"Local manufacturers need a level playing field"

AURORA: What has Olivia’s brand journey been like so far?
AMIR MASKATIYA: Olivia came into being in 1982. Our first office was located in the DAWN building in Karachi. My father’s law practice was based there and after his demise, my uncle, Abdul Wahid Maskatiya, returned to Pakistan to take care of the family. Mahmoud Haroon asked him to join his group of companies as the Head of the Finance Department, and one of those companies was Max Factor. A few years later, my uncle decided to start his own company and with the permission of Mahmoud Haroon, he established a cosmetics company and that is how Olivia was launched.

A: Why was it called Olivia?
AM: My uncle was fascinated with Olivia Newton John at the time! He also wanted a foreign name to be associated with a local brand and a lot of people, even to this day, think of Olivia as a foreign brand, not only because of the name, but because of our packaging and positioning. My uncle’s motto for Olivia was (and still is): “We want to sell you a Rolls-Royce for the price of a Volkswagen.” This meant no compromises on quality, while ensuring affordable prices.

A: What was the target market?
AM: The middle segment. In those days, this was a limited market, so we started small and decided not to venture into highly saturated product categories. Our first product was a makeup stick; it was a quick-fix for the woman on-the-go and turned out to be an instant hit; there was no local product like it at that price. After this success, we developed a bleach cream. It was a difficult product to go into because people did not know what a bleach cream was. It was not a fairness cream; its purpose was only to lighten excess hair around the face and other parts of the body. The only other such product available was Jolen, which retailed at approximately five times the price of Olivia. Eventually, we became the pioneers and the leaders in this product line. In those days, our market share was very high, but with so many other players coming in with fairness creams, our share decreased. A lot of cottage industries cropped up that began to make bleach creams and retail them at low prices and with huge market discounts. One of the issues is that established brands pay taxes and carry significant overheads, whereas the majority of the cottage type industries do not pay taxes and even if their manufacturing processes are sub-standard, they still sell. This is one of the reasons why many of the local, pioneering brands in the eighties and nineties slowly lost market share. We also came up with a moisturising cleansing milk to remove makeup. Today, our product strengths are hair colour, moisturising and cleansing milk and bleach cream.

A: What about shampoo?
AM: We used to make shampoo, but we stopped when Sunsilk came in. They had huge advertising budgets and we could not compete at that level.

A: What is involved in running a cosmetics business from an operational point of view?
AM: All the raw materials (ingredients and chemicals) are imported. We ensure they come in sealed drums or packs. We never buy anything loose.

A: Do all local manufacturers import their raw material?
AM: They should. After Partition, India took measures to develop their local industry in most respects and in terms of cosmetics, they now have an amazing raw material and packaging industry and almost all the ingredients they need are locally manufactured. In Pakistan, we hardly manufacture anything at all, apart from a few chemicals such as calcium carbonate or ammonium hydroxide.

A: What technical skills do you require of the people you hire?
AM: Every cosmetics company should have a microbiological lab and a manufacturing facility which houses a compounding area where the raw material is mixed as per the formula. You need a chief chemist and a product quality control and assurance manager to ensure that the chemicals arriving at the facility are packed and sealed. All the chemicals are tested and so are the batches once they are made. In addition, an R&D manager is required, capable of developing innovative products.

A: How large is the cosmetic sector in Pakistan in terms of volume and sales?
AM: Very difficult to say. I don’t think there is any research on this that everyone would agree with. Whether it is 100, 200 or even 500 billion rupees, it is like shooting in the dark. You cannot determine the market value due to several issues. What values are you using to calculate? Are you calculating from the net distributor price or the retail value, exclusive of sales tax? Where is the data coming from? How do you calculate the data with respect to imports? Then there is the fact that many distributors, wholesalers and retailers are not registered and therefore not subject to providing official values. Furthermore, the focus should not be on primary sales because the business works on a sale or return basis; it should be on secondary sales (what the consumer actually buys), yet the secondary sales market is vastly un-documented. One of the biggest challenges the local cosmetics industry faces arise from the sales tax.

My uncle was fascinated with Olivia Newton John at the time! He also wanted a foreign name to be associated with a local brand and a lot of people, even to this day, think of Olivia as a foreign brand, not only because of the name, but because of our packaging and positioning. My uncle’s motto for Olivia was (and still is): “We want to sell you a Rolls-Royce for the price of a Volkswagen.” This meant no compromises on quality, while ensuring affordable prices.

A: What precisely are those issues?
AM: Let me refer to Section 3 of the Sales Tax Act 1990. A long time ago, the Finance Act, through an amendment, made it mandatory that all items falling under the third Schedule (cosmetics being one of them), charge their sales tax based on the value of the retail price, irrespective of any discounts the manufacturers may give to the trade. The idea of the Sales Tax Act is a very good one, provided it is followed to the letter.How the system works is that manufacturers sell their goods to a distributor who passes them to a wholesaler who passes them to a retailer and the retailer to the consumer. The idea of the sales tax is that there should be documentation throughout the process. Unfortunately, this is not happening because of this Amendment to the Finance Act. Before the Amendment, a sales tax of 15% was applicable to all sectors under the third Schedule, based on the retail price (excluding sales tax) of the article, and furthermore, it was mandatory that the price be printed on the article of sale by the manufacturer. However, prior to the Amendment, manufacturers were allowed to pay the sales tax on the discounted trade price at which they sold the product to the distributor/wholesaler/retailer. Now, subsequent to the Amendment, manufacturers have to pay the sales tax on the retail price charged to the consumer and not on the price they sell their product to the trade. Effectively, it means we are paying the sales tax across the entire process. The reality is that when you negotiate with the trade, a distributor will ask for a 12 to 15% discount and the retailer a further 20 to 25%, otherwise they will not talk to you. So, at the end of the day, the discounts come to 35 to 40%. Yet, manufacturers have to pay sales tax on the retail price as printed on the pack. It is a huge issue. Manufacturers are paying sales tax at a value higher than they are selling their goods.

A: In that case, do the distributors, wholesalers and retailers also pay sales tax?
AM: Once a distributor receives the invoice from the manufacturer showing that sales tax has been paid up to the retail stage, he has no motivation to register his business or pay sales tax and neither does the wholesaler or retailer. Even if they do pay it, they will file a return that shows the value of the goods they bought as higher than the value they sold them at because the manufacturer has paid the sales tax right to the end.

A: Why did the government introduce this Amendment?
AM: It is my contention, and I may be wrong, that a lot of manufacturers may have under-invoiced; a practice prevalent across all sectors of the economy, and the government decided that they should pay the sales tax on the retail price – irrespective of any discount they give the trade. What they failed to understand is that this defeats the purpose of a sales tax. A sales tax means ad-valorem at every stage.

A: Why do customers buy imported products if they are so much more expensive than locally manufactured ones?
AM: Because the retailer will convince you. If you pick up a local product, he will ask why you are opting for a third-rate product. He will show you an imported product and if you are still not convinced, he will even give you a discount because his margins are huge. The motivation for the retailer to sell an imported product is huge and it is the pricing which dictates what goes on the shelf and local manufacturers cannot compete with the margins retailers are offered to sell imported products. The result is that imports, which 10 years ago accounted for a five to 10% market share, account for approximately 30 to 40% now.

A: Where do these imports originate from?
AM: Mainly from India and the UAE. Another issue is that even beauty products manufactured in Pakistan by the multinationals (which account for approximately 50% of the market) must have their retail price structure printed on the pack; yet, imported products made by a sister concern do not have this requirement. The multinationals have been very supportive in terms of countering the prevalence of counterfeit products in the market. They have taken action against manufacturers who are allegedly using harmful products in the composition of the fairness creams they sell. I think it would be a very positive move on their part if they were to also address the adverse effect imported products have on our industry.

Today, imported cosmetics have a stronghold on the market because importers are not required to print the retail price on the pack. The result is that the retail trade can charge the customer whatever price they think fit, and this gives them a huge cushion for profit.

A: How serious a threat do such imported products pose to local manufacturers?
AM: The core issue is that the cost of importing finished goods is very cheap. They can retail at even double the price of a locally manufactured product, and because they do not have to print the retail price on the packaging, retailers can sell them at whatever price the market will bear. If I were to retail my products at a similar price, I would be paying 10 times as much sales tax. So what motivation does a local manufacturer have? This applies to the entire manufacturing sector. Imagine the benefits a strong manufacturing sector can bring! It will increase sales of domestic products, create employment, build infrastructure and motivate others to start local industries. Yet, in Pakistan, the motivating factors are missing. Today, the cost at which goods are imported is so miniscule that the Directorate of Customs is charging sales tax on the weight of the items in the container. What the government should have done, and should be doing now, is create a body made up of manufacturers, importers and the government, to first determine which imports are essential for the country (I am talking about finished goods; raw material is a separate subject). And if the import of certain finished goods is deemed essential, the next step is to agree on a retail price which must, by law, be printed on the packaging of the article. Once the import and the retail price of the merchandise is agreed upon, this must be vigorously enforced by the relevant authorities, followed by punitive measures. Today, imported cosmetics have a stronghold on the market because importers are not required to print the retail price on the pack. The result is that the retail trade can charge the customer whatever price they think fit, and this gives them a huge cushion for profit.

A: Why don’t local manufacturers come together to push back on this?
AM: They do, from time to time, create a bit of a hue and cry and the government then, on an ad hoc basis, imposes an additional regulatory duty on a product, but which is sometimes dropped subsequently. I am a member of the Pakistan Cosmetics Manufacturers Association and I am hopeful that with like-minded people on board, we can find a sustainable solution to these problems. The Pakistan Standards & Quality Control Authority (PSQCA) is an excellent organisation in principle; their mandate is to ensure that international standards are maintained. However, they need to do more when it comes to ensuring that regulations pertaining halal certification, hygiene, equipment, factory workflows and processes are met by both local and international manufacturers. In most instances, imported cosmetics are directly sent to the retail trade without any checks, whereas the factories of local manufacturers are frequently checked to ensure they adhere to all standards and guidelines.

Amir Maskatiya was in conversation with Mariam Ali Baig. For feedback, email aurora@dawn.com