With Fauji Foundation making the right moves in food sector, BR Research recently managed to have a sit down with Rehan Munawar, Chief Co-ordinating Officer of Fauji Meat Limited (FML). What followed was a long conversation on what makes FML different from other meat players in Pakistan and elsewhere in region, and a discussion on the firm's business plans over the next 2-3 years.
Rehan Munawar joined FML's parent firm Fauji Fertilizer Bin Qasim (FFBL) in the capacity of an electrical engineer in 1995. After working in Karachi for 17 years and getting his Executive MBA from SZABIST University in Karachi, Munawar was transferred to FFBL's head office in Rawalpindi where he started working in the firm's newly created business development office. It was here in this department where he developed and pursued plans for Fauji's diversification in meat and dairy business. Below are edited transcripts from that sit-down in Islamabad late last month.
BR Research: It makes sense for Fauji Foundation to diversify into food business. But why meat?
Rehan Munawar: We started exploring different industries for diversification 2012 onwards. We considered many business ideas and did a lot of feasibility studies, including on dairy and aqua culture. But meat was one business where the returns seemed to be far more promising than any other industry.
The biggest sources of cattle in Pakistan are from Southern Punjab, including Bhawalpur, Multan, Lahore and Rahim Yar Khan. This belt is naturally bestowed with the best quality cattle for meat. I have been to places like the UAE, South America and many more places, and I have seen that the demand for Pakistan meat is phenomenal. The only failure is that we as a country have been unable to market our product.
BRR: Who are the top players in global meat market?
RM: The global market consists of Australian meat, which is the best. Then comes New Zealand which comes second in terms of the quality, and then come the Brazil. After Brazil, we have India and then Pakistan. It is unfortunate that India, which is selling the buffalo meat, is getting higher price than Pakistani meat even though Pakistan provides the cow meat, which is far superior in quality.
BRR: Then what is going to be your USP against Australian and Brazilian meat?
RM: The Australian meat is excellent and their demand is very high, which is difficult to compete with at this point in time by any Pakistani meat player. Australians have done a lot of research in this field. But the Brazilian cattle are very similar to what we have in Pakistan. As a matter of fact, about 70 percent of Brazilian breed is very similar to what we have in this country.
Our advantage is that ours is Halal meat, and therefore unlike the Brazilian meat it doesn't smell of blood; that smell of blood makes Brazilian meat less in demand these days especially in the Islamic countries. All over GCC countries people like Pakistani meat, but as a country we have been unable to sustain the quality. We at FML are aiming for higher quality. Plus, we intend to develop institutional contacts in the Middle East and the GCC to market our products in high end retail stores in that region.
BRR: Are you only targeting the Middle East and the GCC?
RM: No We are also looking to target countries like China, Malaysia, Hong Kong, Russia and so forth.
BRR: Tell us about your plant in Karachi, and the wisdom behind this so-called 3-day holding period.
RM: Our 47-acre plant is situated at Port Qasim; it has its own dedicated team professionally trained in managing a meat plant. Ours is the only plant in Pakistan which has a dedicated area to hold the cattle for three days. The reason behind this holding area is that during our research we found out that these animals travel for 24 to 36 hours before they reach the plant. Such long hours of travel puts them in great stress which affects their PH levels. Their muscles get stiff and meat also become tough. So the best way to fix this issue is to give them rest for at least three days.
One half of our 47-acre plant area is the nourishing area for animals and other half is for cutting and processing of cattle, sheep and goat. The plant has been designed by Irish consultant Robin Beer (Beer and associates) who has 30 to 35 years of experience in designing and running abattoirs in Ireland.
BRR: What is the total cost of this project?
RM: The total cost of this project is Rs6.5 to 7 billion. With a debt to equity of 70/30, the debt book is about Rs4.5 billion and Rs2 billion is in equity.
BRR: How many tons of meat can your plant process per day, and what is its size relative to other meat players in the domestic market?
RM: We are talking about 100 tons of meat per day. Pakistan has no other plant of this capacity; we are the only one. The next big player has a capacity of 50 tons per day, whereas the one after that has the capacity of 30 to 35 tons per day.
BRR: How is the capacity divided in terms of beef versus mutton?
RM: We will have 85 percent beef and 15 percent mutton. This is according to the global demand. In Pakistan, people like to eat chicken or mutton as their income level goes up. Globally, it's completely opposite; as people's income rises they prefer beef over mutton or chicken. However, our productions could vary as per requirements.
BRR: Why did you feel the need investing into a plant of your own; with the kind of funds available with Fauji group, you could have easily bought smaller players with running businesses?
RM: The business model we are following and the target market we are eyeing that cannot be achieved by acquiring the plants of existing players.
For instance, one of the markets we are targeting is the Middle East. And the biggest advantage of targeting Middle East is the low cost of transportation. If we use airplane for transportation it will cost us high than using the sea mode. However, transporting our meat via sea means that we will have to ensure that it has longer shelf life. For this purpose therefore, we are introducing vacuum packaging in Pakistan, which no one has done so far particularly in the volumes that we are looking at.
BRR: We will get back to your USP in relation to local players. But first tell about your animal sourcing, and also the prospects of Pakistani meat in foreign market.
RM: Animal sourcing is actually the key of this business. This business will not survive in the long term if our source of animal is not clear. We have to include the farmers in this business, because we are talking about 700 to 800 cattle per day, which we can't get from the 'mandi'. So we have started a process where we will engage with the farmers and tell them that they should do the farming on our behalf.
BRR: How will you monitor the quality of the meat?
RM: We have made this whole process very transparent with specifically defined deliverables on both ends of the contract. We are trying to contact those livestock farmers who have been in this business for 30 to 40 years.
BRR: Why don't you set up your own farms?
RM: It's a very expensive proposition. It doesn't make business sense at this point to set up our own farms. When we are talking about 100 tons of meat per day, then we are talking about 700-800 cattle per day.
But we have plans for backward integration, though we have decided to approach things in a phased manner. Right now we need a constant supply, which are sourcing from existing livestock farmers. And in any case, it doesn't make business sense to invest 100 percent in cattle farms; at the most if we can arrange 30 to 40 percent of animals from our own farming then that would be a huge success.
BRR: When do plan to kick start your operations; what are your sales forecast and how soon do you plan to meet 100 percent plant utilisation?
RM: Our plant will be operational in third quarter this year and in our first year we are forecasting sales of up to 30 percent of our full load operations. It will take about a year and a half to achieve full capacity. But of course there are lots of ifs and buts attach to it.
BRR: Will you focus mostly on exports or will you also tap the domestic market?
RM: We have divided this business into three phases. The first phase is exports, which we will focus on in the first year. In the second year, we will focus on domestic retailing and in the third year our focus will be on value added products such kebabs etc.
We have approvals from senior management to establish high end retail stores in major cities of Pakistan in the second year of our operations. Our target is to open 25 stores in different cities of Pakistan.
However, 90 percent of our top line will still come from exports and 10 percent from the domestic market. We will be very happy if we can sell our entire export quality products in Pakistani market as we will able to save ourselves from all the hassles of exports such as cost of transportation and risks of buyer defaults etc. However, there is the cultural factor due to which the Pakistani market will take a lot of time to shift from typical butcher culture to this type of frozen or chilled meat.
BRR: Do you also plan to sell the by-products separately?
RM: There is a huge market for by-products of animals such as liver, kidney etc. In Pakistan slaughter houses don't have processing mechanism for these by products, so they sell these to certain other processing firms. But because by-products are a good revenue source with much better margins, we intend to process by-products ourselves.
Then we also have a rendering plant. You see traditionally when the blood comes out you can do two things; either drain it in the gutter or sell it to buyers in liquid form. We have a plant which will do three things. One, it will convert blood in powder form. Second, it will make bone and blood meal that is also used in feeding, and the third is the production of tallow, which is used in soup industry.
However, about 60 to 70 percent of our revenue is likely to come from meat.
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