(This article was published in the Sept-Oct 2012 Aurora Magazine issue.)

Anyone who watches TV with even a modicum of interest knows that packaged milk and dairy is big business in Pakistan, based simply on the number of advertising campaigns launched by this industry every year.

Tetra Pak’s consistent efforts to popularise packaged milk since 2003 (when it first launched the Doodh Aur Kya campaign), combined with massive marketing spends by the major milk processors, Engro Foods and Nestlé Pakistan have helped to build market share for packaged milk.

However, for the last two years, there has been a shift in the types of products being promoted, with the focus changing from whole milk to dairy liquid, tea whitener, powdered variants and new formats such as instant desserts, lassi and cold coffee. What has emerged from most (but not all) of these promotions is that milk companies are targeting the lower income consumer segment. This is an important development for an industry that has for years focused mainly on SECs A and B. So what triggered the shift?

Packaged milk in Pakistan

It is important to review some basic facts about the growth of the packaged milk sector in order to explain the shift in focus.

Pakistan is one of the top five milk producing countries in the world with an annual production of 37-38 billion litres (an unofficial figure that no one is willing to confirm). A lot of this milk is wasted due to lack of refrigeration facilities, and an equally large portion is consumed in raw form in the rural areas. As a result, Javed Iqbal, Director Marketing, Dairy and Beverages, Engro Foods, explains, only 12-13 billion litres of milk are consumed in the urban areas, in both packaged and loose form. Of this, says Amir Iqbal, Business Executive Manager, Ambient Dairy, Nestlé Pakistan, approximately 1.3 billion litres (eight to 10%) is sold and consumed in packaged form annually (0.9 billion litres in liquid form and 0.4 billion litres in powdered form).

In spite of efforts to make the use of packaged milk more widespread, the majority of Pakistanis still drink loose milk and even those who consume packaged milk use it in conjunction with loose milk. Therefore Pakistan presents a tremendous growth opportunity for milk processors, but, as Iqbal of Nestlé says, “the opportunity size is much larger in the lower income segment.”

Deeper in the pyramid – the next big opportunity

Tetra Pak’s Dairy Index (an annual report on the dairy industry) from May 2012 helps to explain the size of the opportunity in the lower income segment.

In the Index, Tetra Pak has identified a group of consumers called ‘Deeper in the Pyramid’ consumers or DiPs who live in developing countries, earn between $2-8 a day and accounted for 38% (72.5 billion litres) of liquid dairy product (LDP) consumption in the developing world in 2011. Seventy-six percent (or 55.2 billion litres) of this consumption is concentrated in six developing countries: India (49.9%), Pakistan (21.9%), China (18.7%), Brazil (5.8%), Indonesia (2.6%) and Kenya (1.1%).

What is interesting is that in spite of heavy consumption, DiPs are still virtually untapped by milk processors, and represent, as Dennis Jonsson, President and CEO, Tetra Pak, puts it, “one of the biggest growth opportunities for the dairy industry in the coming years.”

In Pakistan, which ranks second highest in terms of LDP consumption in developing countries, 64% of the population is classified as DiP and these consumers account for 60% of all LDP consumption in the country, most of which is still consumed in unpackaged form, making these consumers an extremely important segment for milk processors. Therefore, based on the fact that the packaged milk consumer base is still quite small, and lower income consumer segments are going to drive consumption in the future, milk processing companies are focusing most of their energies on converting people from loose to packaged milk by making the latter more affordable.

An issue of affordability

Iqbal of Nestlé says that the price difference between loose and packaged milk has increased so substantially that conversion to packaged milk has slowed down. Therefore milk processors need to strengthen the value proposition of their brands so that consumers are willing to pay the premium. To this, Iqbal of Engro also adds that one of the reasons why the usage of loose milk is still so prevalent in Pakistan is because of its low price. For comparison, loose milk sells for Rs72 per litre whereas a litre of packaged milk is sold for Rs90 or above. If you factor in Tetra Pak’s assessment of DiPs earning between $2-8 a day (which works out to Rs8,000-24,000 a month -- based on the conversion rate in 2012), it’s easy to understand why most of these consumers prefer loose milk.

The importance of making packaged milk affordable is also highlighted in the Dairy Index which suggests offering alternatives to whole milk (such as products containing whey, lactic acid and dairy formulations using powdered milk or vegetable protein), and innovations in packaging to drive the price down.

Dairy liquid vs filled milk

Both, Engro Foods and Nestlé Pakistan have innovated with dairy formulations to appeal to lower income segments with the promise of good nutrition on a budget.

Engro Foods launched Dairy Omung in August 2011 calling it a dairy liquid (the product uses 10% milk solids, whereas a product needs to contain 13.5% milk solids in order to be called milk). The savings on milk solids have helped Engro price the product at Rs65 per litre, which is lower than the price of loose milk, thereby directly targeting consumers who still prefer khula dood. (Engro recently launched lassi and cream products under the Omung banner, with the idea being to strengthen the equity of the master brand.)

Iqbal of Engro says that the company’s strategy with Omung is to take market share from loose milk. “The role of the brand is to increase category size and to grow the market for packaged milk.”

However, Engro isn’t the only company to offer formulated milk. Nestlé first launched what it calls a ‘filled’ milk (some of the milk fat has been replaced with vegetable fat) product called Nido Bunyad in 2009 aimed at providing low-cost nutrition to children between the ages of one and 12. Nido Bunyad is sold in powdered form and a Rs70 sachet makes one litre of milk. Iqbal at Nestlé says that Bunyad is a superior product because it is nutritionally fortified with iron and minerals. However any comparison with Omung is unequal because Bunyad specifically targets children whereas Omung is for all age groups.

Nestlé also sought to strengthen its value proposition and target the lower income segments by launching a powdered version of MilkPak in late 2011. Powdered MilkPak is packaged in foil laminate instead of Tetra Pak to bring down costs and one sachet (good for one litre of milk) sells at Rs75, putting it approximately on par with loose milk. Again, the idea is to get people to convert from loose to packaged milk and grow the size of the packaged milk category. However, considering that the prices of powdered milk are soaring worldwide (reflected in Nestlé’s price hike for Nido before Ramazan) the future of powdered MilkPak at Rs75 is very uncertain in the coming months.

The tea whitener phenomenon

Another area of innovation in the packaged milk sector has come in the form of tea whitener, currently the fastest growing category in Pakistan. Tetra Pak estimates that drinking milk with tea accounts for 32% of total milk consumption in Pakistan, making this an extremely important focus area for milk processing companies.

One of the greatest strengths of tea whitener is that it is a less costly product compared to packaged milk because it contains small quantities of milk or milk fat replacers. As one industry source explains, it takes only 30% milk to make a litre of tea whitener. In the case of non-dairy creamers, milk fat is replaced with vegetable fat – milk fat is priced at Rs250 per kg, whereas vegetable fat is for Rs130 per kg.

The low cost formulation of the product combined with widespread tea drinking habits makes tea whitener an extremely effective way of introducing loose milk consumers to packaged products before moving them on to packaged milk. Every milk processor (from the largest to the smallest) has embraced this strategy wholeheartedly with brands aplenty in the category from Tarang (Engro), EveryDay (Nestlé), Chaika (Shakarganj) and Tea Max (Haleeb) to Chai Mix (Nurpur) and Millin (Premier), all priced between Rs18 and 20 for a 250ml pack.

Price, however, is only one factor in the popularity of tea whitener says Iqbal of Engro, whose brand Tarang has a 60% share of the tea whitener category.

“When people make the conversion from loose to packaged products, they want to consume it in smaller quantities so that they don’t have to spend a lot of money. For tea, all you need is 35ml of milk. Taking these factors into account, most tea whiteners are available in smaller SKUs and this is one reason why this product is so attractive to DiPs.”

Further cementing this statement is the fact that Nestlé EveryDay, which for years was only available in larger SKUs, has launched sachets priced at Rs8, 12 and 18. Correspondingly, EveryDay has also changed its marketing strategy (reflected in the most recent ads) to target lower income segment consumers.

Formats aplenty

Although DiPs constitute the bulk of the growth opportunity in the dairy sector, some of the product launches this year have also proven that milk processors don’t want to ignore their current consumers either, especially the young. New formats such as flavoured milk (Engro, Pakola, Nurpur), cold coffee (Nescafé), dairy dessert (Nestlé) and lassi (Engro) are all a step in that direction. In every case, the product is offered in a small, on-the-go SKU which is not only convenient but encourages usage and trial and doesn’t require a huge investment from the consumer.

More to come

In spite of the frenzied activity in the dairy category, there is every reason to believe that what we see now is only the tip of the iceberg.

Milk processors will continue the process of conversion from loose to packaged milk with lower priced, value added products and it is extremely likely that more brands will enter the dairy liquids/filled milk category, currently led by Omung. In fact, Muhammad Tayab, GM Operations, Nurpur Foods reveals that Nurpur is planning to launch a brand similar to Omung in order to remain competitive.

Additionally, the launch of Omung Lassi and Omung Dobala prove that this is the brand that Engro will be focusing on in the future.

However, the growth of dairy liquids will not be challenge-free, as many consumers on social media and blogs are questioning whether it is safe or healthy to consume milk that is not 100% milk with the finer points about percentages of milk solids becoming lost in the conversation. Another area that will see even more growth is tea whitener and as the number of brands increase and usage becomes more widespread, tea whitener could potentially surpass packaged milk in terms of market share.

Iqbal of Nestlé says that ‘consumer relevance’ will be the buzzwords in all future offerings by milk processors and the key will lie in launching products for specific consumer (nutritional/functional) needs; he also says that there will be an increase in the number of on-the-go formats available but remains silent on Nestlé’s strategy.

Iqbal of Engro says that the packaged milk category will continue to grow steadily with better offerings at better (read: lower) price points.

The current strategy at Engro is to “use Omung to take share from loose milk, use Tarang to build consumption through smaller SKU’s and use Olper’s to take away market share from other packaged milk players.”

Contrary to popular opinion, the race to grow the packaged milk market has only started and considering the enormous growth potential, it is really anybody’s game at this point.

Cashing in on the controversy

Making packaged milk affordable to a wider cross section of the population is one of the key challenges milk processors must deal with (see main story for more on this). However an equally important and growing concern is the safety of packaged and especially UHT milk.

Taking advantage of the controversy and the fact that the milk processors have chosen to remain mum on the issue, pasteurised milk has been making small waves in the metropolitan cities. Karachi-based Millac Foods is the biggest player in the pasteurised category and Mahmood Nanji, Advisor at Millac Foods says that of the packaged milk market, pasteurised has a three percent share. Although the numbers are not significant, Nanji says that pasteurised milk offers consumers many advantages: it doesn’t have the health hazards of loose milk, the price is competitive with loose milk and in spite of processing it doesn’t lose its colour and taste (unlike UHT milk).

These arguments have resonated with small but influential (mainly SEC A) groups of consumers who swear by their favourite brands, which currently includes Millac and Dayfresh in Karachi, and Anhaar, Farm Fresh, Premá, Gourmet, Halla, Nurpur and Prime in Lahore.

In spite of its growing popularity, UHT milk processors remain unfazed by pasteurised milk and don’t think it will be a threat to their business in the future mainly because Pakistan does not have the infrastructure to support the cold chain needed to ensure the freshness and quality of pasteurised milk (unlike UHT milk, pasteurised milk has a shelf life of two to three days).

Although cold chain is a major issue, perhaps the only thing stopping pasteurised milk from becoming a major player in the packaged milk market is the involvement of one or two big companies who will be willing to make the cold chain, marketing and advertising investments to take it to the tipping point. Stranger things have happened.

— MLA

The butter spread

Within the dairy industry, butter and margarine fall into the branded spreads category valued at “approximately Rs2.5 billion,” says Raheel Pasha Khan, Marketing Manager Foods at Unilever Pakistan. Nurpur is the market leader in branded butter with a “95% market share,” according to Muhammad Tayab, GM Operations, Nurpur Foods, but there are also two other players: Millac Butter (a brand of Millac Foods, launched in 2008) and Adam’s (a brand of Adam’s Milk Foods, launched a few months ago). The two most popular foreign brands are Lurpak (produced in Denmark) and Mumtaz (from the UAE). The local brands range from Rs105-110 (for 200g) whereas the international ones retail at Rs180 for the same SKU.

Blue Band (Unilever Pakistan) is the biggest local player in the margarine category; international brands include Flora (also a Unilever brand, however the company stopped distributing it locally in 2010), I Can’t Believe It Is Not Butter, Mumtaz and Nawar. Local margarine (i.e. Blue Band) is priced at Rs84 for a 200g SKU (significantly lower than butter) and is therefore more popular with consumers, and the butter to margarine market share ratio is 30:70, according to Khan.

In terms of challenges for the spreads category, the biggest one is the low penetration of branded butter and margarine as a result of high prices. Most people still prefer unbranded butter which is sold at Rs80 for 200g, however by and large butter remains a luxury item in Pakistan.

Another challenge within the branded category, explains Yousra Taj, Assistant Brand Manager, Millac Foods is that people think that butter and margarine are substitute products. This is a major challenge for butter producers, says Taj because as a result a lot of people buy margarine which is cheaper because some of the animal fat has been substituted with hydrogenated vegetable fat.

If the spreads category is to grow, it needs to give consumers cheaper, value added products to draw more people into the branded segment. A concerted awareness raising campaign is also necessary to increase knowledge about the differences between butter and margarine.

— Vanessa D’Souza

Cream close up

Pakistan’s branded cream market is worth approximately five to six billion rupees in value terms or 14,000 tonnes in volume share, according to Amir Iqbal, Business Executive Manager, Ambient Dairy, Nestlé Pakistan. His counterpart at Engro, Director Marketing, Dairy and Beverages, Javed Iqbal, however believes that the market size is between 20,000-25,000 tonnes.

While the total size of the market may be uncertain, what’s very clear is that Nestlé with its MilkPak cream is the market leader with a 50% market share, whereas Olper’s cream (launched in 2010) has a share of 15%. Other brands, such as Good Milk and Haleeb cream are also available. In terms of consumption, Iqbal of Nestlé says that almost 80% of MilkPak cream is consumed by people in Khyber-Pakhtunkhwa for whom cream is a part of their daily diet. Most cream brands are priced at Rs70 for a 200ml carton.

Both Nestlé and Engro also have alternative cream products in which some of the milk fat content has been replaced by vegetable fat, presumably to reduce the price; however both companies have different reasons for launching these products.

Nestlé Creations, launched in 2011 is priced at Rs65 and positioned as a whipping cream for desserts and baking, and targets, says Iqbal, an increasing number of home cooks who are watching cooking shows and want to create exotic desserts at home. Engro, on the other hand, launched Omung Dobala in July this year and priced it at Rs50 for 200ml, making it the cheapest in terms of price. The idea with Dobala, says Iqbal of Engro is to target lower income segment customers (which is very much in line with Engro’s overall strategy for Omung – see Page 6 for more on this).

Iqbal of Nestlé says that although the overall size of the cream market is fairly small, Nestlé isn’t too concerned because the production of cream is entirely dependent on the quantity of milk processed, which can vary greatly especially during the lean season and lead to supply shortages. He does however mention that in the future, specialised products such as flavoured whipping creams and light cream will have potential (presumably because these are vegetable fat based products and therefore cheaper).

Editorial

Milk, milk, everywhere, and unlike the Ancient Mariner’s water, there are plenty of drops to drink. In fact, Pakistan could almost be said to be awash with milk.

Pakistan is rated to be among the top producing milk countries in the world (rankings vary from the top five to eleven), accounting for, according to the Pakistan Dairy Development Company (PDDC), an estimated 38 billion litres annually. Of this total output, however, only 1.3 billion is processed and sold in packaged form, be it liquid or powder. The rest is either consumed in situ on the farms, sold as khula (open) milk by the neighbourhood milkman or largely wasted. Viewed from this perspective, the market is hugely underexploited.

It is also unstructured and undocumented. Not surprisingly, the PDDC figure of 38 billion litres is unverifiable.

Pakistan is said to produce an estimated 38 billion litres annually. Of this total output, only 1.3 billion is processed and sold in packaged form, be it liquid or powder.

This is typical of how much of Pakistan operates. Other countries with a significant dairy industry have regulatory bodies in place to protect the interests of their consumers. Such bodies are charged with enforcing regulations and codes of practices covering animal care, milk processing and transportation, among a slew of other milk safety measures. Added to this, those government departments that are tasked with livestock and related responsibilities by routinely documenting their sphere through data collection, monitoring implementation and regulatory compliance and working with both the private and public sectors to develop their industry further through better capacity building at all levels. In Pakistan none of this applies. The Ministry of Livestock is inert and has little motivation to take a more proactive role. Apart from the PDDC, there is the Pakistan Dairy Association. However, both bodies, like the Ministry of Livestock are somnolent at best.

Under such circumstances, one can only wonder at how Pakistan has managed to find itself counted among the top ranked milk producing countries in the world. It does, however, explain why the industry remains so underexploited and with such large coefficients of substandard quality and sheer wastage. The good news is that the private sector, in the guise of MilkPak which was established in 1979 (a Nestlé company since 1988), spotted the business opportunity and to a large extent pioneered what one may legitimately term to have become Pakistan’s mainstream dairy industry.

Due to the absence of credible documentation, it is hard to determine the value of the industry in either dollar or rupee terms, however what is certain is that dairy is the big business opportunity of the moment in Pakistan. Industry players, such as Nestlé and Engro, having focused on the upper urban consumer segments, are pushing down into the pyramid by offering packaged milk at lower prices, thereby encouraging the switch from khula to packaged. They are able to do so not only because the demand for their products has the potential of achieving a significant tipping point, but because they have, despite the overall lack of structure within the industry, been able to streamline their collection services by dealing directly with farmers across Pakistan. This has involved opening milk reception centres, investing in milk cooling tanks and supply chain infrastructure as well as setting up processing plants. For this and more, Pakistan’s dairy companies need to be commended. However, the lack of any sort of serious regulation by the government or an independent body leaves it entirely up to the dairy companies to ensure that consumers are sold milk that is safe. This is not an ideal situation, simply because health and safety regulations are always best undertaken by independent watchdogs.

Another issue to ponder is why Pakistan’s formal dairy sector is almost purely UHT driven? Countries with significant dairy industries have all adopted the pasteurised method. People usually buy UHT milk for longer life storage purposes. An explanation offered is the lack of cold chain infrastructure that pasteurisation requires. That may be true, but is not entirely satisfactory. Investment in cold chain may be considerable, but so was the investment required to set up UHT processing facilities. Perhaps now that the UHT infrastructure is in place, the milk companies are reluctant to bifurcate their investment. Yet the point is that pasteurised milk is a better option, certainly in terms of taste, if nothing else. Like so much else, Pakistani consumers will just have to put up with what they get.

• Mariam Ali Baig