AURORA: Your return to Pakistan has been recent. Where did you spend the last two decades of your professional life?
AFNAN AHSAN: I left Pakistan in 1988. Going backwards, I was in the Philippines for six and a half years, in Paris for three years, Toronto for six years, Johannesburg for three years and before that I was in the US.
A: Always in the FMCG sector?
AA: The first four and a half years with Coca-Cola and then 16 years with Nestlé. So even within the FMCG sector, my focus has always been food and beverages.
A: It was recently reported that Engro Foods intends to invest $8.7 billion this year in powdered milk, cold chain infrastructure development, dairy capacity extension and livestock acquisition, after which there will be no further equity injection for the next five years. What are the fundamentals driving this strategy?
AA: Let me put this in context. Our compound growth over the last six years has been north of 70%, so every year a significant chunk of business has been added on, with the result that we are constantly chasing the capacity trail. When Engro went into the food business it was a new area of focus and it took some time for the Board to understand the dynamics of this industry, because the majority of our shareholders had until then focused on technology-driven businesses, and one of the fundamentals of a technology-driven business is very heavy upfront investment, after which you reap the benefit of that investment over the next 15 years. In the FMCG business the investment strategy takes a 180 degree turn. In FMCGs, the investment is modular; you invest in a chunk, fill the capacity, then invest more, and your investment always is around the consumption centres. The Board learnt as they went along, hence the investment has been cautious and there has been no step change in building capacity, which is good and bad. Good because if you are cautious your shareholder return is a little bit more robust. Bad, in the sense that you are unable to capture the true demand for your brand, because you are always running into capacity roadblocks. This year we have decided to invest in the capacity trail because the consumption of dairy is so large. In fact, 91% of the consumption is in the disorganised sector and even 30 years into the process the formalised dairy companies account for only nine percent of the consumption. The business opportunity is so large that in the foreseeable future I don’t anticipate this growth slowing down. In fact, with economic development, more prosperity and more urbanisation, this consumption will grow. Hygiene and health will be at the centre of every consumer mindset and packaged goods will play a much larger role in this consumption shift.
A: Is powdered milk going to be a new area of focus within dairy?
AA: For Engro, powdered milk is primarily a management tool for supply gaps, because the dairy industry has lean and flush cycles. In summer, the animals are under heat stress and their production goes way down while consumption in summer goes up. This is a global phenomenon in the dairy industry. To compensate for the lean period a lot of milk is converted into powder during the flush period for use during the lean. Our focus on powder is managing the lean and flush gap.
A: Worldwide, people prefer to buy pasteurised milk rather than UHT processed milk. Why is Pakistan out of sync?
AA: The inherent issue with pasteurised milk in Pakistan is the lack of cold chain availability. Pasteurised milk lasts for seven days at best and that too if kept in a very contained cold chain process, and now that electricity has become a ‘novelty’ in Pakistan, managing that cold chain is very uneconomical. In Pakistan, milk is consumed as a commodity, the value addition of the functionality hasn’t happened yet.
A: And you don’t foresee an evolving consumer trend toward a preference for pasteurised milk?
AA: Consumers will evolve, whether the companies like it or not. Consumer demand will happen, how quickly businesses catch up with that demand cycle is the question, and businesses will only catch up once it becomes economically viable.
A: So is it watch and wait when it comes to moving to pasteurised milk?
AA: At this point in time we don’t see it happening. At this stage we are focused on where we are currently investing and we still see tremendous demand growth there. But if you ask me, have the consumers evolved, absolutely, but is it available for them? Not yet.
A: Why is Omung referred to as a dairy liquid rather than milk?
AA: Because the pure food laws in Pakistan date to 1935, when milk had to have a 13.5% solid composition, milk then had not reached the functional stage whereby there can be low fat milk or high calcium milk or high protein milk, etc. Milk was a functional commodity. The rest of the world has moved on, but unfortunately Pakistan hasn’t.
A: How successful has Omung been in terms of penetration?
AA: Tarang is our most successful brand; it revolutionised the specialised tea cream market in Pakistan, yet compared to Tarang’s first 10 months, Omung is trending at 150 the [growth] index of Tarang.
A: To what extent is price preventing consumers from converting to packaged milk?
AA: Pricing is always the first barrier, regardless of the business. In this case pricing is not as important as price point. There is a price point barrier which prevents people from trying something out, after which they will rationalise their decision with all sorts of reasons. However, when that price point becomes economically reachable, consumers are then tempted to try a product and the first trial is always the first barrier, after that all the other barriers start to fall. Then issues of hygiene and health become more important.
A: The current investment is wholly in dairy. What about the juice business?
AA: At some point in time a company will look at their installed capacity and ask how quickly can they fill it. Engro had the technology to fill and vacuum pack fruit juices, tomato purées, etc., and with packaged fruit juice consumption going up, we did not need to do anything else except buy the fruit pulp. With dairy, Engro had a very large consumption landscape and there was room for many players to come in and be successful. However, the packaged fruit juice category is a very small consumption space, so a ‘me too’ offering did not make a lot of sense. To enter a smaller consumption landscape, one has to go in with a highly differentiated offer. We are now restaging our fruit juice strategy in a very different way. So stay tuned.
A: Is Omoré following a ‘me-too’ strategy, as it seems that a lot of the offerings are similar to Wall’s?
AA: We looked at the ice-cream segment and found a relatively decent sized consumption market dominated by one player who makes a lot of money. So again a ‘me too’ strategy; just do what they are doing, but do it better and capture market share or grow consumption, and we did that very successfully. In three years we acquired 30% of Wall’s market share. We have done brilliantly.
A: You recently launched a new commercial for Omoré Buzz with the tagline ‘no shashka just chaska’. Is this a conscious departure from the brand’s previous communication approach?
AA: I am a strong believer that ‘me-toos’ don’t have a long term view in the market and I am trying to shift gears in the organisation towards a more differentiated approach.
A: Would you agree that for the moment Engro is essentially about dairy?
AA: Dairy is the platform we started with and we see tremendous growth potential over the next three to four decades. However, we have now bought a brand in North America called Al Safa which is halal processed meat. Engro has very high ambitions to become the first iconic Pakistani multinational. Having said this, local consumption will always be the major chunk of what we do, because unless we become a very successful local corporate entity it will be harder for us to invest outside Pakistan.
A: Why is Engro following two different product strategies on the Pakistan and international front?
AA: We believe that agriculture is the backbone of Pakistan; heavily neglected, wrongly prioritised, but still the backbone. And organising the agricultural produce of Pakistan will help us become successful outside Pakistan. Whether it is dairy, meat, grain, spices or fruit and vegetable production, we can organise the agricultural sector very well and the learning that we gained through the dairy business is that everything in Pakistan is up for exploration. The moment anyone comes with a sincere effort to do it, it is so easy to do. We want Pakistan to become a supply source. How quickly we bring that brand into Pakistan is a question mark still. For the time being we believe this is something we can do a better job on outside and stage a quicker success story in this category. We are looking to scale up this business to other continents. We are also the largest rice processors in Pakistan and we are exporting rice under the Al Safa brand in North America. So we are getting into a lot of other business areas but dairy for the time being is going to be a very large chunk of our business.
A: In Pakistan?
AA: In Pakistan and overall in corporate terms.
A: As you have been out of Pakistan for over two decades, what changes do you see in the consumer mindset?
AA: Pakistani consumers are a lot more evolved compared to two decades ago. Awareness, visibility and exposure have evolved the Pakistani consumer much faster than it would have been possible otherwise.
We are in a catch-up stage and this has happened because the media has played a very significant role, and so have the telcos, which brought in new communication and new penetration skills, and they were then followed by the banks and then the consumer industry. We are at a stage where things are happening. Some economists say that economic take off happens once you reach about $1,500-2,000 per capita income and we are very close to this provided some of the other fundamentals don’t shake and we continue to hold on to our democracy.
A: When I interviewed your predecessor Sarfaraz Ahmed just after the 2010 floods, he said that the previous year Engro grew by 80%, in 2010 the growth was 40% and he predicted a 20-25% growth for 2011. Was the target achieved?
AA: Yes, we closed 2011 with a growth of 33%.
A: Do you see further growth now?
AA: Absolutely. We posted our first quarter results with 53% growth this year. I think with success, the organisation went into a consolidation mindset; that we were at the stage where a 50% growth rate was no longer possible. I had to really reenergise the team and say we haven’t even got anywhere yet, and I am very happy to have been able to pull the organisation out of this consolidation mindset. We have started to grow again very significantly.
A: Will Engro be the same company now that Asad Umar has left?
AA: To expect that there will be no change is futile. Asad has been an institution in this company, so with his departure the company is not going to be the same Engro. However, change always brings something new to the party. Asad did a tremendous job of opening up minds and horizons; stretching peoples’ capabilities and making things happen. The good thing is that this is not a new management; a new leader has come in and this new leader is bringing very significant knowledge, but a different knowledge, a newer knowledge to the party, and he has the tremendous opportunity to build further on the platform that Asad created for this company.
Afnan Ahsan was in conversation with Mariam Ali Baig.
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