Retail Review 2017 by Business Recorder

The Team RETAIL REVIEW 2017

October 31, 2017

RESEARCH Research Ali Khizar Aslam Head of Research

Analyst

Sohaib Jamali Analyst Research Editor

Zuhair Abbasi Zuhair Abbasi

Senior Editor Research Deputy

Sijal FawadHaider Hammad

Research Senior Research Analyst

FROM THE EDITOR’S DESK PAGE 4 LONG LIVE THE CONSUMER Ali Khizar Aslam PAGE 5 A CULTURE OF CONSUMPTION Sohaib Jamali PAGE 6 WHAT IS MIDDLE CLASS, ANYWAY? Hammad Haider PAGE 8 BORROWED CONSUMERISM Ali Khizar Aslam PAGE 9 RETAIL ECONOMY IN NUMBERS PAGE 10

TAX LOSS OF SMUGGLED PHONE DEVICES IS ABOUT RS35-40 BILLION P.A. -Mr. Muhammad Kamran Khan Country Head for HMD Pakistan & Afghanistan, PAGE 24 THE AGE OF LAZINESS Hammad Haider PAGE 26 WHITE GOODS: SIGNIFIERS OF RETAIL EXPANSION Hammad Haider PAGE 28 RETAILING BOOM Ali Khizar Aslam PAGE 29

PAKISTAN AND TEA TITANS Huma Sattar PAGE 14

KARACHI NEEDS AT LEAST 30 MALLS -Mr. Sohail Tabba Chief Executive Officer Lucky One (Pvt) Limited PAGE 30

MILK MARKET RIDDLED WITH INEFFICIENCIES Ali Khizar Aslam PAGE 16

‘MALL-SCAPING’ THE COUNTRY Sidra Farrukh PAGE 32

Research Analyst

CARBONATED DRINKS ON A ROLL Syed Tauqeer Hassan PAGE 18

THE KHOKA ECONOMY Sohaib Jamali PAGE 33

Fatima Attarwala

A LITTLE OF BIT SPICE Muhammad Bilal Moon PAGE 19

Naseem Waheed

EDIBLE OIL: IT’S AN OILY PROPOSITION Huma Sattar PAGE 20

Sidra Farrukh

Senior Research Analyst

Syed Tauqeer Hassan Research Analyst

Huma Sattar

Research Analyst

FEAR OF THE TAP Syed Tauqeer Hassan PAGE 21

Murtaza Khaliq Creative Head

FOOD ECONOMY: BATTLING FOR THAT THIRD SPACE Huma Sattar PAGE 22 RETAIL CLOTHING BUSINESS: THE TALK OF THE TOWN Sidra Farrukh PAGE 23

TPL MAPS EYES REGIONAL MAPS BUSINESS -Mr. Adeel Hashmi Head of TPL Maps PAGE 34 RETAIL PREFERENCES OF URBAN CONSUMER A collaboration between BR Research and Gallup Pakistan PAGE 35 HAVING THE CONSUMER’S BACK Jehangir Ashraf PAGE 39

From Editor’s desk

Editor’s note

Higher consumerism economically desirable Consumerism is generally defined as a belief that it is good for progress and well-being of people in general to spend a lot of money on goods and services in order to raise their standard of living and spinning growth within the economy. It is widely argued that consumerism stems from a natural instinct of human species and that consumerism is good for economic growth provided it is supported by economic activity within the country. This Review on businesses and consumerism seeks to analyze the subject through data, however, largely empirical, with a view to providing a picture of the arena in which players are battling it out for their share of the market pie that promises either total triumph or absolute annihilation. It also seeks to fathom out, among other things, the size of the middle class in an emerging market such as Pakistan’s. There is no denying that growth of consumerism in Pakistan over the years has led to many companies improving their services to customers. That an increased consumption of goods is economically desirable is a fact. Thomas Byrne Edsall, for example, had famously said that the contemporary marketplace is “shaped solely by the craven needs of lowbrow consumerism”. One must not, however, lose sight of the fact that the prime objective of a business is to sustain robust returns and financial wealth for its investors. In other

4 | Retail Review 2017

words, businesses are also required to sustain a robust rate of growth in the production and sale of goods and services in order to respond to increased consuming habits of people. But lower or higher output imperative has to be seen through the prism of Cost-Benefit Analysis. That the cost of doing business in Pakistan is higher as compared to the countries in the region is a fact. The foremost constituent behind this anomaly is the price of energy that constitutes 30 to 35 percent cost of manufacturing. Not only has this grave disadvantage rendered our exports uncompetitive in the global market, it has also led to diverting investments to a great extent away from manufacturing to real estate and stock market where returns are said to be abnormally high. There are businesses that are not essentially or necessarily part of export sector but are equally adversely affected by higher energy tariff challenges and energy shortage constraints. A very large number of them, however, are not only surviving with dignity, they are seen to be in fact flourishing as they often flaunt their expansion plans, increased output and aggressive marketing strategies. These concerns are struggling on a competitive plain to establish their respective brands with a view to ultimately creating a niche for themselves in the global market as all of them know well that no brand can claim international

acclaim unless it is able to prove its mettle as a national brand. For example, no American or South Korean brand became a global success until and unless it successfully assumed the role of market leader in its own country. The principal reason behind Pakistani businesses’ growing optimism seems to be robust growth forecasts generated by better availability of electricity and a relatively peaceful law and order environment. Their increased output in accordance with population and other socio-economic dynamics will surely help promote the culture of consumption in a country that experienced sustained growth in consumerism between 2002 and 2007. As the foregoing suggests, China Pakistan Economic Corridor-driven growth momentum in a cheap credit environment will surely lead to boosting consumerism. The prospects of consumerism are always quite bright in a country where there exists no culture of savings.

Ali Khizar

Share in real GDP (%) Consum ption (RHS)

asset prices bubble burst in 2008; but by that time, households had developed their consumer taste and entrepreneurs had started building businesses to capture the bonanza. The banking credit could never really recover from the crisis: private credit fell from 27 percent of the GDP in FY08 to 15 percent of the GDP in FY16. Employment creation, hitherto led by banking and telecoms, and economic growth, seemed chocked. However, consumer growth during FY01-08 had encouraged consumer products marketing companies to expand. Post FY08, MNCs (Nestle, Unilever, Coca Cola, etc.) and domestic consumer businesses have become the engine of employment and

FY 12 FY 13 FY 14 FY 15 FY 16

200

in FY04. This created ample liquidity in the

250

to the extent that the current account was in surplus for four straight years (FY01-04) whilst

10 FY 11

300

GDP/capita (RHS)

1,600

GDP (nominal - $bn) (LHS)

1,400 1,200 1,000

150

800 600

100

400 50

200

9 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16

FY 0

06 FY

05 FY

FY 03

08, when abrupt foreign inflows, and the subsequent credit expansion, created consumer demand. Wealth creation by a hike in prices in various asset classes boosted consumer

Investmen t (LHS) 92

of aid, loan, investment and remittances took the majority out of the poverty. The deregulation and privatization in banking and telecom industries opened up new avenues of employment in the private sector, in addition to a transition from ‘seth’ culture to corporate culture. The salaries of employees increased disproportionately, and vendors, suppliers and other small businesses prospered in the process.

two percent in FY04. The banks came up with aggressive lending plans for corporates, SMEs, and consumers. The private credit expansion was unprecedented and had changed the landscape of the economy. The money multiplier did its trick; and rise in assets prices in real estate and stock market were unprecedented and no economic crisis was enough to halt the consumer spree since then.

which mired the economy with stagnating exports, sharp currency depreciation, sky-rocketing

akistan is predominately a demanddriven economy. On aggregate levels, roughly 90 percent of the GDP by expenditure is based on consumption. Since the inception of the country (FY1950-2016), on average, 88 percent of the GDP has been spent on consumption. And barring government, private consumption stood, on average, at 77 percent of the GDP. Whatever money comes in is mostly consumed in buying goods and services. The nominal size of the economy was very low till the 2000s (GDP per capita FY02:$546) whilst majority of the population was poor (57% of households living under $2 per day). The economic gear shifted in the boom of early 2000s and there is no stopping the consumerism since then.

entrepreneurship. And the phenomenon continues to date. spurred on the money sent back home by Pakistani Diaspora, especially from the Middle East. Home remittances have become the biggest contributor as SBP’s remittances initiative (PRI) really reaped fruits. The remittances started growing since 2001 to $7.8 billion in FY09; and the number almost touched $20 billion last year. Scale matters; and that has kept consumerism upbeat. The per capita income tripled in the last thinned to 7 percent, as per analysis by Dr. Jawaid Abdul Ghani of KSBL. Households living between $2-10 have increased from 42 percent to 87 percent

is emerging too; households living above $10 per day now constitute 7 percent of population versus 1 percent in 2001-02, as per Dr. Ghani. The middle class seems to be rising and driving renewed consumer demand. The numbers validate the argument. During 200114 car ownership increased from 2 percent of households to 6 percent, while two-wheeler owners jumped from 7 percent to 41 percent whilst similar disruption is witnessed in white goods and mobile phone segments. The per capita income will be over $2,000 in a few years; and demand for cars, fashion brands, packaged food, electronics, etc., will be at an unprecedented level. Mind you, there was a severe balance of payment crisis that the country faced in 2008,

on manufacturing; and that had created an opportunity for retailing businesses to grow. Today, many business tycoons in Pakistan, who became big by manufacturing and banking businesses, are betting their money in the retail business. Textile exporters are expanding to cater the domestic demand in fashion products; while cement, packaging and banking big guns are venturing into the mall economy. Many are coming up with food and café chains, if not entering into packaged food or imported animal-based milk businesses. It is simple economics and the unintentional policy measures that are building a new kind of entrepreneurship on the block. Exporters have to compete internationally with high energy costs, bleak law and order, low labor productivity and lack of innovations. That makes exports less competitive. The tax policies are more cumbersome for manufacturing amid the complex and time-consuming compliance. That is why the country is falling at ease of doing business index. However, that is not the case in retail and service-oriented businesses, where the dealings are much easier and the payback period is relatively short. Anyone in Pakistan who has $1 million to start a business would most likely go for trading (mainly import or domestic supply chain) or for a retail business. The jewel within the country in the form of rising consumerism is catching the attention of entrepreneurs. The from manufacturing to services. The retail business is becoming a fad in Pakistan. Are the youngsters from the elite class ready to make their hands dirty with machines, and deal with low-skilled labor? It appears that they’d rather associate themselves with a brand (either international or home grown), and would like to do business in a cozy environment. Some might burn their hands in the process, a few businesses would grow and others may wipe out. The consolidation in the industry is imminent and big capital in the segment. The macro challenge is to control the imported goods demand, as remittance growth seems to be chocking to keep up pace with the trade that would feed consumption; and the country may face crises in the process. But consumerism appears to remain insulated to any macroeconomic deterioration. Long live the consumer!

Ali Khizar is the Head of Research at Business Recorder. He can be reached at ali.khizar@br-mail.com

Retail Review 2017 | 5

Sohaib Jamali

“W

e Musalmans in general and youngsters in particular do not know the value of money. A paisa saved today is two paisas tomorrow, four paisas after that and so on and so forth. Because of our addiction to living beyond our means and borrowing money we lost our sovereignty over this sub-continent,” so said the Quaid-e-Azam Muhammad Ali Jinnah in Ziarat, Balochistan in 1948. Seven decades on, Jinnah’s message is still relevant since nobody seems to ever have gotten his memo. There is little denying, as Adam Smith noted, that “consumption is the sole and end purpose of all production”, and indeed the very reason of the existence of a modern ‘homo economicus’ conception of man. There is also little denying that its living standard, which has no doubt risen substantially across the world during the last century. But Pakistanis have taken Smith a little too seriously. The country’s consumption-to-GDP ratio has remained among the highest in the region, as well as in the world. It has in fact grown to worrying levels over the course of the last few decades level seems to be developing, as marginal propensity to consume

6 | Retail Review 2017

has also increased sharply. DuringFY11, the average consumer allocated Rs 97out of every Rs100 to consumption expenditure. This implies a marginal saving rate of just 3 percent in FY11 compared with over 30 percent in FY01-08,” Pakistan’s central bank wrote

Marginal Propensit ies to Consume and In vest (percent) Consumpt ion

Investment

been updated since, but improvement, if any, is not going to be substantial enough to result in a sigh of relief.

Private

Public

1960s

72.5

11.8

16.5

not consumed. In government accounting, public savings (which

1970s

75.8

11.2

13.8

1980s

63.0

16.4

19.3

numbers; private savings are arrived at as a residual item. But while saving may be the leftover item – i.e. income not consumed - in reality people above a certain income threshold need to save

1990s

77.7

10.7

17.2

2001-08

70.8

11.3

21.3

FY09

95.6

-9.5

2.3

FY10

81.8

6.4

-1.6

FY11

97.0

8.8

4.1

Source: SBP Annual report 2011, table 4.2

Granted that the size of the income and consumption decisions determine saving, especially for the poor who barely have enough (and often not even that) to meet their basic have saved. At the macroeconomic level, literature abounds how differences in long term economic growth of countries can be explained to differences in their rate of savings.

The concept is fairly simple. A low rate of savings by individuals, households and corporations leads to a small sized pool of money called private savings, which is usually the bigger part of national savings. A smaller pool means smaller investments in the productive capacity, in developing human capital or improving socio-economic infrastructure. In turn, this leads to a lower economic growth leading to a lower per capita income and eventually a lower spending power. Little wonder then that throughout Pakistan’s economic of foreign savings in the form of external loans, FDI, grants or remittances. Every time foreign savings have dried up in the history of Pakistan’s economy, the country’s GDP growth has tapered off. The message for economic policymakers, therefore, is pretty clear. Promote domestic savings by channelling money from the pool that is and private saving products. Or, attract foreign savings by continuing liberal FDI policies, reforming tax and non-tax areas of governance, and liberalising trade policies, especially in terms of regional trade for which a nod from the powers that exist is also needed. Failure to do neither is going to keep the external account under continuous pressure at one end, and prevent GDP growth from taking off at the other.

Gross domestic savings (% of GDP) Pakistan

India

Bangladesh

China

South Korea

Vietnam

Lower middle income countries

High income countries

Household consumption (% of GDP) Pakistan

India

Bangladesh

China

Vietnam

Lower middle income countries

South Korea High income countries

0 1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Source: World Bank

require higher tax collectionas well as governance reforms at federal and provincial levels, which is another complicated af fair with no quick solutions. Governance reforms are also needed to attract foreign savings.

determined by a liberal policy. A good law and order situation, consistent policies, openness of trade including regional trade, improved governance in tax and non-tax bureaucracies and government institutions are some of the critical areas where reforms need to be brought about in Pakistan. Remittances too, which are mostly used in consumption, need to be

FY17 are seen falling for the time in thirteen years.

FDI (% of GDP)

Pakistan

India

Bangladesh

30 19601

9651

9701

9751

9801

9851

9901

9952

0002

0052

0102

015

China

South Korea

Vietnam

Lower middle income countries

High income countries

Source: World Bank

NO SHORTCUTS TO SAVING

Neither of the strategies is going to be easy; nor is it so that one can completely compensate forthe lack of the other. One of the biggest structural problems in domestic savings is that Pakistan grows in the dark, and saves in the shadows, if not in Dubai or local real estate. Saving in the long shadows estate, especially land, is point blank dead capital. Fixing this conundrum will require more than just window dressing policies. Another structural factor likely to keep stoking private consumption is inequality. Poverty may be on the way out in Pakistan but inequality is very much growing. Amongst its many consequences, inequality also leads to conspicuous consumption – Veblen’s ‘keeping up with the Joneses’ argument. The matter hasn’t been well researched in Pakistan but there is enough anecdotal evidence to suggest that the argument will stand the test of empirical scrutiny. Then there are other structural factors that keep consumption sticky in Pakistan.For instance, saving is inversely proportional to the size of a household. A six-person household with a single bread earner (or only one major bread earner) has little room to save. Or consider the consumption pressures created by children’s education, medical spending, and energy consumption. In his 2010 study , Dr Ashfaque Hasan Khan and his co-author found that between 1984-85 and 2001, expenditure on education rose three whereas expenditure on fuel and lighting rose at the expense of expenditure of household affects for both urban and rural households. In an economy, where nearly a third of the total population is below the age of 18, where electricity, there is little room left for households to save.

The writer is the Research Editor of Business Recorder. He can be reached here sohaib.jamali@br-mail.com, and @SR_Jamali

But it is also in the long term interest of businesses – those thriving on consumerism - to demand a quality public health and education system as well as cheap electricity. A good provision of public health and education can reduce the household expenditure on these items and thereby create the space for consumption on other commodities or for savings. But these

19751

9801

9851

9901

9952

0002

0052

0102

015

-1 Source: World Bank

Whether Pakistan wants to follow the export-led GDP growth model or the domestic-commerce led one, the need for domestic and foreign savings cannot be overstated. Since the latter is inherently susceptible to swings in global economy, increasing the former is paramount. It may not be obvious to businesses to become the constituency for domestic savings. Surely, why would businesses want to reduce the pool of money available for consumption of the goods and services they produce? The here and now is usually more tempting than the hereafter, but it is that very temptation that enticed the farmer in Aesop’s Fables to kill the hen that laid the golden eggs. In the long term, promoting domestic savings will cushion the economy from adverse foreign saving shocks, and allow a sustainable GDP growth, which in turn can prevent businesses from external shocks tithedomestic demand. Consumerism may be supplying feel-good moments the GDP north to the utter pleasure of thepoliticians. But know well that he who saves not, is himself consumed.

Retail Review 2017 | 7

Hammad Haider

What is middle class, anyway?

aving long been an electoral catchphrase in Western democracies, the concept of ‘middle class’ has seeped into Pakistan’s political discourse fairly recently. In the current, arguably rosy economic scenario, there have been growing references to an ‘expanding middle class’. But the phenomenon remains shrouded in mystery. One major issue is the lack of a precise or consistent methodology to classify middle class. Even if a methodology was available, there is an absence of periodic datasets that inform the size and annual growth trends of Pakistan’s middle class. Also under the question this special review to take up those issues at the outset.

WHO FORMS THE MIDDLE CLASS?

Over the past few centuries, Western discourse has viewed the middle class as falling somewhere between bourgeoisie (owner class) and proletariat (labor class) in an urban context,and between nobility and peasantry in rural settings. But those social boundaries lost relevance in the post-industrial society. In the late 20th and 21st century, economists, donors, and consultants increasingly turned wealth to grade the middle class. However, ‘class’ in modern societies is too abstract a notion to be pegged merely to a person’s income, expenditure, or wealth. There are quite a few downsides to monetary-based measurement approaches. For instance, the quintile approach does not inform the change in middle class’s share in population; middle class would forever remain 60 percent of the population. with “middle class”. This is especially relevant in the case of lowincome countries like Pakistan, where using the median income/ expenditure would risk including poor people into the middle class. In other cases, setting the boundaries can be tricky. In a much-publicized study last year Neeraj Hatekar and Sandhya Krishnan, economists at the University of Mumbai, estimated the Indian middle class at 50 percent of the population (600 mn

Population distribution by income tiers (%) Pakistan

India

2001 2011

79.5

76.9

65.2

62.9 35.4

33.3

19.8

18.1 Poor Bangladesh 55.2 39.1

Low

1.1 2 0.3 0.4 Middle Upper middle

Poor

High Iran

2001 2011 59.3

Low

1.4 2.6 0.3 0.6 Middle Upper middle

0.1 High

2001 2011 62.7 55.2

43.7 28.4 27.2

Poor

Low

1 1.4 Middle

0.2 0.3 Upper middle High

12.4 7.6

1.8 1.6 Poor

Low

Middle

2.1 0.9 Upper middle High

Income tie rs are based on family income or consumption for a four-person household in 2011 PPP prices Poor: <=$2; Low-income: $2-$10; Middle-income: $10-$20; Upper middle-income: $20-$50; High income: >$50 Data source: "A Global Middle Class Is More Promise Than Reality", Pew Research Center, May 2015

individuals as those who spent between $2 and $10 per day.One the GDP growth that leads to an expanding middle class. Whereas criticism on the study is that it set the lower boundary at $2 a day, despite its proximity to the $1.25 a day poverty line. In 2015, the class is a rather sticky phenomenon. For instance, a middle-class the left argues that it is investing in the human capital that grows the middle tier, and thus leads to a sustainable economic growth Pew Research Center used the $2 to $10 band to estimate ‘low- household can be affected by low GDP growth on the income via a healthier and more educated workforce. income’ class, not middle class.However, the same Pew study, indices such as housing, education, and occupation won’t change One of the Keynesian insights was that productive which admirably measured changes in income distribution for some investments require a stable middle class consumption. That 111 countries between In Dr. Nayab’s notion is compelling. Recall that the massive American stimulus 2001 and 2011, ended view, the concentration programs following the Great Depression in early 1930s and the up inter-changing 2 Numbers (in millions) for of the middle class Great Recession in late 2000s focused on putting more money in Class middle-income and middle class1 Total Urban Rural Total Urban Rural has likely increased in the pocket of the middle class, so they could spend more and bring middle-class (see Lower lower (LLC) Vulnerable 41.9 23.6 55.2 83.7 20.1 63.6 the population in the aggregate consumption at a level that triggered new investments. illustration). Middle lower (MLC) Aspirants 23.0 21.8 23.9 41.9 16.4 25.6 last decade. Using a But the middle class can only consume more when their incomes It would Upper lower (ULC) Climbers 15.8 20.8 12.3 28.5 15.9 12.6 conservative increment continue to rise. Here, the conservatives present their case for tax be a mistake to view Lower middle (LMC) Fledgling middle class 8.5 12.5 5.7 16.3 9.4 6.8 cuts and less government, whereas progressives counter with a the middle class as Middle middle (MMC) Hard-core middle class 4.3 8.1 1.6 6.7 5.2 1.5 in the middle class share case for wealth redistribution. a purely economic Upper middle (UMC) Elite middle class 6.0 12.3 1.3 9.5 8.0 1.5 * in the population since But there is little doubt on the positive externalities phenomenonwhen Upper (UC) Privileged 0.4 0.9 0.1 0.6 0.6 0.0 2007, the middle class of a rising middle class. For instance, it can build pressure for it is clearly a Total 100.0 100.0 100.0 187.2 75.6 111.6 would be 40 percent of good governance and accountability. Its greater share in the socioeconomic theme. Source: Nayab 2011 the population today, population can lead to low transaction costs, as middle class A2011 PIDE study,titled or roughly 80 million folks can understand and trust each other more. Then, the middle ‘Estimating the Middle individuals, given a 200 million population estimate. class values of hard work, education, planning and saving can Class in Pakistan”, embraced that approach. Instead of relying A study with a methodology similar to Nayab’s exercise hasn’t been help the rise of innovative entrepreneurs.A rising middle class is on simple economic rationale, Dr. Durr-e-Nayab, the author,used conducted in the South Asia region. But overall, there is evidence good for growth.But does it lead to development as well? William a multi-dimensional approach. She noted, “The concept of class that Pakistan’s middle class, in terms of its population share, beats Easterly hasn’t been convinced. has many dimensions, including: economic, like wealth, income In his 2001 paper “The Middle Class Consensus and occupation; political,including status and power; and cultural, other large economies in South Asia. A 2010 Asia Development Bank study – which used the $2 to $20 per day per person spending and Economic Development,” Easterly, the former World Bank such as values, beliefs, lifestyle, and education.” band to count the economist argued that Using 2007-08 PSLM data, the demographer used a Table 5: Size of the Middle Class inPakistan Using a WeighteCdomposite Index “relatively homogenous weighted composite index, which comprised education index, middle class – showed middle-class societies 2 income index, housing index, lifestyle index, and occupation index. Pakistan’s middle class Numbers (in millions) have more income It resulted in a ‘strict middle class’ that was 18.8 percent of the at 40 percent of the Total Urban Rural TotalU rban Rural and growth, theyhave Pakistani population. The author favored using the ‘expanded middle country’s population – or 18.8 32.9 8.6 32.5 22.6 9.8 Strict Middle Class 62.5 million individuals at more human capital (LMC+ MMC+ UMC) and infrastructure middle class’ is rationalized on the basis of closeness between thetwo the time. India’s middle 34.6 53.7 20.9 61.0 38.5 22.4 Expanded Middle Class1 accumulation, they classes. It is from this class that the households make the transition class was estimated at 25 (LMC+ MMC+UMC+ ULC) percent of its population have better national 35.0 54.6 21.0 61.6 39.1 22.4 Broadest MiddleClass1 economicpolicies, class to 35 percent of the population, with more than half of urban (274 mn individuals) and (ULC+ LMC+ MMC+ UMC+ UC) Bangladesh 20 percent Source: Nayab 2011 more democracy, less households counted as middle class (see illustrations). of its population (31 mn political instability, folks). more “modern” sectoral HOW LARGE IS THE MIDDLE CLASS? Despite the nuances surrounding the topic, folks are always consensus” as a situation where there is “a high share of income interested in a number. So how much is Pakistan’s current middle DOES MIDDLE CLASS CAUSE ECONOMIC GROWTH? forthe middle class and a low degree of ethnic divisions.” class? And how does it compare to the region? Given that much of Pakistan’s GDP is moved by These questions take us back to the PIDE study. Given The inter-relationship between the middle class and economic growth is intriguing. Does the middle class emerge as a result of consumption, and the middle class is the engine of consumption, that the data used is now a decade old, how relevant are those economic growth? Or is the middle class the driving source for one is tempted to acknowledge middle class’s driving role in the economic growth? The discourse is divided on this inter-relationship. economic growth. But going by Easterly’s thesis, Pakistan, a country that Pakistan’s economy suffered a long spell of low growth and Trickle-down enthusiasts, who support cutting taxes and slashing with visible ethnic divisions and a far from dominant middle class, regulations as essential ingredients for more job creation, argue it is converting that growth into development would be a challenge. for the middle class. When asked about this recently, Dr. Nayab Hammad Haider is a Research Consultant at BR Research. He can be reached at hammad.haider@br-mail.com

8 | Retail Review 2017

Ali Khizar

Borrowed consumerism C

itibank-nurtured bankers brought consumer banking into Pakistan during the early 2000s

20%

450

a small fraction even in heydays; the idea to spend beyond one’s means changed the consumer psyche. Consumer loans as a percentage of the GDP peaked during CY04-08 (average: 3.6%); and have been on the downhill since then (CY13-16 average: 1.2%). But the marginal propensity to consume kept on increasing. Perhaps, the informal sector consumer lending is rampant. In 2003 consumer loans portfolio was under Rs50 billion and it was never taken seriously by the banking industry. However, the low interest rates in later years amid a sudden jump in real

18%

400

billion and the toll peaked at Rs387 billion in CY07. Auto loans (Rs117bn) and other personal loans (Rs151bn) led the sector, followed by mortgage loans (Rs71bn) and credit cards (Rs48bn).

10%

16%

350

14%

300

12%

250 200

The idea of consumer durable financing did not die with the banks’ lack of interest. Rather, it seems to have been taken up fast by informal lenders. In short, banks only cater to consumer loans for upper middle class and elite class; for masses, it is left to community lenders or product dealers.

150

100

2% 0%

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 Consumer loans Rs bn

NPLs ratio

time, every bank was calculating debt-burden based on their own loans. Thus, even shoddy The outstanding credit card loan portfolio is deceptive and it undermines its outreach. The non-funded part of credit loans (or sanctioned loans) is much higher than the actual number. It’s the most lucrative business within banking and even a small chunk generates handsome revenues; so banks were keen on issuing credit cards in those days. Plus, banks now partner with retailers to lure customers by giving discounts on outlets upon using those cards. The auto loans ‘direct economic impact is much higher as the loans are secured and Rs117 billion; the locally produced car sales were 173,000; and for the next eight years the sales

400 350 300 250

to the income; and for a few it became even higher once the interest rates went south. The delinquencies were merely a consequence. Credit card NPLs ratio jumped to an average of 21 percent in CY10-12, from 3 percent in CY06-08; and similar is the story of mortgage loans and personal loans. The overall sector NPLs ratio stood at 18 percent (CY10-12) from 5 percent (CY06-08). The infection ratio of auto loans peaked at 10 percent during CY10-12 from 2 percent in CY06. Today the sector is out of the woods again as the toxic assets ratio is at 2 percent. The lending is likely to pick up more in the years to come; and this time the banks are cautions and the demand is robust. One consumer segment that formal banking system failed to cater to, even in the heydays, was consumer durables. The portfolio size peaked at Rs2 billion (0.7% of consumer loans) in CY05, even before the 2008 crisis. Banks didn’t partake not mainly because of high NPLs, but due to the small ticker size of the loans. Subsequently, the minuscule portfolio is left mainly with toxic assets as NPLs ratio was over 70 percent in CY11-12. The banks, even in today’s boom, have shown no interest in the segment. The reason is simple; the size of the loans is too small for commercial banks given their current operating models. Banks’ screening cost is too large for a loan where a ticket mostly ranges from Rs10,000-100,000. Rather, it seems to have been taken up fast by informal lenders. In short, banks only cater to consumer loans for upper middle class and elite class; for masses, it is left to community lenders or product dealers. Motorcycles are the prime examples: bike sales increased from 2 million to over 2 million in a little over a decade. Today, anyone can get a bike at monthly installment of Rs. 5,000. Same is the story of home appliances. Don’t act surprised when your service staff at home tells you they are buying a washing machine, a deep freezer, a mobile phone, or other

200 150 100

high, buyers don’t concern themselves with the amount of interest they pay, rather, they see the utility of goods they buy. Anecdotal evidences suggest that informal lending rates of consumer durables range from 40-70 percent, and community or guarantor ties are too strong for anyone to dare to willfully default.

50 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 Other persona l loans

Mortgage loans

Auto loans

Credit cards segment. One bank is giving consumer loans for durables and vehicles to existing borrowers; and

came good news as consumer-based auto lending was back on the track amid low interest rates: Back during the boom of 2000s, banks were inexperienced; there was no credit bureau to check the unnecessary borrower credit risk; too many cases were too leniently cleared. Many consumers who could not afford were driving high-end cars and had cash lines and numerous credit cards in pockets to spend here and there. Since there was no credit data sharing at that

And for those who are deprived of credit cards, days are not far when e-commerce

Ali Khizar is the Head of Research at Business Recorder. He can be reached at ali.khizar@br-mail.com

Retail Review 2017 | 9

RETAIL

ECONOMY in numbers

OVERVIEW

with a handful of employees, is expected to have grown since.

Wholesale and retail trade' is the conduit for a consumption economy. Its share in Pakistan's subpar average of 2.21% since FY08. the sectoral growth rate has lately improved, standing at 6.82% in FY17. Pakistan has a vast retail footprint. Including wholesale and retail outlets, hotels and restaurants, the sector had a majority representation in the roughly 3 million business establishments across the country (2005). At least half of all business entities in all regions were related to the retail economy. The number of these micro-enterprises, which are mostly owned by individuals

Percentage share of Wholesale & Retail Trade and Restaurants & Hotels (WRTRH) sector in total establishments across Pakistan

remains concentrated in top two quintiles. Mostly informal, employment in the sector, whether formal or informal, is heavily skewed towards men. Its share in total employment has remained almost the same in the last decade and a half. Retail economy seems to have undergone a shift in the decade ending FY15. Within the sectoral employment pie, the share of 'self-employed' and 'contributing family worker' has declined by 21 percentage points, which was scooped up by 'employee' and 'employers'. This could point towards the growing trend towards modern retail (super- and hyper-markets), moving away from the proverbial mom-and-pop stores, corner shops, kiosks, etc. In Pakistan, as the data suggests, we have 'pop and sons' stores rather than 'mom-and-pop'.

54.31%

FY15 FY02 14.64 14.85

69% 59%

52.96%

Wholesale/retail sector's share in formal employment (%)

Percentage share of (WRTRH) sector in provinces as % of total establishments in the province

50%

54%

14.32 14.58

50%

51.10%

0.32 0.27 Pakistan

Rural

Urban

Source: PBS Economic Census 2005

Punjab

Sindh

Balochistan Islamabad

Source: PBS Economic Census 2005

Establishments in (WRTRH) sector by ownership 98%

Total

Male

Female

Source: PBS Labor Force Surveys

Establishments in (WRTRH) sector by number of people employed

Wholesale/retail sector's share in employment by province in FY15 (%) Share in formal employment Share in informal employment

99.04%

41.05

38.54 32.63

30.21

15.51 2% Individual

Partnership

0.01%

0.03%

Society

Private Corporation

Source: PBS Economic Census 2005

10 | Retail Review 2017

13.85

15.82

16.64

0.01% Public corporation/ Govt

1 to 5

0.84%

0.12%

0.003%

6 to 10

11 to 50

50 plus

Source: PBS Economic Census 2005

Punjab

Source: PBS Labor Force Surveys

Sindh

Balochistan

Percentage distribution of employment in wholesale & retail trade by employment type FY16

Percentage distribution of employment in wholesale & retail trade by employment type Employers Self employed Contributing family worker

FY05

Percentage distribution of employd persons in wholesale & retail trade -by income quintile

Employee

FY16 FY07

70%

35%

60%

30%

50%

25%

40%

20%

30%

15%

20%

10%

10% 5% FY16

Employers

Selfemployed

Contributing family worker

Employee

FY05

FY16

Sindh

FY05

FY16

FY05

Balochistan

1st

Source: HIES FY15 &FY05

Percentage distribution of employd persons in wholesale & retail trade by income quintile 2nd

FY16

Punjab

Source: HIES FY15 &FY05

1st

FY05

4th

3rd

4th

5th

Source: HIES FY15 &FY05

Wholesale/retail sector's share in GDP & sectoral growth rate (%) Share in GDP (LHS)

5th

2nd

Wholesale/retail sector's share in informal employment (%)

Sectoral GDP growth rate (RHS)

FY15

FY02

35% -

30% 25% 20%

20.5

19.5

17.5

Source: HIES FY15 &FY05

Urban

Rural

Punjab

Sindh

Pakistan

60,000

50,000

40,000

30,000

20,000

10,000

Overall

1st

2nd

3rd

4th

5th

Urban

Overall

Rural

1st

Punjab

2nd

3rd

Balochistan

4th

Source: HIES 2016

Share of clothing & footwear in avg. monthly consumption expenditures (%)

Share of restaurants & hotels in avg. monthly consumption expenditures (%)

Pakistan

Urban

Rural

Punjab

Sindh

Balochistan

Pakistan 12

Urban

Rural

Punjab

Sindh

5th

Balochistan

2 0

FY17

FY16

FY15

FY14

FY13

FY12

Sindh

Source: HIES 2016

Total

Source: HIES 2016

1st

2nd

3rd

4th

5th

Total

Source: HIES 2016

1st

2nd

Total

Male

Female

CONSUMPTION BASKET

Share of food & beverages in avg. monthly consumption expenditures (%)

Balochistan

0.75 0.66

Source: PBS Labor Force Surveys

Source: Various Economic Survey

Average monthly consumption expenditures (In rupees, by quintile, FY16) Pakistan

-4

FY11

Balochistan

16.5

FY10

FY07

FY09

FY16

FY08

FY07

Sindh

FY16

FY06

Punjab

FY07

-2 FY05

FY16

17 FY04

FY07

FY03

FY16

FY02

33.36 33.3

18.5

10%

34.1 33.96

15%

18.5

3rd

4th

5th

Average monthly consumption expenditures (AMCE) in Pakistan have grown from Rs9,121 in FY05 to Rs32,578 in FY16. That's an average growth rate (CAGR) of 12%. Both urban and rural Pakistan, and all the four provinces, show similar growth rate in this period. Naturally, the reading increases as one moves up the quintiles*, with a drastic Focusing on the retail economy, some interesting observations are gleaned from the HIES FY16: i) Expenditure on food and beverages declines along the quintiles. This pattern is also consistent across regions (urban and rural) and provinces. On account of their small budgets, low-income households end up spending close to half of their AMCE on food items. ii) The prosperous Pakistanis may be spending a comparatively lower portion of their monthly budget on food items, but when it comes to retaurants and hotels, they're outdoing their not-so-rich counterparts. The trend in the graph shows that percentage monthly spending on hotels and restaurants rises as one moves to higher quintiles. This trend is cosistent across regions and provinces. iii) Normally, one would expect the high-income folks to spend more on clothing & footwear. But just as on food and beverages, the percentage monthly spending on this account is higher in bottom quintiles compared to upper quintiles. The more well-to-do may well be spending more on such articles, but due to their high overall budget, that spending comes in lower in percentage terms. iv) Question arises, if the well-heeled are indeed spending just about a third of their AMCE on food and apparel, what really dominates their spending? The rest of the pie is mostly consumed by housing, transport & communication, education, recreation & culture. *Quintiles divide the population into five equal parts. The top income quintile resprsents 20 percent of the population with the highest income, whereas the bottom quintille represents 20 percent of the population with the lowest income.

Retail Review 2017 | 11

Shifting preferences? If domestic production is any guide, consumer habits may be changing in Pakistan. A few examples are provided below: 1) A preference is emerging for cooking oil over vegetable ghee. Between FY06 and FY16, production of cooking oil grew at a CAGR of 4%, compared to just 0.8% for vegetable ghee. Between the two, cooking oil is generally viewed as the less harmful alternative, and is more prevalent in urban areas. 2) Between tea and tobacco, two of the nation's major addictions, tea seems to be winning. During the last dceade, blended tea production saw a CAGR of 8%, whereas cigarette production underwent negative CAGR of roughly 2 percent. Does this mean Pakistanis are smoking less now? Not necessarily, given the growing incidence of informal trade of duty-evading local brands targeting the low-income segment. 3) The thirst for cold beverages is growing at a phenomenal rate. For instance, soft drinks production underwent a CAGR of 11% between FY06 and FY16. Whereas juices, syrups and squashes grew at a CAGR of 7%. Both these beverage segments comprehensively beat both overall LSM growth and GDP growth in this period. (Please find detailed analyses of cooking oil, tea, and soft drinks consumption in subsequent sections)

3000

25%

2500

15%

2000

-5%

1000

-15%

500 0

FY FY FY FY FY FY FY FY FY FY FY 06 07 08 09 10 11 12 13 14 15 16

FY 07

FY 08

FY 09

FY 10

FY 11

80 70 60 50 40 30 20 10 0

FY 12

FY 13

FY 14

-5%

FY 16

FY 15

160 140 120 100 80 60 40 20 0

5% 0% -5% -10%

FY 06

FY 07

FY 08

FY 09

Fixed Investment

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

-15%

0 -2

FY15 FY09 FY10

FY11

FY12

FY13

FY14

FY07

FY08

15 FY09

FY10

FY09

FY 06

-5

FY12

FY13

FY14

FY15

FY16

0 -5

-15

-10

12 | Retail Review 2017

FY 08

-5%

FY 09

FY 10

FY 11

FY 12

FY 13

FY 14

FY 15

FY 16

-5%

Credit to the Retail Economy

FY12 FY11

FY13

FY15

FY16

positive mood for the retail sector. Bulk of the credit offtake has been necessitated by working capital needs. (except for textiles), hence lower

FY08

FY14 FY10

FY13 FY11

FY07

Source: SBP

Private sector credit to major retail sectors - food & beverages, readymade garments, wholesale trade and retail trade - has followed an erratic trend over offtake visibly improved for traditionally large borrowers like food & beverages and retail trade. An improving GDP per

-10

Source: SBP

FY 07

Fixed Investment

FY11

FY 16

FY14 FY10

Working Capital 25

FY08

FY 15

15%

-6

FY07

FY 14

25%

Net credit off-takeby firms engaged in retail trade (Rs in bn)

FY 13

FY FY FY FY FY FY FY FY FY FY FY 06 07 08 09 10 11 12 13 14 15 16

Net credit off-takeby firms engaged in domestic wholesale (Rs in bn)

FY 12

-8

Fixed Investment

FY 11

15%

-20

Working Capital

FY 10

25%

-4 FY16

FY 09

35%

Fixed Investment

FY 08

Net credit off-takeby firms engaged in manufacturing of wearing apparel/ready made gaments (Rs in bn) Working Capital

FY 07

Tea blended - in 000 MT (LHS) Growth in tea production (%) Overall LSM growth (%) 10%

FY08

FY 06

Cigarettes - sticks in bn (LHS) Growth in cigarette production (%) Overall LSM growth (%)

FY07

400 350 300 250 200 150 100 50 0

15%

FY 06

Juices, syrups & squashes - litres in mn (LHS) Growth in juices, syrups & squashes' production (%) Overall LSM growth (%) 25%

100

-25%

Cooking oil - in 000 MT (LHS) Growth in cooking oil production (%) Overall LSM growth (%) 400 350 300 250 200 150 100 50 0

1400 1200 1000 800 600 400 200 0

1500

Net credit off-takeby firms engaged in manufacturing of food productsand beverages (Rs in bn) Working Capital

Vegetable ghee - litres in mn (LHS) Growth in vegetable ghee production (%) Overall LSM growth (%)

Soft drinks - litres in mn (LHS) Growth in soft drink production (%) Overall LSM growth (%)

FY09

FY12

FY15

FY16

capital formation. Presence of a large informal retail sector suggests formal banking channels alone are not the source of credit in this sector.

Financial health of listed firms with a retail focus Rafhan, Gillette, and Pakistan Tobacco.

Foods, Pakistan Tobacco, Philip Morris, Colgate Palmolive, Mitchels, Shezan, and Rafhan have more than doubled their topline. The growth has been more profound in the case of food companies.

FOOD COMPANIES

JAMS / JELLIES

Engro Foods Nestle Foods Unilever Foods National Foods

TOPLINE GROWTH

160%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

140% 120% 100% 80% 60% 40% 20% 0% -20%

STOCK STOCK PERFORMANCE PERFORMANCE

GROSS GROSSMARGIN MARGIN

SOURCE: COMPANY ACCOUNTS

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Rafhan

Mitchels

index between July 2016 and June 2017. Topline growth in consumer segments has tapered off lately, on the back of generally low commodity prices and high-base effect.

HOUSEHOLD GOODS Gillette

Shezan

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

30% 25% 20% 15%

Philip Morris

10%

25%

Pakistan Tobacco

2009 2010 2011

2012 2013 2014 2015 2016

20% 15% 10% 5% 0% -5% -10% SOURCE: COMPANY ACCOUNTS

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

SOURCE: COMPANY ACCOUNTS

150

250

140

130

120

110

100

90 80

80 70 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 16 16 16 16 16 16 17 17 17 17 17 17

70 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 16 16 16 16 16 16 17 17 17 17 17 17

200 180 160 140 120 100 80 60 40 20 0 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 16 16 16 16 16 16 17 17 17 17 17 17

SOURCE: KHISTOCKS

KSE-100

200 150

SOURCE: KHISTOCKS

Trends in FDI in key consumer related sectors ($ in mn) Food

Beverages

0 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 16 16 16 16 16 16 17 17 17 17 17 17

KSE-100

SOURCE: KHISTOCKS

KSE-100

Trends in FDI in key consumer related sectors ($ in mn)

Food Packaging

Cosmetics

600

Household Electronics

Trade

200

500 150 400 300

100

200 50 100 0

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

0 FY02

-100

TOBACCO FIRMS

Zulfiqar Industries

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% SOURCE: COMPANY ACCOUNTS

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% SOURCE: COMPANY ACCOUNTS

35%

Colgate Palmolive

SOURCE: KHISTOCKS

KSE-100

FDI in the Retail Economy Despite Pakistan's large consumer base, FDI in retail-facing sectors has remained subdued over the years. Between FY02 and FY16, Pakistan attracted net FDI totalling $32 billion. Within that, key retail sectors mainly food, beverages, food packaging, consumer electronics, cosmetics, and trade - received $2.6 billion, or just 8% of the country's total net FDI in that period. The retail sector has made its presence felt lately. Two major transactions happened during FY17 that provided a boost to the net

-50

Retail Review 2017 | 13

Huma Sattar

Pakistan and The tea titans Globally, tea is grown in over 35 countries but is largely concentrated amongst China, India and Kenya which continue to out-produce their domestic demand, currently accounting for 81 percent of total world production. Kenya is the biggest exporter of tea – mainly black (25%), followed by China – mainly green (18%), Sri Lanka (17%) and India (13%). Indonesia’s share has been sliding as tea growers are switching to food and other cash crops, such as palm oil and Arabica coffee.

lobally, there is a rivalry between the bean and the leaf, and if you believe The Economist , the beans are winning. There is no doubt that coffee culture has picked up in Pakistan as well, much like in the western world where coffee seems to be staple now. But old habits die hard and if nothing else, the British left us with an insatiable desire for a beverage that people cannot start their day without. In fact, with one of the highest tea consumption across the world, data show that only 0.1 percent of the population in Pakistan would prefer coffee over tea . In terms of consumption, again China and India are on the top, but when per capita consumption is considered, Turkey, Afghanistan, Libya, the UK, Morocco and Ireland are on the top. There is varying data on consumption and consumption per capita for Pakistan. Local sources put the consumption at 230,000 tons while international sources put it around 170,000 tons probably going by Pakistan’s formal imports of tea since production is negligible. Sources say this gap is met by smuggled tea. The range for per capita should lie between 0.8 to 1.1 kg per capita which puts Pakistan in the top 10 countries consuming tea. In production, not so much. According to the Pakistan Agricultural Research Council, there are areas in KP and AJK that can be ideal for tea plantation but farmers have not found adequate incentives to grow tea locally against crops like wheat which give a guaranteed return. According to a 2013 local media report, in 1992, more than 600 acres of land - in Mansehra, Balakot, Battagram and Swat - were planted with tea, which later fell to only 50-60 acres suitable for tea plantation. Globally, tea is grown in over 35 countries but is largely concentrated amongst China, India and Kenya which continue to out-produce their domestic demand, currently accounting for 81 percent of total world production. Kenya is the biggest exporter of tea – mainly black (25%), followed by China – mainly green (18%), Sri Lanka (17%) and India (13%). Indonesia’s share has been sliding as tea growers are switching to food and other cash crops, such as palm oil and Arabica coffee.

600

Tea ($mn)-LHS

Black tea ($mn)-LHS

Quantity (000 tons)-RHS

200 180

500

160 140

400

120 300

100 80

200

60 40

100

20 0

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: ITC Trade Map/ PBS

14 | Retail Review 2017

Thousand s

Pakistan's imports of tea

Tea market in Pakistan

Before the fall of Dhaka, Pakistan was the seventh-largest tea producing country in the world. Now, Pakistan does not even stand in the top 20s, and is dependent on imported tea. Tracing back the history of tea brands in Pakistan, in the early 60s, the dominant players were mostly multinationals and only two local brands, Ispahani and Tapal tea were sold. Soon Lipton tea came which captured a lion’s share of the market. The market is fairly divided between branded (55%) and loose tea (45%, in which about 10-15% is smuggled). But better packaging, better taste, and more variety coupled with potential gains from advertising and product placement has shifted the share toward packaged tea – approximately at a ratio of 60:40. Importers either import tea that is sold in bulk to retailers, or brands import tea that is blended and packaged for sale thereon. There is a contention on market share but only the two—Tapal and Lipton—are really came together in 2003 after the local Lakson Group joined hands with Tata tea of India, and now

Global production vs crop for exports Production (bn kgs)-RHS

Crop available for Exports-LHS

50%

45% 5

40% 35%

30% 25%

20% 2

15% 10%

5% 0%

0 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

captures about 6-8 percent of the market. Other prominent brands include Qarshi and Brooke Bond, also a Unilever product. to-go tea shares are also picking up.

What’s in a name?

Do people follow the taste or the name? Apparently, tea brands believe better marketing can snag a greater market share but numbers do not corroborate that. It seems marketing and branding

has had little effect on what consumers preferred. It comes down to tea variants, different products, and taste, which is why market share has more or less remained the same for most tea makers. Tapal has done well with more variants (Danedar, Family Mixture) but Lipton has maintained its share due to strong brand loyalty. Despite that, competitive advertising took the country’s social media by storm last year when Lipton challenged Tapal head-on in an advertisement. But like the eternal argument over Pepsi vs. Coke, it would seem some people simply prefer the taste of Danedar over Lipton or vice versa. Such consumer brands compete on taste and variety, and to a great extent, on history. If a consumer has used Tapal all her life, she won’t shift brands unless something drastic happens to Tapal’s taste. An FAO study also argues that prices and incomes have a small impact on consumption of tea and for products that have a relatively inelastic demand. This implies that marketing efforts should focus on visibility, retailing, and demographic differences in consumers. Tea brands can play around with the idea of a “new fad”, the cool factor to appeal to millennials or new consumers. If the world-famous TV show Mad Men taught us anything, it was that advertising for products that have an inelastic demand do not try to shift consumers, instead one should simply bring new of green tea has worked which can compete with something as subjective as “taste”. Meanwhile, those consumers who are more price sensitive than others are the real challenge. And each other, but the unbranded loose tea industry, which is cheaper and has maintained a strong presence in the market against all odds.

quality of its products. However, when nearly half of the tea industry is captured by unbranded loose tea available at retailers by thousands of undocumented suppliers, there is no quality control or regulation. This means much of the consumption in Pakistan is of poor quality tea. This is exacerbated by a rampant smuggling of tea. Traders claim that much of the smuggled tea is coming through Afghanistan facilitated by the Afghan Pakistan Transit Trade Agreement (APTTA). This illicit trade report by the FBR – as reported by a local newspaper – losses to revenue due to smuggling were about $2.3 billion p.a. from a variety of products including tea.

The Pakistan Tea Association has been rallying for a lower import duty on tea to curb smuggling, currently 10 percent but which used to be much higher. Together with a 17 percent GST, the price point advantage of smuggled tea is high. While import deregulation could work, it has to go hand in hand with quality controls starting from the custom points.

The Pakistan Standards and Quality Control Association (PSQCA) must play a strong mechanisms especially for goods coming through the land borders. Without imposing regulations on unbranded tea and curtailing smuggling, this widely popular consumer item will continue to affect poor households the most, not to mention the national exchequer.

Poor regulation hits hard

Good companies behind good brands have quality and standards in place that they adhere to. Tapal for instance has an

Huma Sattar is a Research Consultant at Business Recorder. She can be reached at huma.sattar@br-mail.com

Retail Review 2017 | 15

Ali Khizar

Milk market:

Riddled with inefficiencies

producer of milk; yet there is a growing tendency of importing animals for producing milk for domestic consumption whilst virtually no milk product is exported from the country. Pakistan’s mass market is price-sensitive. Since the loose milk is sold at 15-25 percent discount to packaged milk whilst small dairy farmers/suppliers are found everywhere in Punjab and Sindh, loose milk is the choice of the majority, having over 90 percent of the drinking milk market. But it’s not a healthy option as there are no rules and regulations or quality control over loose milk. The gawala model is generally associated with adulteration and lack of hygiene. The food control authorities must take notice and pass a minimum pasteurization law. The process has started in Punjab, with implementation of the law starting in Lahore. Yet, even without any regulatory support, the pie for processed milk is expanding. The dairy market potential in Pakistan is evident in the fact that the single biggest FDI for the past many years was made by FrieslandCampina, which bought 51 percent shares of Engro Foods at $446.8 million in December 2016. A decade ago, Nestle used to be the only big player in this market, with its MilkPak brand synonymous to packaged milk. But today the story is different. Back in 2006, Engro Foods ventured into the milk business and it never looked back. Its growth is remarkable, but it did not hurt Nestle much, rather the pie expanded, and today both companies’ market shares are identical (35% each in packaged milk). Lately, another big player Fauji Foundation has entered into the market by acquiring a sick company (Noon Pakistan) and having revived the Nurpur brand (2% market share). Fauji Foundation is a big group; although it’s hard to compete with two global dairy giants, the scope in the processed milk market is humongous. Thus, with increasing awareness of urban middle-class, the processed milk share ought to grow. Within packaged milk, there is no ambiguity that pasteurized milk has better nutrition value than the UHT milk. But the latter is driving the market: it sets the prices, which are followed by pasteurized and loose-milk sellers with appropriate discounts.

Cow milk sales in Pakistan Value (Rs - bn) (RHS)

Volume ('000 tons)

Data source: Euromonitor International 1,700

250

ast

ec For 200

1,300

150 900 100

20 21

20 20

20 19

20 18

20 17

20 16

20 15

20 14

20 13

20 12

20 11

500

Pasteurized vs. UHT milk

The market is mainly captured by the UHT segment with both MNCs having established brands. Out of the Rs184 billion sale of packaged drinking milk in 2016, UHT had over 90 percent share. But still, processed milk market is small with around 5 percent of the country’s total milk consumption. Once the pasteurization is made mandatory, the packaged milk market might see an exponential growth. Yes, UHT would remain a bigger market because of its higher shelf life (6-9 months muscles of two global giants operating in it. Big local groups have opened up dairy farms based on imported animals from Australia, New Zealand, and the Netherlands just to supply milk to Nestle and Engro Foods. Nishat is the biggest player in the factor market with farm size of 165 acres and 3,200 milking animals with a 100,000 liters daily production. The farm’s average daily yield per animal stands around 31 liters, which is much higher than the domestic animals’ average daily yield of 7-8 liters. Therefore, the economics of imported animals make sense. - Nishat has plans to come up with its own brand by 2018.

16 | Retail Review 2017

The gawala model is generally associated with adulteration and lack of hygiene. The food control authorities must take notice and pass a minimum pasteurization law. The process has started in Punjab, with implementation of the law starting in Lahore.

Yet, even without any regulatory support, the pie for processed milk is expanding. The dairy market potential in Pakistan is evident in the fact that the single biggest FDI for the past many years was made by FrieslandCampina, which bought 51 percent shares of Engro Foods at $446.8 million in December 2016.

However, the UHT milk processing is following from farms across north and south regions and Engro Foods Nestle Pakistan Haleeb Foods bring to their processing plants. Nestle has two processing plants while Engro Foods has one. At Data source: Euromonitor International the plants, the produce is processed, packaged and then supplied back to retail shops across the country. The double transportation – from milk collection to plants and then from plants 2016 34.8 34.7

Shakarganj Food

Others

14.1

3.8

12.6

model.

The usual practice in Europe and Australia is to have small brands working in 2015 usually changes. There are cooperative models working with collecting milk from a pocket, processing it there and then retailing it in the same 2014 area. And mostly pasteurized milk (better quality) is being sold. In that way transportation cost is reduced to less than half, so the consumers get better pricing. Milk prices in Pakistan are at 2013 least 20-30 percent higher than those in Europe, partially because of high food subsidies in the EU

34.6

14.8

3.7

12.3

34.1

34.2

15.7

3.6

12.4

34.0

34.2

16.6

3.7

11.5

Pakistan. The packaging cost of UHT (Rs15 for a 2012 33.5 33.9 17.3 3.5 11.8 liter pack) is higher than that of pasteurized milk (Rs5-12 per liter). increased at a CAGR of 8 percent during 2002But there are reasons why the European catering small market (within a 50 mile radius), the investment for energy provision is probably 12 and is becoming a major export product. The model cannot be replicated in Pakistan. One too high. Also, globally, in countries with a hot growth in volumes in the processed sector is reason until the recent past was the energy weather, UHT is dominant, even in the US, France, similar in Pakistan. According to Euromonitor, shortfall in the country; luckily that is being the milk product sales increased at a CAGR of plugged day by day. Pasteurized milk has a short and Turkey. Anyhow, in the absence of supportive 8 percent during 2009-16 from 723,000 tons to life (5-7 days) and it needs to be chilled. By virtue government policies for the sector, both MNCs in 1.3 million tons. Given a minuscule market share, of this, the model cannot be scaled up to the the UHT segment facilitate small dairy farmers to the potential, especially in pasteurized market, is whole country with one or two plants. And for huge. That is the story of drinking milk. With shifting patterns of urban middle class consumption, the other dairy products also Olper's MilkPak Haleeb Nido Good Milk Others have potential to grow. Currently, mass market product – the tea whitener – dominates the ‘other Data source: Euromonitor International dairy products’. The market size is estimated at Rs28 billion with a lion’s share of Engro Foods. Its Tarang brand (71% share) is the star in the segment followed by Haleeb’s Tea Max (12% 21.5 21.6 21.8 22.0 share) and Nestle’s Everyday (10% share). But there is nothing much for the 3.8 3.7 3.6 3.7

Milk products: Market share by brand (%)

5 10.4

5.1 10.2

5.1 9.9

5.1 9.7

26.9

27.2

27.3

32.2

32.5

32.6

2013

2014

2015

2016

improve the yields, have subsidized loan schemes to import animals, and ensure to buy milk at the farm gate; otherwise the wastage by small farmers is too high. Thus, the factor market would grow further. Concurrently, with increasing consumer awareness of urban middle class, more players would build brands. These brands would be mostly in pasteurized or in better quality fresh milk. Existing few players in the segment are Prema and Anhar in Lahore and Dayfresh in Karachi. Lately, Lucky Foods has also entered into fresh milk retailing in Karachi. Pakistan can learn from Turkey where pasteurization of milk and cream became mandatory in early 2000s. And since then, loose milk consumption declined from 70 percent (2002) to 30 percent (2012) whilst milk production

The cheese market size is around Rs4 billion and out of that decent share is of imported cheese while Adam is the biggest local brand. The formal yogurt market is even below a billion rupees. And there is no awareness of sophisticated products like soy, rice, oat, almond, etc. today.

Outlook

UHT milk may keep the lion’s share in the long term. Since pasteurized milk is of better quality, it should grow as awareness increases. So its main market may develop in big cities and among the also in order. The market for processed milk may also increase now that the Punjab government is considering passing a minimum pasteurization compete in the UHT market dominated by two pasteurized market, operating in small pockets.

Ali Khizar is the Head of Research at Business Recorder. He can be reached at ali.khizar@br-mail.com

Retail Review 2017 | 17

Syed Tauqeer Hassan

Carbonated drinks:

On a roll When it comes to the carbonated soft drinks (CSD) industry, it is a good time to be in Pakistan. The country which has been ranked amongst the top ten countries when it comes to sugar consumption on a per capita basis has burgeoning demand for The country has been experiencing double-digit growth when it comes to soft drink production in the past couple of years. Even as existing manufacturers bolster production and implement aggressive marketing strategies, emerging smaller players are poised to take advantage of lower income rural segments.

DEMAND DRIVERS

The warm and humid weather of the country ensures a constant demand for soft drinks. With the recent climatic changes, summers have grown longer and harsher while winters have shortened in length. Demographics play an important role. Pakistan has the world’s sixth-largest population, with 55 percent of that below 25 years of age. This, coupled with rising middle class incomes and increased consumer spending, continues to fuel demand for soft drinks.

MARKET SIZE AND PRODUCT OFFERING

According to Euromonitor, the carbonated soft drinks market in 2016 stood at Rs90.5 billion with 889 million litres of volume. The majority of sales were “off-trade” (grocery, independent retail etc.) as opposed to “on-trade” (restaurants, hotels etc.) The lion’s share is enjoyed by brands such as Pepsi, Mountain Dew, Mirinda and 7Up by PepsiCo and Coca-Cola respectively, Sprite, and Fanta by Coke. Both companies offer diet substitutes for these such as Diet Pepsi and Sprite Zero for health-conscious consumers. The highest grossing brand in the country is Mountain Dew and Pakistan has been the largest market in the world for the drink after the United States for PepsiCo.

they have become to be known, have resulted in Coke making

Value (Rs - bn) (RHS)

coming down to 55-60 percent in recent years. Pakistan with marketing expenditures of billions of rupees over the past few years. It has also acquired its Pakistan bottling operations after a prolonged period of quality-control problems with local franchisees. The strategic shift is providing promising results: Coca-Cola now enjoys roughly 37 percent of the market share in Pakistan. Coke had a capacity of 332 million unit cases with capacity utilisation rate at 89 percent for 2016. In fact, Pakistan led the growth in international operations for Coca-Cola with a whopping 18.6 percent sales volume grow th whereas Pepsi enjoyed high single -digit grow th. The success could be attributable to advertising campaigns and new product launches, such as Coke Zero and new Fanta

1200

But even as the pie grows larger, smaller players are also gaining ground, particularly in rural and semi-urban areas where demand is more price-elastic. Gourmet Cola introduced by Gourmet Pakistan several years ago has gained presence in Punjab. Local companies like Amrat Beverages and Shandy Cola mostly cater to the price-sensitive consumers in rural areas.

600

COLA-WARS IN FULL SWING

Back in the 1990s PepsiCo used instrumental sponsorship deals particularly of the Pakistan cricket team to cement their brand loyalty amongst the primarily youth-driven population. But characteristic of the viciously fought “cola-wars”, Coke’s master stroke came in the form of Coke Studio which provides local vocalists and musicians a platform and has gained immense popularity. Both companies have also partnered with all the major restaurant franchises including McDonald’s, KFC, Dominos, Pizza Hut and Hardees. From paan shops to high-end grocery stores, MARKET STRUCTURE: COKE GAINING GROUND the aggressive marketing strategy employed by the cola-giants As in the majority of countries around the globe, PepsiCo and Coca- is clearly visible. Another strategy has been to endorse celebrities and Cola dominate the local market as well. Smaller players do exist cricketers to promote their brands with an estimated 16 percent of but mostly cater to the low-income segment of the rural areas. Till the start of the new millennium, PepsiCo held almost 80 percent all air-time booked by beverage companies. share of the carbonated drinks business but the “Cola-Wars” as

EXPANSION PROSPECTS

Last year saw Coke inaugurate its new plant in Multan established with an investment of $70 million with an annual production capacity of 300 million litres. Coca Cola International has a total of 5 plants in Pakistan and is looking to invest considerably more to utilise the untapped market potential. The company is said to have already invested close to half a billion dollars on plant up-gradations during the past year. It has planned to invest another $200 million in green-field projects to increase Coca-Cola's production and distribution capacity in Pakistan. PepsiCo, on the other hand, continues to enjoy market leadership in the snacks and beverage categories, and is the largest FMCG company in Pakistan, in terms of retail sales. The company and its bottling partners combined are among the top five revenue generators for the country, and have invested over half a billion dollars in new industrial infrastructure and upgradation over the last five years. Furthermore, it is constructing a new snacks manufacturing facility in light of growing demand for high quality snacks. According to a Korean news source, Lotte Group is in negotiation with one of PepsiCo’s bottlers in Pakistan. It is believed the new alliance will build on PepsiCo’s existing position in the market.

18 | Retail Review 2017

Carbonate sales in Pakistan Volume (mn liters)

150

125

t as ec r Fo

100

1000

75 800 50

11 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 20

Data source: Euromonitor International

REGULATORY AND TAXATION ISSUES

According to multiple sources, the two main challenges being faced by the soft drinks industry are intellectual property rights (IPR) infringements and the issue of imposition of Federal Excise Duty (FED) along with the sales tax. However, the corporate tax rate has been reduced in FY18 to 30 percent which seems a positive step for the industry. However, a major challenge comes in the form of regulatory action taken by the Punjab Food Authority (PFA) to ban the sale of carbonated and energy drinks in school premises. The ban includes both public and private schools in Lahore and extends to food stalls within a 100-meter radius around schools. and fourteen years of age, this is a crucial segment for future CSD term if the ban persists and spreads to other cities and regions across Pakistan.

OUTLOOK

Pakistan’s per-capita consumption of carbonated drinks still lags behind those of Turkey, Iraq, Jordan, and the majority of Central Asian countries. However, as the population increases, coupled with rapid urbanization and a rise in middle class, the country is poised to become an even bigger market for carbonated drinks. With the market expected to grow to Rs130 billion by 2022, PepsiCo and Coke will be major beneficiaries, but don’t count out the low-end products from gaining more market share.

Syed Tauqeer Hassan is a Research Analyst at Business Recorder. He can be reached at tauqeer.hassan@br-mail.com

Muhammad Bilal Moon

akistan is a nation of food lovers. Some can even argue that having food is the number one form of entertainment in the country. We have different types of food and dishes associated with provinces like biryani in Sindh, pulao in Khyber Pakhtunkhwa, sajji in Balochistan and the ever quoted siri-paye in Punjab. At the heart of all these dishes are different spices and condiments which make them so mouth-watering. To prepare all these cuisines, the main ingredients which are the veggies and spices need to be acquired from different sources. The arid climate in the country restricts production of some spices such as black pepper, cardamom, cinnamon, ginger and cumin seeds, which are imported. On the other hand, onions, garlic, chillies, coriander, and turmeric are home grown. Upper Punjab and interior Sindh are major sources of these products.

PLAIN OR MIXED?

Spices can be further sub-divided into two segments. Plain spices and spice recipe mixes. Plain spices are the main revenue drivers of the category and according to industry sources, it is about 75 percent of the entire spice market. Within the plain segment there are numerous players across the country. Both branded and unbranded spices compete in this space with National Foods and Shan Foods being the prominent players in branded spices. Barriers to entry into plain spices are very low and this keeps the prices in check. There spices. Modern grocery stores and super marts also stock in plain spices with no branding which limits the sales of branded spices. According to industry estimates, annual growth of plain spices segment is about 10 percent. In recipe mixes there are two prominent players - National Foods and Shan Foods. As per industry estimates, both of these collectively control almost 90 percent of the market, while Mehran Foods has about 5 percent market share. Moreover, the recipe mixes segment is growing at more than 10 percent per annum, almost double the pace of plain spices. Rapid urbanization and an overall change in lifestyle are major reasons for growth in this segment. Many people living in urban centres Over the years, the quality of these recipe mixes has improved greatly with both Shan exporting markets. Brand loyalty is very high when using these products and consumers develop Regionally speaking, National Foods is mostly preferred in urban Punjab because of its slightly mild taste, while the spicier Shan recipe mixes have better presence in urban Sindh. Top recipe mixes are same for both, which are briyani, qorma, achaar, and karahi mix. The growth in this segment can be gauged by the local sales of National Foods, which from Rs8.8 billion in 2012 have jumped to almost Rs18 billion in 2016. The revenue growth has come from recipe mixes and also sauces such as ketchup and mayonnaise, which are mostly consumed with fried food. Sales of sauces usually goes up in Ramazan while sales of recipe mixes slow down in the holy month as people consume less whole-meals and prefer fried items during iftar.

EXPORTING THE CULTURE

In 2013, Pakistanâ&#x20AC;&#x2122;s export of spices was almost equal to its imports but since then the import number has just ballooned and is now twice the size of exports. The major reason for this trend is the growth in local demand, which is raking in local production and driving imports. In the export market, Shan has a better market share compared to National, while the latter is trying to increase its capacity to cater both local and export market. According to National Foods company accounts, it had exports of about Rs800 million in 2012, rising to Rs 1.4 billion in the Middle East countries as compared to Shan and National. Mehranâ&#x20AC;&#x2122;s focus over the years has been the export market and only recently it has started to concentrate on the local market. Saudi Arabia is the biggest importer of spices from Pakistan, followed by the USA, UAE and the UK. Consumers abroad are not only those with roots in Pakistan. Recipe mixes from Pakistan are famous among Indian and Bangladeshi communities as well.

OUTLOOK

Spices are an integral part of Pakistanâ&#x20AC;&#x2122;s food culture and with the population dynamics as they are, the demand for food and related products is only going to go up. The trend, however, is shifting towards packaged food and branded mixed spices as urbanization-related factors take over and hygiene standards improve. To utilize the full impact of demographics, the main players in the industry would need to keep spending on advertising as more awareness would have a direct impact on sales. Apart from conventional marketing, digital space needs to be used effectively as well to target not only the local adults but also those living outside Pakistan. The South Asian community living in various parts of the world holds great potential for local players to get their exports going. To cater to their needs, different product varieties can be introduced to expand the brand. Muhammad Bilal Moon is a Research Analyst at Business Recorder. He can be reached at bilal.moon@br-mail.com

Retail Review 2017 | 19

Huma Sattar

Edible oil: It’s an oily proposition

ere’s something ironic. Pakistan is largely an agrarian economy with a burgeoning consumption of edible oil. This should have equated to a scenario where the

of domestic production. But that is not the case. Pakistan is the fourth-largest importer of edible oil, after China, India and the EU, and imports over75-80 percent of its edible soybean seeds and canola. The demand for edible oil has expanded over the years owing to multiple reasons: the growth in the population, the rise of the fast-food and restaurant culture, urbanization, and an increase in incomes. Because a large portion is imported, prices for edible oil have also surged over the years. Of the oil that is imported, 94 percent is palm oil as Pakistan has increasingly become a consumer of palm oil. The demand for palm oils constitutes about 65-70 percent of the total. The rest is followed The country grows some oilseed crops though not in seeds like canola, rapeseed and mustard, and cottonseeds are also grown. Mostly the edible oil industry depends extensively on imports of oil seeds and oil meals. In an interview with BR Research, the current Chairman of Pakistan Vanaspati Manufacturers’ Association (PVMA), Izaz Malik states that the industry has grown fast with at least 170 players operating in some shape or form. Of these, around 120125 are members of the association, which helps them remain organized and formal. Many of these players are small-and medium-sized vegetable oil and ghee units spread across the country, but are

vegetable ghee is about Rs30 per kg cheaper than the average cooking oil. The vegetable ghee will continue to cater to large sections of the rural areas in Pakistan where people consider ghee to be the healthier option.

IMPACT OF IMPORTS AND PROGRESS

Large imports of edible oil are a result of slower growth in local output as compared to a sharp increase in demand and population. And slower output has persisted because there is heavy competition from High Yielding Varieties (HYV) of other This gap will likely widen in coming years as consumption goes up. Pakistan had been importing heavily from Malaysia, but recent imports are coming from Indonesia as that country expands its production. Both countries have preferential trade deals with Pakistan (Indonesian PTA came into implementation in 2013), enjoying duty concessions on palm oil. Total palm oil imports have more than doubled in the past decade or so, with Indonesia snagging majority of the market access into Pakistan.

Palm oil imports vs ghee production (in 000 tons) Ghee production 3,500

But oilseed crop cultivation is not very common in the country. One big hurdle is the overlapping sowing and maturity periods overlaps with that of wheat and its maturity period overlaps with that of cotton. Farmers are reluctant to grow oilseeds when they can easily be growing a crop they have depended on for decades. because it gets ready in three months.

Soyabean oil imports (in 000 tons) 125

Palm oil

109

105

3,000

2,500

2,000

84 66

1,500 1,000

FY15, the total availability of edible oil was 3.5 million tons, with local production contributing to 0.6 million tons while import of edible oil/oilseeds was 2.97 million tons. The edible oil import bill during the period crossed $2.6 billion , which should be around 6 percent of all imports.

12% 10%

Dalda

Habib

6% Soya Supreme

Seasons, Eva

Pakwan 2007

2009

2011

2013

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Source: ITC Trade M AP FY03

FY05

FY07

FY09

FY11

FY13

FY15

Source: ITC Trade M AP

Moreover, the climate in Pakistan does not suit the production Ultimately, the price of cooking oil in Pakistan is likely to be affected by the movement in the global market particularly because of heavy dependence on imported oil and oilseed. The market itself,

Brand wise market share

500

constraints in supply and prices are determined accordingly. A 2009 research study found that despite a greater import bill, efficient production of edible oil in countries abroad had kept prices for consumers in Pakistan lower and affordable. The study warned though that this should not be a long-run economic perspective. “Pakistan needs to exploit its unrealized yield potential in production of oilseed crops. In order to accomplish this effectively, cultivation of individual oil crops should be attached priority on the basis of their oil yields, climatic

regions but soybeans require fertile land which our climate does not allow. The other oilseed crops that have been cultivated in Pakistan have also failed to work due to the lack of technical

Import of oilseeds (thousand tons) 2014

2015

2016 1,157

983

935 807

2015

580

Palm Oil (% in Pakistan's imports) DOMESTIC PLAYERS & CONSUMPTION PATTERNS

Locally, Dalda Foods has the highest share in the edible oil industry with Habib, Soya Supreme, Seasons, and several others closely behind. Dalda saw a drop in its share as competition grew and the sector became even more fragmented with smaller players clinching a higher share in the market. However, since oil remains a prominent consumer product, it is heavily marketed and Dalda has always been ahead of the herd in terms of that. The consumption patterns in the country have evolved over time. Vegetable ghee used to be a prominent sell in South Asia (capturing nearly 75 percent of the demand) but more recently, people are becoming more health-conscious as the global wave of low cholesterol and low fat edible oils takes over. As a comparison, vegetable ghee production has not increased as much as imported palm oil so perhaps this could serve as a likely proxy for health-awareness. market but perhaps in the sprawling cities of the country, the demand for healthier oils will increase. From a price point,

Indonesi a

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Malaysia

193 30

Canola

Soybean

Source: PVMA

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Source: ITC Trade MAP

requirements, and consistency…” the authors recommended. This could include cultivation of non-traditional oil seeds including should include the cultivation of palm plantation in areas along the coastal belt.

Huma Sattar is a Research Consultant at Business Recorder. She can be reached at huma.sattar@br-mail.com

20 | Retail Review 2017

122

knowledge, skills and research development. On the industry outlook perspective, there aren’t any demand-side factors that could limit local oil manufacturers or change the course of their growth. On the other hand, the regulatory, competition & pricing, safety and quality dynamics in the country are up in the air and need major overhaul – especially from the provincial angle as much of these are now dealt provincially. There is no doubt that the sector’s sustainability will be determined by its need to become more organized and effectively regulated.

Syed Tauqeer Hassan

provision of clean drinking water, which has become a luxury for the majority of Pakistanis. Groundwater, the primary source of drinking water, is becoming increasingly plagued with biological contamination from various sources. These include chemical pollutants and hazardous agricultural inputs which results in high arsenic and nitrate levels. Minister for Science and Technology highlighted that ironically more than three quarters of the population does not have access to pure drinking water in the land of the pure. The basis for the minister’s comment was a recent study conducted by the Pakistan Council of Research in Water Resources (PCRWR), which revealed only 72 percent of water supply schemes as functional and a startling 84 percent of the

It then comes as no surprise that with a growing population, rapid urbanisation and increased middle class incomes the share of bottled water in overall drinking water consumption is growing at a healthy pace. This trend is similar to global consumption of bottled water which has become the preferred choice for many worldwide.

MARKET DYNAMICS

According to data by Euromonitor, off-trade sales of bottled water were roughly 571 million litres in 2016 worth Rs14 billion. The CAGR for 2011-16 has been 10 percent when it comes to volume and a decent 14 percent in terms of rupee value. The majority of revenue was generated from bulk sales, which is due to high consumption of bottled water in urban area households. The lion’s share of the bottled water market is held by Nestle with 54 percent of the total volume supplied by the conglomerate. Nestlé Pure Life leads the market with almost 38 percent share due to strong brand loyalty and the perceived quality associated with the company. Pepsi comes second with 22 percent market share, with position as Nestlé’s biggest competitor in the bottled water industry. Coca-Cola lags behind with only 10 percent share of the market with its Kinley brand while Murree Brewery has 5 percent. The remaining 6 percent consists of a variety of small manufacturers, many of which have dubious quality control standards and processing facilities.

Bottled water sales in Pakistan Value (Rs - bn) (RHS)

Volume (mn liters)

A recent study conducted by the Pakistan Council of Research in Water Resources (PCRWR), which revealed only 72 percent of water supply schemes as functional and a startling 84 percent

25 900

700

20 cast re Fo 15 10

500 5

20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21

300

Data source: Euromonitor International

for human consumption! REGULATORY ISSUES

According to PCRWR, there are more than 100 brands operating in the bottled water industry. However, due to a lack of maintaining quality standards and low barriers to entry, new entrants frequently In its most recent report, the PCRWR deemed 10 brands as unsafe for consumption on account of chemical and microbiological adulteration. Even though the Pakistan Standards Quality and Control Authority (PSQCA) takes action against illegal and poor quality manufacturers, unsafe brands crop up with different names and can still be found operating in rural areas where their market penetration is higher. According to PSQCA, it has closed 87 bottled drinking water plants from August 2015 to November 2016.

GOVERNMENT FAILURE

Be it the metropolises of Lahore or Karachi or the rural areas of the four provinces, provincial governments have failed to provide clean drinking water to the masses. Even though Punjab’s CM started an ambitious “Saaf Pani Initiative” to install clean water drinking supplies in all of the province’s villages by next year, the project is so far in doldrums. Even though an allocation of Rs30 billion was made in last year’s budget, the company fell to mismanagement and poor governance leaving a big question mark in its ability to deliver. The fate of the projects taken by the Sindh government has been similar when it comes to potable water supplies, with Karachi perilously close to becoming water-scarce in the coming years.

OUTLOOK

The failure of both the federal and provincial governments has increasingly led the growing middle class with rising disposable incomes to settle for bottled water for consumption purposes. Convenience is a big factor that is driving sales as consumers tend to place a premium on delivered bottled water to their home or boiling water. ndeed, sales have picked up in semi-urban and rural areas as well where the plethora of small brands caters to the price-sensitive consumer. As per Euromonitor International, the size of the bottled water market will grow to almost 1 billion litres will be mostly amongst the big three, Nestlé, Pepsi, and Coke, whereas small brands will continue to vie for the more pricesensitive consumer. Syed Tauqeer Hassan is a Research Analyst at Business Recorder. He can be reached at tauqeer.hassan@br-mail.com

Retail Review 2017 | 21

Huma Sattar

Food economy:

Battling for that third space

t never is just about coffee, is it? Starbucks, the brand that reinvented coffee—and what coffee could mean to people,other than just being a hot beverage on a cold winter morning—understood earlier on that the struggle was to capture that elusive “third space” in the lives of people. To a great extent, Starbucks has accomplished that dream. Behavioral scientists believe that human beings live and communicate in three social zones—the home, the workplace and the third place which encompasses everything else. Much of that space today has been captured by the internet, spilling over our time at home and the workplace. But food service has to be a close second. More and more;coffee cafés, bars, and restaurantsare fast evolving into a prominent third place for consumers across the world.

SELLING ROMANTICISM AND NOSTALGIA

Though this culture has recently just reared its head in Pakistan— in a lot of ways it was always there, perhaps in a limited capacity attracting select audiences. The historical Pak Tea House in Lahore used to be a place frequented by writers, poets, artists and intellectuals alike. Though eventually it was shut down, it is still known as the birthplace of literary and liberal movements that took shape after the independence.

class males who work in large and growing cities like Karachi and Lahore. Cheap dhabas and informal eateries have mushroomed across these urban communities and which target customers from various socioeconomic backgrounds. So romantic is the idea of the Dhaba and roadside eateries that elite versions of them have opened up in the major cities of Lahore, Karachi, and Islamabad. Chai Khana is a local brand that has opened up multiple outlets across different cities selling the romanticism of the Dhaba culture in cleaner cups and fancier wall hangings. Sources tell us that this brand is on sale and the asking price is a whopping Rs750million, compared to its initial cost of about Rs20-30 million. Coffee places like Gloria Jeans opened up which wanted to cultivate this culture further, following the global trend of coffee-love, hoping it would pick up in Pakistan as well due to the demographic changes. It did.Since then, Espresso, Coffee Tea and Company, Masooms’, Coffee Planet, Second Cup, Mocca and dozens of other cafes have opened up. These cafés attract not only people in groups, who socialize, like college students and young professionals, but they have also become like to conduct their meetings outside the workplace.

Credit to hotels/restaurants & cafes as a share of loans to private sector business

Source: SBP

or investors which are hard to come by. But food is clearly a good investment judging just by the sheer growth in the sector that some estimates put at 20-30 percent annually. The dining out culture came in the 90s with then-fancy Pizza Hut (1993), KFC (1997), and McDonald’s (1998). While they ‘value-meal’. KFC today has a network of over 60 restaurants across 20 cities with plans to open a few more.McDonald’s and Pizza Hut have 40 and over 50 outlets respectively across the country.

Pakistan is a consumption-based economy that loves food with expenditure on food nearly 50 percent of all household budget. American fast food culture has expanded massively with foreign names such as Hardees, Johnny Rockets, Fat Burger and Burger King trying their luck at capturing the market share that McDonald’s and KFC enjoy (over 60 percent of the fast food demand) to nominal success, after the initial excitement and hype (Burger Lab, Burger Shack etc.) have gained fast popularity owing to a better understanding of the market and perhaps a more tailored taste.Some local restaurants and cuisines haveactually

1.1% 1.0%

Karachi, Savor in Islamabad, and the historical Mr. Burger circa 1980 across the country- taste of which is considered inimitable. Mr. Burger,however, is a good example of how—in a competitive and growing industry—you have to be at the top of your game.

0.9% 0.8% 0.7% 0.6%

Ray Oldenburg, the American sociologist who coined the term “third space” believed that places like cafés, coffeehouses, community centers, churches, clubs, restaurants, diners, pubs, and bars were an anchor of community life where discourse and dialogue laid their foundation. They were a medium of social interaction, and how communities connected and grew. In Pakistan, food is what brings people together. The middle-income households. In fact, the phenomenon of coming together with food is more common amongst the lower working

Nov-16

June-16

Jan-16

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Mar-15

Oct-14

THE RISE OF FOOD ENTREPRENEURSHIP

Pakistan is a consumption-based economy that loves food with expenditure on food nearly 50 percent of all household budget. Many informal estimates through surveys suggest the food industry is one of the biggest industries in the country. Data also suggest that the growth in food outlets in Pakistan is faster than the world average—3 percent against 2.5 options through the banking sector or through a network of

Huma Sattar is a Research Consultant at Business Recorder. She can be reached at huma.sattar@br-mail.com

22 | Retail Review 2017

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0.5% 0.4%

Image Courtesy: Mangobaaz

a niche where therecould be something for everyone? Many restaurants have spurred in the last couple of years near the sea view in Karachi, less because of the food itself and more because of the environment and ambience the hot spot provides. Given the right commitment from food entrepreneurs; the variety in cuisines, unique taste, ambience, great customer service can all prove to be an edge. In a world where Pakistan is slowly becoming more tech-savvy, with greater internet access and receptiveness of on-demand services(not to mention, the rising mall culture); it is easier to see where restaurants and the larger food economy are headed.While the middle class is giving a healthy boost to it, it is really the purchasing power of the younger population (expected to reach 50% over the next decade) in Pakistan that will be the driving force. Of all these changes though, the real change is in the way we look at the idea of food, as not only a means to connect and socialize but also to discover and share new and exciting experiences. If there was a battle on who conquers that third space, it would seem food is winning.

Sidra Farrukh

Retail Clothing Business: The talk of the town! Pakistan is witnessing close to a revolution in the fashion and apparel industry. Consumerism has managed to remain upbeat in the last decade, paying little heed to political and socio-economic challenges faced by the country.

THE GROWTH JINGLE

Within the retail sector, the apparel segment has grown by leaps and bounds in recent years. From textile giants like Gul Ahmed, Nishat and Alkaram to retail fashion houses and designer outlets clothing business has seen a striking proliferation. According to market pundits, apparel retail is a budding industry with the current growth rate of over 20-25 percent. As per Euromonitor International, non-grocery value sales increased by 10 percent in Pakistan in 2016 to reach Rs2.1 trillion, and are forecast to reach Rs2.9 trillion by 2021, an increase of 38 percent in total. As most of retail in Pakistan is unorganised, and hence undocumented, the “Non-grocery specialist” category by Euromonitor could be used as proxy for the growth in apparel retail. Euromonitor describes “Non-grocery specialists” as apparel and accessories’ retailers, jewelery and watch retailers, and electronics and appliance retailers; in Pakistan, it largely comprises of apparel and accessories. The Euromonitor Retail Research highlights that retail growth has been limited in select cities of Karachi, Lahore, Islamabad and Rawalpindi. And among the key players, Gul Ahmed Textile Mills Limited has been the leading manufacturer with the largest retailing presence in non-grocery retailing as it targets mass upper-middle class consumers with a unique blend of convenience and high quality.

well-established brands like Khaadi have already entered the global markets, many retailers do not have export sales on their agenda as of now, because many of them have only been around for 4-5 years and are till focusing on meeting the local needs. Nonetheless, retailers do believe that markets like Dubai, Bangladesh, India, and Sri Lanka can offer them revenue potential due to similar cultural and weather intricacies. Designers have also pushed their way into the retail sector. And many of them don’t just want to restrict themselves to smaller high-end fashion anymore; they are also reaching out to the masses. On the foreign investment front, the fashion and apparel retail segment has attracted many international players, who have been keen to restrict themselves to premium consumer segments. On the other hand, local retailers have been more inclined to cater the mass market, and thus they are larger in numbers.

A FERTILE FASHION LANDSCAPE

Dissecting the retail clothing business is incomplete without looking at the lawn business. As per PBIT overview of the market, Pakistan has a designer lawn market worth Rs9.6 billion with around 128 eminent players. However, the market is not restricted to those big brands that hold enormous market value and have made huge capital investments. The unbranded vendors are

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lawn market alone is somewhere between Rs11-12 billion, which includes both branded and unbranded retailers. This very existence of a huge market for apparel ¬¬has not only created employment opportunities and contributed to economic growth, but has also given a wide variety of choices to customers in accordance with their disposable income. Besides, the increased number of players has also resulted in a cutthroat competition, the result of which many market insiders call “progression to quality and price stability”.

1200

THE SURVIVAL OF THE FITTEST

Sales performance of appare l & footwear- Rs (bn)

1000 800 600 400 200 0 2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Factors such as rising income levels, growing urban population, awareness and trade liberalization have been key reasons why retailers have been focusing more on local market than eyeing to expand their export sales. ¬¬While some of the

Talking about competition, BR Research has come up with two different views while talking to the industry insiders and leadership of some key brands. The first one pertains to the structure of the retail market. According to some fashion gurus, the retail apparel market has an oligopolistic structure whereby a few dominant players lead the market and compete with each other. For them, quality is their unique selling proposition (USP), and their target market is ready to pay for it. Thus, the low-end clothing choices that purportedly compromise on the quality in order to offer low prices don’t appeal to their “sane customers”, and hence are no threat to them. However, this segment is a very small proportion of the total market – maybe not even one percent. Conversely, other market analysts are of the view that some customers might pay a higher price for a premium quality product, but the middle class - that constitute majority of Pakistani population - is obsessed with the notion of “disposable fashion” or “fast fashion” whereby, they dispose them off after a

Sidra Farrukh is a Research Analyst at Business Recorder. She can be reached at sidra.farrukh@br-mail.com

short time. For customers with such mindset, buying something expensive that they will probably use only a few times is not an economical choice. Women - especially working women - make middle income brands an edge and a much larger clientele. And interestingly, it is this segment that has witnessed the growth much talked about.

Non-grocery retail -Growth in outlets & selling space Outlets (RHS)

Sellin g Space '000 sq m

16,000

160,000

15,500

150,000

15,000

140,000

14,500

130,000

14,000

120,000

13,500

110,000

13,000

100,000

12,500

90,000

12,000

2011

2012

2013

2014

2015

2016

80,000

Data source: Euromonitor International

FUTURE PROSPECTS

Nowhere in the market is there a lack of competition. Players are neck and neck regardless of the target market they are catering to. In such a competitive environment, the key to success is “differentiation”. The mantra of mass marketing and “one size tremendous growth in the past decade or so, the wizards of this industry are heralding saturation. They hint towards consolidation where retailers need a proper business plan, investment, and creative knowledge to succeed. Manufacturer/designer collaboration is another characteristic of the retail apparel sector today. While these have the value chain and backward-forward integration advantages (e.g. Ideas backed by the strong network of Gul Ahmed, Satrangi backed by Bonanza, Zeen by Cambridge etc.), the type of differentiation required to up the game is bringing in design aesthetics. An example of this could be the alliance between Sapphire group and the fashion designer Khadija Shah of Elan. The retail clothing culture is mainly concentrated in the metropolitan cities like Karachi, Islamabad and Lahore; whereas, the smaller cities lag far behind and are largely untapped by the bigger brands. With Faisalabad, Sialkot, Gujranwala, and Hyderabad quickly catching up and retailers spreading their engine for the sector – with perhaps a spillover effect on the real-estate sector.

Retail Review 2017 | 23

Tax loss of smuggled phone devices is about Rs35-40 billion p.a. Muhammad Kamran Khan is the Country Head for HMD Pakistan & Afghanistan, which was founded globally to create new generation of Nokia-branded smartphones, feature phones and tablets. Kamran has a rich experience of successfully working in various leadership positions in leading companies focusing mainly on consumer products. His career spans diverse categories and geographies, mostly in the Asia-Pacific region. During his career, Khan had the opportunity to be associated with companies like Unilever Pakistan, Philip Morris Asia Limited (Hong Kong), National Foods Pakistan, S.C. Johnson Pakistan, Microsoft Mobile Devices & Services Pakistan, and now he leads HMD Near East team. In this interview Kamran talks about Nokia’s plans in Pakistan, his views on the size and nature of the country’s mobile market, and the regulatory improvements that need to be rolled out.

BR Research: Why Pakistan? How lucrative is this market for Nokia? Kamran Khan: When companies look at Pakistan, they are often very simplistic. What they look at is a country with 200 million people who are perhaps not that well off. But when you look at Pakistan in the context that it is a country with a population of 200 million people with a purchasing power parity of 2700 to 3000 dollars per capita, it is a huge economy! That is something often missed. BRR: Okay. So all discussion is in light of that board premise! Which business areas are you focusing on in Pakistan? KK: In Pakistan we are focusing on all mobile devices ranging from phones to tablets or any other thing that falls in between. Though right now, we just have phones. BRR: What is the size of Pakistan’s market in the context of MENA region? KK: Let me give you some numbers. Roughly 1.2 million feature devices and roughly 1 million smart phone devices are sold in Pakistan every month. That is huge! Other countries in the region don’t even come close; we are definitely the largest market in MENA region. BRR: 3310! What do you have to say about the re-launch of that model? KK: 3310 is one of those cool ‘must-haves’. It is something that transcends age. My 16-year-old daughter wants it. And of course, people who are much older than me want it. And when I ask people what they are going to do with it since these are people firmly placed in the smart phone category, they say they just want to have it. And they want all the colors because the colors are really very exciting. You should specially see red and other colors too. BRR: There is Nokia, Samsung, Q-Mobile and what not in the market. What is your domestic market share? KK: Let me segment the market clearly. We have feature phones and we have smart devices. In the feature phone segment, there are only two reasonable pairs, that is, us and Q-Mobile. We would have a share of about 35 to 40 percent and Q-Mobile would have a share of 45 to 50 percent. So between us and Q-Mobile there is hardly 10 to 15 percent left in the entire market. The other players that you see entering the market every other day are the Chinese brands which are in the very low price band of $20. So, as far as feature phones are concerned, we are a very well-established player; a very strong number-two. And the reason we are number two is because there was a large segment of the market we weren’t playing in. For instance, the $20 to $30 was about 50-60 percent of the market and we didn’t have any offering in that segment. But now that we have an offering in that segment we have about 50 percent share of that segment easily. BRR: What is your market share in smartphone category? KK: We do not really have a big share in smartphones since we have just entered that market. The value share is led by Samsung followed by Q-Mobile.

24 | Retail Review 2017

BRR: Who do you think is your main competitor in the smartphone category? Would you be chipping away from Q-Mobile’s or Samsung’s share? KK: Everybody is our competitor because the market is dynamic. There is a lot of buzz in the smartphone space. But the market is growing so fast that I think there is space for people who are offering a product that is appreciated by the consumers and meets consumers’ needs. We don’t really feel the need to target Q-Mobile or Samsung when the smartphone market in Pakistan is growing by 26-27 percent per annum. There is plenty of room for everyone. However, the consumer in Pakistan is very discerning. These are people who cannot be fooled. You cannot really come up with a cheap product and sell it across and win market share. People who have tried this have failed badly. There are many companies, which came and couldn’t survive. And this happened with many brands that came to Pakistan, and it was simply because the offering was not good. So, we have a very hardnosed consumer.

update – say security update – then they will have to rewrite their software which is showing on the consumer’s screen before Android can be updated. And the way this industry works, by that time another update will be needed. The best and pure Android experience is available only on Nokia phones primarily because we don’t put a skin on the phones. That makes our smartphones pure, secure and faster. BRR: You mentioned earlier that you are into phones and other mobile devices. What other devices are we talking about? KK: Right now, we are trying to complete the phones’ portfolio. Once the phone’s portfolio is complete, then, of course, we will expand. For the immediate term, we are focusing directly on the phones’ portfolio.

BRR: Is your distribution and service mechanism different? Because you mentioned creating an enhanced customer experience, and we hear many people saying that they are not very happy with the brand because there is not adequate BRR: Let’s look at this from another angle. In the smartphone customer service available. segment, Q-Mobile is targeting the low-end; whereas KK: That is correct. We lagged in that department for about 3 to Samsung is high-end, and Apple, which is even more 4 months. Look, whenever there is a transition, the exiting partner high-end, is for the sophisticated consumer. Which space starts shutting down systems. And the entering party does not within the smartphone segment do you plan to target? really have the control to start implementing new ones. So, there KK: We are not in Pakistan for the short haul and we are not targetwas a period when Microsoft was shutting things down. And ing a particular price point. Which means you will see product at initially we didn’t have the authority to start our own. But that has every price point in Pakistan within the smart phone category just completely been solved. as you will see products at every price point in the feature phones. Today, 100 percent replacement warranty is available on our We will have a product at the $700 space down to the $100 space. feature devices. Any defect, and you will get a new phone. For That portfolio is developing; right now we have a product under smart devices, we have a full-fledged care system here in $200 space; we have two products that are above $200 price Pakistan. We will be expanding that in terms of presence of retail point; and another one is coming which is going to retail higher as well. The system is in place. than this. It will take us 3 to 4 months to complete the portfolio Now we come to the distribution part. The way we look at distribbut we will have an offering at every price point. utors is that we want more than strategic partners. We are What we will not do is chase volume in a ridiculously low-price looking for people who are willing to invest in the brand. So, it is segment because we feel we will not be able to deliver the experience. not like an arms-length transaction that I give my stock to the distributor. We are trying to build something here and unlike other BRR: What’s unique about Nokia’s smartphone in terms of countries we are fortunate we have a very large base to start that experience you are talking about? with. It is not like we are starting from scratch. KK: We are the only manufacturer in the entire world which is not So, the partner who wants to work with us must be willing to putting up a skin on your phone just so you get ‘pure Android’ invest upfront and drive for growth. For that we have partnered experience. Every other manufacturer thinks that while they are with Advance Telecom, which means today we have the largest on Android system they put their skin on top so that they can sell direct-to-retail reach through Advance Telecom. They have been their own services as well. completely restructured in the last six months, and they invested a significant amount of money in upgrading their systems. BRR: Skin on the software? That’s Greek! KK: Android is an operating system. On our phones, consumers BRR: You mean to say that they are not selling any other interface directly with Android; on every other phone the manufac- phones? turer writes their own software that acts like a barrier between the KK: Advance Telecom is not selling any other device. But to be consumer and Android. The reason they do it is because it allows sure, we are within the compliance of the Competition Act, as we them to sell their own services to the consumers. have asked them not to be exclusive. It is a choice that they have One way of looking at this is that it is an opportunity present in made. Similarly, we have not appointed them as an exclusive the market. But in our case, there is no barrier present between distributor but they have chosen to be a single distributor with us. the consumer and Android, which means that consumers get instant updates. For other players that have their own skin, if Android issues an

BRR: Are you exploring the option of selling phones – especially high-end ones – in partnership with a telecom operator, and through installments? KK: The model for selling high-end phones is still very primitive. But there is a role that operators play and we are in partnership with Jazz in Pakistan which we are developing. I think that is one area where we could add value to a high-end phone. There are number of options of how you can sell high-end devices at an affordable level. BRR: Can you elaborate those options? KK: We are exploring a number of options. But in that the biggest thing is how do we ensure that we cover the risk of default? Can we get it insured? What other option do we have? We have explored a number of things but nothing has happened until now because all financial institutions are very scared of these things. If I give a Rs100,000 phone to somebody, the risk will be huge. BRR: Do you think the regulator is responsive enough to the industry’s requirements? KK: I think they could do a lot. I am not talking about any fancy stuff but very basic stuff, such as making sure that people have legitimately imported devices instead of smuggled ones. The government loses about Rs35-40 billion every year in terms of tax revenues because of smuggled devices. BRR: How does this go about? Do you have any market intelligence to offer? KK: I will not be taking names but if people would look at the NOCs for import which many manufacturers have gotten from PTA, they will find that the number of phones that they sell is at least double. So in this industry what works is that, import stock is kept in the bonded warehouse, shown as export in papers and then sold in the local market. That way you are able to avoid taxes. I will give you an exact example. Taxation on a phone which has $10 import price would be about $11 or $12, which means retail price of that device in rupee terms should not be less than Rs2200 assuming a 100-PKR-USD parity. Yet people are selling such phones in the market for Rs1900, and there are people who are selling the same phone for Rs1200 as well. How is it that somebody can sell a cell phone for below taxes? If the guy got the phone for free, he still would have paid taxes. BRR: What solution do you propose? KK: The one basic thing we could do is; implement a white-listed system under which if the phone is imported illegally, it will not work on any operator system. This is very easy to do since every phone has a unique number, which can be traced. If it is not imported, we can shut it down. We have been working on it for about a year now, and the system is ready. I give a lot of praise to the PTA team for working on it and once we do this, it is not just that the treasury will earn revenue but it gives a lot of confidence to people who are willing to invest in this country. If today somebody wants to build a case to build a brand in Pakistan, the first thing that will come to their minds will be that people who are smuggling will take the benefit away from us. At the time, however, the government needs to see this sector more than just a revenue-generating stream. If there is growth, the tax revenues will grow with the sector. But if you implement $11 tax on a $10 phone, you are actually encouraging tax evasion.

BRR: What are the prospects of manufacturing phones here in Pakistan? KK: The market is large enough to justify investment in manufacturing. Nobody starts off making parts themselves like screens; you get the components and you assemble them. But for someone who is putting up that facility, the government will have to make sure that he is not undercut by smuggled phones from China. As long as smuggling continues to happen, no one will put up a factory here. They will be completely underpriced because the scale in China is so huge. Secondly, there has to be a system to be developed here to ensure that the phones are being developed of a certain quality. So, in the short run, I don’t see anyone putting up a factory or manufacturing of mobile phones at a sizable scale in Pakistan. BRR: Do you think that giving a new investor some kind of protection will start setting grounds for another rent-seeking industry? KK: From a country point of view, it would make a lot of sense to have local production because the amount of foreign exchange that goes for cell phone imports is huge. But you will need someone to define a policy which is consistent before you can ask someone to make an investment. The required investment is not too much. It is easy to assemble as well, though the training of people will take time. The best thing would be to start with a western type of operator who has got experience in these matters. BRR: What’s your view on the extent to which retailing would be done via mobile phones in Pakistan in the near to medium term? KK: One of the world’s leading search-engine estimates that e-commerce may hit $1 billion in the next three years. However, given that CAGR is +100 percent and digital penetration is creating new segments, like ride sharing, this could be a conservative estimate. Enablers such as Internet access and financial sector buy in are already there. Industry can grow even more aggressively as fulfillment levels improve and new opportunities emerge. Almost 70 percent of the people in Pakistan connect to the Internet over their phones. Social media may be our prime interface with consumers. And a housewife may be buying groceries over the net before hailing a taxi over the Internet-based application for her next stop. That is, if she is not doing so already. BRR: What kind of ecosystem, including payment, legal, consumer rights, and other aspects, is needed to give retailing-via-mobile-phone a boost in Pakistan? KK: Last year, our e-readiness index stood at 36. Emerging Asia was ahead at 41 and the Developed world was far ahead at 77. Even basic structural work such as holistic legislation and setting up a functioning regulatory body is still not done. Comprehensive vendor validation / rating system is essential for a third-world country. Surprisingly, we are remarkably ready financially. According to the Ministry of Information, 11 percent of Pakistanis are already using the Internet for transactions. Given Internet access patterns, most of them are doing so over phone. A regulatory body backed by comprehensive legislation and a well-funded innovation-incubation lab for facilitating emerging digital entrepreneurs could really drive this industry forward. Both projects will more than pay for themselves by increasing documentation of our economy.

Hammad Haider

the whole shebang about e-commerce makes sense: folks are aching for affordable convenience to satisfy existing needs. Can’t go shopping? Order groceries home via an online marketplace! Can’t drive a car (or can’t buy one)? Get an Uber! Don’t wanna cook? Order in tonight! Can’t (or won’t) clean your house? Get a handyman online to do it for you! Two things are seen happening, not just in the developed West, but also in the developing corners of the service delivery. But their urge to have something when they want it and wherever they want it is made easy with another phenomenon. Why invest your time, own an asset, or learn a skill to perform your tasks when you can rent other’s time, assets and skills to achieve the same (some might say, better) outcome? Scope of e-commerce in Pakistan in the e-commerce space. But what really does the e-commerce constitute? And how has the market expanded in recent years? A lot of people confuse e-commerce with the online marketplaces that sell products like electronics and apparel. But e-commerce is much more than that. The illustration captures various aspects of Pakistan’s digital economy, which is a mix of online marketplaces, sharing/gig economy, online delivery services, crowd-sourced platforms, etc. By various estimates, the size of Pakistan’s online marketplace has already crossed the $100 million mark. As per Euromonitor estimates, just the online retail sales stood at Rs19.4 billion in 2016. Some would consider that an was roughly $11 last year – ten times over Pakistan’s spend. Why Pakistan falls so awful lot behind India Non-store retailing - Rs (bn) is perhaps linked to the supply-side of payment Share in total retail sales (RHS) infrastructure. As the figure shows, 3.5% penetration of debit cards, credit 250 cards, and mobile wallets in Pakistan 3.0% is way below that in India. But market 200 participants seem confident that 2.5% Pakistan will cross the $1 billion mark in online retail sales by 2020. 150 2.0% The dominance of online retail in e-commerce has been challenged lately 1.5% by the pleasant surprise that has been the 100 growth of ride sharing market in Pakistan. 1.0% Uber and Careem, the two leading players in this segment, have now expanded into a number 50 0.5% of Pakistani cities. Our conservative estimates show that within the key geography of Karachi, Lahore and 0.0% Islamabad (KLI), the two online cab-hailing services 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 are doing a (combined) business of over $90 million per annum Data source: Euromonitor International Fo

Online retail in Pakistan

8 | Retail 26 | RetailReview Review2017 2017

DRIVERS OF E-COMMERCE

Pakistan’s demographic advantage of having a young population that wants to try out new stuff has of course helped e-commerce growth in recent years. Then there is the steady return of the But these things alone do not explain the growth, for a host of factors are at play. The basic driver is broadband connectivity. As of March 2017, there were over 35 million 3G subscriptions and over 4 million 4G subscriptions in the country. These subscriptions have been powered by Smartphones, so one can reasonably claim that there are at least 40 million active smartphones in Pakistan – about 20 percent of total population and 40 percent of adult population. It will, however, be a challenge to transition the remaining 100 million 2G subscriptions – or roughly 50 million unique users – onto 3G and 4G networks. But that in itself may not be a limiting factor – as per Kaymu research, desktops and laptops account The option of cash-based payment settlement also drives uptake through the comfort and convenience that come with it for the end user. The fact that Pakistan is a largely unbanked market and there is no widespread digital payment ecosystem hasn’t come in the way of e-commerce growth. As per different estimates, the cash-on-delivery (COD) channel accounts for over 90 percent of sales closed by online marketplaces. This

of logistics of payment managements. The rising numbers of m-wallets help, but they alone cannot offset the low penetration of plastic cards and the absence of payment gateways. Then there is the impact of social media. As per estimates, Facebook users stand around 30 million in Pakistan, with about a tenth of that number on Twitter. Social media really tickles the side of Pakistanis that is conspicuous consumption. In a lifestyles. KLI generate over half of e-commerce transactions, but rest of the demand is coming from second and third tier cities and towns. Then, social media platforms, especially Facebook, allow both marketers and consumers to interact directly, become more informed, and provide real-time feedback. While keeping big brands in check, this also helps the start-up culture.

FUTURE OF RETAILING: BRICK AND CLICK?

Online retail is growing but still has a long way to go before it can take a sizable crack at the brick and mortar stores. As per Euromonitor International, non-store retailing (online retail) stood at Rs19.4 billion in 2016, which was a paltry 0.4 percent of store-based retailing worth Rs5.4 trillion in the same year. But the low number of online retail is not unique to Pakistan. In the US, online retail is about 10 percent of overall retail sales, and in China it is said to be around 20 percent.

Penetration of electronic payment channels (% of population) 64.4%

expanded almost ten times since 2011. Also, it is expected to reach Rs250 billion by 2021, or 3.2 percent of spending on physical retailing. It India Pakistan seems that online retail will continue 19% to make its mark in non-grocer y 10% retail items, 9.1% such as apparel, 2.2% 0.6% footwear, consumer electronics, durables, etc. Debit cards Credit cards M-wallets D e spite the entire value Data sources: proposition that For Pakistan, SBP data, as of Dec. 2016 online retail offers, For India, RBI data, as of Mar. 2017 it seems that the For Population, UN database, 2016 brick-and-mortar stores would remain relevant, thanks to the experience that shopping has become in the age of mega malls. Also, one is increasingly seeing big brands in apparel and footwear displacing the online intermediaries and up grading their websites to provide their users a seamless online shopping experience. Far from a threat to them, e-tailers can harness this brick-and-click model, for instance, by opening their display shops in dense urban areas as well as regions where there is limited or no rural connectivity. This can unlock a new source of demand by encouraging more people to try out the online retailing platforms. It is trial that can lead to familiarity, which in turn can develop trust in the system.

CAVEATS

For e-commerce to really leave its mark, its segments – especially online marketplaces and ride-sharing pursuit, low broadband penetration, especially in rural areas, will pose a challenge. Then, there is the high cash dependence due to low digital banking footprint, which is a value diluter for the supply-side. The issue of consumer protection, which is a sore spot for the e-commerce players, also needs to be resolved to keep the trust of all users, not just those who have been wronged. Hammad Haider is a Research Consultant at BR Research. He can be reached at hammad.haider@br-mail.com

Retail Review 2017 | 27

Hammad Haider

WHITE GOODS:

Signifiers of retail expansion

White goods, such as refrigerators, washing machines and air conditioners, are as much about convenience as lifestyle improvement. Question is, at what point do households start spending more on improving their living standards? Pakistan’s per capita income (PCI) stands around $1600, latest estimates show. Experts suggest a PCI above $2000 as the level where households start spending more on durables, besides discretionary items. Pakistan’s economy may reach that level 6 percent p.a.

CURRENT DURABLE LANDSCAPE

When it comes to durables, the appropriate measurement unit is the households. And it is the middle-income households that are said to drive sales. Pakistan is still predominantly a low-income country. But a transition has been underway since 2000. As per research done by Dr. Jawaid Abdul Ghani, a veteran research academic who is now with the Karachi School of Business and Leadership, roughly 42 percent of the Pakistani households fell in the category of ‘middle-income’ households in 2015, up from 9 percent in 2001. (Dr. Ghani refers households with per capita consumption per day between $4 and $10 as ‘middle-income’, which is not the same as middle class, strictly speaking).That increase is mostly brought about as many among the poor households transited to low-income and low-income in turned moved up to middle income. During the same period of expansion of middle income households, between 2001 and 2015 that is, household possession of durables – notably freezers, refrigerators and washing machines – has surged, as the illustration below shows. It must be noted that the concentration of middle-income and high income households in the population (a roughly 50% in 2015) corresponds with the durable possession for stuff like refrigerators and washing

There are two kinds of growth segments in the appliances market. One segment is represented by hitherto un-served households. Increasing migration and resulting urbanization is one driver for this segment’s expansion. In addition, as more households migrate from low-income to middle-income – as per Dr. Ghani’s estimates, middle-income households would represent 65 percent of all households in 2030, up from 42 percent in 2015 – and the demand for appliances would go up with it.

are majorly an urban phenomenon. As per data taken from the Pakistan Demographic and Health Survey (PDHS), 2013, a majority of urban households possess washing machines and refrigerators, as opposed to rural areas. For instance, more than 70 percent of urban households had washing machines and refrigerators, compared to less than a third of rural households possessing the same back in 2013.

of appliances, but are mostly concentrated around refrigerators, ACs, and washing machines. The dominant players in these three segments are Dawlance, Haier, PEL, Samsung, and LG. Going forward, the manufacturers would need to focus at least as much on quality improvements and technology up gradation as they do on capacity expansion. Products are not export-ready, given the issue of quality standards. But that in turn is explained away by a low-income market that doesn’t demand sophistication even as low pricing hinders productive investments. After China Pakistan Economic Corridor (CPEC) acquires its connectivity goals and assumes a more industrial flavor, the electronics market is expected to be up among a few sectors where Chinese investment may tie up with local players. Already, Dawlance has been acquired by a Turkish conglomerate. The Dawlance CEO also brought up in the interview the CPEC dynamic, noting “Pakistan has an edge right now with CPEC coming up and the electronics market getting a boost among other sectors.” Under CPEC, Haier is expected to liaise with its Chinese partners to create more capacity.

UNDERSTANDING DEMAND

Nearly all segments of the white goods market are currently growing in double digits, as per estimates gleaned from industry sources. The highest unit sales are of refrigerators, followed by air conditioners and washing machines (see the illustration). Together, the seven durable sales are forecast to reach 4.65 million units in 2017, up 17 percent over last year. This growth is expected to intensify in the coming years, for a variety of reasons. One obvious reason is Pakistan’s population Research in a recent interview, “Pakistan has a growing, young and an enthusiastic population. (Fifty) percent of the population is under 20 years of age, and the country’s per capita income is around $1500, which is expected to grow to $2000 in the next seven to eight years. All of these are rising demand signals. So, the potential is huge in Pakistan.”

Then there is the case of household size, which is still high in Pakistan at 6.41 persons, as per the latest Household Integrated Economic Survey, 2013-14. But the trend is towards a slight decline, more so in urban areas where household size declined from 6.22 in 2011-12 to 6.09 in 2013-14. If in the coming years economic opportunities in the urban areas induce more migration and if the nuclear household trend gears up in urban areas, it will have a positive impact on the appliance market. The ‘new demand’ segment has another source of growth in the still deep-held social practice of dowry. So the appliance market is inevitably linked to the wedding season. As per PDHS, around 8 percent of Pakistan’s population fell between 24 to 29 years of age, an age group that encompasses the average marriage age for both Pakistani men and women. Even if half of these folks choose to get married within this age cohort, marketers are looking at demand originating from at least four million weddings taking place in Pakistan each year! Then, of course, there is the existing market of households already possessing durable goods. As appliances lies in the replacement volumes. This segment, where alreadyserved households retire their used-up appliance at regular intervals, will demand better quality, sophisticated products, while not minding the tab.

THE SUPPLY SIDE

The white goods market is oligopolistic in nature with a small number of big players operating in this market. All the players are well-

OUTLOOK

The economy is buoyant; rising PCI means more money in the pockets; durables are becoming a necessity for many households; and the supply-side also seems ready with players actively competing even as electricity supply improves. The discussion above is not isolated in its rosy perspective for the industry. The central bank also captured the mood, as it commented in its recent State of the Economy report: “Further rise in energy supply in the coming months, increase market access for the rural population, expansionary plans of leading players, and foreign investment, all indicate a sustainable trajectory for the industry’s growth going forward.”

Hammad Haider is a Research Consultant at BR Research. He can be reached at hammad.haider@br-mail.com

28 | Retail Review 2017

Ali Khizar

RETAILIIN NG

BOOM! R

etailing is one the best businesses to do in Pakistan where business owner buys on credit and sells on cash; and if s/he buys on cash, the margin swells. Traditionally , the small corner grocery stores, and electronics and other markets remained the choice of consumers. Lately the trend has been shifting to modern retail stores in big urban centers. Although, even today, 95 percent of the market share is with small non-franchise grocery stores, other non-grocery retailers and wholesalers giants are in the making in the retail business. The convenience of the shopping experience of buying everything under one roof is bringing family entertainment into grocery shopping.

Store-based retailing outlets by channel ('000 units) Grocery retailers

Non-grocery retailers

Mixed retailers

Total 924

491

523

558 595

634

674

721

777

1,009 Fo recast

846

Store -based retailing in Pakistan -Rs (bn)

2,936

3,385

3,870

4,405

4,854

5,383

5,818

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Data source: Euromonitor International

The pie of retailing is getting bigger relative to economic size every year. In 2011 retailing economy was Rs2.9 trillion (15% of GDP), as per Euromonitor, and reached Rs5.4 trillion (18% of GDP) in 2016 â&#x20AC;&#x201C; a CAGR of 12.9 percent. The sector contribution in employment is close to 13 percent of labor force. The share of traditional stores is down from 96.4 percent (2012) to 95.3 percent (2016); the decline is not sharp but what is interesting to see is that players like Imtiaz Super Market and Al-Fatah are gaining size, as their respective shares have chains, the hypermarket segment is picking up as well where

20 17 20 18 20 19 20 20 20 21

20 16

20 15

7,762 20 14

7,239

20 13

6,274

6,740

20 12

ast

Fo rec

Total

20 11

Grocer y retailer s Non-gr ocer y retailer s Mixed retailer s

Data s ource: Euromonitor I nternational

Carrefour (Hyperstar) and other big players are growing at a similar pace. The real juice is in modern retailing, which is expected to grow further in years to come. The retailing pie is expected to reach Rs8 trillion in 2021 assuming its share in the GDP remains constant. Considering the way super and hyper markets are growing, the share of traditional retailing ought to fall further. The retailing sector is divided into two segments: grocery and non-grocery retailing, with a 60:40 ratio. Grocery retail includes food and hygiene products, which are for day-today use, while non-grocery section includes all other consumer durable products such as white goods, electronic appliances, home decor, furniture, textile fashion, etc. Traditional grocery stores commonly known as Kiryana stores are catering to the major chunk of grocery market, while nongrocery market is dominated by electronic and other non-branded markets usually concentrated in hubs like Abid market in Lahore or Saddar in Karachi.Super markets usually cater to the modern retail in the grocery section, while hyper markets are catering to both the grocery and non-grocery sections. That is the ultimate experience of convenience in the brick-and-mortar model.

Why is the modern retailing picking up, and what is its advantage over traditional retailing? The prime reason is the convenience to have retailing experience in a cozy environment where one can buy in bulk. The big stores have the margins to even sell below the RMP (retail market price) for a number of daily use items. They buy directly from companies or import goods like Akbari mandi in Lahore or Jodia bazar in Karachi. The wholesale market is estimated at Rs1 trillion out of the pie of Rs5.8 trillion. The modern retailing is killing the middle man wholesalers); but the wholesale markets would live for masses in urban centers and virtually for all the market in rural areas. There ( are around 10 big urban centers with all the space for modern retailing to grow for middleclass,and currently it is dominated by two big cities. shopper) is shifting to pantry stock-up (modern shopper). The dea is to buy more and save on it. The normal saving by a modern shopper is 7-8 percent on day-to-day purchase. But i the retailer plays with the psyche of modern buyer. For instance n psychological articles such as pampers, oil, coke, etc., an average consumer saves 5-10 percent on MRP, but also does i parallel shopping where margins are high (20-40%) such as on home decor. The retailers are making consumers brand maniacs. Like in appliances, where technology changes almost every year, compelling consumers to buy new phones, televisions, white goods, etc. Everything has to be smart but the guy who is using it. There are also marketing techniques to enhance consumption. For instance, a few years back, Pepsi changed from the traditional size of 250 ml to 500 ml for single serving, and all of a sudden consumption doubled. Also, brands are playing with fear, for example, hazards of drinking from tap water build the market for bottled water, the fear of germs builds the market for germ killing soaps, the fear of buying loose milk builds the market for packaged milk, and the list goes on. Deception is created and perceptions are changed - that is all what matters. The new fad is of organic food and even organic appliances. Folks are paying a premium for organic stuff, and every now and then new kind of fears will be implanted by smart marketing techniques to build market for new products. And the young generation who is born in this fear and ever-changing technology will keep on spending a major portion of earnings on retail consumption.

Ali Khizar is the Head of Research at Business Recorder. He can be reached at ali.khizar@br-mail.com

Retail Review 2017 | 29

“Karachi needs at least 30 malls” Mr. Sohail Tabba serves as the Chief Executive Officer of Lucky One (Pvt) Limited, Lucky Energy (Private) Limited, Lucky Energy (Private) Limited and Yunus Energy Limited. Mr. Tabba started his 40 years long career with Yunus Brothers Group as one of its founding members, looking at various functions from manufacturing, general management, to sales and marketing management. He has also been awarded "Businessman of the Year" by the chamber of Commerce, several times during his career. In this interview with BR Research talks about Lucky’s foray in Pakistan’s mall economy; he also outlines the contours of LuckyOne malls and makes the mall the first of its kind in Pakistan, and also sheds light on possible expansion plans. Below are edited excerpts BR Research: Why a mall, why Karachi, and why in this area? Sohail Tabba: Karachi was chosen because Karachi is the heart of Pakistan. The notion that spending power is present only in Pakistan’s northern Punjab is really a misconception. People living in this part of the city – district central and east -- are the ones who really spend in Karachi. People living in other areas like Defence and Clifton tend to also spend abroad; they even buy their chocolates from Dubai Airport; besides only 10 percent of the people live in that part of the city. The mall is in the middle of a very civilized society, and a very educated class lives here. A lot of the households in this area also have at least one member of a family working or living abroad. So even if you look at the inflow of remittances, there is a big contribution of this area. But we don’t see it only from the lens of capturing the consumer-spend in this area; it is about changing the skyline of Karachi. It’s about job creation, because a big mall drives the economy of that area. As a Karachiite - born and brought up in this city - I think I owe it this much. BRR: We have been told that LuckyOne is the biggest mall in South Asia. Is that for real? ST: I have been told that as well (chuckles). But we have not made any such claims. We are not in the size war. Our group philosophy is that whatever we do should be correct and should create an impact. LuckyOne is not only a mall; it is a family destination because in the South we don’t have many recreational activities like resorts and tourist attractions. So, we wanted to create a place where people can come and spend time. LuckyOne is not just a mall; it also houses the biggest family entertainment centre of the country with 40,000 square meters of covered area. BRR: What is the covered area in total? ST: The master plan for the entire mall complex is over 5 million square feet, which will have 7 towers and 1100 apartments. But the net leasable area at the moment is 600,000 square feet. The mall area is approx. three million square feet, which will include services, parking and everything else. BRR: And all of the shops in the mall are going to be rented or some sold as well? ST: Everything is on lease-based rental. BRR: But you do plan to sell the shops/stores eventually, given low rental yields? What rental yields are you getting from the mall?

30 | Retail Review 2017

ST: Since we have just started off, it is very early to tell what it is. This is something we will find out after some time. We are in line with the market pattern and market norms, and probably we are giving much better incentives to our tenants. BRR: Do you plan to get to the REIT model? ST: For us it is too soon to consider a REIT model. We have a long way to go. We have yet to complete our food street yet, which is another first, and then the apartments. REIT is not yet on our cards. BRR: So who do you consider as the anchor tenant in this mall? ST: Every brand is an anchor tenant at Lucky Mall. Why? Because we have Pakistan’s biggest stores of all major brands like Khaadi, Bonanza, Sana Safinaz, etc. Sapphire and Hyperstar are also major anchors; Stoneage, Outfitters, Ethnic and so many other flagship stores are here. And it is not only the size but the elaborated décor and ambiance they have individually created at LuckyOne which substantially enhance and provide an amazing shopping experience. BRR: What is the average footfall here as against your competitors in this city? ST: I think we are leading in every respect. On a weekend we touch about 40,000 people per day. On Independence Day, we had to close our mall entrance five times because the footfall was 107,000 people. There are no comparable numbers. There is no data-sharing platform, but I think we are leading because 80 percent of the houses and the population are in this part of the city. Time alone shall reveal a leadership position. BRR: What is the mall’s footfall to sales? ST: Our conversions are happening really rapidly. I can’t tell the exact ratio, but the footfall ratio has been changing and will continue to change but growing. We have already achieved our target of opening 90 percent of the stores, and we accomplished this in only 3 months, whereas for others it has taken more than a year. In the food court as well, we have achieved milestones; when we opened the mall, there was only one store that served pizza, and now after 3 months we have achieved 99 percent occupancy in the food court. Today, we are realizing that we should have reduced retail and expanded the food court. But now there isn’t

any space. These are all learning curves that evolve with the passage of time. BRR: Do you plan to open a cinema as well? This area lacks a good quality cinema. ST: No. We are experimenting with ‘Onederland’, because cinemas are everywhere but you don’t have a good quality entertainment area for kids. Plus, you can’t do everything or go after every integration. However, because of this mall, you will see a lot of people down this road evolving as the entire area is changing. In fact, a cinema is opening just down the road. BRR: Has there been some kind of consumer migration from other malls in the city to your mall. Is there any such data out there? ST: There has been a mass migration because of two things. The kind of parking we have has no competition. There are no numbers to match. We have the biggest car park with a capacity of 1500+ cars. This is the first of its kind parking lot in the country. It will be a model for all other malls or buildings. We have the biggest prayer area as compared to other malls in the city. In the case of other malls, the moment you are off on the road, you come across a lot of traffic, whereas we are working a lot to improve the traffic conditions. BRR: In mall terms, there is something called tenant and public-space ratio. McKinsey reports that increasingly malls need to have a bigger public space, because in the wake of growing e-commerce, malls need to offer more than just shopping. Does this theory fit locally as well? ST: That is a consideration and that is why our circulation area has no match. Despite such a huge footfall, our mall doesn’t feel crowded because our circulation is big. Circulation facilities in public-space buildings is a space forming element that is applied to accommodate the need of consumers’ movement – both in horizontal circulation, which is within the floor, and vertical circulation that is between the floors. It takes at least 1 hour to go from one corner of the mall to another if one is visiting all stores on the way. BRR: What is Lucky’s USP then? What’s that customer experience you are selling? ST: Our slogan is “the place to be”. And we have done just that. If you look at our food court, it is the biggest, and it is one of a kind in terms of size, seating capacity, outlets and everything.

Our Family Entertainment Centre, which is called the “Onederland”, is the biggest and most unique in Pakistan; and by mid-November, we will launch Pakistan’s first indoor roller-coaster in our Family Entertainment Centre. BRR: On the one side, the e-commerce industry is growing and then the mall economy is also growing. Will they both continue to grow, or one of those will chip away the other segment’s share? ST: E-Commerce will grow naturally with the growth of Wi-Fi and the internet age. I mean, just look at the transformation from telex to fax, and from fax to email, and now everything is digital. In 20 years, the world has changed so significantly. But what has not changed is that people still like to shop. Yes, there are certain things they buy online and this trend will continue to grow as projected not only in Pakistan but globally. But in terms of malls, if we only talk about Karachi, we need to have at least 30 malls. And if currently there are only 2 malls, there is still space for 28 more to be built. The digital age might provide competition; there will be a price war, for example, because the overheads are relatively low if you buy something online. But the mall appetite is still there. The people will still sharpen up their prices, but they will still come to the mall to buy a suit, or to buy a good pair of shoes. You still like to try things on. Also, look at the fact that the stand-alone shops face the problem of parking chaos, besides there is a security issue. So people prefer to come to the malls. For example, a leading brand near our mall closed down as they were facing multiple issues including parking. Now they are at Lucky One and are doing well with no issues whatsoever. BRR: But a growing number of people including women are buying clothes online. And if they don’t like the clothes, they return it. What’s your take on this? ST: That is a very small segment. Plus, if you have to buy for an occasion then you buy it from the store, because you want to make sure that the quality of the cloth is very good. We do not do online business. BRR: Are you targeting or attracting certain type of brands here so that you can open up a certain kind of cluster here?

ST: We are very selective in choosing whom we want to give an outlet to. We planned and started with a good tenant mix. All the good brands are here. And there are also newcomers in the pipeline. This is because the global mall trend is that every year there is a 10 percent dropout rate. Even if you visit the London High Street, some shops are closing while new shops are replacing them. The same trend is visible in Pakistan. We are also thinking of making a small doctor’s enclave and a small gym. But we are struggling with the space. Although, it is the biggest mall of the country, it has exceeded everybody’s expectations. The response has been more than overwhelming and extremely encouraging. And that is what keeps us on our toes. BRR: Does it also keep you worried? ST: On a10-km radius, you have got a 10 million catchment. So even if 4 more malls open up in the vicinity, it wouldn’t matter much. BRR: What is your selection criterion for outlets? ST: We see the brands, their image, their following, etc. We also look at the shop design. If we don’t approve the shop design, we don’t let them build the shop, because we have to maintain a certain kind of image. We don’t want to just fill the mall up. Our selection criteria are quite rigid in order to get the best for our customers.

LNG-based 15-megawatt power generation unit at the site and then we have a standing backup of diesel power generation as well. BRR: What are your expansion plans? After Karachi, where are you planning to go? ST: We will introduce phase-2 of the mall, which will come in 2 years from now. It is going to be an extension of the existing mall, and the two will be connected via bridges. BRR: Do you have any other plans to venture into the North, or any other city, or within this city? ST: We would like to consolidate this part. Our group is not trying to be part of a rat race where we want to have several malls. We are exploring, and we are focusing on being diversified. It is important to see what you are selecting and at what time. And for us if it makes sense and if we feel like doing this again, we will definitely do it. BRR: Does this mean that adding a new mall is not on the cards at the moment? ST: No. It is definitely on the radar. But we are still not looking for a land in that matter. We believe in doing things the best way and managing things the best way. It is really important to bring the right entrepreneurial skills and the right management together.

BRR: How much has the group invested in this project? ST: We have invested more than $100 million in this project. That figure doesn’t include the cost of land. It doesn’t include the towers. It is just the mall. BRR: Tell us something about the residential towers? ST: We are building seven towers in total with 1,100 apartments. Two of the towers will be ready in about two years, of which we have sold one tower without active marketing. By 2020, all the towers will be ready. It will change the skyline of this area. The residents of those towers will enjoy an 8 acres park, followed by a tennis court, swimming pool, library, and a club house. We also have our own

Interview by Sohaib Jamali

Sidra Farrukh

‘Mall-scaping’ the country Shopping Malls in Pakistan - The Big 5 Karachi

Covered Area

Lahore

Islamabad

Dolmen Mall Clifton

LuckyOne Mall

Emporium Mall

Packages Mall

The Centaurus Mall

1 million sq feet

3.2 million sq feet

2.7 million sq feet

1.2 million sq feet

Total 3.8 million sq feet with Mega Mall of 633,332 sq feet

Footfall (daily)

46K+

50k+

44K+

30K+

25-30K

Average Rent per sq ft. (approx)

Rs300-350

Rs250-350

Rs400-500

Rs350-450

Rs250-300

Retail outlets

180+

200+

200+2

* Rental rates approximated average rates per sq ft. taken from market sources

he hustling and bustling shopping malls are now increasingly dotting Pakistan’s urban landscape. Their rise is almost synonymous with retail expansion in the country. Pakistan is undergoing a transition from small (and local) retailers to large international and local stores. With that, the shopping space, too, has been undergoing a massive revolution as shopping malls are taking the centre stage.

RISE OF THE MALL ECONOMY

While the past was about ‘street shopping’, today all the rage is about the shopping experience based on factors like convenience, rising disposable income, and weather conditions. It is more than just retail; apart from all the key local fashion brands, malls in Pakistan have been able to lure not only international brands but also international hypermarkets and chains. Malls today create a shopping experience that is complete with food courts, cinemas and some sort of kids’ entertainment. While still in a nascent stage, shopping malls tend to increase brand awareness. All around Pakistan cannot afford to not be in a mall. Malls can propel growth in a lower time and cost as brands require a lesser number of outlets to cover a large segment of the population. Today, it is no longer the number of retail outlets but the total retail per square feet that is relevant. While the store space is increasing, the focus on the number of outlets But the downside is that because sometimes brands might just want a mall presence, high rents negatively affect brand equity when these brands are unable to generate appropriate business. From the mall operators and owners’ perspective, too, the mall business is thriving as you see a sudden mushrooming of the mega malls across key urban cities. Recently, big business groups like Nishat, Younus Brothers, and Packages have ventured in the mall business to gain

THE BIGGIES

The modern retail sector in Pakistan is well-represented with sprawling malls and plazas in major urban cities, with the growth not extending to second-tier cities. The country now has some of the largest shopping malls in the region. Arguably, recent ventures such as Emporium Mall by Nishat Group, LuckyOne by Younus Brothers, Packages Mall by Packages Limited, and Dolmen Mall Clifton by the Dolmen Group are internationally comparable not only in size but also as per mall specifications, services, and infrastructure. the right amenities. Dolmen Mall overshadowed a number of small- and medium-sized malls in the city like The Forum, Park Towers, Millennium Mall, etc. Following Dolmen Mall Clifton, the city not only saw a revamp in Dolmen Group’s other mall ventures (Dolmen Mall Hyderi and Dolmen Mall Tariq Road), but also a number of new medium-sized malls like Ocean Mall and Tower, Emerald Tower, and Atrium Mall and Cinema. A recent addition to the metropolitan has been LuckyOne, which is South Asia’s largest mall. Sidra Farrukh is a Research Analyst at Business Recorder. She can be reached at sidra.farrukh@br-mail.com

32 | Retail Review 2017

In Islamabad, Centaurus was a state-of-the-art and a fresh beginning of the mall experience for the inhabitants of the twin cities, though the infrastructure has been seen to deteriorate over the last couple of years. And while Lahore has been late in coming up with its largest shopping mall, the city now hosts two mega malls – Packages Mall and Emporium Mall. However, the progression has not been drastic; the city has been running some of the successful small- and medium-sized shopping malls like Fortress Square Mall, Mall of Lahore, and Xinhua Mall. Worth noting is that some of these new additions like Emporium and LuckyOne are not located in the upscale areas of Lahore and Karachi, respectively; however, they have a promising middle class to generate the footfall.

TRENDS AND TRICKS!

The current revenue model is largely rental-based – also a known format for malls across the globe. they focused largely on buying shops, be it in commercial plazas or elsewhere, as a source of investment. However, as the market for shopping malls garnered pace, retailers understood the However, the rental model’s downside is that many mall operators have tried to exploit the retailers by charging exorbitant rents. Another feature in today’s mall economy is the trend of extravagant stores. Large well-known fashion retailers like Sapphire, Breakout, and Khaadi, have all opened what is being termed as ‘concept stores’. A concept store is one where a retailer sells carefully-curated and unique products connected via an overarching theme. The primary focus of retailers is generating returns; with bigger stores, the whole idea is to create a shopping experience, and what better place would it be than a mall. Coming to footfall, yes, shopping malls increase footfall to stores. However, one rising trend is the increase in ‘window shopping’, where visitors usually come to shopping malls for a ‘day-out’ or to ‘eat-out’, rather than shopping. of Carrefour is one such example. Studies show that malls with anchor tenant or anchor stores have outperformed those without one as they help draw initial shoppers to other stores in the mall.

A BRIGHT SPOT IN FUTURE?

Investment opportunities exist in the construction of large shopping complexes. Real estate investment is a known strategy for diversifying portfolio risk, so this too may explain why the manufacturing giants are entering the mall business. Real Estate Investment Trusts (REITs) also provide that opportunity. Arif Habib’s Dolmen REIT Management Limited is the country’s only REIT. A favourable tax regime may help in having more mall REITs.

Sohaib Jamali

The‘khokha’

economy

hen capital market salesmen pitch Pakistan’s booming retail economy at road shows abroad, their power point presentation starts off with a picture of a good-looking couple

at a chic cafe inside a multi-storeyed fully airconditioned mall. Such malls have indeed started dotting the skylines of Pakistan’s major cities in the last few odd years. But by no measure of imagination do they represent the real face of the country’s retail sector. Data for Pakistan’s retail sector is extremely patchy to the extent that mapping the sector is no less than an exercise in forensic analysis. One can liken it to a huge jigsaw puzzle with half of the pieces missing. The pieces that discussed elsewhere in this publication (See XYZ on page PQR). Some of those nuggets warrant sharing, though some of the data sets presented in the illustration here have extra bits of information, such as hotels and repair, which

MARKET SIZE ESTIMATES

not taxed), but is oft cited by C-level corporate leaders in the country. Whereas HIES survey tracks the income-expenditure patterns of nearly 27,000 households as sample for the country, and is well respected among independent economists at home and abroad. Now take the case of packaged milk, estimates based on HIES imply a market size of Rs61 billion, which is very low compared to

Source

Year

“Annual market size (Rs in bn)”

Apparel and Footwear specialist retailers

Euromonitor-Passport

2014

591

Expenditure on Clothing & Footwear

Estimation based on HIES

2015-2016

938.7

Carbonated Beverages Squashes - Off trade

Euromonitor-Passport

2016

95.8

Carbonated Beverages Squashes

Estimation based on HIES

2015-2016

52.2

not the case. Zain Suharwardy, the MD of Daraz. pk, recently told local media that “there are no even the overall retail industry); in fact, there is no real measure to determine how big the market is.” The business of market estimation also stands on wobbly grounds. Take a close look at the table. It compares the formal market size estimates produced by Euromonitor International with estimates of household expenditure on various items measured by the PBS’s Household Integrated Economic Survey. Euromonitor does not collect data on

Item

Cow milk

Euromonitor-Passport

2016

163.7

Expenditure on ‘milk packed’

Estimation based on HIES

2015-2016

61.1

Expenditure on ‘milk fresh and boiled’

Estimation based on HIES

2015-2016

1040

Corporate dairy sales estimates

Nestle & Engro & others *

2014

144 or 184

Total milk industry - packaged and open market

Industry estimates **

2014

1436 or 1846 65.05

Biscuits

Euromonitor-Passport

2014

Biscuits

Estimation based on HIES

2015-2016

MEMO:

Avg. household size: 6.31

19.8

2016 population: 195 mn

A Monthly household consumption on clothing & footwear: Rs2949 Percentage spending on garments and footwear: 85.83% Monthly household consumption on food items: Rs13406.27. Of which …… B Percentage consumption on carbonated beverages, squash: 1.05% C Percentage consumption on ‘milk packed’: 1.23% Percentage consumption on ‘milk fresh & boiled’: 20.92% D Percentage consumption on biscuits: 1.23% Notes:

HOW IMPORTANT IS THE WHOLESALE/RETAIL SECTOR?

“* Nestle & Engro had combined dairy sales of Rs129bn. Market sources say these two have a combined packaged milk market share of 90%, whereas Euromonitor puts that number at 70%. Total corporate dairy sales have been estimated accordingly. “

“Share of ‘wholesale & retail trade and restaurants & hotels’ sector in total number of economic establishments*”

53%

** Industry sources say packaged milk is 10% of Pakistan’s total annual milk consumption. The two estimates for total consumption are based on different estimates of corporate dairy sales.

“Share of those sectoral establishments set up with an investment of less than Rs1 million (including & excluding land & building) *”

99%

Share of those sectoral establishments that employ less than 5 people *

99.0%

In urban areas *

98.7%

Share of ‘wholesale and retail trade, repair’ sector in total formal employment **

15%

Share of ‘wholesale and retail trade, repair’ sector in total informal employment **

34%

Share of ‘wholesale & retail trade’ in GDP ***

18.50%

* Economic Census FY05 | ** Labour Force Survey FY15 | *** Economic Survey FY17 remain the closest proxy of retail sector statistics publicly available at the Pakistan Bureau of Statistics (PBS). The illustration shows that this sector is huge, be it in terms of its contribution to GDP, formal and informal employment or in terms of economic unit, generally a single physical location and engaged in one or predominately one type of economic activity. Examples of an establishment are establishments in this sector are self owned (98%), set up with a low investment and employ less than the sector. Despite its vast size, however, Pakistan’s economic observers and business community have a poor collective understanding of the sector.

WOBBLY GROUNDS

A host of academic papers suggest Pakistan’s informal or unrecorded economy ranges between 40 to 90 percent of the GDP. But when you ask academics about the sectoral estimates of informal or unrecorded GDP, there is no answer. The matter isn’t researched at all. Even books on Pakistan’s economy written by local or foreign authors carry no discussion on wholesale & retail sector and consumerism. It is as if the sector does not exist, or does not matter, when in fact its share in the GDP and employment suggest otherwise. One would have imagined that at least the size of e-commerce industry would have been adequately recorded because of the technological footprint. But that is

estimates made by Euromonitor or those based on corporate sales data publicly released by total milk consumption based on HIES estimates is very low (5.5%) whereas if industry sources are any guide, packed milk has about 10 percent share of the total market. One could attribute these difference to the fact that HIES tracks direct household consumption, whereas Euromonitor tracks total packaged milk sales including those consumed hotels, restaurants, ‘dhabbas’ in rural and mountain areas, as well as street side juice/ milkshake vendors. But if that is the case, then estimates of market size of ‘carbonated beverages and squash’ based on HIES should have been at least close to Euromonitor’s estimates of off-trade sales of these items; offtrade sales being the closest proxy of purchase of such drinks by households. In the case of apparel and footwear where household-commercial variance doesn’t matter, estimates of annual sales by formal sector specialty stores is more than half (62%) of the estimates of national annual household expenditure on apparel and footwear, which arguably includes purchases from both formal and informal outlets. Could that be possible? Little wonder then business associations too throw up numbers without any basis and are unable to provide a rationale for their estimations when pressed to justify their claims. Data has no sanctity in Pakistan.

CHANGING MINDSET

The implications of having an undocumented and understudied wholesale & retail trade sector are many. While the sector acts as a sink of employment when formal GDP growth (especially manufacturing) slows down, the small and scattered nature of wholesale/retail trade enterprises mean they are outside the banking system, whereas the WHT on banking transactions hasn’t been helpful as well. Advances or bank loans to this sector hovers around 4 percent of the sectoral GDP, whereas banking deposits from the sector remains around 5 percent of the GDP. These percentages too are my own wise outstanding loan/deposits data released by released by the PBS. The lack of documentation also leads to poor tax collection. Given the ubiquity of wholesale/retail enterprises, the taxation of the want to shoot itself in the foot? Unsurprisingly, when an effort was made to rollout VAT and introduce electronic cash registers at every retail outlet in the country a few years ago, the retailers agitated and the government soon backed away from implementation of the universally accepted system. The mom-and-pop nature of the sector means they cannot practically comply with the currently marks the tax system. Failure to put the sector in the spotlight also hurts the prospects of developing the valueadded industry, and new products for exports. At present the regulated and investment-heavy value-added agriculture industry, such as meat or pasteurized milk, is competing against players operating in a widely unregulated, unhygienic field. Can the likes of K&N and Meat One, compete against unorganised sector sitting on the footpathwith virtually zero cost of processing, save for a ‘kunda’, and shop rent; the unorganised sector Without developing the value-added industry for domestic consumption, the room to tap the

export potential is little, because in such industries domestic consumption provides the base. The long road to reforming the wholesale & retail sector must begin with documentation; the PBS needs to come up with a dedicated integrated census of wholesale & retail sector ala its census of manufacturing industries or agriculture sector. The provincial bureaus of statistics also need to be strengthened to build the information basis of this sector. The late Tashfeen Khalid, former chairman Sindh Revenue Board, often bemoaned the lack of adequate statistics in Sindh, which prevented SRB from making the right policies for GST on retail services. His concerns echo across the four provinces. Meanwhile, registration of retail outlets and electronic cash registers should be made mandatory at all retail outlets regardless of turnover thresholds, which gives rise to tax evasion. But such regulations should not come mechanism for tax returns/audit for mom-andpop enterprises that dominate this sector. At the same time, payments in this sector needs to be brought into the banking system; both payments to suppliers and payments received from customers. To this end, the likes of Finja’s SIMSIM, Telenor’s Easypaisa and others should be incentivised or otherwise nudged to focus on the wholesale & retail sector, so at least payments in this sector are documented to start with. These are only some of many the possible ways to document Pakistan’s huge wholesale & retail economy. But these do not only require a federal and provincial coordination, since many ancillary affairs fall inthe provincial domain; it also requires a change in mindset to focus on domestic commerce as an engine of growth, a mindset that is yet to dawn in government circles even though the Planning Commission had adopted the idea under Nadeem ul-Haq’s lead as early as the start of this decade. The writer is the Research Editor of Business Recorder. He can be reached here sohaib.jamali@br-mail.com, and @SR_Jamali

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TPL Maps eyes regional maps business Adeel Hashmi is the Head of TPL Maps – Pakistan’s first and most innovative digital mapping solutions, where he looks after the entire portfolio including GIS, Map development, Navigation product innovation and new technologies. He brings a rich experience of successfully working in various leadership positions in leading organizations like Oracle and global telecom giant – Nokia. His career spans diverse categories and geographies, mostly within Asia-Pacific regions including Pakistan, Afghanistan, Iran, Sri Lanka and Bangladesh. In this interview with BR Research, Adeel shares the story of TPL Maps, how it came about, what makes it better than Google Maps, the kind of benefits it offers to businesses and the future plans. BR Research: Tell us the story behind TPL Maps. How did it all start? Adeel Hashmi: TPL Maps is not a startup, though we’d like to think of ourselves as one. It wasn’t like three or four people thought of making maps and got started. Instead, how it started is that our core business is tracking so whenever there is an issue related to cars or you have to mention the location or give some kind of context. Back then, basic maps with most famous locations were already available but there were a whole lot of locations which were not available. So, obviously, this aroused a feeling of dissatisfaction among consumers as we weren’t able to locate exactly where their car was and had to give references to known buildings around. As a result, we started marking locations; obviously we started from the main cities, namely Karachi, Lahore, and Islamabad, where the customer concentration dominates. When we started out almost five years back, we formed a GIS department in TPL TrakkerCompany. We marked locations as per need, besides mapping the areas that our customers were visiting. For the right context, we even began mapping the points of interest, which included any shop, bakery, or even a small milk shop which our customers visited. Later, we thought that since when we were already collecting data, then why do it under the ambit of TPL Trakker? So we applied for a license with the Survey of Pakistan, which comes under the Ministry of Interior, for we wanted a license to be able to do the mapping activity. In 2016, we attained the license from the Survey of Pakistan. Now we are the only company that has this license. BRR: Is getting the license a barrier to entry in this business? AH: The fee for the license was very nominal but the credentials to be fulfilled were very demanding. Even if there is an iota of doubt of involvement of a foreign company, then getting a license is not easy. This is because mapping is about going and visiting sensitive areas, cities, streets, roads and everything. The concerned authority can’t allow a foreign company to be doing that kind of an activity. It took us a couple of years to get the license. BRR: Why should people use TPL maps as against Google maps? AH: Today the app has all the functionality that Google Maps has to offer. In terms of data, we have crossed Google already. The data include housing data, addresses, road networks, parks, industrial areas and businesses centers, corner shops, and what not. You will even find many dhabas and panwalas. We also offer street vision in Pakistan which Google does not. Also, the deviation from actual location is 3 to 4 meters in our case, whereas in the case of other maps that deviation is up to 9 meters. Google Maps doesn't have the housing data – they'll tell you the street but, say, if you type house # 11/8 at Jami Street, Google Maps probably won’t be able to guide you. Unlike Google we are able to achieve this because we have the license and we can deploy a team on the ground; we have surveyors in about 18 cities; we are into crowd-sourcing, and we are also engaging university students to have more localized data. With localization as the core differentiation strategy for TPL Maps, our Urdu maps have been developed to overcome the language barrier and assist businesses in providing solutions that are based according to the requirements of the domestic market. Just to give you a perspective, we have developed an app that collects data. About 6 to 8 months ago, our data collection cost was between 5 – 7 USD per point and it took a span of 38 days for data collection and updates. Now it takes us 3 days with unit cost being reduced to 10 cents per location. Our run rate was 12000 or 13000 points per month and currently it’s about 0.4 million per month. So this is the efficiency that we have introduced; it has boosted our team, increased speed and reduced cost. BRR: Have you purchased data as well? AH: Previously, we used to only rely on our surveys; now we take assistance from other companies. For instance, in our strategic alliance with Jazz, they shared data of all Jazz cash outlets; likewise with Telenor’s Easypaisa outlets. So that makes 30-40

34 | Retail Review 2017

thousand points of data. Likewise, we took 1500 points from banks’ branches data. Then we acquired physical maps – for example, we take the master plan of Bahria Town, plot, tag and mark it and add it to the data. Then there are real-estate firms that have maps of cities because they’re selling properties.

from the behavior of the driver. For instance, the number of times the brakes were applied, how many times the RPM was shot above 4, fuel consumption and the soundness of the engine. If you study about connected cars, by 2020 it’ll be a $30 billion market, globally.

BRR: Then what’s keeping TPL Maps from elbowing out Google Maps from the market? AH: The objective is not to elbow out anyone, but to have the best and most comprehensive local maps and location-based solution of Pakistan.

BRR: Is any government institution a potential buyer? AH: Yes! That’s where the real potential of mapping is. The Khyber Pakhtunkhwa government has given us the mandate to map the whole province with street view and locations’ virtual tour. We also make 360 degree virtual tours, which is another product.

BRR: How do you then plan to convert people from Google Maps to TPL Maps? AH: As mentioned earlier, it’s not about Google. Let’s assume that today we get the complete algorithm and put it in our app so that its predictability function works just as well as Google Maps. But the primary problem is that in Pakistan 96 percent phones have Android operating system that has Google Maps preinstalled, which makes it next to impossible for us to compete in that space. So why pick up a battle we know we won’t win? Instead, while we keep developing our database, we are tapping the B2B sector. For instance, we went to TCS and told them that our app could increase their distribution efficiency by 10 percent. That means if you make 50,000 deliveries in a day, then our app can help you make it 55,000 just by making sure that the riders have the accurate location.

BRR: What’s the extent of localization in your app? AH: We have launched Urdu maps on 14th August, which is another differentiation from Google. We are also working with Nust where we are getting the maps to work in sync with voice – and that too in different accents of Urdu. This will be a game-changer for a lot of people who don’t know how to type and who don’t know the exact way to a location. BRR: How exactly will localization add to the firm’s topline? AH: We went to Frankfurt to meet the Uber team, who seem to be interested in localization. Earlier some Chinese companies came and they wanted localization. So when we are looking at dollar deals, that’s where the money is, which is why our objective is to differentiate from Google with features that are sought for by the local market. This is why we have appointed local surveyors who know which spot or nook is important on the map. These insights are very important. Google doesn’t have street view of Pakistan but we have it. We are done with Karachi and Islamabad and we want to do another 10 cities in the next six months. Since we have a whole lot of data, we have also made Pakistan’s biggest online directory. If you don’t need the location but only the number, then the online directory is available and we are making its app too, so you’ll have the app and you can search for anyone’s number from around Pakistan.

BRR: How much investment has been put in to TPL Maps so far? AH: Roughly speaking, we have already invested Rs1 billion in the last five years which includes the cost of survey and data collection, human resource and also equipment. Equipment is expensive – for example, one camera, which is required for mapping, is worth Rs12.5 million. Plus, no university in Pakistan teaches mapping, which means that acquiring and nurturing the talent through continuous training and development needs a lot of investment. We have, therefore, invested heavily in technology, R&D and HR development. BRR: When did you start selling to businesses? AH: Earlier this year, we started approaching companies in terms of how we could add value to their system and this included the likes of e-commerce and cab-hailing services. However, K-Electric is now engaged with us; we are of course also in the final stages of implementing TPL Maps into all the tracking businesses and TPL Life Insurance. We are currently offering our API free of cost to start-ups.

BRR: You mentioned crowd-sourcing the data. How are you managing that? AH: The crowd-sourcing model involves engaging the university students. Currently, we have engaged students from the Karachi University and the NED. In total, we’ll engage 400 students – four students every area, who will keep updating us the data while traveling around the city. They can download our app, start collecting data, keep updating, and make money.

BRR: You think this data could be used for developmental purposes? AH: We are collecting a wide variety of socio-economic data – BRR: But why can’t you convert individual Google Map users such as data pertaining to schools and hospitals – as well as to TPL Maps. There are examples elsewhere in the world; for weather and floods related data. Our website will soon give you instance Waze in Boston USA, and Trafi in Turkey. the option to look at these datasets classified by the National AH: Markets likes these are dominated by iPhone, which means Assembly (NA) or Provincial Assembly (PA) constituencies. We that switching of map application is very easy. Most of the countries have all the data relating to the administrative boundaries and don’t have the data because Apple has never made maps its core we have the most updated data compared to anybody else. product. We are focused on location-based services and solutions. Political parties and citizens can now see how many parks, schools, clinics, doctors, and houses an NA or a PA has. Then BRR: So, for now, there is no revenue stream but you are it’s up to the political parties and the citizens how they act on looking forward to revenue stream 2 to 3 years down the that information. We can also provide sentiment analysis line. Is that so? through crowd sourcing. AH: No! When we look at TPL Maps, we have two businesses: one is the mobile app, which doesn’t really make money right now BRR: What are your future plans? but very soon we will have deals with major corporations. The AH: We’ve already started working on overseas markets of Sri other side, which is actually our cash cow, is the navigation system Lanka and Bangladesh. Iran and Afghanistan are in the pipeline. that we are providing to Toyota and Suzuki. Pretty soon, our maps Our aim is to establish ourselves as a regional player in the will also be in Honda, too, as TPL Maps is the only legal mapping maps business as we have the required technology. These are service in Pakistan the countries where Google is very weak and we plan to take In addition, we sell our maps in the shape of an SD card, which advantage of that. anyone can install. These SD cards are sold via Daraz, My cart We can also use the TPL Maps as a planning tool. The menu and TCS Yayvo. gives the details about road length, market models, shop We also have a hardware business. The direction we are steering counts etc. It is assistance to architects, builders and in as a group – and obviously TPL Maps is also a company that developers. We have developed a visual portal via TPL Maps is part of that group – is connected cars, as our hardware and that will help them have a walk-through view of roads, software will be providing a wide variety of data pertaining to cars, districts, markets, etc.

A collaboration between BR Research and Gallup Pakistan

Survey methodology The face-to-face survey was conducted by Gallup Pakistan between May 14 - June 12, 2017. The survey had a sample size of 1,252 respondents in urban areas across the four provinces. The estimated error margin was +3-5% at 95% confidence level.

Retail Preferences Of Urban Consumer Survey demographics Gender: 46% Male; 54% Female

Age: 34% Young (under 30 years); 52% Middle (between 30 and 50 years), 15% Old (above 50 years)

Household income: 12% Low (upto Rs7,000); 52% Medium (Rs7,001-20,000); 36% High (over Rs20,000) Province: 55% Punjab; 35% Sindh; 7% Khyber Pakhtunkhwa; 4% Balochistan

What do you mostly buy online?

In the past twelve months, have you or anyone in your household made at least one purchase from an online shopping website?

Base: 139 respondents who purchase from an online shopping website

Cosmetics Groceries 1% Books 6% 13%

Yes 11%

Clothes 24%

Mobile phones 38%

No 89% What is the intensity of your online shopping?

How do you pay for the online shopping?

Base: 139 respondents who purchase from an online shopping website

37%

40% 35%

32%

25%

Base: 139 respondents who purchase from an online shopping website

54%

60% 50%

26%

30%

Footwear 18%

40%

20%

33%

30%

15% 10%

5% 0% Rarely

(once every three months or less)

Occasionally (once a month)

Regularly

(more than once a month)

Frequently (once a week)

14%

20% 10% 0% Cash on delivery

Credit card

Debit card

Retail Review 2017 | 35

In the past twelve months, have you or anyone in your household made at least one purchase of a packaged/frozen food item?

Yes 19%

What is the frequency of packaged food consumption in your household? Base: 230 respondents who purchase packaged/frozen food item 40%

37%

35% 30%

23%

25%

20% 15%

10%

No 81%

What is the primary reason of your usage of packaged food?

45%

Regularly (more than once a month)

Stopped using it 3% 38%

40%

Frequently (once a week)

Heavily (more than once a week)

Base: 230 respondents who purchase packaged/frozen food item

46%

35%

Occasionally (once a month)

Has your usage of packaged food increased over the past twelve months?

Base: 230 respondents who purchase packaged/frozen food item 50%

Rarely (once every three months or less)

Reduced 24%

To a great extent 14%

29%

30% 25%

To some extent 31%

20% 15% 10% 5% 0% Quality/ Hygiene

Taste

Price

Ease (of purchasing and cooking)

Stayed the same 28%

Do you purchase packaged milk?

Reason for purchasing packaged milk? Base: 549 respondents who purchase packaged milk

41%

45% 40% 35%

No 56%

Yes 44%

30%

38%

39%

31%

35%

25% 20% 15% 10% 5% 0% Hygiene

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Quality

Taste

Longer shelf life

Ease of use

Which do you prefer to drink?

What are you looking for when buying your tea? Base:1248 respondents who drink tea

35%

Coffee 12%

30%

29%

31%

29%

25% 20% 15%

11%

10%

Tea 88%

5% 0%

40%

30%

24%

25% 20%

10% 5%

6% 1%

0% Olive Coconut oil oil

Palm oil

Canola Soybean Sunflower Other oil oil oil veg. oil

Ghee

DK/NR

How often do you go out for coffee with friends/family? 80%

73%

The health benefits 52%

How often do you eat out at a restaurant? 80%

70%

60%

50%

40%

30%

20%

10% 0%

How cheap it is compared to other oils 37%

16% 15%

15%

No Response 1%

The brand itself 10%

34%

35%

Taste and Consistency in taste and quality quality over a period of time

What do you look for in the cooking oil you buy?

What kind of oil do you use for daily cooking? 45%

How well-known Its price compared the brand is to other tea

75%

5% 8%

10%

0% Once a month

Once a week

Twice a week

More than twice a week

Less than twice a week

Never

Once a month

Once a week

Twice a week

More than twice a week

Less than twice a week

Never

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Do you go to shopping malls?

Which of the following features are important for a shopping experience to you? 70%

61%

60% 50% 40%

Yes, very often 11%

55%

39% No 46%

30%

21%

20%

10%

Yes, only when need arises 43%

0% Brand

Quality

Price

Convenient location

On-Trend

Store atmosphere

Advertising

What are the reasons for your visit to shopping malls?

How often do you visit malls?

Base: 687 respondents who go to shopping malls.

60% 50%

36%

40%

50%

48%

35% 30%

40%

32%

30%

25%

23%

20%

20% 15%

10%

Buy clothes/ accessories/ gifts

To eat

To kill time To watch a movie

For groceries Meet friends

Base: 687 respondents who go to shopping malls.

20%

17%

40%

Ambiance and lighting

38 | Retail Review 2017

Air conditioning

World class brands & services

Rarely

44%

50%

10%

Service quality

Once a month

58%

60%

10%

Once a week

What kind of products or services do you normally purchase in shopping malls? 70%

14%

15%

More than once a week

Base: 687 respondents who go to shopping malls.

25%

22%

25%

10%

What tempts you to visit the mall of your choice often? 30%

28%

26%

Entertainment & recreational activities

Popularity

30%

27%

20%

11%

10% Distance from home

CafĂŠ/ lounge

Consumer goods/ everyday basic needs/ groceries

Accessories, Apparel and footwear

Electronics

Jehangir Ashraf

Having the consumer’s back S

igns of growth in online retail are all over the place.Black Friday in Pakistan has become an online shopping extravaganza not unlike it is in the West, with Daraz.pk crossing Rs1 billion in sales in a single day last year; small, proprietary e-retailers are proliferating using Facebook as their primary platform, selling gift items, makeup and accessories, t-shirts and clothing, etc.; and to top everything off, the largest online retailer in the world, Alibaba is also mulling entry into the Pakistani market.

such as lack of quality assurance or misleading products and advertisements. What makes things e-commerce users in Pakistan prefer cash-on-delivery (the other option being online payment). The added caveat is that the parcel may not be opened for inspection until after the payment is made. This leaves the consumer highly vulnerable, and begs the question: what protection does the consumer have from e-retailers?

CONSUMER PROTECTION IN PAKISTAN

In Pakistan, consumer protection is a provincial subject. The table gives a list of all the relevant consumer protection acts in Pakistan. At the centre is the Competition Commission of Pakistan, which is a federal body and operates under the Competition Commission Act 2010. A relatively new body – quasi-judicial and founded in 2007 – the CCP has enforcement powers, and its focus lies on deceptive marketing practices (as well as cartelisation). With provincial legislation as well as the CCP at the centre, consumers thus have the recourse of either going to the CCP or to a provincial consumer court to redress their issues, depending on the issue. However, only Punjab and KP have dedicated consumer courts; Punjab has 11 consumer courts whereas KP has eight. Sindh is currently in the process, as per industry sources, while Balochistan shows no sign of entering the picture.The CCP mostly comes into play when big companies are involved.

PROTECTION FROM ONLINE RETAILERS

Section 10 of the Competition Act of Pakistan 2010 pertains to deceptive marketing practices and deals directly with consumers. Broadly speaking, if an individual purchases something and doesn’t get what he or she paid for, that consumer can prosecute the seller under this Act. There have been numerous cases under this heading – misleading ingredients, false advertising, false claims, and trademark infringement, to name a few. Regarding e-commerce, there are currently a number of cases pending with the CCP. As per website: an enquiry against Kaymu.pk – Pakistan’s most popular e-commerce platform. The case pertains to a wristwatch that the consumer purchased, which arrived in unsatisfactory quality: “The case of the watch was torn and the watch itself was very different as compared to the one showed in the product description on the website,” the CCP cites the complainant. Kaymu – like most e-commerce platforms such as AliExpress, Cheezmall, and others – serves only as a platform to connect buyers and sellers and is hence legally not liable for any faulty products. Then again, the company claims that in the event of misconduct by a seller, it will resolve the customers’ concerns. For the most part, it does so – that’s what the customer-care helpline is for. In this particular instance, however, the seller disappeared and the matter went unresolved. The CCP thus ruled that: “[Kaymu] asserts itself as a safe market place and a cooperative and helpful mediator… however; the return policy has not been placed clearly and conspicuously around the website.”

WAY FORWARD

Going forward, a lot of precedents will be set as e-commerce picks up and cases start surfacing. Currently, an e-commerce policy is in the works; a working group consisting of people from the Ministry of IT, CCP, PTA, FBR, Customs, SBP, and different private sector stakeholders are working on an e-commerce policy. This policy is expected to be launched within the next couple of months, a source in the CCP said, though it was expected in March of this year. For now, there are some obvious hiccups to consumer protection in Pakistan – not just for e-commerce, but generally speaking. For one thing – as it is with almost every legal issue in the country – cases take forever to reach a resolution. Sindh and Balochistan do not have dedicated consumer courts to begin with. Even the CCP, which has enforcement powers and doesn’t need to take matters to court, takes a while to give its verdict on matters referred to it. evidence. Thirdly, the legislations of federal and provincial bodies may vary. For instance, Punjab Food Authority might deem something in violation of health standards, while the PQSCA may deem otherwise (which has been the case regarding edible oil). Fourthly, consumer groups are unorganised in Pakistan. Consumers need to organise and form local level consumer committees to represent themselves at the district level. Finally, with all that being said, the e-commerce industry in Pakistan is at an infant Jehangir Ashraf worked as a Research Analyst at Business Recorder.

path between safeguarding the consumer and not allowing e-retailers too much freedom.Creating

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