It is no secret that Pakistan is witnessing an economic downturn. Newspaper headlines and news bulletins on TV have focused on it of late; the rupee’s devaluation has been staggering and it seems that the dollar gains at least a rupee a day, and the rupee has depreciated by at least 15% since January.
The findings of the Pakistan Economic Survey 2018-19 (released in June 2019) have been less than optimistic: core inflation stood at 8.1%, up by 2.5% compared to the previous fiscal year when it was 5.6%; Consumer Price Index (CPI) inflation nearly doubled from 3.8% to seven percent. Foreign investment stood at $1.38 billion between July 2018 and April 2019, registering a decrease of 51.7% compared to the same period in the previous years, when it amounted to $2.85 billion.
After the announcement of the Federal Budget on June 11 (read more about the impact of the budget in Weathering the downturn here), economists have not been too optimistic about Pakistan’s economic future; this is because the budget predicts that the economy will grow at a rate of 2.4% (last year’s projection was 6.2%) in the forthcoming fiscal year.
Economists have termed this projected growth rate to be “a massive decline from last year’s forecast of 6.2%”, which it turned out was a “muted” 3.29%. According to DAWN, the last time Pakistan witnessed such a low GDP growth rate was during the global financial crisis in 2009-10, when Pakistan’s revised growth rate amounted to 2.6%. It would be pertinent to state here that the projected 6.2% was based on optimistic projections for the agriculture, industry and services sectors which amounted to 3.8%, 7.6% and 6.5% respectively. Their actual growth, as it turned out, came to 0.85%, 1.4% and 4.7%. Notable declines have been observed in several sectors according to the Pakistan Economic Survey 2018-19 and include automobiles (-6.11%), chemicals (-3.92%), coke and petroleum products (-5.5%), food, beverages and tobacco (-1.55%), iron and steel products (-10.26%), non-metallic mineral products (-3.87%), pharmaceuticals (-8.67%) and textiles (-0.27%).
Although the large scale manufacturing sector (LSM) witnessed a negative growth of two percent, several of its sub sectors did witness growth: electronics (34.63%), engineering products (8.63%) and wood products (17.84%), albeit without meeting their respective growth targets.
More optimistically, several sectors such as services, retail and transport/storage have registered overall growth of 4.71%, 3.11 % and 3.34% respectively; however these are lower compared to FY 2016-17 when their growth amounted to 5.98%, 6.82% and 3.94%. Similarly, although the finance and insurance sector showed an overall growth of 5.14% in FY 2018-19, it is relatively lower than the 10.8% growth witnessed in the previous fiscal year.
Impact on FMCGs
In light of the above statistics, it is no surprise that Fast Moving Consumer Goods (FMCGs) have been impacted. The sector (worth an estimated 1.8 trillion rupees according to Euromonitor) has witnessed a slowdown due to several reasons, although there are no figures available so far to estimate by exactly how much.
Akbar Ali Shah, Country Manager, Health, Hygiene and Home, Reckitt Benckiser Pakistan (RB), homes in on several economic factors that have impacted FMCG companies in particular. “International commodity prices have started going up after a stable period of three to four years, as have oil prices. As a result, all their by-products [many of which are FMCGs] have been impacted. Secondly, the exchange rate is high and that affects organisations which import raw materials or even finished products. Lastly, in the last two years, import duties have been revised, and some have increased by up to 80%. These factors combined have created a challenging environment.”
As FMCGs constitute a relatively diverse range of categories and include beverages, processed foods and personal care products, it is important to examine which ones have experienced the most challenges.
According to Aly Yusuf, Director Finance, Unilever Pakistan, their more expensive products have been adversely affected compared to the brands which are positioned for the bottom of the pyramid segments. He adds that consumer staples are generally less affected in an economic slowdown as are those that enjoy higher consumer loyalty. This is because during an economic slowdown, purchasing power declines and higher price sensitivity emerges among consumers.
Shakil Ashfaq, CE, Shujabad Agro Industries (manufacturers of Eva cooking oil), is more specific, and of the opinion that beverages, cosmetics and personal care products have been affected the most. He explains his reasoning by stating: “With an average household income of around Rs 30,000 (more than half of which is spent on food) there is more room for reduction in non-essential items.”
Muhammad Sabir, GM Marketing, Bisconni, takes this rationale a step further and places FMCGs in three categories: necessity, comfort and luxury. Products that fall within the last two, he says, observe a significant decline in consumption due to inflation.
Changing consumer patterns
All this makes sense as during difficult economic times consumer patterns change; they are generally not willing to spend more than they have to. These changes are more apparent in middle- and low-income groups as they are impacted the most, and while they continue to spend on necessities, they try and reduce their consumption of elastic items. Shah points out that during economic downturns, in the case of functional products (such as soap) if cheaper alternatives are available, people tend to consider switching or in the case of severe economic downturns, move on to ‘private labels’ (store-owned products). “Interestingly though, FMCGs are not the first to be hit by a downturn; the travel and hospitality industries, as well as real estate, feel the impact first as do high-investment purchases such as cars.”
The question then is: how have FMCG companies in Pakistan been affected by the downturn specifically? To answer this question, Aurora spoke to experts in national and multinational companies across Pakistan, most of which have witnessed lower profit margins despite introducing price increases.
Give us our daily roti
For Mian Mahmood Hasan, MD, Bake Parlor, the impact of the downturn has not been drastic. This is because although the company makes ‘elastic’ products such as frozen foods, ketchup and pasta, a significant proportion of their revenue comes from ‘non-elastic’ items such as bread and flour. As a result, Hasan says that their organisation has witnessed a 10 to 12% growth in the previous year and attributes this to the fact that “our edge is wheat and we are commodity traders as well.” He adds that although Bake Parlor have witnessed no difference as far as sales of their flour is concerned and a marginal decrease in bread, their pasta sales have gone down. He attributes this to the fact that people with lower disposable incomes have been impacted the most by the downturn and tend to purchase less pasta.
Elastics in a jam
Waseem Amjad Mahmood, Director Marketing, Shezan International, states that increasing production, distribution and fuel costs have impacted them the most, as has the rupee’s devaluation. The latter comes into play as Shezan in certain cases import fruit due to production shortages in Pakistan as well as packaging materials such as jars and pouches. Amna Iqbal, Group Brand Manager, Mitchell’s Fruit Farms, seconds Mahmood’s views, and adds that as none of Mitchell’s products are inelastic, companies such as theirs suffer the most during difficult economic times. “We produce specialty items such as jam, ketchup and squash which are not necessities and demand for these is affected the most during an economic slowdown. Consequently, an all-time high inflation rate and decreased consumption have directly impacted our gross profit margins.”
Biscuits booming
However, in the case of Bisconni, Sabir has an interesting insight to share. Although one may assume that biscuits would be part of the elastic category, he says that they have not been affected too much because a significant proportion of the general public consume biscuits as a replacement for regular meals in some instances. In fact, he goes as far as to say that demand for biscuits continues to grow – although he does concede that overheads are rising.
Ramzan fuels cooking oil
In the case of Eva Cooking Oil, Ashfaq states that due to increased import duties and other negative economic factors, Eva have increased their prices by 10 to 12%. However, he adds: “As we provide premium and mid-tier brands, they have not been affected much.” He attributes this to the fact that the upper SECs have, so far, not changed their consumption patterns drastically; he adds that sales in Ramzan were also relatively high and this helped the company.