'Packaging industry seen growing 5-10 per cent' an interview with Jorge Montero, MD, Tetra Pak Pakistan

Jorge Montero is currently serving as the Managing Director of Tetra Pak Pakistan; a position he took up in November 2015. In 1993, Montero joined the Tetra Pak group in Germany as finance director. Three years later, he was posted to Switzerland for a period of 11 years - looking after several regional finance functions, serving as Vice-President Finance for Global Market Operations during the last three years of his stint. In 2007, Montero was named Managing Director of Tetra Pak Italy, and five years later in 2012 was moved to a similar position in Mexico.
In this interview, BR Research finds out Montero's thoughts on growing competition in local packaging industry, as well as his outlook for, and policy/regulatory suggestions on the drivers of packaging industry.
BR Research: Competition has grown in Pakistan's dairy and juice packaging industry in recent years. Chinese carton packaging players have entered the market, so have PET bottles and Ecolean. What is the existing market share of leading players and what kind of growth do you see in packaging industry?
Jorge Montero: When we look at dairy, milk in Pakistan represents a huge market with about 55 billion liters produced as reported by the latest official statistics. This puts Pakistan as second in the world in terms of milk production. Out of the total produced, 25 billion liters are traded, while 30 billion is kept in farms for own consumption or used for calf feeding. Of the 25 billion that is commercially traded, it is estimated that the share of packaged milk is around 8 percent, and the share of liquid packaged milk is around 5 percent, which is a very small proportion of the total universe.
More than ninety percent of the 25 billion liters of traded milk is loose milk, which is very much against the trends you see around the world. In fact, it disappeared from Europe and the US some 50-100 years ago. The conversion to packaged milk thanks to pasteurization led to significant health improvements and dramatically decreased child mortality rates in those countries. For these reasons, sale of loose milk is banned in most developed countries, or it is only allowed under very strict hygienic conditions. The key lesson here is that our biggest competition is actually loose milk, and not various types of packaging that you mentioned.
BRR: No disagreements about that. But what we are trying to get that the market share of leading packaging types and packaging companies within that small packaged dairy and juice segment. With the arrival of various new packaging variants in the market, have your market shares gone down?
JM: If we were to narrow it to just packaged milk, a big factor that has affected our growth comes from the perception of parts of the public and some of the public authorities that packaged milk is not safe. Several investigations were made on the basis of these accusations but were later corrected and proven to be largely unsubstantiated. Still, the packaging industry has been very negatively affected by these unfounded communications.
When we look at the Tetra Pak's share of packaged milk, it hasn't changed so much over the past few years. We are a key partner to all the major dairies. Over the past few years new competitors have emerged, plastic pouches have entered the market as well as some Chinese carton producing companies, as you mentioned. On the other hand, the processing, filling and packaging of dairy products requires very high-quality standards, and since these companies do not have a local presence, they cannot provide equipment and expertise as we do, so they are not so active on the milk side.
BRR: Market shares aside, how do see the recent changes in the landscape. We know that Ecolean is taking some share in pasteurized milk and tea whiteners. Pepsi is using GA Packaging for its drink Slice. Low quality Chinese packaging are trying to chip away the 200 ML segment, whereas Nestle recently introduced its 1 litre juice in PET bottle.
JM: The bulk of our sales are milk related packages, about 60-65 percent of our total. So, when it comes to juice/nectar and especially still drinks, there has been movement and substantial growth in imports from Chinese manufactures. To some degree this is normal as competition is intensifying across all industries. It is happening in a number of Pakistani industries. Given the sheer size of Chinese market, these enterprises enjoy economies of scale and a number of other benefits that make them formidable competitors.
We have four factories in China ourselves, but we have chosen to be present in this market and produce here as it is great opportunity to add value to Pakistan. However, it still has some negatives such as high import duties on raw materials; we are also unable to match the scale of operations that you find in countries like China. That said, a healthy level of competition is quite normal.
BRR: What are your thoughts on the minimum pasteurization law by the Punjab government? If indeed that law is fully implemented, then what kind of changes in the market do you expect?
JM: The minimum pasteurization law was proposed by Punjab government in May 2017, and it states that it will be implemented over the course of five years. However, so far there are no clear signs that it will be implemented soon.
If it were to happen that would be fantastic because, from our point of view, it would help the country improve the safety and health of its citizens. But whatever is done should be done with planning and caution so that it can be carefully and sustainably managed after a well thought out process; India has also done something on a similar scale, and it took many years of planning and execution.
BRR: What are then your growth drivers? Could you put a number on the growth outlook of this industry?
JM: It is important that government policy encourages economic growth and formalization of dairy, juice and so many other sectors, moving from uncontrolled to controlled, taxed and verified. Also, policies should focus on updating farming practices across the country, because Pakistan's farming practices are still inefficient when compared to rest of the world. This is one of the reasons why farm gate milk price is one of the most expensive when compared to other countries. When you are getting an expensive raw material, it makes it very difficult to give a competitive price to the public.
Assuming good economic policies will prevail, we expect Pakistan to enjoy very high growth rates in packaged milk and you should see growth in packaging industry rising to least 5-10 percent per annum over the next few years, because Pakistan has strong population growth. Its disposable income is also growing, which is why you see an emerging middle class.
We have seen cases like Vietnam that were one-tenth in size of Pakistan's packaged milk market 10-15 years ago, but today they are larger than Pakistan. In a single year, Vietnam managed to double its milk production, which is what you can achieve if you have the right policies.
BRR: What is your assessment of the campaign against UHT milk that has been going on lately, as it has been getting a lot of bad press? How do you think the consumer is reacting to this? Do you think the UHT industry will come out of this crisis and if yes, then how so, and how long might it take to change consumer sentiments?
JM: This is a complex question. It is the provincial governments' duty to pass the pasteurization laws and give the conditions to ensure that all milk that is sold commercially is safe and healthy. This is not happening today. Many people believe that loose milk is good and healthy, but that is generally not the case. We have performed studies ourselves and can point to numerous academic research studies done around the world that reveal this is far from the reality. There can be good quality loose milk, but it requires a lot of care and prevention - unlikely to be enforceable. Without due care, which is the case most of the time, loose milk is a reservoir of bacteria and consequent diseases.
BRR: True. But what is your assessment of consumer sentiments. The growth in UHT segment has tapered off in the last few years. Do you think it has bottomed out or growth will fall further over next 2-3 years?
JM: The slide in growth of UHT segment has stabilized now, and hopefully our customers would be able to reignite growth. But both the consumers and the public agencies are not yet aware of the risks associated with the sale of unregulated milk and the questionable methods that are used to keep loose milk good. You can't transport and sell milk over large distances without pasteurizing and refrigerating it or undergoing a UHT process. We can see that while loose milk is being transported around, there isn't really any proper refrigeration apart from some ice cubes. So, the authorities have to remain alert and step in.
There have been a lot of media reports and unsubstantiated rumours about packaged milk. However, the quality of packaged milk can be verified at every stage and every single day, and at any point in the super market. These accusations are pushing packaged milk manufacturers to struggle for survival in an environment where facts don't back up opinions held by different people. It is being said that UHT milk is unhealthy, yet people in France, Spain and Portugal, to name just a few, lead very healthy lifestyles. These countries have more than 95 percent UHT consumption and they have some of the highest life expectancy rates in the world!
BRR: One of the bottlenecks in this industry is that the government has price controls as far as loose milk is concerned in the retail market. That means the farmer has no incentive to produce good quality milk and they resort to poor feed adulteration, whereas middlemen resort to adulteration and so forth. So, price capping is a major barrier to formalization of milk industry. What are your thoughts on the subject?
JM: Even without price control, people generally have a problem in terms of being able to afford milk. So, I am not sure if it would change too much. In this situation, what you need is pasteurization laws and regulations that promote efficient farming, or policies and concessions to farmers that promote efficient farming because that is the root cause of milk being expensive in the first place. I don't think that putting or removing a cap on the prices will address the root cause.
Coming back to your point, there will always be a lot of pressure on keeping milk less expensive, because not many people are able to afford it. The issue is that milk in Pakistan is very expensive because of the inefficiencies in the farming sector. Pakistan marks the lowest activity in terms of milk per cow; an average cow in Pakistan produces 4 times less than a cow in Mexico, or 6 times less than a cow in the US.
Farm gate price would be above Rs60 per liter for good quality milk, which is the price at which customers typically buy milk. In dollar terms, it is about 45 cents per liter at farm gate level. The raw milk in most countries would be about 30 cents. In the US you can buy a liter of milk at 50 cents in the store, after packaging, distributor, and retail margin.
BRR: With 90 percent of the cattle at the bottom of the pyramid, many of them have 1 to 5 animals, how do you think can Pakistan invest in efficient farming and bring down farm gate level prices?
JM: I understand that is where the problem exists. Europe had a similar problem. But then farmers came together and created cooperatives and worked together to find the efficiencies. This is where the government comes in and provides support for this to happen. India followed the corporative model too - for example, the famous Amul model in India. These cooperatives have led to reduction in milk prices; they produce various types of dairy products, e.g. cream, cheese, and dairy beverages, and help growth of the economy, by helping the farmer and the consumer.
BRR: Why did Nestle switch to PET bottles as far as 1-liter packaging is concerned?
JM: That is something which you find all over the world. You can have juices packaged in cans, in glass bottles, in cartons, so it can work with any type of system. The two leading systems around the world today are the carton and the plastic. So, in some we win and some we lose, we can't win them all.
BRR: You still think that carton packaging is still the way to go as far as juice, nectar and still drinks (JNSD) segment is concerned?
JM: We think we have a cost competitive system, and far superior product in terms of environmental profile. There have been a lot of discussions on the environment over the last few years and have intensified over the past 6 months. When so many of us are concerned about the future of our planet, companies opting for plastic have to rethink whether that is the smart choice, especially when more environment friendly alternatives are available.
BRR: About two-third of packaged juices in Pakistan are packaged in 200 ML size, which is a price sensitive segment. We are getting reports from the market that some JNSD players are thinking of switching from Tetra Pak to either GA packaging or Chinese carton packaging because they are less expensive. Some may even explore PET bottles for the 200 ML segment because children and even adults prefer to gulp which is a more refreshing feeling instead of using a straw to drink juice.
JM: We don't see the 200 ML portion changing drastically to PET as it is not cost competitive. Some juice producers have opted for PET because of the opening and re-closing option of bottles. We now also have cartons with a variety of options for openings, which is something that is coming into the Pakistani market stronger in recent times. So, we do have solutions for those needs as well. The imported cartons of course will continue to be an important competitor.
BRR: You alluded that PET bottle is not as environmentally friendly as carton packaging; how would you compare the various types of packaging in terms of pricing, environment friendliness, and maybe other metrics of evaluation of packaging? What are the major advantages and disadvantages of various packaging types that are available?
JM: In terms of cost, we have the superior offering; otherwise you would see a lot more of it. In most of the emerging world, you see cartons as the preferred choice. When it comes to environmental profile, we can look at comparisons made on a country to country basis, as we cannot generalize. Take studies done in France or Germany, for instance, where the CO2 impact of our packaging is about half of a similar sized PET bottle. Surprisingly, it is also much less than that of returnable glass bottles.
You may wonder how this can be, as returnable glass can be re-utilized many times, but transporting one liter of juice in terms of space and weight of glass bottles as compared to cartons is extremely inefficient, hence the greater environmental impact of glass bottles. With cartons transportation, you get maximum utilization. Besides, Tetra Pak cartons consist 70 percent of paper, which is a renewable resource. All other packaging such as PET, cans and glass is not made with renewable resources. Recently, initiatives on the PET side have been taken to introduce materials with 30 percent renewable plastic made from sugar cane. Tetra Pak cartons are made with 70 percent paper, which is a fully renewable material.
BRR: What are the key factor inputs that go into the production of carton packaging and what are the general price trends of those factor inputs? Are there any policy lacunas that need to be fixed so far as those factor inputs are concerned?
JM: The tricky part is the raw material, because the paper and other materials we require in our production processes are produced in huge plants that require $1 billion worth of investments. We can source some of the paper we need here in Pakistan, but rest of the raw materials don't exist in Pakistan because the country lacks the critical scale in terms of size. For this reason, we have to partly rely on imports for our raw materials. On the other hand, there are a lot of high duties that we pay on imports of the raw materials needed for production.
BRR: Do you have any capacity expansion plans in Pakistan?
JM: At this stage there is no fixed plan, as over the past two years there have been flat figures due to decline, especially in dairy. The plans are present but growth needs to take place for them to be expedited.
Our factory was built some 10 years ago with the idea that we could double the production if required.
The space and the layouts are such that we could easily expand, and that could happen if growth does come back following the last difficult two years.