Profit issue 05

WELCOME

RUNNING A TIGHT SHIP ne of my all time favourite movies has to be Braveheart (1995). The movie had many powerful scenes but the one depicted on our cover page gained most popularity. It shows the English cavalry approaching in slow motion bearing down on William Wallace(Mel Gibson) and his fellow Scots. One could feel the tension as the horses drew nearer while Wallace kept shouting , "hold....hold...hold" until the cavalry came extremely close.

Judging the right time, he said "now"!! and the scots immediately sprung those spears at the advancing cavalry.

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You may wonder what is the connection between this illustration from Braveheart and our cover story on METRO Cash and Carry? The analogy drawn, is to depict the strategy of METRO Cash & Carry's team which has kept 'on hold' in terms of opening new stores for the last eight years. Now , they plan to go all out and "strike" when the iron is hot! Their plans to open new Metro stores in in unchartered waters, launching convenience stores and last but not the least, to enter the world of e-commerce are all great ideas.Now it all depends on how successfully these plans are executed because that is where the devil lies.

The closing paragraph of our cover story nicely sums it up.

“All the plans that Marek talks about are exciting and look good on paper. But they are ideas. Implementation is where the magic happens. Large organisations like METRO, regardless of how no-frills they gear themselves out to be, are going

to be sluggish in comparison to new, nimble ones like, say Daraaz. If Marek’s METRO can be both big and fast, we’re certainly looking at exciting times ahead.”

Another important point that the Managing Director of METRO mentions is that his company is the largest tax collector for the Government. He was obviously referring to the 17% sales tax that MCC charges on all items it sells to its customers.

This they charge on behalf of the government and deposit it in the FBR’s kitty at the end of every month .They even ensure that all their vendors are also sales tax registered. This is not all, they also deduct withholding income tax from their suppliers payments and in a country like Pakistan where vendors usually add the amount of Withholding tax to the final price this means that Metro’s buying automatically becomes expensive. I can personally vouch for this since one of this publication’s sister companies is a vendor for METRO’s printing needs. The irony is ,that the other wholesale markets and most retail outlets never provide the Sales tax invoice to their customer , thereby gaining an extra 17% possibly to pass on to their customers in the form of discount. Taking this into account it is commendable to say the least,that METRO has still been able to successfully compete as a low cost provider in both the B2B and B2C formats.

To know the details of how they have managed to run such a tight ship, please go to page 18.

Happy reading

Babar Nizami

Publishing Editor: Arif Nizami l Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Editor Reporting: Farooq Baloch Reporters Karachi: Aisha Arshad l Nida Jaffery l Arshad Hussain and Usman Hanif l Reporters Lahore: Syeda Masooma l Abbas Naqvi and Hassaan Ahmed l Reporters Islamabad: Amir Sial l Ahmed Ahmedani Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) Design & Layout: Rizwan Ahmad l Illustrator: ZEB Photographers: Zubair Mehfooz & Imran Gillani Contact: profit@pakistantoday.com.pk

FROM THE MANAGING EDITOR

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18

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8 Weekly Roundup 12 Empress Market: Disadvantaged minorities without a level playing field 18 Hoooold...Hooooold…..Charge!!

28 28 Taking a slice of the market 32 rozee.pk a job lot of jobs 36 Booming hospitality industry

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39 SNGPL— Finally getting it right 42 Cement Sector: Upward growth trajectory to continue

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46 46 Talking Heads 48 McKinsey’s 10 tips for leading companies out of crisis

CONTENTS

“Chinese firms are keen to invest in cattle, fruit and vegetable farming and processing plants in Sindh” Chief Minister Sindh Syed Murad Ali Shah

QUOTE

BRIEFING

“Businessmen should put forth proposals to accelerate the pace of economic development” Information and broadcasting minister of state Mariyum Aurangzeb

Pak-Uzbek Trade House Agreements have been signed between Uzbek Export Corporation and KASB Group to introduce technologically advanced agriculture equipment in Pakistan to enhance the country’s per-acre yield. KASB via Uzbekistan has already introduced cotton-picking equipment and tractors that are much superior to local machinery. The mechanised process increases yield by almost double. Due to the high cost of the machinery KASB has decided to initially give the machinery on lease to farmers. Despite being an agrarian economy, Pakistan still has a very low yield due to the manual nature of doing things. Prime Minister Nawaz Sharif met with deputy Prime Minister of Uzbekistan on the 23rd and welcomed the concrete proposals from Uzbekistan.

He stressed on the establishment of the Pakistan-Uzbekistan Joint Business Council. Uzbekistan is a large exporter of chemicals, electrical equipment among other products yet trade with Pakistan is only at $30 million, a figure that both countries wish to increase to $300 million.

more road projects will be financed by China under CPEC. This will take its total contribution to road related CPEC project to Rs102500 crores.

Rs10776 crores will be given as a soft loan to the National Highway Authority (NHA) for the three new projects. Already Rs91700 crores has been given for another three projects. The three new projects to be financed by China fall on the western route of the corridor. They include a 280-kilomtre road from Raikot to Thakot at a cost of Rs800 crores, 210km dual carriageway from Yarik to Zhob (Rs8000 crores), and a 110km road from Basima to Khuzdar (Rs1976 crores). The Raikot-Tahikot was damaged in the 2010 floods.

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20pc increase in duty on electrical steel sheets used in fan making has compelled all fan makers to increase their prices in the next season.

The price of the key raw material in making low energy fans in the electrical steel sheet has jumped from $425 per tonne to $800 per tonne.

Only a dozen of the 150 fan producers have the financial resources to import the sheets directly, the rest of the companies are dependent on commercial sellers who also charge a tax. This has squeezed the margins of ordinary manufacturers. As a result smaller manufacturers will have to use lower quality steel sheets to manage their costs. The global increase in the price of steel sheets coupled with the 20 pc tax means that the already declining exports of fans will suffer further.

BRIEFING

46%

return was provided by the Pakistan Stock Exchange (PSX) in 2016 making it the best performing market in Asia for the year. It also remained number one in the MSCI Frontier Market Index. Improvement in the domestic economy along with the large local liquidity supported the index to reach new highs. On average the daily value remained at $109 million as compared to $111 million in 2015 however average volumes increased by 14% to 281 million shares. The National Clearing Company of Pakistan Limited reported that foreigners bought approximately $3 billion and sold stocks valuing $3.4 billion. The 40% sale of PSX to a Chinese firm for $215 million also boosted the index at the end of the year.

QUOTE

“It’s time we took a holistic view of the situation and adopted a rather active and Keynsian approach towards export promotion” FPCCI Head of Horticulture Exports Ahmad Jawad

30% is the idle manufacturing capacity in the textile sector according to recent trade figures. Textile exporters have expressed their concern over the widening of the trade gap and shrinking exports that they attribute mainly to high cost of energy among other factors. In a statement Pakistan Textile Exporters Association (PTEA) Chairman Ajmal Farooq and Vice Chairman Muhammad Naeem said that Pakistan’s exports fell 3.93% to $8.18 billion from July to November 2016, down $334.68 million compared to the corresponding period of previous year. Textile exporters have repeatedly made the demand for early announcement of the incentive package promised by the premier to control the widening trade deficit.

200%

225,000

was the increase in complaints against insurance policyholders in 2016. The number of complaints to the ombudsman against insurance companies saw a120% increase in 2015. Out of the 839 complaints that were lodged in 2016, 70% were lodged against life insurance firms. Cases that were reported included instance of changing of a factory address in order to avoid payment by the insurance company.

In another instance 12 month policy promises were not kept with pay outs only being given for 8 months in the case of life insurance policies, thereby reducing the amount. The number of disposed cases until May 2016 was 150% higher as compared to 2015. Rs4.10 crore monetary relief has been given to affected parties out of the Rs189crore cumulative claim amount received by the ombudsman.

tonnes of sugar has been allowed to be exported by the Economic Coordination Committee (ECC). The reason for export being allowed is an estimated surplus of 1.23 million tonnes this season. Sugar cane production countrywide fell by 3.9 per cent in 2015-16 at 65.5 m tonnes.

While chairing the ECC meeting, Finance Minister Ishaq Dar said that measures would be taken to ensure that domestic prices are not affected. Permission to export for mills is conditional upon them clearing all dues of farmers from the last season.

Rs3.60 per unit is the reduction in electricity rate as reported by National Electric Power Regulatory Authority (NEPRA). The reduction is a result of reduced cost of production for power producers in November. K-Electric will however charge 0.60 per unit more as it had to use furnace oil amid a shortage of gas.Against the reference price of Rs7.30 per unit, the cost of power generation in November was Rs3.70 per unit; therefore, it proposed a reduction Rs3.60 per unit.

BRIEFING

BRIEFING

was the consumer price index (CPI) number for December as reported by Pakistan Bureau of Statistics (PBS). The annual inflation rate measured by the Consumer Price Index (CPI) – which captures prices of 481 commodities in urban centres. The main reason behind the fall was reduction in prices of both perishable and non-perishable food items and transport fare. Due to the same reasons, the monthly inflation rate decelerated to negative 0.7% last month over November.Core inflation – measured by excluding energy and food items, which had started picking momentum also – slightly decelerated to 5.2% last month. It was for the first time in half a year that the rate of increase in core inflation was lower than the previous month, showed the PBS data.“We expect average CPI inflation in fiscal year 2017 to remain lower than the target of 6% set by the government,” wrote the State Bank of Pakistan (SBP) in its first quarter report on the state of Pakistan’s economy

3.7% QUOTE

“Support from the international organisations will help Pakistan fulfil its obligations to the WTO” Commerce Minister Khurram Dastgir

26 million tonnes is the projected increase in Cement production capacity over the next two to three years. A six-month review of the performance of the industry shows that sales grew 8.6% reaching 19.81 million tonnes said in first half (July-December) of current fiscal year 2016-17. The growing demand means that the current available capacity of 46 million tonnes will therefore be insufficient. All Pakistan Cement Manufacturers Association Chairman Sayeed Tariq Saigol saidcapacity would increase to 72.25 million tons in the next two to three years with additional domestic sales of 26 to 28 million tons.According to data released by the association, domestic cement sales grew 11.07% in the first half of current fiscal year comparedto dispatches in the same period of previous year. Exports, however, fell 3.53% in July-December 2016.

is the expected import bill of cotton for fiscal year 2016-17. From being the third largest cotton exporter two years ago, Pakistan is now a net importer of the commodity. Last year, Pakistan imported around 2.7m bales from India at a cost of $800m.There was a time when Pakistan was the largest exporter of cotton yarn globally, according to Asif Inam, chairman of the All Pakistan Textile Mills Association (Aptma) for the Sindh-Balochistan zone.Pakistan’s Department of Plant Protection (DPP) restricted cotton imports from India when low prices prevailed there citing phytosanitary conditions.The APTMA official said the government should remove 4 per cent import duty from raw cotton as 4.5m bales will be required to meet local demand.

$1.58 billion

has been accumulated by Pakistan International Airlines while and additional Rs 560 crore per month will be added to this amount. The PIA management told this to a Senate committee in a briefing. The panel was informed that the airline earned around Rs7.5 billion a month while its expenses were over Rs 13.14bn.Major monthly expenses are over Rs 4.4bn in loan and mark-up repayment, over Rs 2.6bn over fuel and over Rs 1.6bn over salaries. The accumulated loss / liabilities of over Rs300bn include over Rs186bn of bank loans, Rs40bn of Civil Aviation Authority charges/ dues, over Rs13. 5bn to be paid to the Pakistan State Oil and over Rs 4.5bn to the Federal Bureau of Revenue, etc.The senators grilled the airline management and wanted to know how such a (huge) loss had accumulated, during whose tenure the PIA’s downfall had started and why nothing had been done to turn the situation around.PIA chief Bernd Hildenbrand said that most of the poor financial performance of the airline was owing to the aviation policy.

Rs 30, 000 crore

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Rs 12,700 crore was the shortfall in tax collection was witnessed by the Federal Board of Revenue (FBR) for the first half this fiscal year. The government faces the challenge of achieving a fiscal deficit target of 3.8 per cent of the GDP for 2016-17 owing to its lower-than-expected revenue collection so far. The situation is going to remain the same in January and February as Incumbent FBR Chairman Nisar Khan and Finance Secretary Dr Waqar Masood Khan are set to retire this month. Finance Minister Ishaq Dar has therefore started looking for suitable replacements. Three segments were identified as poor performers because of policy decisions taken during the period under review. These include five zero-rated sectors, petroleum products and the fertiliser sector.In the first six months, the revenue collection amounted to Rs146, 600 crore against the target of Rs159, 300 crore, leaving a shortfall of Rs12, 700 crore.

BRIEFING

JOURNEY

Manisha Patel is just one of the many Hindu women exploited in the name of employment in Karachi's Empress market

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Prejudice against minorities manifests in the form of low wages,higher costs and above all physical andmental abuse while the government andstate institutions provide little to no support lad in a vibrant Banarasi saree with a messy braided hairdo, Manisha Patel stood at her fixed spot amidst the early morning hustle bustle of the main Empress Building – a famous market situated in Sadar, downtown

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Karachi.

Her deep green bangles chimed in unison as she swiftly stuffed dried fruits in dull khaki paper bags for customers.

“Some shop owners here [Empress Market] buy from my stall every morning. I keep their packets ready before they arrive,” Patel said. All this time, her eyes remained on her shade-less stall, a few plastic sacks filled with dried fruits and a foot-tall wooden stool. Her hands fixed packets expertly as she served her customers.

The 52-year-old Hindu woman sells dried

fruits every day from morning until evening at the same spot. Patel started this work 30 years ago and has been involved in the same business ever since, she recalled, tears rolling down her cheeks.

Though Patel, who toiled in heat, cold and rains during all these years, has been able to double her daily income to Rs400 or Rs12,000 a month (if she works 30 days a month), she still earns less than the province’s Rs14,000 minimum official wage for unskilled workers.

Patel is not the only Hindu woman in Empress Market who is in the business of dried fruit vending. The front street of the main Empress Building is encroached with more than a dozen small and large stalls operated by women from her community, who deal in dried fruits to earn the bread and butter of their families.

These stalls are owned by wealthy merchants who have large-scale shops in Jodia Bazar – the biggest wholesale market for commodities in the port city. Affluent dried fruit merchants hire these women from the Hindu community

By: Nida Jaffery

on daily wages to sell the merchandise and supplement their earnings.

“Seth Sahabs [whole sellers] hire us because we are easily available to work on lower wages,” said Rukmani, another Hindu dried fruit vendor who earns Rs300 in daily wages. “We settle for lower compensation because we [Hindus] have fewer work opportunities.”

The minorities in Pakistan are nearing 13 million or 8 percent of the total population, according to the 1998 census, the most recent by the government of Pakistan – some estimates suggest they are 10 percent of the population. According to a recent book named “Religious Freedom in Asia”

by Edward P. Lipton, Christians, Ahmadis and Hindus have populations of 3 million, 3 to 4 million and 2.8 million respectively.

However, it is crucial to note that given the disadvantages and stigmatization attached, communities do not opt to identify as minorities. This is why the above-mentioned figures are only a conservative estimate.

In a country where census has not been conducted for the last eighteen years, it is almost impossible to find the correct em-

Besides limited work opportuNities aNd lack of acceptaNce, miNorities face a larger threat iN the face of iNcoNsiderate Behavior of the iNstitutioNs meaNt to protect them iN the first place iNsight

ployment numbers for minorities. However, a report by Pakistan Society of Victimology suggests that more than half of the minority population of Pakistan is living under the poverty line. In monetary terms, poverty line stands at Rs3,030 per adult equivalent each month.

Patel, one of the oldest dried fruit vendors at the Empress Market, is a classic example of the hardships minorities go through in the country’s labour market.

With seven family members to feed, including a son with special needs, Patel earns approximately Rs1,714 per family member a month, which is 43 per cent less than what is required to stand aligned with the poverty line.

Even if one looks at public sector employment, the condition of minorities is not

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any different.

According to an amendment passed in 2009, all government organizations are bound to set a 5 percent quota for non-Muslim employees. However, several cases were observed where the law was not implemented. Out of a total of 2.8 million public sector employees, only about 11,000 or less than 0.5 percent are non-Muslims, out of whom, many are low-level employees or sanitary workers.

According to the research carried out

by Profit, more than 70 per cent of the seats reserved for the minorities in the federal government are vacant. This is despite a fixed legitimate quota reserved for minorities in government jobs. “Around 10,573 posts can be sanctioned under the 5 per cent quota reserved for non-Muslims in the fed-

eral government,” the research concluded.

However, out of these only about 2,447 are occupied and 8,126 jobs allocated for the non-Muslims remain vacant.

Besides limited work opportunities and lack of acceptance, minorities face a larger threat in the face of inconsiderate behavior of the institutions meant to protect them in the first place.

“Police officers patrolling in the market find it reasonable to grab a fist full of dried fruits from our stalls any time they wish,” said Patel. This stands tall as an example of ill-treatment faced by many workers around all spheres of the society. This is in addition to Rs400, which she pays to the shop owners at Empress Market who safe-keep her dried fruits each night inside their shops.

However, extortion and exploitation are not the only issues facing minorities, they also go through extensive hardships while at work. This may come in the form of stigmatization or physical and mental abuse.

The case of 22-year-old Roop Chand Bheel further elaborates this issue. Due to lack of employment, Bheel went to MirpurKhas to work as a cotton picker in a farm. He was accused of stealing and was buried in the ground up to waist level. First, he was gashed on different parts of his torso with a sharp-edged knife, and then pulled out only to be set ablaze. Succumbing to his burns, the young lad died in a hospital in Karachi three days following the incident.

“In shops and factories Hindu and

Christian servants and employees never drink water from a glass that Muslims use,” said a minority rights activist in Karachi who wishes to remain anonymous.

The activist further said that socio-economic challenges that come with this discrimination affect the daily lives of religious minorities in Pakistan tremendously. Minorities are often relegated to live in decrepit conditions in slums such as ‘French Colony’ in Islamabad and ‘Maaripur’ in Karachi, where Patel and her colleagues live.

Bonded labor is another atrocity faced commonly by the minorities of Pakistan.

According to recent estimates by the Asian Development Bank, approximately 1.8 million people are in bonded labor across the country. However, some estimates are even higher.

“Hindus predominantly the Bheel and

AS PART OF A SIGNATORY TO UNITED NATIONS MILLENNIUM DEVELOPMENT GOALS, PAKISTAN AGREED TO ERADICATE EXTREME HUNGER AND POVERTY – ONE OF THE EIGHT SUSTAINABLE DEVELOPMENT GOALS THE COUNTRY PLEDGED TO ACHIEVE BY 2015 – YET PEOPLE LIKE PATEL CONTINUE TO LIVE BELOW POVERTY LINE TO THIS DAY Kohli clans are most vulnerable to bonded labor in different areas of Sindh,” said a Bonded Labor Report by Thar Deep Organization, an NGO working for the basic rights of minorities in Pakistan. Unfortunately, the realities aren’t any different for other minorities living in Sindh and Punjab.

“We are breeding venom,” said LajpatSarkar, a minority rights activist working in the rural Sindh. “Kids belonging to minority communities will grow up to be nothing but bitter venoms,” he said. “It’s high time that we brought an end to bonded labor and religious discrimination in schools and madrasas. You just can’t take away their right to feed themselves,” Rai said.

As part of a signatory to United Nations Millennium Development Goals, Pakistan agreed to eradicate extreme hunger and poverty – one of the eight sustainable development goals the country pledged to achieve by 2015 – yet people like Patel continue to live below poverty line to this day.

At the end of the day, Patel along with her colleagues packs her stalls and prays at a nearby temple. She then collects her daily wages and heads back home, where she has seven people waiting for her to bring food in the house. n

INSIGHT

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COVER STORY

Having led METRO Cash & Carry to recover from a merger that almost went wrong to bringing stability in his first year as CEO, Marek Minkiewicz now seems all set to go on the offensive and disrupt the local trade models, something that he has intended to do since the wholesale giant entered Pakistan By: Babar Nizami & Syeda Masooma Photos: Zubair Mehfooz

COVER STORY

Marek Minkiewicz, Managing Director, METRO Cash & Carry Poses for the camera standing at his Model Town store in Lahore

hatting over tea and Baklava pastry in an unadorned small office on the first floor of a METRO Cash & Carry store in Lahore, Managing Director Marek Minkiewicz recalls how he discovered the original recipe of the middle-eastern delight, which later became a regular on METRO Café’s menu.

However, that’s, perhaps, the smallest of changes he has made to the business since he joined as its chief one-and-a-half years ago.

Marek has taken the international self-service wholesaler from barely breaking even two years ago to double-digit growth in its profits this year. And he has barely begun – the new chief of MCC has far bigger plans: he now wants to disrupt the market by launching a country-wide network of small convenience stores under a franchise model and even better enter full throttle into the burgeoning e-commerce industry along the lines of Alibaba from China.

But bringing MCC to this level within a span of one year wasn’t smooth sailing – the

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man fired almost the entire top management, half of the mid-tier managers and fought many other challenges in his attempt to restructure a business, which remained almost stagnant for five years before his arrival with no new store openings.

Not just wholesale he international leader in self-service wholesale has so far had a very eventful journey in Pakistan, to say the least. For starters, the wholesale giant isn’t exactly a wholesaler here. Well, atleast not any more. What started off strictly on a B2B model, catering exclusively to institutional customers like hotels, restaurants, corporates and kariana stores (small grocery shops) and that too to buy only in bulk packings, was soon forced to revise its strategy due to lackluster market response. A year-and-a-half after its launch, MCC started operating as a wholesaler as well as a retailer from where small household consumers could now also shop under a hybrid B2B-B2C model. However, it turned out that this wasn’t enough to bring profitability to the company.

MCC’s stores were essentially built and de-

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signed as no frills warehouses and were nothing like the interiors of fancy hypermarkets.

The entry of Hyperstar part of Carrefour S.A -one of the world’s largest hypermarket chains- didn’t help the cause either and judging by the general hustle and bustle at Hyperstar stores, it was evident that household consumers preferred to shop at custom built hypermarkets while institutional customers generally leaned towards METRO stores.

Marek however dispels the impression “Hyperstar generally bases its location in Malls; Dolmen, Fortress, Millennium etc. So more people are seen inside the store but most of them are just visitors to the Malls and not actual customers.” He adds that sometimes the rent of a shop in a mall is much higher than having your own space. “So it might appear on the surface that they are doing better, and they have to do better as well, to make up for the higher costs and overheads.” Due to high costs, high revenues do not leave them with higher profits, he explains. Joking about the fact that Malls have parking lots where customers have to pay Marek says “Malls charge for parking and it is not good in the long-run. So I’ll say come to METRO, we have free parking.”

Merger ETRO Group wasn't the first wholesale giant to enter the Pakistani market. Infact Makro Habib Pakistan Limited - a joint venture between the Dutch based SVH Holdings, and the House of Habib, one of the biggest business establishments of the country - had already opened two Makro stores in Pakistan when MCC opened its first in 2007 . This was another first. Contrary to the rest of the world where METRO had an informal international agreement with Makro not to operate in the same country, Pakistan became the first country where both players competed head on. Suppliers like the big FMCG companies exploited the situation and successfully resisted the separate demands for deep discounts that were crucial to the wholesalers’ success. Resultantly none of the two players were making money. Hence, in 2012, the two one time competitors decided to merge their operations under a single brand name, METRO. On paper the merger was a stroke of genius supposed to bring all

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“MAKRO WAS MOSTLY KARACHI BASED, FAISALABAD WAS ONLY METRO’S PLAYFIELD AND LAHORE WAS EVENLY DIVIDED. SO THE AMALGAMATION WAS A GOOD COMBINATION OF THE PORTFOLIOS OF BOTH ENTITIES” Marek Minkiewicz, Managing Director, METRO Cash & Carry

sorts of expected benefits including cost synergies, combined resources and increased market power, but what it also brought with it were some very unexpected and serious challenges. “It was like combining two different cultures, and all the problems imaginable with this sort of an

amalgamation arose.” says Marek. From software to corporate culture, every ideology had to be unified to get harmony in operations. And because Makro Habib was the junior partner in the joint venture, its staff felt that it wasn't actually a merger but in fact an acquisition.

COVER STORY

Even though Marek was not part of either the METRO group or Makro Habib at the time of the merger in 2012, his prior experience as the first MD of Makro Habib in Pakistan, had allowed him to better understand the bearings of such events. In 2009 when SVH Holdings owner of Makro stores decided to sell its 70% majority stake to its local partner House of Habib and exit Pakistan, Marek had reportedly experienced similar circumstances. “You see Marek was a representative of SVH Holdings and as soon they decided to exit, he was asked to take a back seat. People on key positions were replaced with loyals from other House of Habib companies.” reveals a former employee of Makro Habib. According to her, owners of House of Habib are good businessmen; successfully running Indus Motors, Shabbir tiles and Habib Metropolitan Bank amongst other diverse interests but the people they sent from group companies did not understand the demands of cash and carry business. Also these people were coming from a conservative culture which was very different from that of Makro.

Despite his personal experience at Makro and the challenges METRO-Makro merger brought, Marek still believes that the decision to merge made sense “Makro was mostly Karachi based, Faisalabad was only METRO’s playfield and Lahore was evenly divided. So the amalgamation was a good combination of the portfolios of both entities.” The details of the agreement that happened between the two entities are now ancient history, but the part that lingered on was the division of responsibilities between the two partners. Habib Group took over the responsibilities of real estate management, and METRO concerned itself with the operations management of the united business.

Talking about the challenges posed by the merger, Marek says, “Post 2012 period can be a perfect case study for the students of business. It was a time filled with chances and circumstances that could go very right or not-so-good. The two entities had the common factor of cash and carry, but had two very different cultures.” He adds that they had to merge lots of things and also had to combine two head offices into one. There were some necessary changes in the workforce as well since “one head office did not need as many employees as two,” he says. The overall make-up of the post-merger METRO head

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office was 70 to 80 per cent old METRO combined with 20 to 30 per cent old Makro.

Out of the eight board members seven belonged to METRO. The changes at the lower management levels and other branches remained minimal. “Post merger period brought some fluctuations in the revenues of different

stores in the early days. Revenues from the original Makro stores were particularly hurt but now they have been stabilized.” However, stores had to undergo several changes to achieve that. Only recently the interiors of the original Makro-Habib stores were refurbished and some changes in the operational

processes such as addition of conveyer belts were introduced. Marek said, “The customers here in Pakistan are very much accustomed to one particular way of the placement and functioning of things. When it was changed, they were confused. They didn’t like it and took a while adjusting to it.” Marek believes that integration of various business processes and departments was the biggest challenge for the newly merged business so much so that Marek adds, “That was also the reason why we didn’t open any new stores for a long time.”

However MeTro was not the only one stalling opening new stores. Marek gives example of one of his competitors, Hyperstar, which also did not open any new store till very recently since opening of its Dolmen mall store in karachi in 2012.

A HYBRID B2B-B2C MODEL WASN’T ENOUGH TO BRING PROFITABILITY TO THE COMPANY. MCC’S STORES WERE ESSENTIALLY BUILT AND DESIGNED AS NO FRILLS WAREHOUSES AND WERE NOTHING LIKE THE INTERIORS OF FANCY HYPERMARKETS

Original plans and expectations

tors responsible for this. For instance in India, every state has different laws and that is difficult to keep up with. So in this respect Pakistan is the better choice for doing business.

He said that Japan was another country which was difficult to operate in. He added, “The point I am trying to make is that, in Pakistan we are the market leaders, we have the first mover advantage and we have a huge opportunity, not only in traditional cash and carry, but perhaps also in some other formats, like convenience stores etc. where we can play a role in terms of knowledge transfer as well.” elaborating his point on the changes brought in by MeTro Marek says, “Multinational stores like ours have made a lot of change and have forced local stores to also develop and adopt international best practices. In turn customer experience has completely changed.

Before 2006 what was there? There was one Imtiaz Super Market on Shahrah-e-Faisal.

There was one Al-Fatah that burned down three times mysteriously in the middle of the night, the whole parking and the basement where you had to squeeze everything. Then you had Pace where Imran Khan took some friends and opened the store. There was one HKB. Then what happened after 2006?

MeTro and similar chains have now given the confidence and motivation to local chains and they have realized that they can do better and they have to do better.” He feels that local businesses have now realized that if they don’t adapt with the changing times, they will become extinct. Before these multinational giants hit the market, the safety standards and

hen Makro and MeTro entered Pakistan in 2007, there were hopes and fears (depending on where one fitted in the supply chain) that the two wholesale giants would disrupt the traditional trade models. Both had announced big plans. Ali Habib, Chairman of Makro Habib announced in Nov 2006 “By the end of 2007, Makro will have a total of 7 stores in service.Makro's immediate plan is to have 12 centers by the year 2009 for which real estate is being earmarked and negotiations are underway. In total it has an ambitious program to establish 30 such stores in all major economic centers of the country.” MeTro was not to be left behind and within only 18 months of its launch MCC expanded to five wholesale centers. Yet ,considering that at present the total combined store count stands at only 9 , a case can be made that MeTro and Makro failed to revolutionize or disrupt the Pakistani wholesale or retail market as was widely expected. Marek disagrees, “The acceleration of business goes at different speeds in different countries.

So Pakistan was slower as compared to some countries and faster as compared to others.”

He said that there are several fac-

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COVER STORY

environment of locals supermarkets remained inadequate. For instance In Imtiaz you had electronic cables running through the ceiling.

CSD remained in the same stagnated condition for ages.

Ready to Disrupt oing forward Marek seems to have some pretty aggressive plans that have the potential to disrupt the Pakistani market and finally bring the impact that was expected from it about a decade ago. Some of these projects in Marek’s words are “babies that are already conceived and on their way.”

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Convenience Stores etro has already established its franchise model for small convenience stores in Pakistan.

Marek shared that a pilot store for their franchise model oDIDo has already been inaugurated near Moon Market, Lahore under the name ‘Freshly’. “this is a model for convenience

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stores and all the operational decisions are made by the franchisee but the stores buy from Metro.” the model is based on 2000 stores in Poland, 500 in romania, 40 in Moscow, and also some in China, where they have already become operational.. Metro will help these smaller stores with logistics, store layout and advise on product mix . Marek said that these new stores will be functional from early next year,beginning February or March, and will be slightly bigger than the first one. He says that if Poland can do 2000, then Pakistan can definitely have more. “the plan is to open 800 to 1000 such stores in Pakistan initially.” these stores do not offer competition to Metro’s wholesale concept stores.they are instead closer to the idea of convenience stores when customers need only a few items and want to shop local. i.e. “the full range of products would still be in Metro, but products like fresh meat and slush, juices etc. would be available so the Metro customers don’t have to travel all the way for one or two products.” the prices in these franchise convenience stores will match Metro and they would be better looking than the other general stores as well, the MD said. Metro hasn’t

CONTRARY TO THE REST OF THE WORLD WHERE METRO HAD AN INFORMAL INTERNATIONAL AGREEMENT WITH MAKRO NOT TO OPERATE IN THE SAME COUNTRY, PAKISTAN BECAME THE FIRST COUNTRY WHERE BOTH PLAYERS COMPETED HEAD ON finalized the actual model for this franchise plan and are open to issuing varied operational licenses to cater to different locations..

For instance a Freshly store in Pakpattan would be different from the one in Sahiwal,

depending on the factors of the location.

E-commerce arek finally unveiled his trump card. Metro is in the process to enter the world of e-commerce. He said that half of the total 200 million Pakistani population is less than 25 years old. they have never had a fixed phone, they have never had a desktop and they have never written a letter. But they all have smart phones. “the ease with which they go to Food Panda or order Khaadi’s new collection is incredible. My sons make fun of me when I am typing with one finger. Now they are under 25 and a lot of them don’t have too much to spend. But these 25 become 30, then they become 35, then they become 40, and they will still go like this and their children will still laugh because they will be even faster with technology.”

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“IN A CITY LIKE KARACHI, THREE METROS, ONE HYPERSTAR, FOUR OR FIVE IMTIAZ SUPER MARKETS, SOME CHASE UPS, ARE NOT COMPETITION. NO WAY. OUR ONLY COMPETITION IS WITH OURSELVES. I SAY THAT YOU CAN START COMPLAINING WHEN THERE ARE FIFTY HYPERSTARS IN KARACHI AND TWENTY MAKROS. THEN YOU SAY THAT THERE IS COMPETITION” He said that e-commerce is gaining momentum in the country but almost 95 per cent of it is non-food until now. It focuses mainly on clothing, electronics, some FMCGs. He said that some students have now initiated startups for online selling of food. “But I say that it depends on how deep dad’s pockets are? How long they can sus-

Mubashir Jalil Former Vice President and Head of Business Development Hyperstar “The two Major players METRO Cash & carry and Hyperstar Hypermarket have streamlined the supply chain for their existing retail and whole sale business through their over 12 Stores in the country. The supply chain has already been developed over time, I am confident that suppliers have learned for quality and timely deliveries. It will be of great advantage for e-commerce market as the launching pads have good performance in conventional retailing.” He also believes that even though ecommerce is on the rise in Pakistan owing to increase in smartphone usage and urbanization, retailers will have to work for profitability. “The overall shift from brick store to e-commerce is slow; many consumers are reluctant to try online shopping due to lack of trust. It is critical that retailers must deliver on time and quality product to gain confidence. The special discount offers / promotions on e-commerce will also be helpful to increase the share. How much portion of the market will be capture by e-commerce, it all depends on credibilty of retailer and exchange policy.” About the franchise model of smaller utility stores, he believes: “The smaller version of Cash & Carry / hypermarkets, neighborhood stores or convenience stores like Carrefour Express, 7-Eleven and familyMart have witnessed great success around world. The existing big retailers can copy such models and spread stores. The expansion of big store is restricted due to lack of reliable developers, big retail space and proper shopping malls availability in the country. It is easy to establish smaller neighborhood stores which carry huge success due to enhanced timings, may be 24 hours. It all depends on the businesses to build own stores or go for franchise system. The franchise system is also popular around the world. The franchised convenience stores may attract investors if the business terms will be lucrative for initial years. The franchiser should give better business terms to partner franchisee. The 7eleven concepts will not have significant impact on e-commerce due to quick pickup and scheduled delivery time.”

tain and tell their dad that in some years we will have some investors and we will do an IPo and pay you five times back? But even if this happens, it is still local.” the reason that Metro has not already started it is that even though Metro has non-food products that it can sell online, Marek wants to start it with a complete brand name. “We don’t want to put selective items online because if I brand Metro, then what would people think? they would expect everything.”

When asked if Metro would seek association with other entities, he said that Metro would not likely rely on tCS or Daraz etc. “tCS is a logistics provider and they have an advantage there but they don’t know retail. Daraz is good in softwares but how good do they know about supply chain? So yes we are all looking into it and it will be very very interesting and very very exciting.” When asked how much time it would take, he said that horizons are like babies. “Sometimes they have already been conceived and are already on the way.”

He said, “the retail environment in Pakistan is very very exciting, the group is committed and we know what our expertise are.

We want to develop our breadth, we know our USPs and we know what people are coming here for. And if we can translate it in other forms of retail and see it fit, we will do it.” the interesting part is that unlike other e-commerce channels, Metro would not need to wait for the suppliers. Its stores will also serve as the warehouse for the online store, the inventory would already be there.

Marek mentioned one of his inspirations for this plan - the Alibaba supermarket in Shanghai. In these stores, there is a rail on the ceiling and there is a picking station for online orders. the workforce runs around, picks up bags and scans the products to fill

COVER STORY

the orders. Outside the store, people wait on motorbikes to pick up these bags and deliver it to the customers. Marek said, “These guys give a 30 minute guarantee for delivery. You can also buy in the supermarket but there is only one way to pay. You cannot pay by cash or by credit card. You can only pay through phone, Ali-pay. That means that Ali-pay knows exactly who is buying, where they live and what they are buying.

They don’t need loyalty system. If you live within one kilometer of the store, you will start getting things. Alibaba says if they open 17 of them in Shanghai, anybody in Shanghai can order and will get that in 30 minutes at any time of the day.

While Alibaba still has to open th these stores, MeTrO already possesses them. Marek says he is serious about this new venture. “I think it’s great. I loved it.”

MeTrO hasn’t done this in any other country yet. “We don’t have rails but we have big warehouses.”

New stores ccording to Marek all the MeTrO stores are doing well now and the business is now preparing ground for opening new stores. “I am looking at different cities; Hyderabad, Multan, Gujranwala. Three stores in Karachi for a population of 20 million (2 crores) is simply nothing. So we are looking at opening new

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“WALMART OR TESCO OR OTHER BIG OPERATORS FROM AMERICA OR FRANCE WOULD NOT COME TO PAKISTAN. ON THE OTHER HAND, EVEN IF THEY DO DECIDE TO GO TO COUNTRIES IN THIS REGION, CHINA AND INDIA WOULD TOP THE LIST. SO FOR US IT IS A GOOD THING” 26

stores. He seems convinced that the number cluded.” sales volumes of MeTrO has been of retail chains in the country are not affected because of this since some of their enough to pose a real competitive threat . competitors don’t charge the taxes but “In a city like Karachi, three MeTrOs, one MeTrO does, so sometimes its prices are Hyperstar, four or five Imtiaz Super Marhigher. “Some of my local competitors have kets, some Chase Ups, are not competition. trucks that are supposed to go to Afghanistan No way. Our only competition is with ourfrom Karachi and halfway, half of the goods selves. I say that you can start complaining when there are fifty Hyperstars in Karachi and twenty Makros. Then you say Ahmad Saeed that there is competition.”

The co-founder of GrocerApp He adds one more factor He welcomed the possibility of favoring MeTrO in being METRO Cash & Carry entering in able to push out any potential the world of e-commerce. “It is a future competition. It is the good thing for such a big player to enter the market. international image of security It will convince more people and create awareness and law and order of the counof the market. ” He said that small players will benefit try which is not very welcomfrom all the marketing without having to spend their ing for more international own money.

On the flipside, however, he seems rechains to bring their operaally doubtful about the success of METRO in e-comtions into Pakistan. “Walmart merce.

“If you take international experiences, even or Tesco or other big operators the biggest players like Walmart and Tesco haven’t from America or France would been able to compete the e-commerce players like not come to Pakistan. On the Amazon.

They are not even close to Amazon. ” He other hand, even if they do dethinks that having a warehouse might be beneficial cide to go to countries in this as a supply chain part but it also means that the region, China and India would business will have to deal with the challenges of top the list. So for us it is a both markets – retail and online marketing. good thing.”

“In Pakistan everyone who succeeds in a single venture believes he can succeed in anything. They enter ten other ventures, most of which flop in the end.” He said time will tell if METRO can succeed in this completely separate market of e-commerce than their current retail industry. arek claims that

As things stand

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MeTrO is the leader in the market in terms of volume. Drawing comparison with another wholesale retailer Imtiaz Super Market who also claims to be the leader in the industry he says, “I am not sure. We would still be close.”

Talking about the Pakistani market’s contribution to the overall MeTrO revenues Marek says that the stores in Pakistan are making more than breakeven returns. “We have 700 stores worldwide and only nine in Pakistan, so we are not a big contributor but we are definitely not the smallest anymore either. Our sales are more than the Japanese stores.” Marek also highlights the positive contribution of the giant supermarket chain’s to Pakistan’s economy stating, “We are Pakistan’s largest tax collector because all our products’ prices have sales taxes in-

fall off.” he says sarcastically.

However, Marek admits to some positive changes in the last ten years. “Ayesha Mumtaz of the Food authority is using the right methods to differentiate between what is hygienic and what is not. We are sometimes more expensive than some dhaaba wala or the vendor on road selling meat but there is reason for that” The other thing he mentions is the restaurant Invoice Monitoring System, (rIMS) launched by Punjab revenue Authority. The scheme encourages people to submit GST invoices and win prizes in return. “How can it be that a restaurant is making revenue of 20 lacs per week and they only have an invoice of 5000 rupees?” he asks rhetorically.

In 2015, MeTrO made rs 3,800 crore in revenue and this year it is expecting the annual turnover to grow by 10 to 15 per cent.

Marek says that before 2015 the firm was operating at slightly over breakeven level but had now started performing well. “In my five year plan, I want to be 200 per cent bigger.” Detailing on the specific measures taken to turn Metro’s performance around, he commented, “If you had visited this store before, or ask people who work here, they will tell you that things have improved. We are now closer to our customers. We started listening more to our HoreCA (hotel, restaurants and cafés) customers, our traders and our end customers.”

Metro has also revamped the café.

(Pointing to the Baklava plate) Marek says,“We have delicious baklava. We have also introduced different grades of rice. A while ago we saw that karianas were not buying any rice and pulses from us. So one of the pitches was made as new arrivals and

were driving around in BMWs and Mercedes. I am driving in a small Honda. I think that if you are a cash and carry you need to keep costs under control. I fly economy within Pakistan and my employees take selfies with me when they are sitting with me.

So these are the ways you need to control costs, not by turning off the lights or turning off the air-conditioning, because that affects customers.” talking about the recent changes in the management he says, “In the books, there are three of us at the top most level. other than that, the executive level is the highest in the management at this point.” the offer management group is one of the most important departments for Metro because it is responsible for the customers’ side .It is being headed by a consultant, let alone a manager or a director. Speaking about this matter Marek says, “that consultant has a lot of expeAhmed Khan rience. When I CEO/ Founder at Cheetay (with previous was the pioneer experience at Kaymu.pk) of Makro in Pak"In e-commerce business it is a fairly good adistan, he was the vantage to have an in-built warehouse bepioneer of cause the nature of the business is as such, but it is not likely to Metro. He was put such a business on top just because they have their own the first MD of warehouse.

Metro and is Retail businesses did not enter the e-commerce market so far now running its because their margins are very low and their ticker rate is also offer management very small. And also because most of their customers are group. I don’t households. For instance if someone orders a bottle of shamwant to go into poo online, it's cost will be say Rs. 300 and the margin for the detail, but the the retailer will be 6%, so this much margin will not be able to man is 73 years cover their cost of delivery. old so we can’t The logistics management is also a big issue for such busihave him on a nesses and unless they find some way to profitably cover their high management delivery costs and related expenses, e-commerce will not be designation. But profitable for them." his experience counts.”

Marek also clarifies that the layoff of that allowed us to successfully sell rice and the high management was not done to repulses to karianas.” duce costs. “We sized down the head office “We also did some things on the cost to make it more adequate to the store sizes. side. We are cash and carry and we are low We are putting more emphasis on being a cost. When I came here, all the directors low cost company and making the right cost choices. We have smaller cars but our stores now have proper lighting and other store related expenses.” He added that the head offices of such stores always look better because senior officers shop there.

“But all nine stores are supposed to look as good as the head office. I visit all stores in

IF MAREK’S METRO CAN BE BOTH BIG AND FAST, WE’RE CERTAINLY LOOKING AT EXCITING TIMES AHEAD

“HYPERSTAR GENERALLY BASES ITS LOCATION IN MALLS. SO MORE PEOPLE ARE SEEN INSIDE THE STORE BUT MOST OF THEM ARE JUST VISITORS TO THE MALLS AND NOT ACTUAL CUSTOMERS. SO IT MIGHT APPEAR ON THE SURFACE THAT THEY ARE DOING BETTER, AND THEY HAVE TO DO BETTER AS WELL, TO MAKE UP FOR THE HIGHER COSTS AND OVERHEADS” Lahore every weekend if I am not travelling.” He informed that all the personnel in the management, be it be finance or Hr or any other department, had adopted a store and had to maintain an active stance in the running affairs of that store.“they don’t report to me about it as such, but they stay posted and informed of what happens in store.”

Comparing the contribution of different measures in the turnaround of Metro he said that it was a result of a mix of both cost and revenue sides. “Very roughly, I would say that the improved sales volumes, higher margins and low costs contributed around 30 per cent each in these results. the lower shrinkage that is controlled wastage also helped in improving the returns.”

All the plans that Marek talks about are exciting and look good on paper. But they are ideas. Implementation is where the magic happens. Large organisations like Metro, regardless of how no-frills they gear themselves out to be, are going to be sluggish in comparison to new, nimble ones like, say Daraaz. If Marek’s Metro can be both big and fast, we’re certainly looking at exciting times ahead. n

COVER STORY

JOURNEY

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WITH A SHRINKING MARKET SHARE AND NEW ENTRANTS OPENING SIMILAR PIZZA OUTLETS, WILL 14TH STREET PIZZA BE ABLE TO SURVIVE AND EXPAND? n a market where global giant Pizza Hut ruled for 18 years, young and determined Tanveer Yusuf decided to grab a chunk of the pie by launching the first deliveryonly pizza shop of Pakistan, 14th Street Pizza.

Despite challenges from all directions, the then 26-year-old lad stood successful in achieving his target of introducing the concept of a kitchen-based pizza business, which was a novice for the pizza market of Pakistan.

Five years into business, it became the

largest local chain of pizzas based on volumes, owning seven kitchens – two self-managed, five franchised – in Karachi, Islamabad and Multan. The brand, which was started by three partners, now employs more than 250 workers.

It is among the top five pizza brands in the country, according to Nauman Mirza, CEO of Foodpanda and EatOye, which together form the largest online food portal.

One of the innovations Yusuf brought to the market was introducing the 21-inch pizza at a time when 12 inchers still ruled the arena. He also managed to grab customer attention by offering, for the first time, single slice pizza and personal customization, where the buyer gets to choose the topping of his preference – and in doing so Tanveer inspired a whole generation of entrepreneurs who jumped into the pizza bandwagon in the years that followed.

DESPITE HAVING NO TRADITIONAL OR PHYSICAL MEANS OF MARKETING, THE LOCAL PIZZA GIANT REMAINED SUCCESSFUL IN CREATING A REPUTATION IN AREAS LIKE DEFENCE, BAHADURABAD, GULSHAN, SHAHEED-E-MILLAT ROAD AND NAZIMABAD, ACCORDING TO MARKET EXPERTS

“The 6 inch pan pizza had only 3 inches of topping,” Yusuf said. “We introduced the concept of one slice where you can enjoy the absolute flavor of cheese and chicken.”

Though 14th Street Pizza has become a prominent player in the market, it didn’t happen overnight. Yusuf started to work on a pizza concept in 2009 for which he visited several different countries including USA, South Africa and India.

He tried their pizza and researched about their markets. There he realized that around the world, dine-in and delivery of pizza are two different concepts. Both in India and the United States, Pizza Hut dominates the dine in market whereas Domino’s remains the leader in the delivery business.

Yusuf wished to be the Domino’s of Pakistan and rule over the delivery market of Pizza.

“I didn’t wish to be compared with Pizza Hut, let alone compete with them.”

Yusuf said depicting that his interest always lied in delivery only.

“Pizza Hut is an international chain with a marketing budget five times more than my entire investment,” said Yusuf who wanted to do not ‘something’ but ‘everything’ different with his brand.

“It took me two years to come up with the perfect recipe,” Yusuf said referring to

HOSPITALITY

the time he spent in research and planning.

Yusuf remembered with a dreamy look and a slight smile on his face that he and his mother would get into the kitchen each day and try different recipes till he found the perfect one.

Despite having no formal education in business, the ambitious foodie knew his game well. His far-sightedness bode well for him as he decided to use social media as his only means of marketing. The idea was opposed by many and mocked by some.

Nevertheless, Yusuf thinks the first impression on people was exactly what he wanted: Fancy.

“We were probably the first brand in Pakistan that depended solely on social media in order to advertise our product,” Yusuf said.

Despite having no traditional or physical means of marketing, the local pizza giant remained successful in creating a reputation in areas like Defence, Bahadurabad, Gulshan, Shaheed-e-Millat Road and Nazimabad, according to market experts.

Yusuf refused to share financial details but added that they deliver almost 500 orders on a good day and 150 orders on a day when sales aren’t great – they sell a slice for Rs370, the minimum order one can place.

14th Street Pizza gets 20 per cent of its orders from third-party online platforms like Foodpanda and EatOye, 40 per cent orders from its own website and 40 per cent of its orders via phone calls.

Though Yusuf’s brainchild remained successful in catering to the customers of all

WHILE IT HAS GROWN TO BE ONE OF THE MOST SOUGHT-AFTER PIZZA BRANDS IN THE COUNTRY, INDUSTRY SOURCES SAY IT HAS SLOWED DOWN RECENTLY WITH ITS SHARE SHRINKING FROM A PEAK OF 15 PER CENT TO LESS THAN 10 PER CENT 30

IT IS AMONG THE TOP FIVE PIZZA BRANDS IN THE COUNTRY, ACCORDING TO NAUMAN MIRZA, CEO OF FOODPANDA AND EATOYE, WHICH TOGETHER FORM THE LARGEST ONLINE FOOD PORTAL areas and classes, it has always remained the most favorite among young college going kids.

“We wanted to target the youth,” said Yusuf. “Young kids generally gather to watch movies or cricket matches and end up ordering pizzas.”

Market experts consented that the pizza chain managed to get most popular among youth and for a very long-time remained the leader in off meal hours.

Like his brand, Yusuf too proved himself a promising leader.

14th Street Pizza wasn’t the first in his long list of accomplishments. In 2006, when Yusuf was only 21, he earned the management control of a franchise of Subway located in Khayaban-eShahbaz DHA. He has now reinvested the profits earned by 14th Street Pizza to start two other businesses of his own: an IT company by the name of Cyber Inc. and a physical and online vegetable shop named Subziphal.com.

“It’s a 10-year long journey. Our numbers are a clear proof of our hard work,” the entrepreneur said – the brand holds 5 to 7 percent share in the market, which has saturated due to massive growth of mushroom (small) pizza outlets, say experts.

While it has grown to be one of the most sought-after pizza brands in the country, industry sources say it has slowed down recently with its share shrinking from a

peak of 15 per cent to less than 10 per cent – this is because they are not investing more and relying on franchises for further expansion, pundits say.

“Franchising has given a blow to the quality of pizzas offered by 14th Street Pizza,” said a retail expert. “When someone who has only three outlets, franchises, he’s done.”

He explained that the brand should gather enough personal or outside investment to be able to handle expansion in its native city at least on its own without franchising. “Franchising is for other cities and countries once you’re big enough in your own city,” said experts.

They believe that 14th Street Pizza will face the threat of its market share shedding even more in the years to come mainly on the back of lack of investment.

However, Yusuf has a better picture to paint.

“We want to sustain ourselves till we get more space in the market and then expand further,” said Yusuf.

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PROFILE

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In the highly competitive world of online businesses, Monis Rehman, CEO of Rozee.pk believes being at the top is key, which he believes his business is By: Syeda Masooma rofit visited Rozee.pk head office and interviewed its CEO Monis Rehman.While the team adjusted camera and lighting, Monis started questioning on the technicalities of the lens, its aperture and ISO. His detailed knowledge about photography was surprising before he explained that he loves cameras and photography and at events like weddings he likes to take out his state of the art camera and shoot pictures and videos. “Sometimes people think I am a professional photographer covering the event and ask me to click multiple pictures while they smile and pose.”

As he shared how people sometimes fail to realize that he is a businessman and owner of a big company, he narrated another instance when he went for a meeting

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along with his team and chose to sit behind the wheel himself. He had requested his hosts to give his car’s license plate number to the guards so they didn’t have to wait for confirmation at the gate. So when they arrived the guard recognized the plate and went to talk to Monis. He recounts, “When I was taking our car inside, the security guard at the gate said to me, ‘aapsahabkochorkewapisaajaen’(drop your boss inside and come back here).” He laughed it away and Pakistan Today team began the interview.

Explaining the origins of his business initiatives, Monis said that it was sometime around the turn of the century, when he realized the potential of internet and online works. He was working with Intel in the Silicon Valley back then and he remembers, “When I was working in the valley, a billion dollars were being spent on new projects every month.” He says he knew from then on that the internet was going to be the future.When Monis returned to Pakistan, he had a plan to launch a networking site and he started his first company under the title of Naseeb Networks Inc. He then went on to launch many more businesses under his primary company of Naseeb Networks Inc. Two of the most renowned ones were gaari.com and bastee.pk for automobiles and real estate respectively.However, Rozee.pk is the most, and perhaps the only, highly successful platform launched by Naseeb Networks Inc. Monis Rehman said, “Around 40,000 jobs are processed per day at Rozee.pk and so far at least one million people have been hired by nearly 65,000 employers.”

Talking about the early days of his business in Pakistan he informed us that although there was no shortage of computer literate and expert professionals back then, the internet had still not gained much mo-

ROZEE.PK HAS BEEN TARGETING SEC A (THE TOP CATEGORY IN THE SOCIOECONOMIC CLASSES) AND IS ALSO PENETRATING INTO SEC B AND SEC C. A MAJOR PROPORTION OF THE EMPLOYERS WHO USE ONLINE CLASSIFIEDS TO LOOK FOR WORKERS ARE SMES AND THEREFORE MAKE A SMALL PROPORTION OF THE OVERALL CLASSIFIED’S MARKET

mentum in Pakistan. Because of this the same skilled labor was very expensive in the United States but it was available at a very low costin Pakistan. For his first initiative – online matrimonial/ social platform – he hired three people; a software programmer, a network programmer and a graphics expert. He said, “The required workforce for software and programming was available in Pakistan in abundance and at low price but they were all raw, not very practiced or experienced.”

About the startup costs of the company Monissaid he started a private limited company but invited some of his friends to contribute. He had some of his friends as his angel investors, which included Reid Hoffman, the co-founder and executive chairman of LinkedIn, and Joe Kraus, the founder of Excite, JotSpot and DigitalConsumer.org. However,Monis said, “They were not so much as investors as they were supporters. Their contribution wasn’t much but it was a symbol of their faith in me.”

Both these entrepreneurs still have a stake in his business.

Like every other business, online classifieds is also a competitive industry. It is all the more so because everything depends on the outreach of any business entity. However, Monis Rehman believes that competition is good for the business. He said that the competitors can only bode well for Rozee.pk. He says that people in Pakistan, the businesses specifically, who are looking for workforce or have to hire, do not often turn to classifieds. For them it is something that they have never done and believe that they don’t have to. “If another online classifieds entity can bring them into the market, then they also become our potential clients. And in online businesses, the best product always wins. And as of now, I’m pretty sure that our product is the best.”

About the other competitive platforms like newspapers, he believes that only three per cent of the total employers use newspapers for job advertisements and they usually take ads for the companies that are looking for experienced people. So only those people are in demand who are already employed somewhere. Therefore Rozee.pk gets an edge by also offering jobs to fresh graduates and inexperienced professionals.However, he says that Rozee.pk is not competing for online

TECH

“ONLINE BUSINESSES ONLY BECOME SUCCESSFUL WHEN THEY REACH A TIPPING POINT, WHEN THEY HAVE ENOUGH ORGANIC AND RELEVANT TRAFFIC. YOU HAVE TO PROVIDE BETTER CONTENT THAT BRINGS MORE VIEWERSHIP AND MORE VIEWERSHIP LEADS TO BETTER CONTENT. SO IT’S A CYCLE THAT YOU NEED TO KEEP TO SUCCEED” Monis Rahman, CEO Naseeb Networks

space. “There is a huge online market still unexploited and if more online platforms enter the market, they will only pave more way for us and get more customers.”

According to Monis, the major and the only potentially harmful competition that Rozee faces is against the word of mouth and the mentality of the people.

Some employers feel that advertising jobs is something unnecessary. For ages they have become accustomed to hiring through their current employees or associates and finding candidates for the jobs.

This word of mouth not only prevents employers from seeking platforms like online classifieds but also becomes a barrier for qualified and efficient workers to get the jobs they deserve.

Competition is not the only challenge faced by the online classified businesses. For Rozee.pk, another big hurdle was to protect their source code and other intellectual properties (IPs). Monis recounted an incident in the early days of his business when a member of their workforce stole the entire source code and launched a very similar platform soon after. That incident was settled through court but not long ago Rozee.pk found itself in another problem when one of their competitors started stealing listed jobs. The company and the employers jointly complained to the court which issued an injunction to settle the matter.

Regarding the marketing strategies of the company, Monis noted that the television commercial they recently conducted led to almost 150 per cent inbound sales.

They are also planning on another TVC but they are waiting for the right time, which they describe as when they need to reintro-

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duce their product. The first TVC was launched at a time when the entire company was rebranded and the logo was also changed.

Monis says that the first logo was a product of a casual discussion and was designed without any detailed study. The new logo was designed with the intention of correcting the market image of the company which was being perceived as a platform solely for low wage jobs and

unemployed people.He said that Rozee.pk has been targeting SEC A (the top category in the socioeconomic classes) and is also penetrating into SEC B and SEC C. He says that a major proportion of the employers who use online classifieds to look for workers are SMEs and therefore make a small proportion of the overall classified’s market.

Monis stressed that since Rozee.pk has the first mover advantage it is also their responsibility “to bring a behavioral change

in people.” Monis is convinced that to survive in an online industry, a business has to be number one, or at least number two, otherwise someone else will be there to push it out of the market altogether. And he has full confidence in his own product, Rozee.pk, to be the best available in the market.

The Rozee office consists of a single floor with two cubicles at one far corner, neither of them occupied by the CEO himself. He shares a table with four other workers and says that he prefers to be part of the team instead of playing their superior.Regarding his workforce, he said that he encourages an equivalent attitude in his employees instead of maintaining a strong hierarchal attitude. “This has allowed me to find and employ hardworking people who are also loyal to the business.” He pointed at two people sitting on one corner of the room and said,“These two are out of the same three people I hired for my first business when I returned to Pakistan.”

As an advice to young entrepreneurs, especially those aiming for online businesses he said that they need to ensure that whatever sector they choose, they stay at the top. Otherwise they will not be able to survive for long in the highly competitive market. “Online businesses only become successful when they reach a tipping point, when they have enough organic and relevant traffic. You have to provide better content that brings more viewership and more viewership leads to better content. So it’s a cycle that you need to keep to succeed.” n

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INTERVIEW

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ullish about growth in the hospitality business, Avari Group of Companies that owns Avari Towers in Karachi is launching five new hotels in different cities of Pakistan during the next 18 months to capitalize on the gains the industry has witnessed on the back of improvement in the country’s security situation.

Established in 1944, the Karachi-based hotel chain, which also owns Beach Luxury Hotel in Karachi, Avari Lahore, Avari Dubai and two relatively smaller hotels in Islamabad is opening the first of these five hotels namely Avari Xpress in Faisalabad, Avari Towers’ General Manager Erik Huyer told Profit while unveiling their expansion plans for the next couple of years.

By: Usman Hanif

The GM did not share the details regarding the location of the other four hotels and how much the company is investing to set up these new hotels. However, market sources say at least one of these hotels will be opened in the federal capital.

The development comes at a time when the country’s overall security situation has improved while economic activity is on the rise especially they related to China Pakistan Economic Corridor (CPEC) projects.

According to Global Terrorism Index (GTI), Pakistan witnessed the third largest decline in terrorism worldwide in 2015. Target killing which was a major cause of unrest in the port city decreased by 43 percent in 2015.

On the other hand, businessmen and foreign delegates are frequently visiting Pakistan in connection with projects in the power sector, gas exploration and harbor construction boosting demand for hotels thus helping the hospitality industry.

Erik, who took charge as GM in October 2015, says he sees an excellent impact of CPEC on the hotel business because business delegates from both private and public sector including officials from the Chinese government are visiting Pakistan and staying in their hotels.

“The business at Avari Towers Hotel is very positive. We are busy all year,” Erik says.

The statistics of the hotel industry, perhaps, explain that further. Hotel occupancy rate has inclined to 80 percent in 2016 compared with 35 percent in 2015, according to a recent report, which quoted Rehan Wahid,

Director Business Development at Beach Luxury Hotel.

Breaking down business details, Erik said 80 percent of the hotel clientele is from the business community or employees of government institutions but other people like leisure travelers, group travelers and honeymoon couples also give them business.

“We always provide some reason for clients to come back like new food or booking offers,” Erick says about his business

IN KARACHI, AVARI ENJOYS A MAJOR PORTION OF CATERING ORDERS AND MOST OF THE CONSULATES COME HERE FOR THEIR NATIONAL DAY CELEBRATIONS HOSPITALITY

TARGET KILLING WHICH WAS MAJOR CAUSE OF UNREST IN THE PORT CITY DECREASED BY 43 PERCENT IN 2015

strategy, which comes at the back of a long experience in the hospitality industry.

For a man who has worked for about half a dozen renowned hotels including Sheraton (Darwin and Perth, Australia), Rosewood Hotels USA (KSA) and Duxton Hotels (Vietnam & Philippines), he understands the hotel industry inside out. His entire experience has been in this sector working in various departments all the way up to the top. He started his job as a management trainee at Sydney Hilton Hotel in 1974. “With this position, I worked in every department of the hotel such as the kitchen, restaurants, housekeeping, laundry, stewarding, front office, finance, sales, conference and banqueting etc,” he said describing his experience at Sydney Hilton.

This experience is coming in handy at a time when Pakistan is witnessing an increase tourism, particularly on the local front, which is helping the hotel industry grow.

PIA has inducted new planes, international airlines like Qatar Airways, Emirates and Etihad Airways are expanding their operations for Pakistan-bound passengers while a new airline namely Serene Air has also announced to launch its operations in the country

38

to tap into this growing market segment.

One can find more foreigners on Pakistan-bound flights now than there were a few years ago, and statistics from the hotel industry also indicate a similar trend.

Erik says 40 percent occupancy is by foreigners, among whom Chinese, Korean and Japanese are the most visiting tourists.

The GM sees great opportunity for tourism in the country, which has a rich history that can attract foreign tourists if Pakistan markets itself the right way like organizing travel shows and publishing travel magazines because “every picture tells a story”.

“Pakistani food is not boring, every area of the country has its own style of food,” Erik says of Pakistani food, which he thinks is another attraction that can make his clients revisit the country -- there is a reason why every large hotel has those fancy buffets displaying a variety of local cuisines.

Due to the diversity in food Avari changes it menu every week to accommodate the different styles of cooking in Pakistani cuisine. In Karachi, Avari enjoys a major portion of catering orders and most of the consulates come here for their national day celebrations.

Erik’s knowledge about Pakistan’s culture and history is linked with the time he spent as a child in the country. He spent his childhood here due to his father’s job with Philips Pakistan. “My father was the one who introduced television to Pakistan and my family was the first European family to appear on TV,” he recalls.

Erik Huyer sees a great future for Pakistan’s hospitality industry and says good human resource is coming in the industry from schools like COTHM and PITHM which offer education in hotel management. “We are getting young people who understand the hotel business.”

Erik divides tourist into two types, adventurists and the other type who want luxury hotels for a quality experience and comfortable stay. “Backpackers don’t care about five star bathrooms,” but any improvement in hotels in the northern areas of Pakistan can attract the second type towards the country”..

“It is necessary to be doing right thing every time in the hotel business,” Erik says in the light of his experience. “Once the customer is unhappy, he is gone and we will not be able to bring him back”.

HOSPITALITY

By: Abbas Naqvi hile consumers got somewhat better gas supply to warm up their rooms and cook food this winter, they weren’t the only ones benefiting. Sui Northern Gas Pipeline Limited (SNGPL) has reported a profit after tax of Rs 12.4 crores for the year ended 30 June, 2016, against a loss after tax of Rs 250 crores in the year ended 30 June, 2015. The company has managed to post a profit after three years, a period where annual reports were not published on account of Oil and Gas Regulatory Authority (OGRA) quorum (the minimum number of members of the board of directors that must be present at any of its meetings to make the proceedings of that meeting valid) not being complete.

In addition to that, SNGPL has issued its quarterly report for the ongoing fiscal year 2017’s first quarter (July-September), revealing a profit before tax of Rs 200 crores, compared to a loss before tax of Rs 77.6 crores in the corresponding period of last year.

Net Sales on an annual basis have increased by 18 per cent in FY2016, while gas sales in the first quarter of FY2017 have increased by 21 per cent against the corresponding period of the last fiscal year. In addition to that, gross profit has increased by 97 per cent in the fiscal year 2016, while cost of gas sold and other expenses increased by 17.3 per cent and 8.2 per cent respectively. There-

ANALYSIS

By curbing expenses, increasing LNG sales, reducing wastage of gas and implementing a more robust anti-theft mechanism, SNGPL is able to turn a profit after three years of losses fore, it can be deduced that major contribution to the profit came from a reduction in overall expenses. On top of that, SNGPL is going to set up 30 LPG-air mix

SNGPL

plants in selected areas where natural gas supply does not exist, such as Azad Jammu and Kashmir, Gilgit-Baltistan and Chitral etc, which would consequently reduce deforestation in those areas. Sale of LNG is an important factor in improving

the topline, and subsequently the bottom line of the company, hence the company is focusing on LNG sales, evidenced by an increase of 429 per cent in RLNG gross sales in FY2016, according to the latest annual report published by the company.

“We earned a profit mainly on the basis of reduction in UFG(unaccounted for gas) and increase in sales,” says Managing Director/CEO SNGPL, Amjad Latif, adding that almost three-fourth (Rs 140 crores) of the profit before tax earned in 1QFY2017 is due to the reduction in UFG. SNGPL management drafted a 3-year plan in 2013 to reduce UFG from 11.5 per cent to 9 per cent in the year 2016.

“We are proud to announce that we brought down the UFG to 8.50 per cent in 2016, surpassing our target of 9 per cent,” says Latif. Other reasons given by the CEO for improvements in the financial performance of the company include doubling the capacity of its metering workshops; deployment of laser leak detector to identify and plug underground leakages; latest electronic gadgets such as electronic volume corrector; and the use of GPRS and GSM for monitoring live data from industrial users and CNG pumps. With the use of such technology, vigilance of the industrial and domestic users has been greatly increased.

39

The company has also repaired and replaced (where needed) above the ground and underground pipelines in order to reduce gas leakage.

“Earlier, people had to wait for two months to get a new meter. Now it takes only one day for the meter to be made since we have doubled the capacity of our workshops,” says Latif.

Talking about the 4.5 per cent threshold level of UFG set by OGRA, the CEO said that if the regulator expects the company to perform at par with European countries, it should ensure the support of state institutions like the law enforcement agencies and judiciary to help the company achieve it.

“We need police and courts to reduce gas theft,” says Latif, while adding that the recent Gas (Theft Control and Recovery) Act 2016 has allowed for the creation of special courts which would solve the cases expeditiously in a period of three months, and would thus help in improving the UFG level as well as the financial performance of the company.

According to an article published in a local newspaper, SNGPL has so far plugged 742,202 above-ground leakages and 26,467 underground leakages. In addition to these, it has rehabilitated pipeline covering an area of 231.42 kilo-

40

“WE ARE PROUD TO ANNOUNCE THAT WE BROUGHT DOWN THE UFG TO 8.50 PER CENT IN 2016, SURPASSING OUR TARGET OF 9 PER CENT” Amjad Latif, Managing Director/CEO SNGPL

metres and replaced 462,582 metres of pipeline. Raids have also been conducted in association with the Federal Investigation Agency (FIA) and other law enforcement agencies to curb the stealing of gas.

Incidences involving theft of 3,854 million cubic feet have been unearthed and FIRs have been lodged against people involved in the crime.

The company is ensuring utilisation of Hi-Flow Sampler to quantify aboveground and underground gas leakages and is purchasing cyber locks to enhance security at the consumer meter station.

The CEO believes that the company has turned itself around and the profit-

earning is not only sustainable, but will also grow with time.

“God willing, we will increase the profits and you will see an even better result for the second quarter of fiscal year 2017,” says Latif, adding that the result will be announced by the start of February 2017. He also disclosed that the company has set a target to sell 500,000 new connections in the ongoing fiscal year, half of which have already been sold.

Giving credit to the management, the board of directors has praised the company for turning the company’s losses into profits finally, and hopes that the management would be able to sustain it. n

ANALYSIS

Seemi Saad, ER Head, SPL & Belinda Lewis, British Deputy High Comissioner

Shahid Khaqan Abbasi, Federal Minister for Petroleum and Natural Resources

Shell V-Power launch ceremony Shell unveiled its global premium fuel Shell V-Power in Pakistan at a glitzy ceremony held at the Mohatta Palace

Mohatta Palace Aly Mustansir, Sara Koraishy, Imran Afzal

Sheikh Imran Ul Haq, Shahid Khaqan Abbasi, Jawwad Cheema, Nasser Jaffer

Jawwad Cheema, MD, SPL

Ahsan Bari, Sounds of Kolachi

INTERVIEW

WITH THE OPTIMISM OF CPEC AND INCREASING BARRIERS TO ENTRY FOR NEW PLAYERS IN THE MARKET THE CEMENT SECTOR SEEMS ALL SET FOR MORE YEARS OF SOLID NUMBERS AND GROWTH By: Syeda Masooma he cement sector over the last six years and the industry itself has seen a growth in volume every year something that is also reflected in the huge return on investment cement stockholders have enjoyed.

Considering the heavy investment the Chinese have made in Pakistan with the China Pak Economic Corridor (CPEC) and the barriers to entry for new entrants it seems the growth will continue for few more years to come. We spoke to Maple Leaf cement CEO and All Pakistan Cement Manufacturer Association (APCMA) Chairman Sayeed Tariq Saigol for his view on the industry as a whole going forward.

T

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Profit: The last five years has been exceptional for the shareholders of Cement companies especially that of Kohat and Maple leaf. However it seems the ‘Bull-Run’ has finally ended.

What should the shareholders expect going forward and why?

Sayeed Tariq Saigon: Growth has been good in the past couple of years; it has been increasing every year. Three years ago we saw 7.5%, then12% and this year we are looking at upwards of 15%growth (annualized growth in volume averaged out for the country).

As the utilization of the industry is going to go up, obviously the profitability of the industry will go up and as a result the returns to shareholders and

markets will continue to go up, at least for the next two years.

Profit: You expect further growth even though there are plans of cement companies to add further capacity which could reduce utilization of current plants?

STS: First of all the moment that a plant decides to expand, it will be at least 30 months before they can get into fully commercialized production. If you look at itright now, there are two plants coming up in the South, but there are no other plants in the pipeline even though some companies have announced plans to install new plants.

However there is a big difference between announcing plans and the

ground work actually starting. There are a lot of issues like land availability, leasing problems and difficulty raising capital, just to name a few.Therefore not all plans to install new plants will be executed. Secondly, there is a high potential for the growth rates to continue.

So some plants in the local market will expand and part of that expansion may be from a foreign player but so long as the growth rates continue then I think in a twoyear or three-year cycle there shouldn’t be any major issues.

However in a longer period, say a fiveyear cycle it is difficult to predict because every commodity business will have a down cycle. I have yet to see that not happen. So there will be a down point in the cement side also. That could be because of consumption, or capacity or whatever that may be. But I don’t see that downside coming before three years.

Profit: How do you think CPEC could play out for the local cement industry?

able to move forward in other countries. If they fail here, then the future is in question.

So it is very important for China to prove this as part of their global strategy.

Profit: There is skepticism that under CPEC, our imports would increase and some Chinese cement companies will enter the Pakistani market by acquiring a smaller manufacturer like Dewaan Cement and introduce price competition that has somewhat been missing from the cement industry and reduce the margins. In other words most of the benefits would accrue to the Chinese companies as opposed to the Pakistani companies. What do you think?

STS: To address the cement part specifically even if a Chinese cement company comes, the CPEC project will buy from whatever cement plant is closest to them along the route.

Freight cost is a very big element in this picture. So if they acquire the Dewaan plant in the South for example, which is ‘Saadi cement’,instead of the ‘Pakland plant’ in Kara-

the government in the land acquiring process, which will take a very long time and as I mentioned there is not a lot of availability of sites.

I think that current cement players are also having problems in expansion because apart from issues with land availability there are now environmental concerns as well that the government is taking very seriously. The Kallar Kahar and Chakwal area for example may not ever have another plant due to the impact it will have on the environment.

That leaves some parts of Central Punjab and certain parts of South Punjab. Expansion in Hattar and Islamabad area, for example where the Fauji cement plant is, will also be very difficult because that area is going to be part of the new airportthere as Islamabad expands.

Existing cement plantsin the area are having difficulty because the government is asking them to curb production as the area is becoming increasingly populated.

Profit: In the recent past the cement sector

“IN A LONGER PERIOD, SAY A FIVE-YEAR CYCLE IT IS DIFFICULT TO PREDICT BECAUSE EVERY COMMODITY BUSINESS WILL HAVE A DOWN CYCLE. I HAVE YET TO SEE THAT NOT HAPPEN. SO THERE WILL BE A DOWN POINT IN THE CEMENT SIDE ALSO. THAT COULD BE BECAUSE OF CONSUMPTION, OR CAPACITY OR WHATEVER THAT MAY BE. BUT I DON’T SEE THAT DOWNSIDE COMING BEFORE THREE YEARS” STS: While I am not sure in terms of the quantity of cement that would be used, the perception of CPEC is very positive. It’s a good story. Everybody is excited about it. I see the general activity in the market increasing because of this perception; indirectly, because of the sentiment that CPEC creates.

If you talk to anybody today, they are talking about CPEC even if they have nothing to do with the construction industry. They are looking at CPEC for property prices risingand influx of people. Even the foreign fund managers, globally, are looking closely at CPEC. I met someone from England the other day who runs a fund and he was very positive about Pakistan. When I talked to him but about terrorism and all, he said that yes those are all valid problems but the CPEC story provides a very positive outlook.

Also China has to make an example of this CPEC route in Pakistan for them to be

chithen Saadi cannot supply goods to a project that is taking place in Baluchistan.

Those goods will have to come from a plant that is closer to them - they just won’t be competitive.

I am also not that worried about a Chinese player coming here or a local player who is expanding because the sites on which you can expand now are limited. There are limited sites for new plants.So whether that comes from an international player or whether that comes from a Pakistani company I think that is going to be part of the normal expansion that is going to take place.

Profit: Considering that there is limited possibility for new leases and licenses, do you think that if a new player comes in it will be through acquisition?

STS: Acquisition will be the approach for a new player to enter the market. For them to secure a new site the will have to work with

has increased its reliance on local consumption. Why is that the case and should we expect to see the same trend in future?

STS: There has been growth in the country resulting in increased demand and consequently increased utilization in the local market. There has been a reduction in exports as well which is largely driven by the fact that the areas where we were exporting as a country have new cement plants coming up.

So the reduction in Afghanistan market has a lot to do with Iranian cement flowing in there; reduction in East African market has a lot to do with new cement plants coming in the East African market. Same is the case with Iraq, which used to be a big Pakistani cement importer has over the years become self-sufficient with new cement plants becoming operational.

Profit: In that case how is Iranian cement cheaper in Afghanistan than Pakistani ce-

INDUSTRY

ment?

STS: There are parts of the Afghanistan market which are more competitive for Pakistan, such as Kabul area and certain other parts.

But if you go towards the side of Pakistan border with Afghanistan i.e. Chaman area, there it is closer for Iran to come in. So it is a logistical play.

SimilarlyPakistani cement going through Wagah to Amritsar and Haryana areas is cheaper in terms of freight. Even though India has 30-35 per cent excess capacity today, it is still not feasible for them to bring goods from the South where all the limestone is and deliver it to areas closer to Wagah. So freight is an integral part in the radius in which you are selling cement. Therefore a plant in Iraq will surely make exports disappear for us.

Profit: Back on the domestic front, is there any fear of cheaper Iranian cement flooding its way into the local market, perhaps through smuggling given how our own cement is relatively expensive because of government duties?

STS:Everything that is locally manufactured in Pakistan has certain government protection, whether it is cement, pipes or furniture.

But I think that Pakistani cement industry is still quite competitive. Smuggling however is something that you cannot do much about, it’s a different ball game altogether. The pricing doesn’t really fit into the picture and this is also true for fertilizers, cement, oil and diesel.

That being said, smuggling is not that big of a problem as it is not happening on such a large scale. As soon as CPEC routes start becoming operational the closest cement plants are going to be from Pakistan. Iranian cement will also be limited to the smuggling aspect, because by bringing cement through legal channels they would have to go through

44

Karachi and their goods have to be cleared, and that involves paying clearing charges and duties. So when all that is added, the Pakistani cement will always be more competitive.

Profit: Do you think that there is anything that the government can do with respect to export of cement?

STS: Cement manufacturing globally is a localized business. Anywhere in the world where exports and imports take place, they are temporary and only fill a gap. Japan used to export to America but that was for a specific time period. So export of cement can only take place in times of shortage. So if there is a shortage in Pakistan for CPEC then Iranian cement can flow in.

Profit: We are told that cement industry is one of the most competitive industries in Pakistan and it has significantly reduced the cost of manufacturing, especially in energy, how did this happen?

STS: In Pakistan lot of cement plants have put up wastage recovery plants, which capture all the excess gases that would otherwise go out into the air. Their heat, which is very low heat, is captured and converted into usable electricity. Initially there was no technology to do it, in the last 10 years this technology has come in. We recover around 16MW of power from it. Many cement plants have doing that which is the major reason for the energy efficiencies that cement plants have had. Although it costs around Rs3,000 crore to set up such a wastage recovery plant, the return is very good and there are no running costs, just the one time capital expenditure.

Profit: The industry came across higher FED (Federal Excise Duty). What has been the impact on prices and volumes?

STS: The argument made by the cement association has been that cement is not a luxury good so excise should be reduced. There have been moments with various governments where excise duty had been reduced and then there were moments when due to budget deficits and bigger economic concerns that excise duty was increased.

But I think cement prices have generally been quite stable in the past two-three years and have

actually reduced a little bit despite the increased excise duty, because the cement industry has worked a lot for cost reduction, vis-à-viswastage recovery plants. So part of it was absorbed and part of it went into the market. I think that the current price levels don’t have that much effect on a consumer, a person building a house or a factory.

Cement is a very small proportion of the total project cost;thereforeeven thoughthe government has increased the duty and the price increases by 10-15 rupees a bag as a result, it does not affect the demand.

Profit: Even though the industry is competitive and coal prices globally are not that of 2008 prices in Pakistan are still on the rise, why is that so?

STS: If you look at the last twelve months, the cement prices have been coming down.

There are also large price variations in different markets. In KPK the price levels are maybe 10-15 rupees lower than Central Punjab.

In Karachi prices are higher than in Lahore. This is because of lot of cement plants that came into production over the past decade were more concentrated towards Rawalpindi, Chakwal, Hattar and other areas of Islamabad.That expansion led to excess capacity there making the region more competitive and cheaper than the South.

So I think that generally the prices will remain stable unless there is a shortage. If there is a shortage then prices go up. But I don’t see prices going up because utilization is going up and people are expanding their market share.

Profit: Cement companies are not known for advertising, such as paint companies who advertise heavily even though that is also a commodity. In your industry how does one decide between different brands, what differentiates your brand considering that prices are similar?

STS: There is a lot of difference in prices.

Today I am 15 rupees more expensive than

I AM ALSO NOT THAT WORRIED ABOUT A CHINESE PLAYER COMING HERE OR A LOCAL PLAYER WHO IS EXPANDING BECAUSE THE SITES ON WHICH YOU CAN EXPAND NOW ARE LIMITED. THERE ARE LIMITED SITES FOR NEW PLANTS. SO WHETHER THAT COMES FROM AN INTERNATIONAL PLAYER OR WHETHER THAT COMES FROM A PAKISTANI COMPANY I THINK THAT IS GOING TO BE PART OF THE NORMAL EXPANSION THAT IS GOING TO TAKE PLACE Sayeed Tariq Saigol, CEO Maple Leaf cement and Chairman All Pakistan Cement Manufacturer Association (APCMA)

my second competitor. If you go to the market and you get Maple Leaf, it’ll be more expensive because we are a premium brand.

I think every company has their own marketing strategies in place, I cannot speak for others in the industry but my view is that most of the brands have been established on historical basis.I don’t think that the industry has been heavily engaged in branding activities to differentiate themselves in certain ways.

For example the only two cements that used to come in the market pre-privatization in Lahore and Islamabad were Zeal Pak and Maple leaf.Both were owned by the government but after privatization, Zeal Pak closed down and Maple leaf remained. This is how our historical value has been built. In Rawalpindi Maple Leaf will be one of the cheaper brands, because historically Fauji cement and Askari Cement Limited (AWT) have been selling there.

Maple Leaf has spent a lot on branding but all our branding is below the line, on distribution level. We have a value chain and we think our value chain starts from the truck driver to the mason, because this is the decision making chain, the logistics chain and the supply chain.

But there are no tricks of the trade. People do try to gain market share and that is why there are different prices in different markets and various people have different strategies for marketing, but it is all primarily on the basis of price differentiation.

Profit: As per reports cement companies keep their margins high by having a quota system. Also there are reports that most companies are running idle capacity which

gives the perception that there is a cartel.

How would you respond?

STS: That is something that I cannot comment on but I can give you an indicator to look at. There are big pricing gaps and differentials in different markets. In the last year and a half the cost increased, excise duty increasedbutthe cement industry was not able to pass that on fully, some regions were able to do it more, other regions much less.

Then if you look at the utilization of cement industry, plants are operating from 60 per cent utilization all the way to 102 per cent utilization. So these are things for a judgment call that people have to make.

Profit: If there is no as such cartel then why is it next to impossible to get a new license even though Pakistan has a huge potential of Limestone? Especially for those who do not have an existing stake in the industry?

STS: There is no license that is required as such. If you go today to apply for a lease in Punjab, and I’m told in KPK as well, for a new site, it is not as straightforward as the provincial governments are now looking to put in place a new, stricter leasing policy for all mines and minerals. In the past you could just go and apply and get a lease. This is not limited to just limestone, rather all minerals.

The Punjab government is working on a strategy to revamp how leases will be given out in the future. It is not a barrier to entry, they are just in the process of making these rules and regulations about how leases will be allocated, whether there will be a bidding process for them, how long you have to use the lease for etc.

People took coal leases all over Punjab

as you knowand nobody has done anything with them. There are only donkeys and carts taking mining there. So I think that the government wants to make a regulatory frameworkof how leases will be used. Mineral is the wealth of the state and it has to be utilized at the most optimum level.

The second perspective is that over the last couple of years and especially under the current government, the environmental damage that can be caused by mining is being very seriously considered. So now there is a whole thought process behind it and it just cannot be a free-for-all scenario like before.

New cement plants can come and will come but I don’t think that it’s going to happen tomorrow.

It is not as such good news for players already in the market either. Will they be able to renew their lease or what basis would be needed for renewal, will they be able to expand or acquire new land, and these are all valid questions now. So the government is trying to regulate not just the cement industry but the whole mining and mineral industry.

Profit: Please tell us about the future plans of Maple Leaf Cement, and of the decision to setup a 40MW coal-fired power plant.

STS: The 40MW plant is going to come online in just under 12 months. We have already announced in our last board meeting that we are looking to expand out cement capabilities.

We are working on it and right now we are looking at maybe another plant of 7,000 tons per day, at the existing site. So right now we are in the process of evaluating it and studying it. We haven’t started the construction as yet, but we are in the final stages of evaluating it. n

INDUSTRY

TALKING HEADS

“Our new Head Office building is a beacon of UBL’s ‘Progressive’ and ‘Innovative’ brand attributes. This modern building complex is a dynamic symbol of the transformation that UBL has undergone in the last 14 years” Wajahat Husain President & CEO UBL

“Are we now getting locked into a cycle of borrowing and imports under the garb of CPEC even as the more important pillars of the external sector — exports, remittances and FDI — shrivel up?”

Khurram Husain Business journalist

“ Despite the energy crisis, clusters of Sialkot have managed to retain their dominant market share abroad in key products, such as sports goods & surgical instruments. Sialkot is an inspiring example of what can be done in Pakistan. Imagine if the conditions were better, what could be achieved” Vincent Palmade Lead Economist South Asia Region, World Bank

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“We believe that fossil fuels have a life of another 40 to 60 years, until that time other technologies will evolve. So far, there is no technology in the world that has reached the level where fossil fuels have become Shamsuddin Ahmed Shaikh unnecessary” CEO, Sindh Engro Coal Mining Company

“According to last year’s statistics, 90% of our graduates have either found employment within the first six months of their graduation or gone abroad for higher studies. The statistics are phenomenal but we are not following an employability agenda as such” Dr. Sohail H. Naqvi Vice Chancellor, LUMS

“The unbundling and creation of 10 Distribution, 5 Generation and 1 Transmission Companies were supposed to provide benefits of corporate governance. Result: multiplied overheads, with no improvement in efficiency or governance” Mohammad Younus Dagha Secretary Ministry of Water and Power

TALKING HEADS

BEYOND BORDERS

McKinsey’s

10

tips for leading companies out of crisis I’ve seen my share of boiled frogs,” says Doug Yakola, comparing companies in crisis with the metaphorical frog that doesn’t notice the water it’s in is warming up until it’s too late. As the chief restructuring officer or CFO of more than a dozen turnaround situations over nearly two decades, Yakola has witnessed firsthand how managers back right into a crisis without recognizing that their situation is worsening. “They’re not bad managers, but they’re often working under a set of paradigms that no longer apply and letting the power of inertia carry them along.” And if they don’t realize they’re facing a crisis, they won’t know that they need to undertake a turnaround, either.

He’s also heard the regrets: sometimes managers underestimated how critical their situation was— or they were looking at the wrong data. Others took advantage of easy access to cheap capital to stay the course in spite of poor performance, believing they could push through it. Still others got so caught up in the pressure for short-term returns that they neglected to ensure their company’s long-term health—or even willfully sacrificed it. Rare among them is the executive who stepped back to review his or her own plans objectively, asking “Is this what I thought would happen when I first started going down this road?” That’s a problem, Yakola says, because acknowledging that your plan isn’t working is a necessary first step. Yakola joined McKinsey’s Recovery & Transformation Services as a senior partner in 2011. Here, he offers ten ways ailing companies can get started on the turnaround work they need.

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Courtesy: mckinsey.com

1 Throw away your perceptions of a company in distress It’s next to impossible to come up with one working definition of a company in distress—and dangerous to think that you have one for your own company. Depending on the situation, there are probably 25 different signs of potential distress (exhibit). The problem is seldom made up of just one or two of these things, however. Rather, it is the result of a greater number of them interacting together and with other external factors.

2 Force yourself to criticize your own plan The biggest thing you can do to avoid distress is periodically review your business plans. When you’re creating them, whether at the beginning of the year or the start of a three-year cycle, build in some trigger points. A simple explicit reminder can be enough: “If we don’t have this type of performance by this date or we haven’t gotten the following 12 things done by this date, we’ll step back and decide if we’re going down the right path, given what’s happened since our last review.” Such trigger points should be oriented both to operational and market performance as well as to basic financial metrics and cash flow. Look at where you are as a company using basic financial and cash milestones, and then look at where you are with respect to your industry and competitors. If you’re not moving with the rest of the industry (or not outpacing it, if the industry is struggling), then your plan may be obsolete. And don’t forget to look back at your performance over past cycles to identify any trends.

If you keep missing performance targets, ask why.

3 Expect more from your board The beauty of a board is that it has enough distance from the company to see the forest for the trees. Managers often treat their board as a necessary evil to placate so they can get on with their business, but that undermines the board’s role as an early-warning system when a company is heading for distress. It’s also the board’s responsibility to look the CEO, the CFO, and the chief operating officer (COO) in the eye and say, “OK, we like your plan. Now let’s talk about what it would take to cut costs not just by 3 percent but by 20. Let’s talk about all the things that can go wrong—the risks to the business.” Sometimes significant events happen that no one could have foreseen, of course. But in a typical distress situation, a company has usually just had 18 to 24 months of poor performance, and the board hasn’t been aware or hasn’t asked the right questions. Independent board members—truly independent ones—can have a big impact here.The senior team at one company maintains a list of risks to the business, employees, and the plan. They review those risks with the board on a quarterly basis to ensure that they’re staying top of mind. It’s an excellent way to have conversations that you wouldn’t normally otherwise have in a business operation.

4 Focus on cash A successful turnaround really comes down to one thing, which is a focus on cash and cash returns. That means bringing a business back to its basic element of success. Is it generating cash or burning it? And, even more specifically, which investments in the business are generating or burning cash? I like to think about this in the same way one would if running a local hardware store. By that, I mean asking fundamental questions, such as whether there is enough cash in the register to pay the utility bill, for example, or to pay for the pallet of house paint that will arrive next week, or how much more cash I can make by investing in a new delivery truck. When you bring a business back to those basic elements, the actions you need to take to get back on track become pretty clear. In many of the cases I have seen, the management team and board are focused on complex metrics related to earnings before interest and taxes (EBIT) and return on investment that exclude major uses of cash. For example, variations on EBIT commonly exclude depreciation and amortization but also exclude things like rents or fuel. These are all fine metrics, but nasty surprises await when no one is focused on cash. Keeping track of cash isn’t just about watching your bank balance. To avoid surprises, companies also need a good forecast that keeps a midterm and longer view. For example, failing to pay attention to the cash component of capital investments routinely gets companies in trouble. Project net present values can look the same whether the return begins gradually at year two or jumps up dramatically at year five. But if you’re not focusing on the cash that goes out the door while you’re waiting for that year-five infusion, you can suddenly find yourself with very little cash left to run the business, sending you into a spiral you may not recover from.

5 Create a great change story Companies in distress don’t focus enough on creating a change story that everyone understands—and that creates some sense of urgency. Here’s an example. I recently did a turnaround as chief restructuring officer of a mining company. It was profitable, returned a decent margin, and was cash positive. But the commodity price was dropping, and the board was worried about generating enough free cash flow to drive the capital needs of the business. The change story we created said, “Yes, we are profitable. But the whole point of profitability is to generate enough cash to expand, grow, and maintain operations.

If we can’t do that, then we’re headed for a long, slow decline where equipment breaks down and lower production becomes the new reality.” If you can tell that story in a paragraph or less, in a way that means something to the average guy on the front line, then people will get on board. In this case, employees wanted to have their children and their grandchildren work for this company in the same remote mining location, and the change story spurred them to action. The key was a simple message, not fancy metrics.

6 Treat every turnaround like a crisis Without a crisis mind-set, you get a stable company’s response to change: risk is to be avoided, and incrementalism takes over. Your workers are asked to do a little more (or the same) with less. More aggressive ideas will be analyzed ad nauseam, and the implementation will be slow and methodical. In contrast, a crisis demands significant action, now, which is what a distressed company needs. Managers need to use words like crisis and urgency from the first moment they recognize the need for a turnaround. A company that’s in true crisis will be willing to try some things that it normally wouldn’t consider, and it’s those bold actions that change the trajectory of the company. Crisis drives people to action and opens managers up to consider a full range of options.

STRATEGY

7 Build traction 8 for change with quick wins The tendency of most managers is to put all of their focus and resources into three or four big bets to turn a company around. That can be a high-risk approach. Even if big bets are sometimes necessary, they take a lot of time and effort—and they don’t always pay off.

For example, say you decide to change suppliers of raw materials so you can source from a low-cost country, expecting 30 percent lower direct costs. If you realize six months later that the material specifications don’t meet your needs, you’ll have spent time you don’t have, perhaps interrupted your whole production schedule, and probably burned a bunch of cash on something that didn’t pay off. In addition to going after big bets, managers should focus on getting a series of quick wins to gain traction within the organization. Such quick wins can be cost focused, cutting off demand for some external service they don’t need. Or it could be policy focused, such as introducing a more stringent policy on travel expense.Not only do such moves improve the bottom line, they also generate support among employees. In any given company, you’re likely to find that a fifth of employees across the organization are almost always supportive. They work hard.

And they will change what they’re doing if you just ask them. These are the people you’ll want to spend most of your time with, and they’re the ones you’ll promote—but you’ll probably spend too much time with the bottom fifth of employees. These are the underachieving ones who actively resist change, look for ways to avoid it, or are simply high maintenance.What often gets ignored is the remaining 60 percent of the organization.

These are the fence-sitters, and they are tuned into action, not just talk. They see the changes going on, and if you proactively work with them, then 80 percent of the organization will be behind you. But if you don’t give them a reason to stand up and be positive about the company, they’ll go negative. That’s the importance of quick wins.

When you quickly take real action, and when those actions affect the management team as well, you send a powerful message.

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Throw out your old incentive plans Management incentives are often the most overlooked tool in a turnaround. In stable companies, short-term incentive plans can be a complex assortment of goals related to safety, financial and operational performance, and personal development. Many are so complex that when you ask managers what they need to do to earn their bonus, many just shrug their shoulders and say, “Someone will tell me at the end of the year.” In a turnaround, take a lesson from the private-equity industry and throw out your old plans. Instead, offer managers incentives tied specifically to what you want them to do. Do you need $10 million of improvement from pricing? Then make it a big part of your sales staff’s incentive plan. Need $150 million from procurement? Give your chief purchasing officer a meet-or-beat target. Be willing to forgo bonus payments for those that don’t achieve 100 percent of their target—and to pay out handsomely for those whose results are beyond expectations.

Replace a top-team member—or two Experience tells me that most successful turnarounds involve changing out one or two top-team members. This isn’t about “bad” managers. In my 20 years of doing this, I’ve only seen a small handful of managers I thought were truly incompetent. But it’s a practical reality that there are managers who must own the decline. And more often than not, they are incapable of the shift in mind-set needed to make fundamental changes to the operating philosophy they’ve believed in for years. Whether they realize it or not, they block that change because they’re bent on defending what they believe to be true. Although it’s difficult, removing those people sends another signal to your stakeholders that there will be changes and you’re not afraid to make tough moves.

10 Find and retain talented people

Beyond the leadership team, there are two types of people I look for immediately. First are those that have the institutional knowledge. They may not be your top performers, but they know all the ins and outs of the company—and are vital to understanding the impact of potential changes on the business. Many times they are the disgruntled ones, unhappy with the company’s performance. But you need people who are willing to point out the uncomfortable truths. A turnaround is also a real opportunity to find the next level of talent in an organization. I’ve been through multiple crises where the people who added the most value and impact weren’t the ones sitting around the table at the beginning. I have often found great leaders two and three levels down who are just waiting for an opportunity—and the fact that they can be part of something bigger than themselves, saving a company, is often enough to attract and retain them.

For both groups, it’s important to realize that retention isn’t always about money and bonuses. It’s also about figuring out the individual’s needs. Good turnaround managers actively look for those people and find a way to get them involved.

STRATEGY