Wrapping up: Engro Foods closes Mabrook retail shops

Decision comes after market response to pasteurised milk remained below expectations.

KARACHI:

After a year-long experiment with Karachi’s loose milk market, Engro Foods wrapped up its retail business of pasteurised milk (Mabrook shops), noting that market response to the value-added product remained far below its expectations.

A subsidiary of Pakistan’s largest private-sector conglomerate – Engro Corporation – the local foods giant had launched the first Mabrook shop in November 2013. It hoped to tap into Karachi’s gigantic market of loose milk, estimated to be about one million litres a day, using a franchise model. The company was betting on pasteurised form of milk, hoping the hygienically dispensed product would lure urban consumers. But the idea didn’t click.

“The company’s idea of providing consumers with a hygienically processed value-added product didn’t bode well for the market perception,” said an official.

The company wanted to provide consumers with a hygienic product while creating a feel of loose milk at the same time to compete with the traditional loose milk suppliers, an official said, so it chose the pasteurised model.

However, the costs of sustaining the value-added product were damaging the margins while poor market reception and competition from traditional players did the rest, he said.

Engro Foods had launched Mabrook shops after months of planning and research but the company was cautious in its approach as it had been calling it a pilot project since day one. The company had set aside Rs460 million for the project for marketing, promotion and subsidies (Rs200,000 per outlet) to make up for lower volumes during the first two years.



By the time it decided to wind up all Mabrook operations, the company had already spent more than half the amount.

“Though Engro Foods made the formal announcement a few days ago, the market had already been expecting it for over a month,” Taurus Securities’ Head of Research Zeeshan Afzal said.

Some of their shops started closing a month ago, Afzal said, noting even the best shops – those selling 500 litres a day – were not generating enough return on investment.

“Apparently, the market response remained below their expectations, an indication that the business was economically not viable,” he said.

The company was planning to have 40 outlets by the end of 2014, but it could only manage to have 20 franchises as of October 2014, which fell to 16 outlets a month later, when it decided to close the operations.

There were signs that the business was not proving to be very successful, which was also acknowledged by its chief.

“It has not been easy to open more stores,” Engro Foods CEO Sarfaraz A Rehman told a correspondent in October last year. He, however, added the project would continue for another year before they could come to a final decision about it.

Responding to a question about the decision to wind up Mabrook shops, Rehman said, “the business is not viable at the moment.”

Explaining, the Engro Foods chief said it may take about three to four years before the market is developed for pasteurised milk. Perhaps, Karachi had to be gradually converted to the taste and idea of pasteurised milk, Rehman said.

Energy, which accounts for a significant part of a franchisee’s fixed costs, was another reason why the business struggled against its competitors.

Given that the business requires setting up a cold chain, it would be more appropriate to reconsider the business model only after the country’s energy situation improves, Rehman said.

Published in The Express Tribune, January 30^th, 2015.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.