Pakistan is predominantly a consumption-based economy (source: Business Recorder’s Retail Survey 2017). We just love to spend and our expenditure on food items in particular is close to 40% of our average monthly disposable income/grocery bill.
The way Pakistanis have access to packaged goods made by multiple manufacturers is predominantly through different types of retail stores and more recently, e-commerce. Conversely, manufacturers use various route to market (RTM) models to get their products on the shelves of different types of retail stores. To do this, manufacturers usually appoint a sole or multiple distributors, or alternatively, choose to distribute directly to the stores by appointing a third-party logistics provider or even managing that part themselves. Increasingly though, in a world of rising input costs and focus on core operations, most tend to follow a hybrid model, whereby some of their distribution is direct and some is indirect via distributors.
According to internal estimates by Nielsen in 2018, there are approximately 600,000 grocery outlets in Pakistan with a 46% to 54% geographical split between urban and rural respectively. With 63% of the total population residing in the rural areas, that amounts to one store for every 400 people in the rural areas and one store for every 290 people in the urban areas. Having said this, despite the higher population and number of stores in rural areas, the weighted percentage of FMCG sales still amounts to only 20% with the rest coming from urban centres. These 600,000 stores are further divided into four classifications: International Modern Trade (IMTs); Local Modern Trade (LMTs); Grocery stores (GT/TT); Kiryana stores (GT/TT) and Wholesale (WS).
The international and local modern trade stores are collectively known as modern trade (MT) with the big individual or chain of stores known as ‘Key Accounts’. They represent roughly 15% of total weighted sales and about two percent of the numeric weighted stores. Large grocery stores, small grocery stores and kiryana stores are collectively referred to as traditional trade (TT) or general trade (GT). These make up the bulk of the weighted sales and numeric stores of the grocery retail sector. Wholesale is yet another channel used as an alternative RTM by manufacturers in order to boost indirect distribution to GT stores.
The process of getting a product from the factory to the store is known as the value chain. At the back end of this chain, companies source raw materials and packaging materials, manufacture the product and prepare the product for shipment. At the front end, the products are shipped out to stores via distributors and ultimately find their way on a shelf.
Consumers usually link the product on the shelf to the company directly not realising how many times the product changes hands before it eventually reaches their pantry. The various models or RTMs that companies deploy have different implications on the way the product eventually reaches the shelf and the relationship between the company, distributor and retailer. P&G have long been a proponent of the sole distributor model. Operating with IBL initially and later Abu Dawood, they believe in the efficacy of having one strategic partner responsible for the country. Although this helps in the planning, organisation and execution, it does somewhat compromise the reach. Despite the fact that the distributor usually employs smaller sub-distributors for further outreach and uses the wholesale channel for deeper GT reach, the company’s main interface remains a single distributor.
This is helpful when credit policies are strict as in the case of P&G and where sales to the GT channel are made on a cash basis and the payment terms with the distributor are tight. Unilever has gone the other way and deal with 300 to 400 distributors across Pakistan, in an effort to attain deeper and farther reach. The obvious disadvantage is that dealing with so many distributors makes it a daunting task to deploy the required plans and strategies. Data uniformity and gathering also becomes a challenge with so many touch points, such as the willingness to share data (from the distributor side), deployment of infrastructure (hand-held terminals and computers to upload data) and employing data analysts for consolidating and crunching numbers. Nestlé combines both models by appointing master distributors who in turn appoint sub-distributors in order to get the best of both worlds. Some companies employ the distributor route for servicing GT and directly service the key accounts.
The choice of RTM is usually based on the strategic importance of areas such as product portfolios, sales related data requirements, credit policies, payment terms and costs to the company. Daily multiple use items, such as detergents, razors and tea, which have high penetration, require frequent replenishment and a deep reach to all types of outlets including kiryanas and in some cases pan kiosks. Products with longer purchase and use cycles can afford a focus on high weighted distribution and less frequent replenishment. Frozen foods and beverages have different demands on their value chain, therefore higher costs of distribution.
For the longest time, kiryana stores were the go-to place for monthly grocery requirements. Everyone knew everyone in small communities and monthly credit (khaatas) was extended to each household and accounts were settled on a monthly to bi-monthly basis. With the advent of larger neighbourhood stores offering imported goods, combined with increasing disposable incomes, people upgraded from the kiryana stores in favour of these bigger stores. The monthly credit system started to disappear although it still persists in certain areas and segments, as people started to enjoy the walk-in experience rather than counters at top stores.
When international hypermarkets came to Pakistan, the conversation was about how they would take over and become the main shopping experience. However, this proved to be a false dawn, as they did not expand at the anticipated pace, maybe due to the real estate requirements and more importantly the response from shoppers. In an entertainment starved society, people loved going to these stores for the experience and the air-conditioned environment, but did not necessarily do their shopping there – so no surprises then that hypermarkets’ weighted shares have remained stagnant and not moved since 2005. Having said this, pre-Covid, the trend had picked up again with the big malls housing most of the hypermarkets or the big hypermarket chains offering a mall-like experience.
The pandemic, however, significantly accelerated online grocery sales. According to ecommerceDB, the overall e-commerce market is worth close to four billion dollars, with fashion retail accounting for almost 70% of this share. Grocery sales via e-commerce are estimated to be anywhere between $100 to 200 million and are forecasted to reach close to one billion dollars sooner rather than later. An explosion of online grocery e-tailers has taken place to fill the void during lockdowns, with established players pivoting their business models in this space (for example, Foodpanda and Airlift Express, according to i2i Insights).
Moving forward, technology will have a huge role to play in defining how this landscape shapes up. Point of sale payment adoption in terms of moving from cash to card to contactless (Easypaisa, JazzCash, Tap, etc.) will depend on how quickly retailers and consumers feel comfortable using these methods – and this in turn will determine the future of e-commerce and check out models. Technology is already disrupting the distributor end of the value chain with players such as Bazaar, Jugnu and Retailo enabling retail order placements from multiple manufacturers on a single platform. They are able to do this by maintaining dark warehouses with fast running SKUs from multiple manufacturers. There are even start-ups providing working capital loans going into the wholesale space. It will be extremely interesting to see how these players disrupt the traditional grocery supply chain business model which will have many traditional distributors on tenterhooks.
Next time you reach out for a packaged item from the shelf, take a moment to appreciate the journey it has been on.
Sheikh Adil Hussain is CMO, Tapal Tea and a member of the PAS’ Executive Council. firstname.lastname@example.org