with us and Unibrands in what has emerged a company called Nutrico," the advisor noted.
Mr. Jooma added that, "We'll follow all the ethical standards in this market as well. Going into this business, we strongly subscribe to the WHO code on breastfeeding and will comply with its recommendations. However, if a mother is unable to fulfil the feed requirements of her child, due to socio-economic or career pressures (eg when the mother is working), there is infant formula that can substitute mother's milk. We will comply with that code 100 percent of the time."
The feasibility study may take about a year, and after that, the planning will start, Mr. Ohno remarked. Understandably, the JV does not have an exact timeframe, but is confident that operations will commence in due course and build an ecosystem in the upstream and downstream sectors. But the JV does not have a management structure as yet, which Mr. Patel attributed to the fact that they await the feasibility study for a pathway. However, ICI Pakistan, in addition to an equity participation in the JV, will have management of the said entity.
But it seems that the JV will set up a plant somewhere in Punjab. "The plant will be where the raw material is. Too soon to say, but seeing the major raw material (milk) and logistics (cold chain), the location will most likely be in Punjab. Where exactly in Punjab, we will have to wait for the study," Mr. Jooma said.
Looking forward
Towards the end of the sit-down, Mr. Ohno appreciated the support shown to Morinaga by Pakistan and its people. Mr. Jooma mentioned that the Morinaga top management also met the President and the Prime Minister on their visit - both the head of the state and the government have encouraged Morinaga to invest here. Mr. Patel said that they were happy after receiving assurances "that all the stops will be pulled in offering assistance to set up this plant. We are confident after seeing that the companies that have invested in Pakistan and have stayed the course are the ones that have all done extremely well also for consumers in Pakistan."