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Beverage Industry in Pakistan Essay Sample

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Beverage Industry in Pakistan Essay Sample

1. Executive Summary

Pakistan’s Beverage industry is one of the top industries. It’s operating with around 170 units. And its sales volume is up to 30.5%. The beverage industry in Pakistan, currently having a size of little over 120 million cases per annum with an annual growth of around 10-15 per cent, has the potential to double its size in the next 3-5 years, if the government’s taxation policies towards this industry are corrected. Tea which is the second largest segment of beverages, share in net sales and operating profit during 2008 was at 32% and 18%, respectively. Among carbonated drinks, about 84 million cases 70% per cent are Pepsi products; about 26 to 28 per cent are Coca-Cola products and remaining are other local cola drinks. Challenges faced by beverage industry are the high prices and unavailability of sugar and also the taxes and excise duty, subjected at the rate of 12.5 percent and sales tax at the rate of 15 percent on the retail price.

This is the reason that beverage industry at the moment has very low per capita consumption of 20 serves whereas in other countries of our region it varies from120-250 on the basis of single serve of 250 ml. Growth of the industry is slowed due to intense competition from the foreign products and also because of the decreasing purchasing power. Competition is also because of the large number of hyper marts which offers greater variety of carbonated drinks to consumers. Soft drinks market in Pakistan has increased at a compound annual growth rate of 6.4% between 2004 and 2009. And the carbonated category is the leader in the soft drink market with a share of 63.7 %. Pakistan’s Soft Drinks Industry Is Set to Experience Volume Sales Growth of 30.5% to 2010.This reflects such a huge market to cater.

Beverage Industry in Pakistan
Running a business in today’s globalized world does not often offer easy times, as Pakistan normally scores quite low on global competitiveness indicators. One such industry in Pakistan, that seems to be bucking this trend however, is the Beverage industry. According to the “www.accountancy.com.pk” the growth in the production of beverage industry is 30.5% during 2008-2009. The beverage industry in Pakistan has grown over the time. The industry produces soft drinks, juices, syrups, milk, and squashes. With about 170 units currently in operation throughout the country, both upstream and downstream industries have grown and are flourishing. Pakistan’s soft drinks industry is set to experience volume sales growth of 30.5% till 2010. The beverage industry in Pakistan, currently having a size of little over 120 million cases per annum with an annual growth of around 10-15 per cent, has the potential to double its size in the next 3-5 years, if the government’s taxation policies towards this industry are corrected.

There are 34 beverage plants in the country and this is one industry, which is very well organized. Job oriented in nature, the beverage industry employees over 500,000 people directly and indirectly and also supports many other up/down stream industries such as crown corks, glass bottles, plastic shells, sugar, transport, advertising and media, P.E.T bottles, concentrates etc. due to this industry a huge number of outlets/shops are supported to generate wide-spread economic activity in the country Beverages, the second largest segment consists of various brands of tea. Beverages share in net sales and operating profit during 2008 was at 32% and 18%, respectively. Net sales of the segment posted a healthy growth of 22% in 2008 to PKR 9.6 billion. Sharp increase of 24% in Kenyan tea prices as well as depreciation of domestic currency reduced the margins of the segment to 23% in 2008 from 28% in 2007. Lipton is the key brand in beverages segment of Unilever Pakistan.

A leading carbonated drink brand has its annual sale up to 175-180 million crates. About 84 million cases 70% per cent are Pepsi products; about 26 to 28 per cent are Coca-Cola products and remaining are other local cola drinks. Due to the Afghan and Iraq wars, local Cola did get a little footing especially in the frontier and Islamabad area but still they are not immensely popular. Success of the cold drink industry is depends on the sugar as it is the key input in beverages. According to the Federal Bureau of Statistics the production of beverages declined by 3.7% as the prices of sugar rose sharply in recent months. Another challenge faced by the beverage industry is the taxes and excise duty. Beverages are subject to excise duty at the rate of 12.5 percent and sales tax at the rate of 15 percent on the retail price. In addition to a 16 percent sales tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages. Therefore, high duties on machinery and raw materials, which are not available locally, are a disincentive to companies that want to establish manufacturing facilities.

The beverage industry at the moment has very low per capita consumption of 20 serves whereas in other countries of our region it varies from120-250 on the basis of single serve of 250 ml. This is definitely due to the heavy taxation, as the price of the product is very important and especially in our country where clean drinking water is not available and our products has to be affordable to a common man which it is not at moment. Report revealed that US investors in Pakistan’s beverage sector, for instance, are targeted with higher taxes than domestic companies and those from third countries that manufacture competing beverages such as fruit juices, tea and bottled water. In addition to a 16 percent sales tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages. Therefore, high duties on machinery and raw materials, which are not available locally, are a disincentive to companies that want to establish manufacturing facilities.

2.1 Slower Growth with Decreasing Purchasing Power
The economic crisis hit Pakistan hard, and the consumer purchasing power dropped significantly. Carbonated drinks volume growth slowed down due to increasing poverty, and rising unit prices have also put downward pressure on volume growth. Competition has increased with the wide availability of imported products and additional products from local manufacturers at the rate of 25 per cent every year but now this growth has gone down instead, because of excessive taxation policy on this industry, which is 36 per cent of the retail price. 2.2 Increasing Consumption of Diet Products and Bottled Water The beverage industry at the moment has very low per capita consumption of 20 serves whereas in other countries of our region it varies from120-250 on the basis of single serve of 250 ml. Consumer demand for ‘diet’ products has increased.

New products from international companies which are major share holders in carbonates have been well received and imported products in the juices category have also attracted a lot of consumer attention. On the other hand, bottled water consumption has increased with the deteriorating water supply in urban areas and increasing health consciousness. This is definitely due to the heavy taxation, as the price of the product is very important and especially in our country where clean drinking water is not available and our products has to be affordable to a common man which it is not at moment due to 36 per cent of taxation, whereas in this region taxes vary from 8-15 per cent of the retail price. Today when the economical conditions all around the world are in recession and this product price is very much sensitive and elastic to the retail price.

2.3 Increasing Purchases at Department Stores and Discounters Department store chains are aggressively opening up branches in different areas of the country. This gives consumers a choice, but creates a competitive environment for carbonated drinks manufacturers. With rising poverty and reduced disposable income, people prefer to shop at Government owned discount stores and big departmental stores that give discounts on bulk purchases like Makro and Metro.

POLITICAL
1. Political instability may affect: the ability to acquire of form a strategic business alliance with suppliers, activities that make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology. 2. The security measures taken by the government have increased the cost of doing business. The anti-terrorism campaign has caused inefficiency in allocation of resources, as increasingly resources have been diverted to security matters at the expense of economic development.

3. In addition to a 16 percent sales tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages. (High Taxation – figures can be double checked) ECONOMIC

1. The cost of raw materials e.g. soda ash for glass manufacturers, HDPE for plastic bottles and sugar have increased to further impact the price of the cold product. Production of beverages (weight, 0.28%) declined by 3.7% as the prices of sugar, one of the key inputs in beverages rose sharply in recent months. (ESP – 2008-9)

SOCIAL
1. Practice of “healthy life-styles” has led to a shift in consumption of Carbonated Soft Drinks – switching to bottled water and diet colas. 2. High Population Growth Rate .
TECHNOLOGY
1. New Marketing Techniques and E-Commerce
2. Introduction of bottling technology is hindered by duties on machinery and raw materials – not available locally. 3. The Scope
Soft drinks market in Pakistan has increased at a compound annual growth rate of 6.4% between 2004 and 2009. And the carbonated category is the leader in the soft drink market with a share of 63.7 %. Pakistan’s Soft Drinks Industry Is Set to Experience Volume Sales Growth of 30.5% to 2010.This reflects such a huge market to cater. Coca-Cola and Pepsi are two companies that have fought hard to be on top in the beverages and nonalcoholic industry. Scope of beverage industry is very vast in Pakistan as there is sluggish but potential growth in the market. Other companies like Redbull bringing in new drinks that are targeting the youth. According to the statistical bureau of Pakistan, Pakistan youth is composed of 70% of the total population. Hence there is a huge market potential

4. Problems of the Beverage Industry during the Current Socio-Economic Situation Primarily, this industry faces three issues.
1. The first issue is the security concern which is hampering business all over the country. In Karachi, for instance the sales volumes have considerably decreased due to security issues. The last two years for the Coca Cola Company have been quite testing. If the situation does not improve, the foreseeable future business will further go down in these areas. 2. Secondly, the taxation structure on the beverage industry has also been a cause for great concern. When compared with other countries in the region such as India, Sri Lanka, Nepal and Bangladesh; Pakistan has the highest taxation rates on beverages. This in a way is discriminatory as other industries in Pakistan are not taxed at the same ratio. For the last eight years, the beverage industry has time and again raised this issue with the government. Reduction in taxes will give organizations more room to invest.

Hence, with increased investment and resultant increased production volumes the government stands to earn more in taxes. 3. Third and the most vital issue is the presence of spurious and fake products in the market which make up almost 8 percent of the total market share. These inferior quality drinks are causing serious health concerns and also bring a loss of almost 650 million rupees annually to the government in tax revenue. The beverage industry has raised voice against these concerns several times and expects the government to bring a law into place and levy punishments on spurious product producers. A strict check and balance and punishment procedure from the government towards spurious products producers is lacking which in the end is problematic not only for the beverage industry but for the consumers as well.

5. SWOT Analysis
STRENGTHS
Renewal and investment
Innovation and Technological development
Experience in searching for new markets, niches and partners Availability of key raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage.

WEAKNESSES
Old technologies and poor work organization
Insufficient pace of creation and implementation of innovations
Insufficiently effective activities of small and medium-sized businesses Change in household consumption patterns

OPPORTUNITIES
Presence of a favorable market
Market globalization
Foreign direct investment promoting knowledge and developing export channels Transfer of production to the countries with smaller labor costs Well established distribution network

THREATS
Unfavorable market trends in energy resources
Increasing competition among exporters and decreasing dependency on one market Intense competition between the organized and unorganized segments and low operational cost. Water scarcity in Pakistan

Implementation of Goods and Service tax by 2011

6. Production of Beverages
According to Economic Survey of Pakistan 2009-2010

7. Major Players of the Beverage Industry
The two major players of the beverage industry are Pepsi and Coca Cola. They have more than 75% market share. In addition fruit juices are also gaining their market share slowly as people are learning more about the disadvantages of using a carbonated drink. The companies are having large annual turnovers with wide range of product portfolios which include all kinds of beverage drinks from soda to energy drinks. These companies are having a large variety of products like soda, water, Colas, Fruit based drinks, Milk beverages. 7.1 Pepsi

Pepsi International is a world most admired company. It is a very well organized multinational company, which operates almost all over the world. They produce; one of best carbonated drinks in the world. Pepsi is a symbol of hygiene, quality and service, all over the world. Pepsi is producing Cola for more than 100 years and it has dominated the world market for a long time. Its head office is in New York. 7.1.1 Pepsi Pakistan

Pepsi started its operations in Pakistan in 1971. Pepsi was put up their first plant of Pakistan in Multan. Pepsi is the first choice of every one in soft drink. Pepsi is popular in all age groups due to its distinctive taste. As compare to the other Cola brands in the market, it is bit sweeter which contributes greatly to its liking by all. Against the biggest competitor Coca Cola, Pepsi use its aggressive marketing planning and diversification in creating and promoting new ideas is successfully maintaining its No.1 position in Pakistan. Pepsi strong their portfolio by adding new brands of cold drinks which make them stronger than their competitors. Due to the strong portfolio Pepsi enjoy 70% market share in cold drink industry where as its strong competitor coke just has 28% market share. To maintain the power of brand name Pepsi make sure the availability of their products so that they can gain edge over their strong competitor Coke.

Pepsi also advertise their brand creatively, which stands Pepsi apart from competitors. PepsiCo is an international cold drink brand and the leader of Pakistani beverage industry. Their vision is to be the world’s best beverage company. Being the best means providing outstanding quality, service, cleanliness and value, so that their every customer is satisfied and happy with their products. 7.1.2 PepsiCo Inc Remains Market Leader with New Product Launches PepsiCo Inc has introduced new diet product that has been well received and supported by good marketing activities. This new launch will help PepsiCo Inc to increase its share in the market and prove to be tough competition for Diet Coke. Juices manufacturers have taken their lead from Nestle by offering 100% concentrate products across the country. Bottling companies are facing stiff competition from local unregistered companies that sell a class, urban areas. (Pepsi, 2010)

7.2 Coca Cola Company
The Coca Cola Company started its operations in Pakistan in 1953 with the first bottling and concentrates plant in Lahore. The organization then gave out franchises taking the number of bottling plants to six. Fifteen years ago, the company acquired back the bottling plants and today all of them are owned and operated by the company itself. This gives them the benefit of controlling the quality of product and also to bring about efficiency in overall operations and procedures of the company. As far as the beverage industry in Pakistan is concerned, Coca Cola is the second largest player in the market. The local beverage market is primarily dominated by carbonated soft drinks with each company having its own strategy of acquiring the market share. Coca Cola currently holds 31 percent of the overall beverage market share and aims to increase this share further through increased investments. In the last five years the organization has invested over 220 million dollars and has committed publicly to invest another 250 million dollars in the next three years. 7.2.1 Coca Cola in Pakistan

Being the largest beverage name in the world, the core business line has always been beverage and the focus still remains. The Coca Cola Company is ranked high in terms of innovation. Globally, the organization is producing more than 3500 products with diverse ranges such as dairy drinks, coffees, sports and energy drinks. Currently in Pakistan, there is a very interesting product range which comprises of carbonated soft drinks and juices. Minute Maid, which was launched two years back, has been extremely popular with the consumer. Owing to the positive response from the consumer, the organization is expanding its range and introducing new flavors for the product in the next year.

7.2.2 Production Capacity and Sales
In the last ten years, Coca Cola has nearly doubled their sales. The organization is expanding with two new production plants being established, one in Karachi and the other in Multan. These production plants are expected to increase the growth in double figures in the next year. This gives the organization an edge as it will be better equipped to serve the consumer with increase production as well as more portfolios. Coke and Sprite dominate overall sales of the organization. On the other hand Minute Maid, the juice brand, which is relatively new in the market, has also been extremely successful. 7.2.3 Kinley

Kinley water understands the importance and value of the life giving force.
Kinley water comes with the assurance of safety from the Coca-Cola Company. Coca-Cola introduced Kinley with reverse osmosis along with latest technology.

8. Fruit Juices
The fruit juice coupled within beverage industry is considered to be one of the largest industrial sectors in Pakistan. It is expected to be growing at a robust rate of 20-25%. Modernization of this industry, in consonance with the change in urban life style, massive shift of rural population to the urban areas, growth in population, etc., predict a growing potential for instant solutions in fruit juice segment of the beverage industry. Traditionally in Pakistan and generally all over the world people prefer to use natural drinks rather than carbonated soft drinks and this perception is gaining more currency day by day which also adds to the advantage of the fruit juice industry. Around 70% of the total fruit juice market is accounted for by 250ml tetra pack servings while the rest 30% includes 500ml and 1000ml packs. This shows significant convenience (from consumer’s perspective) and high sales frequency in 250ml package category. Based on this market situation, it could be observed that the entrepreneur should focus more on small serving packs rather than one liter or other serving sizes. Currently in Pakistan, there are 24 fruit juice/pulp processing units and a number of small units in the informal sector are working.

The present installed capacity is estimated around 400,000 metric tons per annum with an estimated growth rate of 20% to 25% annually (EAC-2003 and discussions with the industry experts). The fruit juice market is estimated around 2.5 billion to 2.8 billion Rupees. Common people especially young generation is inclined to have ready to consume drinks; in addition hotels, hospitals are also expanding day by day where juices could be marketed successfully. Moreover the global trend of preferring fresh fruits and juices also marks possibilities of growth in this sector. Furthermore, the growing exports volume and withdrawal of CED (customs and excise duty) on fruit juices (produced locally) could further supplement significant growth in the fruit juice industry. For industrial scale manufacturing of fruit juice, pulp is used which is available round the year; on the other hand, fresh fruits are also being used for 100% pure juice production.

However, based on our discussions with industry experts, we understand that business viability could be a question mark when fruit juice business starts with fresh fruits processing. It is absolutely necessary for someone starting a juice manufacturing operation to be familiar with the regulations and requirements of the market. For commercial purposes, it is important to define the differences (from other juice products) carefully and ensure that specifications and labeling are correct. There are circumstances where a 100 percent juice or puree product is impractical while dilution with other juices and/or water and sweeteners are practical, as long as the products are correctly identified. Water, sugar, organic acids and low cost bulk juices are much cheaper than higher value fruit solids. Most of the fruit juice manufacturing units are operating in Lahore, Sargodha, Bahawalpur, Hyderabad, Gujranwala, Hattar NWFP and Karachi. The following table presents a synopsis of some well known local and imported brands:

Following are considered to be the major players of fruit juice industry. Some of them have closed their operations due to political instability during the last five years e.g. Monalisa and Sunflo Cit-Rus:

Currently Shezan is giving tough time to other fruit juice manufacturers due to its quality and huge export volume as well as capturing local fruit juice market where it has competition with Nestle. Most of them offer fruit juice in tetra packs where squashes and syrups are available in glass bottles. 8.1 Fruit Juice Industry – Potential Barriers

1. A significant number of fruit juice manufacturers have imported cheap, second hand machinery which is inefficient with high cost of production. 2. The packaging material, such as glass bottles are inconvenient and expensive. 3. Many manufacturers use small percentage of real fruit juice, rendering low quality product not offering a long life. 4. Many units were established through bank loans. The project owing to various reasons could not generate sufficient funds to repay loans and have turned into sick units. 5. Lack of infrastructure and limited budget for advertising & publicity. 6. Most consumers continue to show a preference for fresh foods. 7. High cost of processed food due to high input, processing & packaging costs. 8. Low income coupled with erosion in purchasing power

10. Prospect for New Entrants
There is a huge potential for this business to grow in Pakistan as more than 60 percent of our population is below 30 years of age. The initiation of this business depends on the level of investment that an investor can make. Establishing a production plant requires ample investment; however, other areas in the beverage industry such as distribution can be a great venture for investors who do not have the resources to make huge investments. In the last couple of years, we have seen a number of local brands come into the market and have made a place for them on some level. However, what needs to be considered here is that it is not just about setting up a business only; it is about getting into this business keeping in mind international standards of product quality and production process.

11. Conclusion
Pakistan at this point in time is facing dire socio-economic problems. However, in the face of natural calamities and social unrest the country is still moving forward, with an economic growth rate of 3.2 percent. This shows the potential that this country has and its capacity to deal with and move forward towards a positive direction in the worst circumstances. In a similar way, Pakistan has one of the lowest per capita consumption of soft drinks which makes a huge potential for the beverage industry to grow, in fact grow manifolds in the next ten years. Therefore, the government and CBR should abolish excise duty as we have sales tax on the products as well which is double taxation, this in turn will allow to readjust the retail price and maintain at an affordable level which will make sure that the industry grows at a faster and higher rate which ultimately will increase the total revenue of the government which at the moment is over Rs5.2 billion. “It must be noted here that the beverage industry is the 3rd largest revenue participant of CBR”.

Beverage industry has tremendously changed in the last 10 years due to more aggressive participation and marketing strategies of the two multinational brands known all around the world i.e. Pepsi and Coke. Currently, 95 per cent of the market share is held by these two brands and the rest by some other foreign and local brands, therefore, your point of view is correct as the local brands of this country are also not being given any special incentives to grow. The focus of the government and its economic policies is on export-oriented industries only which we believe is correct but at the same time the government and policy makers should also keep in mind that all those industries which may not be export oriented but to generate economic activity inside the country should also not be neglected, that is industries like construction and consumer product industry such as confectioneries, food and beverages. “Due to the economic downturn the government should provide special incentives to the beverage industry by way of reduction in taxes to provide a chance for them to push forward their growth by maintaining affordable prices to generate maximum economic activity, especially the food items which can be kept within the reach of common man”.

Bibliography

http://www.finance.gov.pk/survey_0910.html
www.google.com
www.wikipedia.org
www.sbp.org.pk
www.pepsico.com.pk
www.thecoca-colacompany.com

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