The consumer goods business of any country is directly linked to the national economy. The key demand drivers in this sector include increasing disposable incomes, rapid urbanisation and widening retail penetration. Favourable demographics are an advantage for consumer industry players in the Pakistani market.
The country has a population growth rate of approximately 2 percent per annum, with more than half of the people under 20-years of age. This signifies tremendous untapped potential in this industry. Consumer goods sales are generally based on real GDP growth, per capita income, private consumption expenditure, and retail and wholesale trade expenditure.
Simply the size, growth rate and age demographic of the population of Pakistan make the consumer sector attractive. Narrowing down our focus to the fast moving consumer goods industry (FMCG), the main players have initially been multinationals. A few of the early entrants were Unilever Pakistan (Formerly Lever Brothers Pakistan), P&G Pakistan, Nestle, Colgate Palmolive and Reckitt Benckiser.
More recently, over the last decade or so, a number of local companies have developed themselves into major participants in the sector. The more prominent amongst these are Engro Foods, National Foods, Candyland, Continental Biscuits, English Biscuits Manufacturers, Tapal Tea, Shan Foods and Shezan International. The growth of these companies has been impressive and they continue to steal market share from the international players.
GROWTH TRENDS AND POTENTIAL The growth rate of the FMCG business in Pakistan has been approximately 8 percent between 2003 and 2005. Given the aforementioned factors in the economy that have been fuelling growth in the consumer industry, it is estimated that the growth rate would have increased, if not at least remained a healthy 8 percent. In 2007, the State Bank of Pakistan estimated that there were 30 to 35 million Pakistanis earning an average of $10,000 per annum.
This has produced a healthy size of middle-class consumers who form the bulk of FMCG consumers. Moreover, FMCG consumption has so far only been successful in urban areas. This growth parallels increasing urbanisation of more Pakistanis than ever before.
Economic well-being has been accompanied with a changing consumer life style. The effects of globalisation, the opening up of media, have all contributed to rising demand for FMCG products in Pakistan.
Two-income households, leading to a premium on time and supplemented incomes, have generated an increasing demand for packaged goods. Owing to this enhanced awareness, consumers demand quality associated with leading brands from around the world.
CATEGORY DEVELOPMENT All categories of FMCGs have been growing at an unparallel rate. Food being the largest, comprises edibles, hot and cold beverages, dairy, oils and fats, to name a few. As we have seen, with the population growing at 2 percent per annum and over 50 percent under 20 years of age, the demand for food is growing rapidly. Changing life styles and increased awareness have been fuelling demand for packaged foods. This has led to exceptional growth in categories like packaged snacks (biscuits and savouries). For example, Bravo, a Kolson brand, grew to be a Rs1 billion brand in just over five years.
Dairy is another sector of FMCGs that has developed rapidly with livestock contributing approximately 50 percent to the agriculture sector. Pakistan being the 5th largest producer of milk, dairy products, on average, account for approximately 22 percent of expenditure on food.
With growing awareness of health and hygiene, the packaged milk and dairy sector is expected to continue seeing the rapid growth it has been experiencing. Although packaged and processed milk accounts for only about 5 percent of the market, there are three large players in this market namely, Nestle, Engro Foods and Haleeb Foods.
As a subset of dairy, ice cream is a 9 million litre market and growing. Over the last two years, from a single dominant player, Walls of Unilever, the category has been expanding, especially spurred by the launch of Omore by Engro Foods. This sector also has strong regional players like Igloo, Hico and Yummy.
Home, personal care and grooming products is another category of FMCG products that has grown on average 12-14 percent over the last ten years and continues to grow rapidly. Within these, detergents and fabric care are consumed on an almost daily basis in every household. With household ownership of washing machines at over 75 percent, there is extraordinary growth in this sector and major conversion from bar soap usage to detergents.
The major market players in this category are Unilever, P&G, Colgate Palmolive and Sufi soap and detergents. Other product categories in this sector - toothpastes, toilet soaps, shampoos and cosmetics - are expected to continue to exhibit strong growth averaging 12 percent.
Beverages, again, are a multi-billion rupee category comprising of tea, coffee, soft drinks and juices. In Pakistan tea consumption has become an inherent part of the culture, making Pakistan the third largest non-producing tea importer in the world, and the fifth largest tea consumer. Per capita consumption of tea is about 1kg per annum and is rising owing to increasing demand, making it one of the highest per capita consumers of tea in South Asia according to the Financial Times.
The total tea market is 175 million kg. Of this 100 million kg is legally imported while 75 million kg is smuggled to Pakistan through the Afghan Transit Trade route. The major demand driver for tea, as for other categories, has been population growth. The dominant players in this market are Unilever with Lipton and Brooke Bond, and Tapal with a combined share of nearly 85 percent of the market.
Other beverages include soft drinks, dominated by Coca Cola, Pepsi and Nestle in juices. One key reason for this extraordinary growth of FMCG in the Pakistan market has been the catalytic effect of low unit packs. Multinational FMCG companies operating in Pakistan figured out in the early nineties that to survive and grow in these markets it was important to match the purchasing power of consumers. One road that this led to was the introduction of sachets. These were low-unit packs which were priced lower.
However, with strong distribution through retail penetration, these low-priced products were made available across the length and width of the country. The low-unit-pack effect was applied to every category of FMCG products. Pioneered by Unilever beginning with sachets of Sunsilk shampoo, emulated by P&G with Ariel detergent, the idea ran across categories to tea, soft drinks, cooking oils and fats and even mini Cornetto frozen desert by Walls. This one initiative has been responsible for driving distribution penetration as well as growth of brands, mainly because low unit packs also became trial packs for the more affluent consumer.
FUTURE PROSPECTS Pakistan and Bangladesh have been growing at a quick pace. Both have been averaging around 8 percent to 10 percent across the last decade, while India and Sri Lanka have been averaging around 2 percent over this period.
The reasons for robust growth in Bangladesh have been similar to those in Pakistan. The key being changes in consumer buying patterns, an emerging middle class and aggressive distribution by manufacturers.
India and Sri Lanka are almost similar in behaviour. Categories like toilet soaps, detergents and toothpaste even recorded negative growth rates in 2004. One major factor for this appears to be the aggressive pricing strategy of FMCG marketers in the Indian and Sri Lanka markets. It seems FMCG marketeers, while being over-awed with the impressive economic growth in these markets, somehow overestimated the buying ability of Indian consumers. Consequently, it has only been able to return to a positive situation following deep price cuts and promotional activities.
There is a strong growth potential for FMCGs in particular, and consumer industry in general, in Pakistan. The major thrust for this will come from the rising younger population, emergence of social media, and its use by FMCG marketers. Coupled with the advantage of the desire for quality, known brands have been indoctrinated within the consumers psyche. The prospects are bright!
Jami Moiz lectures on marketing at the Institute of Business Administration (IBA), Karachi. He can be reached at jmoiz@iba.edu.pk. The writer acknowledges the contribution of the MBA Class of 2011 in putting this piece together.