welcome
A CULTURE OF ACCOUNTABILITY Business journalism in Pakistan has historically been a loser beat, and in most news organisations, it still is. And come to think of it, journalism is mostly the loser profession too. An astonishingly high number of writers whose work you read – including this scribe – are people who failed the civil service exam (ironically, in the English Essay). And once they get to journalism, the ones who have any spark at all gravitate towards covering politics. Those with a little less will try to get the sports or entertainment beats (at least they are fun), and the ones who still have aspirations of breaking big stories but do not want have the chops for politics will go to the metropolitan news section so that they can start covering crime. The leftovers, usually, get assigned to business or “commerce” as most news organisations still call it. So it is unsurprising that most business journalism in Pakistan has been the kind of comatose verbiage that nobody cares about. Add to that the old culture – originally started by Dawn and then copied by most other news organisations – of not naming any company names, and there was virtually nothing worthwhile to read in the business section of any newspaper or magazine in Pakistan for most of its history. Over the past decade, however, things have begun to change. Naming corporate names is a little more common, even at Dawn, which was long the bastion of traditionalism in Pakistani journalism. But the vast majority of companies still think of business journalists as ill-informed scribes whose job it is to write down what they are told at a press conference or a begrudgingly granted interview, in effect an extension of the company’s public relations department.
FROM THE MANAGING EDITOR
So when reporters like those at Profit and at a handful of other publications have the temerity to view the job as that of holding the economically powerful accountable, and – horror of horrors – have the audacity to ask the occasionally uncomfortable question, the immediate assumption is that they must be doing so for bribes paid by their rivals. Heaven forbid a Pakistani business writer have something interesting to say about a company and want to talk to their management about it before writing it! It is always amusing to see the kind of middle class Pakistanis who would rail against corruption among politicians and government officials, and calling for accountability in the government, then reeling back in horror against the idea that their own actions also be scrutinised and held to account. How dare journalists do their jobs when it comes to us! They are meant to target those other people! The bad people! Not us good people! So what if our actions affect hundreds, or even thousands of people. Why should we be held accountable for anything? Accountability is for those sleazy politicians! Not us!
Farooq Tirmizi Managing Editor
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Readers Say Umar Saif is brilliant but does it mean he is a visionary person? May be or may be not. Secondly the place of highest education can only be built by having a very strong primary and secondary educational system which we do not have at all, so expecting to bring a technology revolution by building top notch educational institutes manned by highly paid imported PHD from abroad will not function. Incubation centres like one at LUMs or Plan-9 which is Umar Saif’s initiative failed to push startup into full-fledged business, although the spendings and budgets are sizeable. In comparison to that, Zai Khan who worked with Saylanee Trust has been able to produce so many teams which are earning millions of dollars of foreign exchange and bring employment to groups of people . Because Zai Khan is able to put dreams in the eyes of his student, when our kids grow their parents, schools and overall society discourage them to dream big . All the time the focus is about getting numbers and getting a job. So going after Buzdar will never work although it may help out in venting our own personal frustration . Always remember the sign of good governance shall always start from building a robust primary and secondary education , a just legal system and a long term industrial development plan. (Apropos: Can ITU become Pakistan’s MIT?) Jawaid Gilani Usman Buzdar knows much about sheep but little about ITU and Umair Saif's vision.If this initiative founders in Naya Pakistan, blame the stars. Clearly, Saif knows nothing about the power of Istikhara. Research in unknown reaches of human intelligence and applications couldn't possibly interest a sheep farmer or purveyor of the occult. Dear Saif, what could conceivably encourage you to fight on in the service of your country? (Apropos: Can ITU become Pakistan’s MIT?) Dilwar Gilani How to ContaCt
facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com
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Great piece of knowledge. I know that the Pakistani public is in habit to see the temporary “everything fine” environment which makes it difficult for the government to decide as they need votes after 5 years. Maybe it's time, the brains from public stand up and give government
the relaxation to fix the economy with no pressure at least from public. Thanks for this article and love Profit. (Apropos: The rupee is falling. Let it crash) M.Hamza We just had made our mind that world is ended after Umar Saif. No doubt, he is a brilliant person but sky's the limit. Govt should find a good alternative anytime soon or this institute will be doomed. (Apropos: Can ITU become Pakistan’s MIT?) Umar Mian Expecting a successful startup which requires trustworthiness and trust amongst the constituents whether employees, employee/management or founders in a society that is predominantly untrustworthy and an economy based on hoodwinking others of their money is at best a pipe dream. (Apropos: 200 million people and zero unicorns) Khurram Ahmed Bugvi I’m not sure how anyone who understands basic economics can disagree with this article. Very well written and kudos to the author. (Apropos: The rupee is falling. Let it crash) Zeeshan This article is a breath of fresh air, at a juncture when financial journalism in Pakistan has stagnated with no originality, Profit is raising the bar by featuring in-depth and investigative pieces which are fascinating to read. The author has charted the history of the rupee, its impact and the structural flaws of the last seventy years and summed it up beautifully. Irrespective, the author should be felicitated for such an in-depth understanding of the country’s economy and the diversity of his previous articles deserves a kudos. (Apropos: The rupee is falling. Let it crash) Anonymous This is a good piece of writing having only one flaw.. It’s eyes on an idealistic approach only, which may be more harmful in our case. (Apropos: The rupee is falling. Let it crash) Abid
COMMENTS
Microsoft founder Bill Gates
QUOTE
“Microsoft may explore investment in Pakistan”
“Economic and trade policies are being framed to ensure development of agricultural and industrial sectors” Finance Minister Asad Umar
1.35pc
stake in Meezan Bank has been divested by Noor Financial.Last month, Meezan Bank had informed the bourse of Noor Financial being in initial stages of talks with foreign institutional buyers to divest 5.96% of its shareholding in the bank. In December, the country’s leading and first Islamic bank was granted a license by the Securities and Exchange Commission of Pakistan (SECP) to act as ‘Banker to the Issue’ for Initial Public Offering of Shares (both for book building and general public portion) for companies going through listing at PSX. Noor Financial had requested Meezan Bank to approach the central bank for the unblocking of the sale shares to enable it to consummate the aforementioned transaction. In August, according to a notice filed on the exchange, Meezan Bank Limited announced that Noor Financial Investment divested 0.85% of its shareholding. Earlier on, Noor Financial had divested 2.49%, 0.28% and 3.4% stake in Meezan Bank in May and June 2018 respectively. In May, Noor Financial said a foreign financial firm had expressed interest in buying part of its stake in Pakistan’s leading Islamic lender Meezan Bank. In 2017, Noor had stated it was continuously looking for strategic alternatives for its investment in Meezan. Meezan is Pakistan’s biggest Islamic bank with a retail banking network of more than 600 branches in more than 150 cities of the country.
3.75m
is the total requirement for potatoes in Pakistan, whereas the expected yield stands at 4.2 million ton. Out of which 95 to 97 percent is produced in Punjab and rest is produced in other provinces. In 2017-18 Punjab produced 4264.4 thousand tons (95.96 per cent) compared to 5.7 thousand tons (0.12 per cent) in Sindh, 152.6 thousand tons (3.063 per cent) in KPK and 22.6 thousand tons (0.9 per cent) in Balochistan. Hence the availability remains continuous around the year from January to December. From December onwards up to January 20 new potato crop is available. The price structure also fluctuates from December to March. In 2018 it started from Rs33 per kg in January to Rs28.8 per kg in December, and after January 20, potato crops are prime for exports. There have been rumours that the current government stopped or banned the potato export including a levied duty on the export of potatoes. The obvious reaction to this false news within the industry has caused unrest among the growers, traders and exporters.
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Rs4b
is being injected by Pakistan Telecommunications Limited (PTCL) in U-Bank, its wholly-owned subsidiary. This capital injection would enable the bank to further capitalise on the growth opportunities available in Pakistan’s microfinance sector. In the constantly changing competitive landscape, this Tier 2 facility would enable U Bank to expand its current customer so that the under-served population could be facilitated. U Microfinance Bank plans to utilize these funds in its business operations and expansion plans. Serving its customers through disruptive innovation and digitization, the bank would focus on achieving its growth targets. On the occasion, PTCL President and CEO and U Microfinance Bank Chairman Dr Daniel Ritz and said, “Seeing the potential in U Microfinance Bank’s ability to further expand and grow, PTCL has taken the decision to further inject Tier II capital into the bank. This is in line with PTCL’s commitment to support Pakistan and its economy as a whole.” Expressing his views, U Microfinance Bank’s President and CEO Kabeer Naqvi said, “U Microfinance Bank has been successfully enabling underserved Pakistanis and has been positively contributing towards poverty alleviation and economic empowerment.
“The new tariff policy will be industrialisation-driven and not revenue driven” Adviser to PM on Commerce, Textile and Industry Abdul Razak Dawood
$1.7b
QUOTE
200m
smartphones were shipped by Chinese technology entity Huawei during 2018, a new record for the company. In 2010, Huawei’s smartphone shipments were 3 million units, according to market research firm IDC. The company overtook Apple in the second and the third quarters of 2018 to become the world’s second-largest phone vendor, IDC said. Richard Yu, CEO of Huawei’s consumer business group, said the group hopes to become a pioneer and leader in the new generation of the smartphone revolution, continue to create values for the consumers and make Huawei a more favoured global brand. Headquartered in the south China city of Shenzhen, privately-owned Huawei is a world-leading telecom solution provider and also one of the world’s major smartphone brands.
$18.9b
worth of early-harvest projects have been completed or are under construction under China-Pakistan Economic Corridor (CPEC). The Chinese government provided concessional loans of $5.874 billion for Pakistan government’s major transportation infrastructure projects, with a composite interest rate of around two per cent in a repayment period of 20-25 years. Meanwhile, the Pakistani government provides a sovereign guarantee for the above loans and will start the repayment from 2021. “The Chinese companies and their partners invested $12.8 billion in energy projects in Pakistan. Among them, Chinese companies provided $3 billion from their own equity. The rest $9.8 billion is raised from commercial banks with an interest rate of about five per cent. The repayment period is 12-18 years. All the CPEC energy projects are an investment in nature, which is purely independent business behaviour of these companies,” the document read. “The companies are responsible for their own profits and losses and repayment of loans.
of foreign loans were received by Pakistan during the first five months (July-November) of current financial year 2017-18 reflecting insufficient disbursements due to the absence of an IMF programme. According to finance ministry officials, the $1.72 billion disbursements equated to around 18% of the annual estimates for FY19. The $2 billion financial aid received from Saudi Arabia is not reflected in these figures and is shown as part of the State Bank of Pakistan’s (SBP) accounts. And funds received from international creditors plunged by 37% or $1 billion compared to the corresponding period of last year. During the corresponding period of last year (July-November 2017) Pakistan received $2.7 billion in the shape of loans. In November, Pakistan had contracted another shortterm commercial loan from a syndicate led by Credit Suisse AG, taking its overall contribution during July-November FY19 to $270 million as per finance ministry officials. Additionally, it has obtained $160 million from Dubai Islamic Bank (DIB) and $20 million from Noor Bank. Pakistan external financing requirements have been revised to $22 billion on expectations that the current government would be able to rein in current account deficit to $13 billion in current FY19. The dismal figures of disbursements in foreign loans could be attributable to the failure of the government to clinch an International Monetary Fund (IMF) bailout. Consequently, this has contributed to lesser disbursements from the Asian Development Bank (ADB) and World Bank (WB). The plan to float a $3 billion Eurobond has also been shelved by the government and replaced it with commercial loans. A boost in foreign inflows is anticipated by the finance ministry in the next few months as conditions for Chinese commercial loans are being negotiated, said the officials. Moreover, Pakistan requires $4 billion in commercial loans in the last seven months of FY19 to keep the foreign exchange reserves at the existing level of $8 billion, said sources in the finance ministry.
$100m
agreement has been signed with World Bank (WB) for Sindh Solar Energy Project. The project would support the deployment of solar power in Sindh, spanning three market segments: utility-scale, distributed generation, and at the household level. Utility-scale solar includes the development of solar parks to support private sector investment and launching of Pakistan’s first competitive bidding for solar power production, starting with an initial 50MW pilot solar auction. Distributed solar includes at least 20MW of distributed solar PV on the rooftops and other available space on and around public sector buildings in Karachi, Hyderabad and other districts of Sindh. The project would also provide solar home systems to 200,000 households in areas with low or no electricity access.
BRIEFING
CAN
WOMEN-ONLY RIDE-HAILING
SERVICES SOLVE THE HARASSMENT PROBLEM?
Both Paxi and Safr want to create a safe environment for women using this mode of transportation, but it is unclear if both management teams will be able to create businesses that can scale 16
I
By Shoaib Pervaiz
t was April 2018 when Sarah* called for a driver from a popular ride-hailing company to her office at about 9:30pm at night. When the driver showed up, she got in and told him the address to her home. A ride that usually took her half an hour, had already taken around 50 minutes and she still was nowhere near her home. Busy texting her friend, she noticed the time on her phone and asked the driver what was taking so long. The driver responded by saying there was a traffic jam and he had hence taken a longer route. Urging him to hurry up, she got busy on her phone
again. As she felt the car coming to a stop, she looked up and outside the window. She was clearly in a different area. The driver had instead stopped in a deserted street. What happened next would remain etched in her memory forever. The driver had turned around, and had a knife pointed at her. He ordered her to quietly get out of the car, and follow him to his friends’ apartment. Trembling with fear, she got out, and in a moment of madness, started screaming hysterically. Luckily, a few people from the neighboring house got out and saw her, which led the driver to flee. While Profit has not been able to
independently verify Sarah’s identity or story, it is by no means a unique or unusual one. Women narrate such experiences on social media quite often, which makes one wonder, is the ride-hailing business not safe for women In Pakistan? And have businesses tried to do more to ensure women’s safety? The birth of ride-hailing services such as Uber and Careem has had a massive impact in Pakistan. The ride-hailing concept has itself been a game-changer and has made travel easy, convenient, and personalized. But in this, as in many things, the ability of women to take advantage of this convenience is more limited than that
TECHNOLOGY
of men. In a survey conducted by Profit, 30% of women who have used ride-hailing services say they have felt unsafe in them, and 15% said they have faced harassment. And when asked about what might make them a more frequent user of the services, nearly 59% of women surveyed said that increased security, and 33% said the ability to select the gender of the driver.
For women, by women
A
few companies are trying to change that situation and offer more security for women. In March 2017, a new company entered the ride-hailing business: Paxi. The company started operations in Karachi with three unique features; the option to call the ‘captain’ through an SMS or by calling its call centre, uniform-clad drivers, and a ‘Pink Taxi’ – a service for women, by women. Zahid Sheikh, the CEO of the company, had then said the company wanted to provide women with an equal opportunity, and a safe environment for women passengers as well as captains. Careem, in 2016, had also updated its fleet with female captains who would pick both male and female passengers. Paxi, in a bid to differentiate itself, and perhaps provide a more exclusive service, ensured its female captains would only operate for female passengers. “The idea behind Paxi was a
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transport service especially for women. We started Paxi in the hopes of capturing the female audience, and to provide a more convenient and safer environment for women in Pakistan”, says Iqra Hameed, Paxi’s former marketing manager. In 2017, Paxi announced that it will ‘soon’ start its operations in Peshawar and Islamabad. “We intended to branch out operations to other cities such as Islamabad and Peshawar, however, we faced obstacles such as construction and government related permits in these cities which delayed our plans,” says Arif Khan, co-founder of Paxi. With a population of more than 23 million people, Karachi is a city that has seen exponential growth and urbanization. It is a major hotspot for new businesses, eager to explore their options in the area and achieve rapid growth. It also still has the single largest concentration of middle class Pakistanis who have the kind of spending power that would form the target market for any such startup. Since 2017, Paxi, a company which has seen steady growth and has received considerable coverage from the media, has only been able to increase its fleet of female captains to 12, confirms Arif Khan. “We have had to train our female captains on customer ethics, self-defense, CPR, and especially in panic-situations that frequently occur in the Karachi traffic”, he says. At present, Paxi operates at the same pace it has been since the last
“WE INTENDED TO BRANCH OUT OPERATIONS TO OTHER CITIES SUCH AS ISLAMABAD AND PESHAWAR, HOWEVER, WE FACED OBSTACLES SUCH AS CONSTRUCTION AND GOVERNMENT RELATED PERMITS IN THESE CITIES WHICH DELAYED OUR PLANS” Arif Khan, co-founder of Paxi year. Its co-founder estimates that it will take years to popularize the concept of a female-only ride-hailing service in Pakistan.
Equal opportunity for all
A
nother entrant called ‘Safr’, found the spotlight last year in Lahore when talks of a women-only ride-hailing service circled media outlets. Somewhat counterintuitively, the inspiration for Safr was not local to the Pakistani market, but came originally from the United States market. Michael Pelletz, an ex-Uber driver from Boston, realised the need of a female-only service similar to Uber, and created ‘Chariot’. While the company called Chariot didn’t work out as planned, the idea struck a chord with Pakistani-American Zain Gillani, who acquired the company, re-branded it as ‘SafeHer’, which later became ‘Safr’. The new owner of Safr saw the need for a by women, for women ride-hailing service in Pakistan, and set out to create a team in the country. “The concept of Safr is simple. It is a ride-sharing platform for women who have had to use public transport, and face the risk of assault, unwanted stares and advances from men”, says Syeda Ramla Hassan, CEO of Safr. “Women face harassment on a daily basis. While cases are frequently reported and heard, I suspect that
“WE’RE IN TALKS WITH SOME MAJOR BANKS, NGO’S, AND OTHER FINANCIAL INSTITUTIONS TO HELP US GET MORE AWARENESS FOR OUR APP. WE’RE ALSO IN TALKS WITH SOME PEOPLE IN THE RED-LIGHT AREAS SO WE CAN ONBOARD FEMALES WHO HAVE NOT HAD THE PRIVILEGE TO RECEIVE PROPER EDUCATION AND HENCE GET EMPLOYMENT. THE IDEA IS TO GET MAKE PEOPLE MORE AWARE OF THE CONCEPT OF A FEMALE-ONLY RIDE-HAILING SERVICE FIRST, AND THIS IS WHY WE ARE FOCUSING ON PROMOTING OURSELVES. WE HOPE TO LAUNCH OUR SERVICES SOON” Syed Ramla Hassan, CEO of Safr most are not even reported. Even if we look at the surveys conducted by UN Women, by the Government of Punjab, or by the Aurat Foundation, 90% of women who participated in the surveys in Lahore had faced sexual harassment in public transportation., and over 82% had faced harassment in bus stops”, adds Ramla. Safr believes that the people of Pakistan want a new and reliable service for women who can safely travel from point A to point B, irrespective of the time and location. “Most of the people we have talked to have faced issues with male captains, and would welcome a female-only service”, says Ramla.
Among the women surveyed by Profit online, there seems to be at least some support for Ramla’s hypothesis, though perhaps not as strong as she might expect it to be. Of those surveyed, 41% of women stated that they would support a women-only service, while 59% stated that they have no gender preference. Some of the detailed responses indicated the prevalence of stereotypes of female drivers, especially among men who use ride-hailing services, regardless of whether they support or oppose a female-only ride-hailing service. One respondent commented that he would rather choose a male captain since female captains are
known to drive slow. Another user said that his niece was almost robbed and kidnapped on gunpoint and she had to get out of a moving vehicle. “I think a woman-only ride-hailing service can be very successful,” he added. In a separate survey, Profit asked what they would choose if people were given the option to choose the gender of their captain. Out of the 358 responses, 240 (67%) said they would choose a ‘male’ captain, while 118 (33%) said they would choose a ‘female’ captain. Most of the respondents (both female and male) suggested that the main difference between a male and a female driver is the experience of driving in crowded traffic. Safr’s CEO further shared her disappointment with the ride-hailing services currently operating in the country, and about how they had failed to live up to their promises of equal opportunity, freedom of movement, and creating job opportunities. “When I see stories posted by people and women on social media and hear of these incidents of harassment, it tells me that the promise made by the ride-sharing companies that we have, have not been fulfilled because women still face harassment in one way or another on a daily basis. So, when a woman driver is not comfortable picking up a male passenger at night, her work hours are automatically limited, and hence her earning potential and freedom of movement are also limited. “This scenario is not just prevalent in Pakistan, it’s all over the world,” she adds.
TECHNOLOGY
Paxi, initially had intentions to become the primary go-to service for Karachiites. However, with the rise of Uber and Careem, it had to focus on its niche, and develop its female-only business. “With 12 female captains currently on board, it’s hard for business to flow on a regular basis”, says the company’s co-founder. Arif Khan also told Profit that female captains hardly get regular passengers throughout the day, and hence, are paid a monthly salary. “Our female captains are currently providing pick-and-drop services for women who have to go to and come back from offices, schools, and universities. We also pay them commission for any other passengers they pick throughout the day.” he explains. For women, working during the night is almost an impossibility due to family reasons, society, and culture. Fathers have issues allowing their daughters to travel late in the night, husbands seldom allow their wives to work at all, and single women find it difficult to work late and face harassment. As found out in the survey conducted by Profit, most women have trouble traveling in the evening, especially with male drivers. Profit sought comment from Careem Pakistan about their female captains, but the company declined to comment.
Failure to launch
I
t is clear from both survey data as well as anecdotal evidence that there should be at least somewhat of a market for ride-hailing services
that cater to women, particularly as a means of solving for the rampant harassment problem in the country. Both Paxi and Safr have attempted to create that solution, though both have had difficulty making headway into the market against their larger competitors – Careem and Uber – for different reasons: Paxi has a problem scaling its operations, and Safr has trapped itself in a cycle of planning and public relations without actually launching operations. In the case of both companies, at least part of the problem in scaling appears to be a lack of funding. Both Uber and Careem have poured millions of dollars into seeking to capture the approximately $300 million (and rapidly growing) ride-hailing market in Pakistan. Those are the kind of resources not available to the founders of both Paxi and Safr, though it is not entirely clearly if they have sought
such funding and been unsuccessful, or whether they have not even tried to obtain growth capital from external investors. Pakistan’s venture capital industry is small, but has been attracting growing interest from institutional investors looking to capitalize on the opportunity for promising tech startups in the country. For their part, while the management team of Safr appears to have identified a market niche they wish to serve, they appear to believe that their biggest challenge in creating a business that can scale has more to do with societal factors than their own lack of financing and marketing. “The problem is that the society has restricted its female population and its freedom of movement by enforcing a draconian culture that does not allow women to go out, or work late at night,” says Safr’s CEO. As for the company’s marketing efforts, the company appears to be relying on low-cost methods to try to get the word out: “We’re in talks with some major banks, NGO’s, and other financial institutions to help us get more awareness for our app. We’re also in talks with some people in the red-light areas so we can onboard females who have not had the privilege to receive proper education and hence get employment,” says Ramla. “The idea is to get make people more aware of the concept of a female-only ride-hailing service first, and this is why we are focusing on promoting ourselves. We hope to launch our services soon.” n * Names have been changed to protect people’s identities.
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TECHNOLOGY
22
THE NEXT PHASE OF THE MILK WARS Engro Foods and Nestlé Pakistan have been engaged for years in a stiff competition for a share of the Pakistani consumer’s wallet, but the hard part is yet to come
I
Shoaib Pervaiz and Farooq Tirmizi
t is the advertisement that cause a stir in Pakistan’s marketing world. Olpers, a brand of milk owned by Engro Foods recently launched a television commercial that showed a package of an unnamed rival, though the packaging is distinctly similar to that of the yellow packets of Nestlé’s Nido Fortigrow. A young boy asks his mother if the package is ‘not milk?’ (kya ye doodh nahi hai?), to which his mother exasperatedly says it isn’t, and that ‘ye tou teil milli safaidi hai’ (its a mixture of oil and white powder!). Following this, the grandmother in the commercial then questions in disgust, ‘Yaani ke itne saal se hum dhoka kha rahay thay?’ (So we were being deceived all these years?).
FOOD AND BEVERAGES
Needless to say, even though Nestlé was not named in the ad, the company did not appreciate the implication that they had been less than forthcoming about the nature of the product. Nestlé’s ad agency, Ogilvy & Mather confirmed that Nestlé Pakistan had taken legal action in the form of a stay order for airing the television commercial against Engro Foods. The Olpers ad is currently still airing on most television channels, but without the part where the boy mentions anything about the yellow packaging. “It remains to be seen whether this TVC has done damage to the business in terms of reducing sales or market share, since it has only been a couple of weeks since the advertisement was aired,” the agency added. On the surface, this is the story of two giant companies competing against each other, with the smaller competitor – Engro Foods – seeking to gain market share by highlighting what its brand managers perceive as the contrast between their product and that of their bigger rival, Nestlé Pakistan. Yet scratch beneath the surface, and this is really a story of two large companies struggling to gain market share against a much bigger, much more persistent rival: loose, unpackaged, unpasteurised milk, sold at dairy shops throughout the country. This ad, and the legal action it has prompted, is a minor skirmish in a much broader battle for supremacy of Pakistan’s milk market, and it is one in which Engro Foods and Nestlé Pakistan are more allies than rivals. Both companies compete against each other for
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share of the packaged milk market but have a common interest in working to expand the market for packaged milk relative to unpackaged milk.
The story of packaged milk
T
he history of packaged milk in Pakistan starts with its packaging. In 1956, the Wazir Ali Group set up a packaging company – Packages Ltd – in collaboration with Tetra Pak, the Swedish packaging giant. Packages quickly became the leading supplier of packaging material to Pakistan’s nascent packaged food industry. In 1976, during a routine review of the company’s operations, the management found that one of their machines that made packaging for beverages was underutilised. Rather than simply let the machine remain underutilised, or even eliminating the business line entirely, Packages decided to invest in vertical integration by creating its own downstream user of beverage packaging. Thus was born Milkpak, a brand that remains one of the leading packaged milk brands in the country and one of the most recognised overall. Milkpak Ltd was incorporated in 1979 and began production of its eponymous brand of packaged milk in 1981. By 1984, the company expanded into the fruit juice market, acquiring the “Frost” branded line of juices from its parent company Packages Ltd. The next year, Milkpak launched its brand of butter, and the year after that, a line of packaged cream.
In 1988, Nestlé, the multinational food giant based in Switzerland, bought a controlling stake in Milkpak Ltd, and the company came to be known as Nestlé Milkpak Ltd. The Nestlé acquisition brought significantly more resources – both in terms of capital and technical expertise – to the packaged food industry in Pakistan, which sought to grow the share of packaged food relative to unpackaged food in Pakistan. For much of the 1990s and early 2000s, for instance, Packages Ltd, in collaboration with Nestlé Milkpak, ran long informational advertisements on television (back then, there were only two state-owned channels), seeking to educate the Pakistani middle class consumer on the safety features of packaged milk and the health benefits of avoiding unpackaged foods. The strategy was clear: packaged food companies will all grow together if more people realise that the product offering was better than that of unpackaged food. The effort was less about creating an individual brand personality – though there was certainly some of that as well – and much more about creating the perception of additional safety around the entire category of packaged foods. Yet despite all of these developments, packaged milk remained a relatively small segment of the overall market for milk in Pakistan, which itself is one of the largest categories of consumer spending by Pakistani households. According to household spending
“THE LAWS ARE CLEAR. WE HAVE A SET OF REGULATIONS WHICH GOVERN ADVERTISING PRACTICES IN THE COUNTRY, AND WE WORK TOWARDS MAINTAINING THAT THESE PRACTICES ARE FOLLOWED. UNDER OUR LAWS, SPECIFICALLY SECTION 10, WE ARE VERY CLEAR THAT BRANDS CANNOT FRAUDULENTLY USE ANOTHER COMPETITORS’ NAME OR PACKAGING IN ADVERTISEMENTS. HOWEVER, IF IT IS DONE FAIRLY, THEN WE HAVE NO ISSUES” Asfandyar Khattak, Competition Commission of Pakistan spokesperson data from the Pakistan Bureau of Statistics, the average Pakistani household spends 9.5% of its monthly consumption expenditures on milk and dairy products, the overwhelming bulk of which is spent on milk alone. According to Profit’s analysis of that data, that amounts to approximately Rs3,373 per month per household on milk in 2018. That makes milk the single most valuable prize in the competition for share of the Pakistani consumer’s wallet. Small wonder then that just when Nestlé began to gain significant
traction in the Pakistani milk market, a well-financed competitor entered the market. In 2006, the Engro Corporation launched its first consumer-facing subsidiary, Engro Foods, and their very first product was a line of packaged milk – under the brand name Olpers – that would be a direct competitor to Nestlé’s Milkpak. But for the first six years of Engro Foods’ existence, far from being seen as a threat to Nestlé’s supremacy, Olpers helped expand the market for packaged milk. In 2005, the year before Engro entered the market, packaged milk accounted for just 3.0% of the total market for milk in Pakistan, by rupee value. By 2012, that share had jumped to 7.8% of the total market. In other words, Engro and Nestlé were not taking market share from each other, they were both taking share from the unpackaged milk market. And in public-facing statements, Nestlé’s management acknowledged that market share within the packaged segment did not matter to them. “Take the example of yoghurt. We are 80% of the market when it comes to packaged yoghurt. But that packaged segment is only 2% of the total market,” said Ian Donald, then the managing director of Nestlé Pakistan, in a 2012 interview with The Express Tribune. “So it doesn’t really matter what our market share is. We need to grow the whole packaged segment.” Nestlé Pakistan and Engro Foods were never exactly friendly with each other, but in the period between 2006 and 2012, they did not think of each other as their primary competition. But
then matters stalled. And that is when the two companies started getting into a stiffer competition with each other.
The post-2012 stagnation
S
ince 2012, the market for packaged milk has seen much slower growth, and the numbers show it. First, it is important to acknowledge that packaged milk has continued to make strides in Pakistan’s dairy market. According to Profit’s analysis of data from the Pakistan Bureau of Statistics, between 2002 and 2018, the market for milk and dairy products in Pakistan grew by 15.1% per year (inflation during that time averaged 8.4% per year). Spending on packaged milk has grown by 25.7% during that same period. As a result, the share of consumer spending on packaged milk relative to total spending on dairy products has risen from 2.5% to 7.3% between 2002 and 2018. However, there is a considerable difference between the years between 2006 and 2012 and the years between 2012 and 2018. Between 2006 and 2012, total consumer spending on milk and dairy products grew by 20.8% per year. Spending on packaged milk during that time grew by an astonishing 36.3% per year (inflation during this period averaged 11.8% per year). As a result of this tremendous industry growth, both Nestlé Pakistan and Engro Foods did very well. During this period, Nestlé Pakistan grew its revenue by a compound annualized growth rate (CAGR) of 23.7% per year, taking is annual revenue from Rs22.0
FOOD AND BEVERAGES
billion in the calendar year 2006 to Rs79.1 billion in 2012. Engro Foods did even better during that time, growing its revenue at a CAGR of 72.4%, from Rs1.5 billion to Rs39.5 billion. The overall packaged food industry continued to take share from the unpackaged industry, rising from 4.2% of consumer spending on milk in 2006 to 7.8% in 2012. At that point, however, matters began to stall. The dairy market as a whole grew more slowly during that period, at about 9.5% per year (inflation during that time averaged 5.2% per year). However, what is interesting is that unpackaged milk appears to have made somewhat of a comeback, growing at a slightly faster average of 9.6% per year, while packaged milk grew at an average of just 8.8% per year during that same period. As a result, between 2012 and 2018, the packaged industry’s share of the milk market went down from that 7.8% to 7.3%. It is not entirely clear exactly why the packaged industry started retreating in terms of market share after so many years of gains, especially since the economy did not materially deteriorate during the years between 2012 and 2018, at least in the early part of that period. What is abundantly clear, however, is that the impact of that retreat was not uniform on the two big players in the industry. Nestlé Pakistan saw a dramatic slowdown in its revenue growth, which went from a CAGR of 23.7% in the six years before 2012 to 8.1% in the six years since 2012 (through the end
26
quite as strictly dependent on the milk and dairy sector as its smaller rival. What that means is that Engro Foods feels the urgency of creating and marketing new products as a means of not just catching up with its larger competitor, but also of diversifying its business and mitigating the risk of its significant revenue decline repeating itself in the future.
The ad wars begin
B of the third quarter of 2018, the latest period for which data is available). Engro Foods, however, saw a sharp drop in overall revenue growth, going from a CAGR 72.4% in the six years prior to 2012 to -3.9% in the years since then. The decline has been even more dramatic since 2015, the last full year during which Engro Corporation was the majority shareholder of Engro Foods. Revenue has declined 36.4% since then. This differential fate is at least in part due to the fact that Nestlé Pakistan has a larger stable of brands and products that it sells compared to Engro Foods, and thus has a more diversified revenue stream that is not
etween 2006 and 2012, Nestlé had watched Engro Foods growing its revenue and market share in many of the markets in which it competed, and for most of that period, it did not feel threatened. Yes, the relative numbers were moving in Engro’s favour, but the absolute numbers for both companies were growing. In 2013, however, came the first absolute revenue decline for both companies, followed by a year of relatively slower growth in 2014, and suddenly, it appeared that Nestlé Pakistan would have to rethink its corporate strategy if it was going to retain the title of the largest food company in Pakistan. The strategy Nestlé chose was a dramatic uptick in its advertising spending, a near doubling that saw the company’s total advertising expenses jump from Rs5.3 billion in 2014 to Rs9.5 billion in 2015. The company invested heavily in promoting its brands and building up a greater brand equity in the minds of the Pakistani public. (For those of you wondering, this increase
“THE COMMUNICATION NEVER MENTIONED A COMPETITOR BRAND. THE AD SHOWS AN IMAGINARY BRAND CALLED YE QUDRATI DHOODH NAHI WHICH REPRESENTS ALL THE BRANDS THAT CONSUMERS PERCEIVE AS MILK BUT THEY ARE ACTUALLY POWDERS MIXED WITH VEGETABLE OIL. WE WOULD URGE CONSUMERS TO READ THE JUDICIAL RULING ON POWDERS MIXED WITH VEGETABLE OIL. EVEN THE JUDICIARY HAS RULED THAT SUCH PRODUCTS ARE NOT MILK AND ORDERED COMPANIES THAT PRODUCE POWDERS MIXED WITH VEGETABLE OIL TO PUT A WARNING ON THE PACKAGING IN A CLEAR AND LEGIBLE WAY” Nageen Rizvi, Engro Foods spokesperson does not appear directly related to Nescafe Basement, the music show sponsored by Nestlé Pakistan. That show started in 2012, and its costs show up in the form of a marketing expenses increase in that year’s financial statements.) Engro Foods, being a smaller company, did not have the capacity to keep pace with that massive increase in advertising spending by Nestlé Pakistan. Nonetheless, the company did catch its rival’s advertising spending rise and responded by raising its own spending
by about a third to Rs2.4 billion in 2015. Since that year, however, the decline in revenues has meant that Engro Foods has had fewer resources available to invest in its marketing and brand building initiatives.
The “safaidi” controversy
A
t the heart of the controversy between Engro Foods and Nestlé Pakistan is the differences between the two products.
“Olper’s Full Cream Milk Powder is produced by removing the moisture content (water) from natural, full-cream milk and by adding some extra nutrients like vitamins and calcium. Once water is added back, it becomes FullCream Milk, enriched with calcium & vitamins,” said Engro Foods’ corporate relations department, in a statement issued to Profit. Nido Fortigrow, which has a market share of more than 90% in the powdered milk category, includes milk solid non-fat (MSNF), milk fat, vegetable fat, emulsifier, vitamins, minerals, and soya lecithin in its ingredients. On its package, it says on the front of the package that it is ‘milk powder with milk and vegetable fat’. Both brands have similar ingredients, are powder-based, ultra-heat treated, and contain additives which add to the milk component, implying
FOOD AND BEVERAGES
“IN PAKISTAN, PEOPLE OR ORGANIZATIONS DON’T TAKE INSTITUTIONS SUCH AS THE CCP SERIOUSLY. WE NEED TO EMPOWER ALL OUR INSTITUTIONS SO THAT THEY CAN TAKE STRICT ACTION AGAINST THOSE WHO ARE NOT OBEYING THE RULES/ LAWS. IN THIS CASE, ENGRO MALICIOUSLY STARTED THIS CAMPAIGN WHICH IS FACTUALLY INCORRECT AND UNTRUE. ORGANIZATIONS LIKE THE CCP NEED TO TAKE DIRECT ACTION AGAINST SUCH COMPANIES WHO VIOLATE THEIR LAWS” Abdul Saboor, Ogilvy Pakistan executive that both are milk products enhanced with other ingredients. Nestlé Pakistan believes the Engro Foods advertisement is “factually inaccurate”, according to a company spokesperson. For its part, Engro Foods categorically states that it did not target Nido or any other actual competitor brand in its target. In a statement issued to Profit, Engro Foods spokesperson Nagin Rizvi said: “The communication never mentioned a competitor brand. The ad shows an imaginary brand called “Ye Qudrati Dhoodh Nahi” which represents all the brands that consumers perceive as milk but they are actually powders mixed with vegetable oil. We would urge consumers to read the judicial ruling on powders mixed with vegetable oil. Even the judiciary has
28
ruled that such products are not milk and ordered companies that produce powders mixed with vegetable oil to put a warning on the packaging in a clear and legible way.” Olpers is promoting itself as ‘full cream milk’, while Nido promotes itself as ‘milk powder with vegetable fat’. Nido, like Olpers is also made from natural milk, claims Abdul Sabhoor, Nido’s Business Head at Ogilvy & Mather. However after its fortification with a high standard fatty acid/vegetable fat, it cannot be claimed as ‘real milk,’ he adds. This is not the first time competitive advertisement has been used in Pakistan. Coca Cola launched its ‘Zaalima Coca Cola pila de, chai ko thand kara de’ (“Give me a Coca Cola, cool it with the tea”) campaign featuring Maya Ali and Ahad Raza Mir last
year. The punch line, ‘chai ko thand kara de’, targeted the country’s leading tea brands, Unilever Pakistan’s Lipton and the independently owned Tapal. Lipton responded with its own digital campaign, posting a cup of tea on digital and social media platforms that said, “Pakistanis love chai zaalima… nice try’, with a caption that said, ‘Pakistanis have no doubt when it comes to chai’. Lipton also started using the hashtag ‘#Pakistan’sBestBeverage’ to counter the onslaught by Coca Cola. Lipton came up with its ‘Tum, mein aur aik cup zaalima chai’ campaign with a hashtag that said, ‘TapalDanedarZalimChaiBanaye’. Following this, even Nestle joined in the party by showing a chilled glass of Coke with a person dipping in a biscuit – the ad read, ‘Dunk now Zaalima’ and a caption that said, ‘It’s not even a question of choice, #ZaalimaChaiP-
ilaDe’. Zeban Syed, Business Director at Ogilvy & Mather says, “Brands often use various tactics to viciously compete with each other. Whether this practice is right or wrong is another debate since there are no hard and fast laws governing these practices and so, for television channels and agencies, it’s mostly about the business that their clients are bringing in. Clients, on the other hand, should take more responsibility when they make certain advertisements and use their competition”. There are, however, at least some laws that govern corporate behaviour when it comes to advertising practices. The Competition Commission of Pakistan (CCP), under Section 10 of the 2010 Competition Act, defines “deceptive marketing practices” as “the distribution of false or misleading information that is capable of harming the business interests of another undertaking, false or misleading comparison of goods in the process of advertising; or fraudulent use of another’s trademark, firm name, or product labeling or packaging.” Abdul Saboor, Head of Nido at Ogilvy & Mather says, “In Pakistan, people or organizations don’t take institutions such as the CCP seriously. We need to empower all our institutions so that they can take strict action against those who are not obeying the rules/ laws. In this case, Engro maliciously started this campaign which is factually incorrect and untrue. Organizations like the CCP need to take direct action
against such companies who violate their laws.” Asfandyar Khattak, the director of media and advocacy at the Competition Commission says, “The laws are clear. We have a set of regulations which govern advertising practices in the country, and we work towards maintaining that these practices are followed. Under our laws, specifically Section 10, we are very clear that brands cannot fraudulently use another competitors’ name or packaging in advertisements. However, if it is done fairly, then we have no issues.” Engro Foods states that it believes its advertising content was not a violation of the law. “We are fully compliant with CCP rules,” said the Engro Foods spokesperson. “Having a full cream milk powder brand vis a vis a powder which is mixed with vegetable oil is a genuine advantage.”
Gaining share, ignoring the gorilla in the room
I
n the powdered milk category. Engro’s market share is estimated to be smaller than that of Nido according to analysts who track both companies. The powdered milk category was originally meant to be just a tea whitener, with Tarang by Engro Foods and Everyday by Nestle. However, in their efforts to go after the unpackaged milk category, both companies have been seeking to create a product that has a lower price point, which often means adding ingredients that are cheaper, and thus change the product from being actual milk to being some sort of beverage that can at best be described as dairy-derived, but not actually milk. Indeed, orders from the Punjab Food Authority prohibit companies from calling such beverages “milk”. Engro Foods brands its product “Omung” a beverage that is an alternative to unpackaged milk, but does not call it milk itself. However, in seeking to create these “milk-adjacent” products that are meant to capture market share from the unpackaged milk sold at dairy shops throughout the country, the packaged milk companies – both Engro Foods and Nestle Pakistan, as well as their smaller competitors – are forgoing
the brand advantage that they have spent decades building: that theirs is a purer, healthier, more hygienic milk. If they can no longer even legally call it milk, how are they now any different from the neighbourhood gawala (dairy shop owner) who they spent the better part of the 1990s accusing of “adulteration” of milk, going so far as to say: “the reality is that the gawala does not add water to his milk, he adds a little milk to water.” Some consumers, particularly those in upper income neighbourhoods that were the early adopters of packaged milk, have already started abandoning these brands in favour of locally sourced milk from dairy shops and delivery services that are pricier than even the packaged milk brands, but provide their consumers with greater confidence in the quality and purity of the milk they produce. In their effort to compete with the gawala, the packaged milk companies have become exactly what they criticised about the gawala and in turn are already beginning to lose their first customers. Rather than focusing on competing with each other for basis points of market share, these companies might be better served sticking to the strategy that initially built their businesses: gain the consumer’s confidence that they offer a higher quality product that is worth paying a little extra for. n
29
WHY PAKISTAN’S
COTTON
VALUE-CHAIN HAS BEGUN TO ATROPHY
The industry blames a lack of government support, but capital appears to be shifting away from manufacturing, and the economics of growing other crops is better than that of cotton
A
By Muhammad Faran Bukhari
mir Jahangir’s family has been in the textile and cotton business since the pre-Partition era, during which time they have had to completely shut down their business and started again from scratch three times. Before Partition, his family had a textile business in Calcutta, which they had to let go when they migrated to Pakistan in 1947. After Independence, they set up another textile business in Dhaka, which they had to abandon when East Pakistan separated from its western wing in 1971. The third death and rebirth of the family’s business came in 1987, while Amir was still enrolled in Lahore’s Aitchison College, though this time, it was purely for economic reasons. His father had set up a spinning mill known as Taj Textile Mills, which ran into difficulties and had to be shut down. “It is a very difficult thing to run a manufacturing company. We had cash flow problems. And at the end of the day you need a lot of cash flows to run a spinning mill,” he said, in an interview with Profit. Such problems in the cotton value chain are not uncommon in Pakistan and over the years numerous cotton millers have gone out of business and cotton farmers are increasingly switching to other substitute crops like wheat and sugarcane that offer better returns. However, Jahangir, seems to have found a way around this. Instead of focusing on manufacturing, in 2007 he decided to venture into cotton trading instead and today his cotton brokerage house handles almost 3% of Pakistan’s total cotton produce. “In the whole season we trade around 400,000 cotton bales, the vaIue of which comes down to roughly Rs12 billion,” he says. Many millers then switch over to trading, which, while rational on their part, has the perverse economic effect of taking investment out of Pakistan’s manufacturing capacity and into commodity trading, further weakening the overall competitiveness of Pakistan’s textile manufacturing as a whole. This also has the effect of significantly increasing the market power of traders over both growers and manufacturers, which in turn further continues to skew the incentives.
Traders perspective
P
akistan’s cotton production, which peaked at close to 14.5 million bales per year, has fallen down to around 11 million bales this year, owing to a variety of factors, though like all good textile professionals, Jahangir blames the government. The mills usually exercise significant market power over the ginners, and gener-
30
ally have an upper hand in price negotiations because they are the buyers. However, cotton brokers like Jahangir, who buy from ginners and sell to mills often are able to extract outsize pricing from the mills as well. “For example, if a broker is selling 2,000 bales, which cost Rs35,000 to Rs36,000 each, and only charges Rs100 extra per bale, then he can easily earn Rs200,000 extra,” he says. Similarly, small spinning mills also have an inherent disadvantage compared to larger mills. According to Jahangir, even the big profits made by large spinning mills are not primarily manufacturing profits but are trading profits. “Only people operating large spinning mills can survive in this industry, as they earn a trading profit over and above their manufacturing profit. The banks give [high credit] limits to the big mills, who then buy the amount of cotton that they need for the whole year in one go, which pushes the cotton market up. In comparison, small mills who buy cotton on a daily basis lose out and their average cost of the cotton becomes uncompetitive. Everybody can earn a manufacturing profit, but there is a limit to how much you can save in manufacturing,” he says. A large number of spinning mills have recently shut down in the country, under the burden of rising costs. According to Jahangir, the number of mills that have shut their doors is as high as 40. “Spinning is a business which, if shut once, is very difficult to set up again. Recently, more than 40 mills have closed down.” Jawad Asghar, the Chairman of the Pakistan Yarn Merchants Association, who heads the biggest yarn market in the countries textile hub, Faisalabad, also paints a bleak picture of the countries textile industry. “More than 50% of all the yarn produced in Pakistan’s spinning mills is sold here in the Sutar Mandi (yarn market). So this is such a big market,” he informs. “However, our export has fallen. We used to sell our yarn to China and other
“WHY IS INDIA’S COTTON BETTER THAN OURS? WHY DO WE IMPORT FROM INDIA? BECAUSE WE CANNOT PRODUCE LONG STAPLE COTTON AS WE HAVE NEVER PROPERLY INVESTED ON COTTON SEED RESEARCH” Amir Jahangir, Chief Executive Officer, H2A Cotton Company countries which has ceased now, due to which the local market has come under pressure. There is excess domestically produced yarn in the market and even then we are importing yarn from India and China as their yarn is cheaper than ours,” he says. Why? “The electricity and gas in China and India are cheaper, their raw material is cheaper, the government gives subsidies and rebates, which means that the prices of the yarn produced by China and India are cheaper, hence making our yarn uncompetitive.” “The same goes for farmers. Their costs have also increased. Urea (fertilizer) used to cost Rs1,200, now it has increased to Rs1,700.” Javed, another trader in the same Sutar Mandi also blames the falling textile exports. “The Afghanistan border is blocked, due to which textile produced in Pakistan, just ends up in warehouses. Exports to other countries has also fallen considerably,” he says.
The cotton crop
P
akistan is currently the fourth largest producer of cotton in the world after China, India and the United States. However, Paki-
stan’s cotton production has been falling in recent years. Over the last five years, cotton production has experienced a decline of almost 14%, falling from 13.86 million bales to almost 11.98 million bales. Similarly, cotton exports have fallen from more than $5 billion in 2012, to $3.5 billion by 2017. During the same period the imports of cotton have increased from around $700 million to $974.98 million. The import of cotton is further expected to increase with the government considering removing the 5% custom duty on its import. “The price of the imported cotton will decrease which will lead to a reduction in domestic cotton prices, impacting cotton farmers adversely, as the price of the domestic cotton is very closely related to the price of cotton internationally. If the price of domestic cotton is higher than that internationally, the textile mills will switch to imported cotton,” says Bilal Israel, a cotton, wheat and sugarcane farmer based in the Rahim Yar Khan district. However, he says that the said decrease in custom duty will positively impact the mills as they will be able to buy their primary raw material, cotton, cheaper than before. One of the reasons for the declining cotton acreage is the eroding economics of the crop. In recent years, cotton has been losing growing area to other crops that either have better economics like corn or maize or are provided support prices like wheat and sugarcane. The All Pakistan Textile Mills Association (APTMA) estimates that Pakistan has had a 27% decline in cotton production, which includes a 17% decrease in area under cultivation since the 2014-2015 growing season. “Why will the farmer grow cotton if there is no manufacturing industry present for it? He will not be able to sell
TEXTILES
cotton at a feasible rate and will naturally move towards economically feasible substitute crops,’ says Javed, a yarn trader in the Sutar Mandi. On the other hand, the sugarcane crop needs lots of water and farmers are able to use water from canal system which they get at heavily government-subsidised prices. Hence the total input costs for the sugarcane crop becomes economically competitive compared to other crops. “This is one of the reason that people are shifting to sugarcane,” says Bilal Israel. However, the recent Khareef season has been bad for Bilal and even his sugarcane crop has taken a hit. “We get water from the Abbasia canal that comes out of Panjnad. On the way, it crosses Cholistan, over where landowners steal water from the canal and the water doesn’t reach us. This time I have had practically no production of cotton or sugarcane due to shortage of water. Their were approximately 106 illegal outlets in the canal,” he says. “The agricultural downstream in the Rahim Yar Khan District has been effectively destroyed. In Rahim Yar Khan, the share of water from Abbasia Canal is 1,900 cusecs but we are getting only 554 cusecs. My personal crops of cotton are so bad that some of the cotton fields have not afforded a single picking despite putting in every possible effort and investment.” Another reason for the decrease in cotton production, according to APTMA, has to do with a 12% drop in per acre yield of cotton, since 2014-2015. On the other hand, yields in the Indian Punjab are almost 50% higher, compared to the Pakistani side of Punjab. Why? Because over the years, Pakistan has failed to invest into seed research. Currently, over 97% of the cotton grown in Pakistan is first generation genetically modified pest resistant plant cotton (also known as BT cotton). However, this first-generation technology first entered Pakistan around 20052006, through piracy and illicit means and without proper stewardship from the technology provider. As a result, the BT characteristics lost efficacy after a few years, and crops became resistant to it and Pakistani farmers were unable to fully benefit from it. “It’s like buying a fake copy of Microsoft Windows. If you do that, you will not get any updates. You have to have proper measures through which you
32
Water theft at Abbasia Canal in Rahim Yar Khan district. manage crop resistance. Over time the crops become resistant to the BT characteristics. It is a natural phenomenon. Companies that own the technology have specific measures and strategies in place so that the resistance does not develop very quickly,” says an agricultural expert who works at a large multinational agricultural technology company while talking to Profit on the conditions of anonymity. In comparison, BT cotton has brought about a revolution world over and added to cotton yields, productivity and farmer profitability. Internationally, the third generation BT technology has been launched, whereas poor enforcement of intellectual property laws make it impossible for BT cotton technology providers to enter the market in Pakistan. “There was no ownership, no education for the farmer and it did not have proper monitoring. And there is no protection for intellectual property in Pakistan. When the first generation BT cotton was illicitly bought into the country in 2005-2006, everyone was able to steal it and use it. Hence, technology providers are reluctant to enter the market, despite Pakistan being the fourth largest cotton producer, as there
is no way for them to ensure that they will be able to capture value,” said the agricultural technology expert.
Quality matters
I
t’s not only the quantity of cotton produced that is the problem in Pakistan, but the quality lags behind as well. Even if the cotton production increases, Pakistan will still have to import long staple cotton that the textile industry needs to produce premium products. “Why is India’s cotton better than ours? Why do we import from India? Because we cannot produce long staple cotton as we have never properly invested on cotton seed research,” says Amir Jahangir. Quality of cotton hinges on the seed variety. Seed variety breeding programs have been compromised and therefore new varieties with requisite fiber characteristics have not been introduced. “Not a lot of people are investing time and money in breeding good variety cotton seeds that are demanded in the market. Traditionally, there were farmer breeders as well who used to create and release their own seeds. But again there was no protection of intellectual property. The government should focus on strengthening intellectual
Stunted crop growth due to water shortage in Rahim Yar Khan district.
“WE USED TO SELL OUR YARN TO CHINA AND OTHER COUNTRIES WHICH HAS CEASED NOW, DUE TO WHICH THE LOCAL MARKET HAS COME UNDER PRESSURE. THERE IS EXCESS DOMESTICALLY PRODUCED YARN IN THE MARKET AND EVEN THEN WE ARE IMPORTING YARN FROM INDIA AND CHINA AS THEIR YARN IS CHEAPER THAN OURS” Jawad Asghar, chairman of the Pakistan Yarn Merchants Association property laws and especially focus its effort towards operationalizing the newly enacted Plant Breeders Rights Act 2016 which will incentivize the public and private sector researchers to develop newer and better cotton seed varieties,” says the agricultural expert, again commenting on the condition of anonymity. “Nobody will invest into research if they know that we will develop something and as soon as they will release it, someone will copy it.” Raw cotton quality is also compromised due to traditional cotton-picking practices and post-harvest handling. “During the post-harvest handling and transportation trash gets accumulated in our cotton which contaminates it. One of the reasons is that we do not use proper equipments and rely on hand picking.” While farmers and small millers take a hit, people at the top of the cotton value chain are still making good money. Amir Jahangir claims that the trading volumes for his cotton business are growing by an almost 30 per cent every year. However, if the decrease in cotton production continues and government policies remain non-existent or biased in favour of other crops, it is highly likely that this growth rate will become unsustainable in the future. n
TEXTILES
ALL YOU WANTED TO KNOW ABOUT PAKISTAN’S
E-COMMERCE SCENE
(BUT DIDN’T KNOW WHO TO ASK)
(PART 1)
A top executive at one of the leading e-commerce companies in Pakistan breaks down the contours and possible future path of the industry
34
By Adam Dawood
T
his article is the start of a series which will aim to provide the reader with an understanding of the e-commerce industry in Pakistan, with a special emphasis on the online retail market. We will start by looking at the genesis of the industry, its key players and where all of them stand today. We will continue on to analyse why certain sectors seem to be doing better than others. In part 2 we will focus on the retail e-commerce sector in much more depth and look at the challenges they are facing both internally and external threats that may arise in the near future.
note include, Rozee.pk which started as side project of Naseeb Networks in 2006, and Zameen.com, Pakistan’s largest property classified player, which also started up at around the same time in 2007. The oldest however is PakWheels which started in 2003, initially, as a community forum for automobile enthusiasts in the country.
E-commerce landscape
E
-commerce is an all-encompassing term which incorporates multiple verticals or sectors within it. For this article we have focused on the largest of these verticals to give a sense of the depth and kind of services that are offered.
woo, and Pakistan Railways. • Ride hailing has been overtaken mostly by the global and regional giants Uber and Careem. A local player has also emerged under the guise of a startup named Bykea which takes a much more indigenous and hyper-local approach to product development and marketing, and has seen fast growth in its key motorcycle-powered ride sharing and parcel delivery business. • Classifieds cover a wide range of verticals from real estate, to human resources, to used cars. Sites such as OLX acts as a marketplace offering all these services and
History of e-commerce in Pakistan
T
he e-commerce market in Pakistan has now been around for nearly 18 years. The first online store named Beliscity started in 2001 and even though it no longer exists today, other early stores such as Shophive (2005), Symbios (2006) and HomeShopping (2008) still do. While each of these websites continues to serve its customers even today, none of them have blossomed into homegrown successes stories as the likes of Flipkart or Coupang. In 2012 Rocket Internet decided to enter the Pakistani market. Within the first 6 months they had already launched three ventures namely Azmalo, Daraz and FoodPanda. Azmalo shut down within its first 2 months but was later re-envisioned as a drop-shipment site that too eventually changed its name to Kaymu. Kaymu then went on to be acquired by Daraz in 2016. Daraz started as a fashion focused portal and in early 2015 transitioned to a managed marketplace focused on all categories and was subsequently acquired by AliBaba in the summer of 2018. They also subsequently launched 5 other ventures which were eventually shut down. The oldest foreign entrant is OLX, which started its operations in 2010 and continues to operate today. Other large global startups included Careem and Uber in 2015 and 2016 respectively. In the ride-hailing category, the largest local player is Bykea, and you have regional players such as Cheetay in Lahore. Other large Pakistani startups of
•
etail e-commerce is defined as R the online sale of physical goods and consumables. These can be subdivided into two sectors: marketplaces and brands. An online marketplace can be described as a virtual mall hosting and selling numerous different brand offerings. Online brand stores, on the other hand, only deal in products they themselves produce. Marketplace competitors include names such as Daraz, Yayvo, HumMart and others while the list for brand store competitors include Khaadi, Ego as well as many other Facebook stores. Our primary focus for this article will be on the marketplace competitors. • E-ticketing includes startups such as Bookme.pk, Easytickets, Checkin.pk and Sastatickets. It’s important to note that this sector also comprises of owned & operated, online ticketing businesses built for large transportation service providers such as PIA, Dae-
more. Other sites such as Zameen, PakWheels, Rozee, on the other hand, have placed their focus on specific verticals and in doing so have successfully created a niche for themselves. • Food Delivery service providers include startups such as FoodPanda (an amalgamation of FoodPanda and local startup, EatOye) and Eat Mubarak. To analyse and compare the market we will be using several data points, combining both anecdotal and expert opinion. We will compare each of the verticals in terms of their fulfilment speed and accuracy, their payment methods, the share of mind they capture amongst the customer base and what the alternatives were before they arrived.
Current Scenario
T
he e-commerce market has changed rapidly in the last 5 years. With big funding rounds for the largest players, most
TECHNOLOGY
have made a sizeable impact on the internet economy. Sectors such as classifieds and ride hailing are fairly saturated right now. OLX globally has close to no competitors. A few years ago Schibsted entered Pakistan with Asani.pk. However, OLX soon bought them out. In the property, automobile and jobs space there is Zameen, PakWheels and Rozee, all of whom have a very high share of mind in their respective categories. Both Zameen and Pakwheels have also enjoyed the validation of outliving the Rocket Internet funded startups such as Lamudi and Carmudi. Ticketing we believe is still an open field because even through there are three viable competitors in the market, no one has really managed to own the space yet. This is also due to the fact that many direct carriers have still not opened their sales to online channels. None of the ventures in the industry have received any major funding as yet also, with the largest funding announced to date being $1.5M into Sastaticket. A Rocket Internet company by the name of Jovago was also competing in the hotel booking market, but they shut down after 3 years. Retail e-commerce is the anomaly in that it has received a lot of heavy funding especially Daraz, Kaymu and Yayvo, yet the market is still not as captured as one might expect. So why does retail e-commerce seem to be lagging behind the other e-commerce verticals? This is even more surprising given that in more established markets, after classifieds, the retail e-commerce market always exhibits the strongest growth. Each of these verticals have their overall customer service challenges as well. However, the general consensus seems to be that customer complaints within the retail e-commerce
36
sector are much higher than those registered in all the other sectors. We will explore each of the verticals one by one against their offline competitor to get a full answer.
Detailed Analysis of Sectors
To do a full comparison as to why the retail marketplaces might have not grown as rapidly, we take a look at a multitude of factors including cultural factors. We start by noting how each of these services was delivered before the e-commerce players entered the market.
Ride hailing
T
he ride hailing sector is the one that has probably enjoyed the most growth within Pakistan. Uber, the global leader and Careem, the regional leader, are competing aggressively to win their share and stake of the market. Bykea, a local startup focused on motorcycle rides and deliveries, has also done well to carve out a niche for itself as the first online company to introduce motorcycle rides in the country.
Once the average fulfilment time for taxis was 45–90 mins. The startup market has successfully managed to bring this down to just a few minutes while simultaneously making the rides much cheaper on average. This we feel is the primary cause of this tremendous growth. Mobility has always been a challenge in Pakistan, especially for the underserved and female population. By bringing air-conditioned cars at multiple price points, the market has grown tremendously over the last 3 years. The biggest challenge still facing the ride hailing market is accessibility. Their addressable market is currently limited only to those customers who have a smartphone and an internet connection. While internet penetration is growing, there is still a lot of opportunity to solve the mobility problem for the offline population.
Food Delivery
T
he food ordering sector has also done well even though its growth hasn’t been as swift as that of the ride sharing sector. Online food ordering companies have had no com-
petitors for the last three years after Foodpanda bought out EatOye. However, August witnessed the launch of Eat Mubarak a new service that offers, for the first time, a viable alternative to FoodPanda site that seems to have started gaining traction. Cheetay, a startup focused on the Lahore market, also offers food delivery alongside groceries and other commodities. Competition in the market will increase in 2019 with Careem and Uber also launching
their food delivery services in the first quarter. As you can see that although online food apps have drastically increased the ease of ordering, bringing it down to just a few short clicks, the overall fulfilment time is still the same. This might be one of the reasons for why the market hasn’t matched up to the break-neck speed of the ride-hailing startups. Nevertheless, it does continue to gain strength. Typically, the food culture in Pakistan differs from city to city. The online food market is much larger in Karachi than in Lahore. Apart from its market size one of the cultural reasons for this is that in Lahore dining out is more of a preferred experience whereas in Karachi ordering in is far more widely accepted.
Retail e-commerce
T
he retail e-commerce market has the greatest revenue generating potential within the entire e-commerce sector. The biggest differential between all the verticals is that the fulfilment time in the retail e-commerce sector is far higher than what is expected from the other sectors, averaging 3–5 days as compared to less than an hour for all other verticals. The fulfilment success ratio is also lower with on average less than 80% of customers ending up actually receiving the order they place. The above table makes a very vital case for fulfilment time being a major impediment in the growth of online retail. Even though e-commerce provides the convenience of not having to leave your house to place an order there are
other deterrents which stem from traditional and cultural factors. E-commerce could never replace the experiential element of families going to the mall together where impulse led shopping is a powerful tool. Traditional shopping methods also allow one to see the product being bought and prices can be haggled down. One also knows exactly where to go to return or exchange a product, an issue which in traditional shopping can be dealt with on an immediate basis. These factors have contributed to be a huge impediment for online shopping and, unless they can offer a more reliable and quick service, they will forever play second fiddle to brick and mortar retail.
Conclusion
W
hile the overall e-commerce market has doubled in the last year alone, and many of the large retail e-commerce ventures will have also grown at this rate or higher themselves, we believe that if retail e-commerce ventures had addressed their fulfilment challenges earlier, their growth rate might have been closer to 5-10x per annum rather than 2-3x. This growth would have been possible as returning customers would have help spread word of mouth and there would be a lot more trust overall within the retail marketplace vertical. It is for these reasons that we believe this market segment is still open for disruption and believe that this disruption could potentially come from the upcoming super-apps or the growth of direct-to-consumer (D2C) business models within the next two to three years. I discuss these business opportunities and how the retail e-commerce vertical can secure itself against such threats in part 2. The author has been running e-commerce companies for the last 6 years. Currently serving as the Head of Yayvo, his prior experience includes being the Managing Director of Kaymu.pk and the Product Manager at Daraz.pk. Adam is also the Founder of DYL Ventures a startup consultancy. n
TECHNOLOGY