Pakistan Food Market

Market Overview, Recent Developments, Drivers and Trends
Date: June 29, 2019

Market Overview
Government intervention is transforming the food industry in Oman. With massive meat, poultry and dairy production projects with a value of USD616mn, the state aims to significantly reduce the country's dependence on food imports. We believe that this will put downward pressure on prices and substantially raise barriers to entry for foreign producers.

Recent Developments

A report from the Pakistan Business Council released in Q118 labelled Pakistan as a country trailing behind most countries in the world in terms of agricultural productivity. According to the report, 50% of agricultural products are spoiled due to low-tech or outdated storage, logistics and processing centres.

As part of the proposed China-Pakistan Free Trade Agreement, Pakistan's food sector could face stiffer competition from Chinese manufacturers, particularly in the field of processed foods. The FTA is a major part of the improving ties between the two countries, with Pakistan seen as a major part of China's Belt and Road initiative.


Market Drivers And Trends
Leading Players
Food quality has long been an issue among Pakistani consumers. Counterfeit goods have flooded the market in recent years, and in industries where the quality of goods is deemed essential (such as food and beverage production), established and well-known brands tend to thrive. Companies with marketing and distributional expertise are also better placed to succeed in the challenging Pakistani market.

Belgium-based Artal is one of the leading food processors in Pakistan. It is involved in the production of poultry and the bottling and marketing of water and baked goods. Other multinationals active on the domestic market include Anglo-Dutch consumer goods company Unilever, through subsidiary Unilever Pakistan, and soft drinks bottlers The Coca-Cola Company and PepsiCo.

Switzerland-based conglomerate Nestlé is also present, having entered in 1988 in a joint venture with MilkPak. The company manufactures a range of food and beverage products and is one of Pakistan's leading fast-moving consumer goods companies. The company changed its name from Nestlé MilkPak to Nestlé Pakistan in 2006 to emphasise its commitment to general food and beverage expansion and to prevent a perhaps limiting association with the dairy sector.

Food Processing
Pakistan's food-processing industry is relatively large and fragmented, with numerous small processing units employing on average fewer than 10 people. The inefficient state of the agricultural sector means the industry relies heavily on imported raw materials. Around half of country's food processing industry is situated in the major port city Karachi, with the remainder in other large urban centres, primarily Lahore.

Major sub-sectors of Pakistan's food-processing industry include cooking and hydrogenated vegetable oils, sugar, flour, tea, dairy products, beverages, biscuits, breads and confectionery, snack foods, processed chicken, jams, jellies, squashes, sauces, pickles, spices, cereals and canned foods.

The fish, meat and fruit and vegetable sectors are underdeveloped, partly due to inadequate infrastructure, particularly in areas such as cold storage and transportation facilities. The fastest-growing sectors in terms of output are poultry, edible oils and dairy products. The food-processing industry as a whole is likely to be boosted by any improvement in the country's agricultural industry, since it would remove some of the sector's import dependency, making it more attractive to foreign investors. The quality of domestically produced processed food products has improved considerably in recent years, but around 60% of processed food sold via retailers is still imported as a result of growing consumer demand for international brands and high quality products, which local manufacturers cannot yet provide. However, a handful of foreign firms have entered the local market, either establishing their own presence as manufacturers or forming joint ventures with local firms. This has contributed to improvements in the country's food and beverage processing industries.

Agriculture
Although Pakistan's agricultural output has declined steadily in recent years, it is still the largest source of foreign exchange earnings and employs close to half the total number of workers in the population. The industry continues to face challenges, notably the fragile security situation, the risk of flooding and inadequate power supply. However, we expect the industry to remain a government priority, and the state has taken steps to ease tariffs and taxes on key inputs, and improvements to irrigation systems and to the energy sector will help create much-needed certainty for farmers.

We forecast continued strong growth in the agricultural industry's gross value added, in nominal rupee terms, averaging just over 11% a year. As a percentage of GVA, we forecast it to rise slightly from 25.13% in 2018 to 25.44% by 2022.

Over the long term, we expect the dairy, poultry and wheat industries to benefit the most from increased investment. However, despite the existing network of irrigation systems across the country, significant improvements in infrastructure and better supply chains are necessary in order for the country to reap the full benefits of its fertile soil.

The disputes over sugar stocks, sugar exports and government buybacks affecting the Pakistani sugar sector highlight the harmful fissures within the industry. Unless the bureaucratic barriers are resolved and a workable compromise is set, we foresee more challenges for the industry.

Dairy
Pakistan is one of the world's largest milk producers. Despite high levels of output, the dairy sector is very underdeveloped, with around 70% of all milk produced consumed on-site or sold informally. Of the remaining 30%, only around 3-4% is processed, with the rest sold raw through traditional marketing channels or used to make sweets or ghee.

The government has begun to pay more attention to the development of the industry. In 2005 it founded the Pakistan Dairy Development Company, commonly known as Dairy Pakistan, a public-private enterprise tasked with driving change in the dairy sector. Investors from the private sector and from foreign countries (the Gulf states in particular) have also been showing interest in Pakistan's dairy sector, recognising its strong growth potential.

The adoption of new technologies will likely enable the country to increase dairy production significantly in the long term. Genetic improvement of dairy animals through artificial insemination has already led to a tripling in dairy production and contributed an additional PKR0.5bn to the national economy, according to the chair of Pakistan Agriculture Research Council. Also, the use of embryo transplant technology has enhanced the livestock reproduction capacity from one to three offspring a year, which could support increased production in the long term.

Confectionery
Pakistan's confectionery industry is underdeveloped, with no single category dominating the sector. Grocery stores are the key point of sale for confectionery purchases. The market leader in the segment is Hilal Confectionery, which manufactures chocolate, sugar confectionery and gum, as well as snack foods. Hilal exports a number of its brands, notably to a number of Asian and African markets. Its low-cost export portfolio appeals to price-sensitive consumers.

Food services
Pakistan's major cities have a truly international food services sector, with many globally recognised brands available. US-based burger chains, McDonald's, Burger King and Hardees are all present. McDonald's opened its first outlet in Lahore in 1998 and now has 60 restaurants across the country. Burger King started operations in Pakistan in 2014 but has since expanded rapidly, opening restaurants in Karachi, Lahore, Islamabad and other cities. Hardees has a much smaller presence, but all three chains offer home delivery services via online ordering platforms including Pakistan-based EatOye.

Home grown restaurant chains include Bundu Khan, which specialises in Pakistani cuisine but also sells burgers, has nine outlets (most of which are in Lahore). Salt'n Pepper, which claims to be Pakistan's first restaurant chain, has been expanding gradually since its first restaurant was opened in 1983.

A variety of other internationally recognised brands operate in major Pakistani cities. These include KFC, which first opened in the country in 1997 and has more than 60 outlets, Nando's (opened in 2001 and with nine restaurants) and Dunkin' Donuts (operating under franchise agreements since 2000). US-based pizza chains include Pizza Hut (which operates in Pakistan under a franchise owned by Habib Oil Mills), Domino's Pizza (with 18 outlets across major cities) and Broadway Pizza.

Coffee shop chains have had a mixed experience in Pakistan. US-based Gloria Jean's has been present in Lahore since 2007 and has modest expansion plans. UK-based Costa Coffee ceased operations in the country in 2007, citing supply chain, security and real-estate difficulties. In mid-2017 it was announced that 35 Baskin Robbins outlets, under a licensing agreement with AHG Flavours (PVT), would open in Pakistan. The first of the ice cream chain's Pakistani outlets is set to be in Lahore.
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