Even as the economy continues to grow sluggishly, Nestle Pakistan announced another year of record breaking profits, which grew by 13.5% to reach Rs4.7 billion – or about Rs102.94 per share – on the back of a 26% increase in revenues, which reached Rs64.8 billion.
Nestle, which announced its annual results for the financial year ending December 31, 2011 on Wednesday, is already the largest food company in Pakistan by almost any measure. It has the dominant market share in several of the product lines in which it competes. And yet the company’s management still feel that there is plenty of room for growth.
Managing Director Ian Donald – a South African national who has been with the global parent company for 40 years – believes the key for Nestle to grow in Pakistan is primarily by growing the packaged foods market.
“Take the example of yoghurt. We are 80% of the market when it comes to packaged yoghurt. But that packaged segment is only 2% of the total market,” he said in an interview with The Express Tribune. “So it doesn’t really matter what our market share is. We need to grow the whole packaged segment.”
A key constraint to growing that segment, however, seems to be the limited purchasing power of the ordinary Pakistani consumer. “Our single biggest challenge is how to get the right quality product to the consumer at a price that they can afford,” said Donald.
Over the past year, inflation has not helped matters. While Nestle’s global food portfolio is highly diversified, in Pakistan it focuses heavily on milk and dairy products. As milk prices continue to rise by more than 20% a year, the company has not been able to pass on the entirety of that effect to its customers. This is at least partially reflected in its gross profit margins, which shrank by 1.2% to 25.8% in 2011. Energy costs have continued to go up as well. Nonetheless, the company was able to grow the volume of products sold by a healthy 12%.
Nestle’s management say that they have been able to retain relative stability in profit margins by cutting costs and finding efficiencies wherever possible.
“We have a lean mindset,” said Giuseppe Bonanno, the company’s head of finance and control in Pakistan. The company’s operating costs are certainly lower than most of its competitors. For instance, Nestle’s logistics costs are about 12% of revenues, compared to between 18% and 19% for both Unilever Pakistan and Engro Foods, two of its biggest competitors. Part of the advantage is economies of scale: Nestle about as big as both of its rivals combined. But part of it, said Donald, is that the company invests heavily in its infrastructure. In 2011, the company invested about Rs8.9 billion in building up its capacity.
Nestle already has a gigantic infrastructure in Pakistan. The company collects milk from over 190,000 farmers spread out over an area of about 145,000 square kilometers.
Another part of its growth strategy seems to be augmenting and developing its existing brands rather than adding newer brands to its line-up in Pakistan. “We cannot afford to invest in too many brands because we cannot grow all of them,” said Donald.
However, the company has introduced brands such as Nido Bunyad, which is a powdered milk product targeted to the rural consumer at a price that is competitive with non-packaged milk.
The rural economy seems to be a key market for Nestle. “It seems to us that the rural economy is growing faster than the urban economy. However, we are also consciously driving growth in the rural markets,” said Donald.
The company identifies its fastest growing markets as Peshawar, Multan and areas that it describes as “peri-urban”, areas that lie on the outskirts of most large cities and form a part of its metropolitan area.
Nestle’s growth in Pakistan has been a mixture of both organic as well as through acquisitions. When asked about whether Nestle might pursue acquisitions in the future, Donald replied: “We are always open to considering opportunities.”
As part of its plan over the next three years, the company will spend about 320 million Swiss Francs in growing its presence in Pakistan.
Published in The Express Tribune, February 9th, 2012.