How the milk companies are gearing up to cash in on a wider milk bonanza.
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 (a fact which has been captured to great effect in our latest edition of Ad Farm on page 4). 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 two to eight dollars 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.
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 Rs 72 per litre whereas a litre of packaged milk is sold for Rs 90 or above. If you factor in Tetra Pak’s assessment of DiPs earning between two to eight dollars a day (which works out to Rs 8,000-24,000 a month), 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 Rs 65 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 Rs 70 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 Rs 75, 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 Rs 75 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 Rs 250 per kg, whereas vegetable fat is for Rs 130 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 Rs 18 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 Rs 8, 12 and 18. Correspondingly, EveryDay has also changed its marketing strategy (reflected in the most recent ads) to target lower income segment consumers.
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.