Babur Sultan is the CEO of Engro Foods; prior to becoming the CEO he was vice-president Supply Chain and has been with the company since its inception. Babur did post-graduation in Agriculture science and also an Alumnus of Santa Clara University, CA and INSEAD. He has 28 years of FMCG experience in the field of Sales & distribution, Trade marketing and Supply chain. He joined Engro Foods in 2005 and is a founder member of EFL, prior to which he worked for Wellcome Pharma, Russel Ucalf, Reckitt Benckiser and Haleeb Foods. BR Research recently sat down with Babur and discussed issues surrounding the industry and the company’s future plans. Below is the edited excerpt.
Business Recorder Research: At the industry level, we see that agriculture deposits and lending are shrinking as a percentage of agriculture GDP. In the meat business for instance, a lot of transactions are done on cash. What is the reason for this trend?
Babur Sultan: The agriculture segment contribution to GDP is approx. 25% though it is very fragmented. Milk is sizable agri-produce. At present, we collect milk via a system called EMAN (Engro Milk Automation Network). It is a business inclusive model for which we also got recognition from IFC and few other international institutions as well. Through EMAN, every farmer is paid on a weekly basis. Most of the farmers have bank accounts and their payments are transferred there. This is like cash, on a weekly basis.
Around 10 years back when the milk processing industry hadn’t evolved much, the cash payment trend was prevalent here as well. With growth in the industry, processes get more disciplined. The example you cited regarding meat business is a recent phenomenon and is evolving. Over time, as the system will get larger and more channelized, it will force the players to be more disciplined.
BRR: Is it fair to say that the food market has experienced saturation to some degree, given the decline in food sector FDI; lower credit off-take compared to historical trends, and muted growth in the number of food companies?
BSn: We have a population of 200 million, growing at a sizeable rate of 1.5 percent annually. Our 54 percent of the population is below 25 years of age. A lot of channelization & digitalisation is going-on resulting in awareness. We see an increasing trend of both husband and wife working in urban areas, urbanisation and GDP is at increasing trend. Dining-out is also increasing significantly. These all translating into increasing spending power in the economy. Considering this, I don’t think the food market is slowing down in general and dairy segment in particular – which is growing at 10 percent in last three years.
Yes poor law and order situation also had a part to play – it put off international investments and overall growth was affected given recent improvements though. Market is not saturated at all. FDI is bound to improve. It’s more like a time-bound effect, not permanent.
BRR: If it is a short-term check in the food industry, what do you think is the reason and what will drive growth?
BSn: I can give you an ice-cream business example. There used to be significant growth in the segment which has been worsened in the past three to four years. The prime reason is electricity outages, plus five hours outages in urban areas and up to ten hours in rural have led to a lot of damage to ice cream industry. This is true in all chilled businesses. As the situation is rectified, such businesses will improve and we will see more investments in processed food industry.
BRR: Does the company have plans for backward integration?
BSn: We have dairy farm near Sukkur with 5,000 Australian cows which makes up about four percent of our milk supply and growing organically. In Punjab & Sind provinces, we have very extensive agriculture livestock programs. We are also developing and helping small (commercial) dairy farms and hooking them to our milk collection system. We are also working with international organisations and local institutions to facilitate financial arrangements, skill development and also providing services like effective feeding, breeding, artificial insemination practices and improvement around general hygiene to farmers.
BRR: What is your current market share?
BSn: We operate mainly in liquid milk business with three brands – Olper’s, Omung and Tarang. Olper’s is plain all-purpose milk, Omung is affordable nutrition dairy drink and Tarang is liquid tea-whitener. We are market leaders in Liquid milk category and hold 57 percent of its market share with these three brands. In all these three categories, our brands Olper’s, Omang and Tarang are market leaders.
BRR: Recently, your firm as well as Nestle saw a big jump in milk-business margins, the cited reason for which was cost efficiency due to decline in international powdered milk prices. To what extend is powdered milk used in your products?
BSn: That isn’t the only reason as you said, the fuel prices also played a role plus there is ongoing innovation and best practices which also created the impact. Our products are based on local raw milk collection. Powder is primarily used in Tarang tea whitener. The prices of powdered milk have dropped in recent past and we transferred the benefit to consumers as well – prices of Tarang range were also dropped to translate benefit to consumers.
BRR: We see an increasing trend of farm owners using hormonal injections to increase their milk yield. Does Engro cross out such suppliers?
BSn: Engro has very stringent quality controls measures and rejects such supplies in case we found at our milk collection centres. We have a proper system placed at various checkpoints. The first test is conducted when milk is collected, following further inspections at area office and at the plant. Since our farmers and suppliers know of our strict policy, they refrain from such activities.
BRR: How comparable are our farm yields to those internationally?
BSn: There are four key factors that affects farm yield; Animal breed, feed, climate, and best farm practices. Overseas, commercial dairy farms can get yield up to average 35 liters per cow per day or even more because these significant factors. Here in Pakistan, bigger commercial farms can produce up 20-24 liters per cow per day at an average while contribution to total milk pool is very less. We have very fragmented livestock structure and 92 percent holding is two to five animals per farmer while buffalo and cow local breeds can give from four up to ten liters of milk a day respectively.
BRR: Engro Foods also tried its luck at retail business with Mabrook. How did that go?
BSn: Mabrook was a pilot project based on pasteurised fresh milk. We do projects to test the market for possible potential businesses and to build learning. This allows us to exploit the different business categories for future endeavours. Mabrook was a chilled business, and electricity was the main issue behind its expansion. Electricity and legislation around pasteurisation have large significance to exploit this huge potential in Pakistan dairy scene.
BRR: What is your strategy on accelerating the growth of packaged milk and taking more share from the loose milk segment?
BSn: Process milk industry is only 2 billion liters while approximately 19 billion liters of milk is being used as unprocessed. Out of these 13 billion liters worth of $10 billion is being used at home for drinking, tea-making and desert-making. We know that there are many issues associated with loose milk around general hygiene and adulteration. So, we are working on accelerating the growth of packaged UHT milk. We are doing so by raising awareness in people about the benefits of packages milk verses loose milk usage through campaigns using all sorts of available platforms. We also developed a new category – Dairy drink through Omung brand, providing people affordable nutrition. Moreover, we did a few major innovations in our Olper’s and Tarang brands ie different size of packs as per customer need, microwaveable packaging for Olper’s 250 ml which enhance convenience for our consumers.