An interview with Kamran Khalili, CEO Al-Shaheer Corporation 'Local demand for red meat to reach Rs1.8 trillion by 2025'

Kamran Khalili is the CEO of Al-Shaheer Corporation Limited, which is in the business of selling red meat in domestic and overseas markets. Earlier, he was a member of the Karachi Stock Exchange for 10 years and has a vast experience in the corporate sector. After exporting red meat for several years primarily to the Middle East, the company launched the Meat One brand to cater to the local market as well. BR Research recently sat down with him to understand the red meat segment, its challenges and the way forward. Following are the edited excerpts of the discussion: BRR: Let's start with your poultry expansion plans; we are told it has been shelved. Kamran Khalili: In 2015-16, we went for an IPO with the view that we'll set up a new meat processing facility in Lahore, which has a chicken slaughtering facility of 9000 birds per hour. Prior to that, we had already been doing red meat, but we wanted to enter the poultry segment to offer the whole range of red meat, poultry and seafood to our customers. When we started this process, Al-Shaheer was a profitable company. But unfortunately, the previous government kept the dollar frozen for a few years, which made our exports uncompetitive and which negatively affected our revenues. For a while, the existing business kept funding the new facility. But as exports slowed, it created a liquidity crisis in the existing business which resulted in lower volumes, and hence lower profitability. The board then decided to shelve the new project even though the plant is ready and trial runs have been conducted. However, for now we have decided to consolidate the existing line of business. We cut costs, laid off 250-275 people and shut down unprofitable outlets of Meat One. BRR: What's the plan for now? KK: After the main line of business was rationalised, we realized the company needed cash to increase volumes and profitability. Following the devaluation and the export incentives offered by this government, exports have become profitable to quite an extent. Therefore, at our last board meeting we decided to go for a rights issue of 40percentat par. The proceeds from this issue will be used for our working capital needs. Going forward, the business will grow, and so will our profitability. BRR: What is the share of exports in your total sales at present and what was it 2-3years ago? KK: It is about 75 percent at the moment since we are going through a lean period. Earlier, it used to be 85-90 percent. But with exports going down at a time when domestic sales didn't see much of a negative impact, the share of exports in our total sales naturally went down. However, going forward this mix will again tilt towards exports. BRR: Your FY19 sales stood at Rs4.2 billion. What's your outlook for FY20? KK: We will receive the proceeds from the rights issue by end of February. So, between March to June, which is the last quarter, there will be a drastic change in numbers in terms of both top-line and bottom-line. BRR: You mentioned the rights issue is for working capital, which means you basically buy livestock on cash? Should you not have a credit arrangement with your suppliers by now? KK: Unfortunately, in Pakistan, the livestock market is unorganised. Livestock suppliers in the mandis are too small to offer credit terms. They simply do not have the capacity. BRR: With a lot of non-Muslim countries also exporting halal meat, do you face competition in the international market? KK: There is no competition for us in Middle Eastern markets, where the meat is exported from all over the world and every kind of meat has a different utility. Meat from New Zealand or Argentina or Australia or India cannot be used by people from South Asia with the kind of recipes they cook. The Middle East also imports frozen meat which is altogether a different kind of meat and does not fulfill the requirement of people from these origins. We have a defined market segment that buys our meat, and fortunately Pakistan is the only producer of beef in the region. India also exports beef, but they have some ethical issues. Other than India nobody has beef. Iran, Iraq, Afghanistan, none of these countries has exportable livestock. BRR: What is your five-year outlook on domestic meat segment? And within the domestic market, what is share of Meat One and Khaas? How is it changing and where do you see more growth? KK: We are very bullish about the domestic market. Right now, we have not focused a lot on Khaas, which is our traditional butcher-styled model catering to socioeconomic classes B and C (i.e. middle and lower income). Khaas'net work is smaller compared to Meat One. However, opportunity lies across the board in the long run simply because consumer trends and preferences have changed. There was a certain generation that used to go the butcher to buy meat. The new generation prefers going to a modern outlet. So our model will take off as more and more people start showing greater concern about health and hygiene. I do not think that in the next few years, the traditional model will have as much share of the market as it has today. BRR: When do you see that tipping point? Do you see it five years down the road or after? KK: I see it happening in less than five years. The generation born around the time of independence has either already taken a backseat or are about to. Today's generation has different priorities, approach and thought processes. It is not just meat, altogether there will be a change in retail. I foresee a very short life of grocery stores in the unorganised sector. The new generation prefers to go to a big store and purchase everything from one place. This is also why we are moving towards shop-in model. It is both our requirement and also the stores'. The stores already have a captive customer, there are 500 people walking on a daily basis. If we set up a new store today, we do not know if 500 customers will walk in or not. For instance, hyper star must have a daily footfall of 4000-5000 people with the mind to spend money. Here I definitely know that there is a footfall of 5000 target audience and that too, from day one. There is also immense potential in e-commerce, which is why we will be launching our e-commerce platform for meat delivery, within the next six months. BRR: What do you think is the demand for red meat in Pakistan? In other words what is the domestic market size of red meat? What was it five years ago, and where do you see it five years from now? KK: It's about Rs1.25 trillion. This includes all kind of raw protein meat, and not value added. Five years ago, it was roughly the same, because per capita growth in consumption in Pakistan has been very small in the last five years. But from here on, it should at least grow 50 percent to about Rs1.8 trillion by the end 2025, growing at a rate of 7-8 percent per annum. BRR: Looking at this figure of Rs1.25 trillion, what is the share of each type: red meat, poultry and seafood? KK: I think 60-70 percent is poultry, 30 percent beef and 10 percent mutton. Seafood is insignificant since it is a cyclical business and consumed mostly only in winters. BRR: What about the domestic B2B market? KK: The B2B market is definitely bigger than retail; you could say that 70-75 percent of the meat market is B2B and 25-30 percent being retail sales. However, that market is very price sensitive because at the end of the day they compete at prices, which means for most of them hygiene and other factors are secondary. BRR: Pakistan does not have a proper livestock breed for meat purpose. Is that a major limitation to Pakistan's meat export potential? KK: Meat breed livestock has better yield in foreign countries. It puts on weight much quickly as compared to the Pakistani animal. In Pakistan, beef animal has never really been developed. Both the meat Pakistan exports or consumes domestically is actually dairy animal. Developing a domestic beef breed may not be very critical at the moment, but at some point we will have to develop the genetics of animal for beef, if we wish to develop brand 'Pakistan', For example, everyone is aware about the quality of 'Australian lamb', even those who have not consumed it. BRR: Is any work being done on this, now that the law for breeding societies has also been passed in Punjab? KK: Yes, the government has started working on farming sector. We hope that these things will be included in the next trade policy because the current government has, at various forums, asked us about what we want to include in the trade policy; what are the issues, possible solutions and so forth. The secretary commerce alone has held several meetings with us. BRR: What recommendations were put forward, especially in terms of structural reforms for the meat sector? KK: It's a long list including the fact that the costs of doing business needs to be lowered; timely tax refunds; that the animal quarantine department should become more proactive; that work should be done to improve animal health and welfare. It is also important to initiate disease prevention programs, and especially develop foot and mouth disease free areas, so we can certify abroad that we are a foot and mouth disease free country. Going forward, the name of the game in Pakistan is agri. Agri is our opportunity and our strength. BRR: High cost of doing business and tax refunds are no doubt problem areas but what is the biggest structural issue facing the industry in term of export growth? KK: The fact that we don't have certified animals in this country is a major problem. The government should develop a programme whereby it can certify that a certain animal has come from a disease-free area and has been grown on this or that particular farm. Because in international market they clearly ask for farm-to-fork traceability. The market Pakistan is exporting to at the moment (the Middle East) does not require pedigree certifications. The government is now taking the initiative to develop meat export segment. Pakistan has also signed an FTA with China which allows us to export meat to them. But in order to export meat to China, which is a big market, we will need this traceability. Basically, if we want to export meat anywhere outside of the Middle East, we will need to show traceability. BRR: How long will it take to develop a chain of traceability? KK: A villager cannot supply meat breed. But if corporate farms start developing meat breeds in Pakistan, we can have this ready in 2-3 years but at a small scale. For large country-wide changes, big players and the government will have to join hands to develop the meat breed. All you need is to import proven bulls from Australia which can be used to breed Pakistani cows and you will start getting results in 4 to 5 years. BRR: We've seen corporate farms in dairy- big corporates names like Lucky, Sapphire have gotten into this business. Have you considered backward integration? KK: Yes absolutely. It should be done. But we can't. Because the districts suitable to set up livestock cattle farms do not have a suitable business environment, especially in terms of law and order issues. BRR: Is there any price regulation on your domestic sales? KK: We get frequent visits from people from commissioner's office, especially in Ramadan, and they impose their rate list on us. As per definitions of the current law, we are not selling value-added meat. Unlike branded UHT milk which does not fall under the regulated milk price regime, the meat we sell is only commodity, without any value addition. So the law says that we cannot charge a premium on it. But we've gone to court arguing that we have a state of the art facility, we have invested in cold chain to ensure good quality meat supply that meets the standards of health, hygiene and slaughtering ethics; we comply with incomes tax; we pay our full dues of electricity bill and not rely on 'kundas'; we have generators to ensure our meat is kept fresh in our shops. Our costs are simply not the same. Our premium isn't more than 5-8 percent. But we offer 100 percent money back guarantee. Plus, when we sell a kilo of meat then it is really a kilo of meat since we weigh it after cleaning the meat, whereas in the open market the kilo of meat you buy is actually less than a kilogram since the butcher cleans after he weighs it. Lastly, we are open seven days a week and home delivery option is also available to customers. I believe there should not be any price regulation anyway. It is the customer's choice; it is a free market. People won't buy if you sell poor quality or expensive good and services. BRR: What factors affect your gross profit margins both in terms of your pricing in Middle East, and in terms of your cost of livestock supply? KK: Initially the government provided freight subsidy, which affected our margins. That's not present now.