ENCOURAGED by a spike in its sales over the past several years owing to a booming economy, National Foods Ltd — mainly a spice firm — set for itself in 2009 an ambitious target of becoming a Rs50bn company in the convenience food segment by 2020.

At that moment, the target seemed quite achievable as the firm’s sales had surged by a whopping 28pc to over Rs3bn in 2008 despite a rapid increase in its material and distribution costs on account of escalating global commodity prices, political uncertainty and poor security conditions in the country.

The management believed the target could be achieved if the firm continued to grow its sales by around 25pc a year and expand to overseas markets.

In hindsight, both financial analysts and company officials consider National Foods’ Vision 2020 to be “overambitious in spite of its exponential growth that saw its sales almost quadruple to Rs11.6bn” in FY15.

“The growth achieved by National Foods, a 45-year-old company, in the last few years has been remarkable since it had grown incrementally in the first 30 years of its existence because of low investment in distribution network, marketing, product diversification, domestic economic situation, price sensitivity and the management’s aversion to taking risks,” says a Karachi-based analyst who asked not to be named.

Analysts say rapid urbanisation, with more women joining the workforce, and the rise in purchasing power of middle-class households offers a ‘great opportunity’ for food firms to expand

He believes that the exponential growth recorded by the company over the last decade or so “owes not only to growing urbanisation, improving purchasing power of middle-class households and increasing number of working women, but also to radical changes in the company’s management style, technological advancements, product diversification and expansion in its manufacturing capacity”.

Yet, like other analysts, he thinks that while the company may almost double its sales, the possibility of its becoming a Rs50bn firm in the next five years appears to be quite dim.

“No business can grow at such a rapid pace even in the best of best times. From the get go it [Vision 2020] was an unrealistic target that was perhaps carved out to motivate its employees,” the analyst argues.

Indeed, National Foods remains one of the fastest growing food companies in Pakistan despite a decline in the pace of growth in its net sales. Its sales grew by 12pc to Rs3.41bn in the first quarter of this financial year from a year ago.

But its profitability as a percentage of net sales was hit by the rising cost of sales because of a hike in key raw material prices, predominantly red chillies and black pepper. The cost of sales went up by well above 15pc to Rs2.17bn during the quarter, reducing the spice firm’s gross profits to 36pc of net sales from 38pc a year ago.

The company’s export revenue also dropped slightly to Rs218m from Rs229m, while its after-tax profit fell to Rs296m from Rs299m.

In FY15, the company had reported a 20pc increase in both its net sales (of Rs11.6bn) and cost of sales (7.54bn); it had posted an after-tax profit of Rs994m for the year.

A major reason for the rise in the cost of sales is said to be the company’s focus on aggressive electronic and print marketing and its policy of extending its distribution network to rural areas to grow its sales revenues.

The company’s financial position remains quite strong as its un-appropriated profit rose to Rs2.54bn and its short-term borrowing — export refinance and working capital — significantly declined to Rs193m from 384m, providing the management sufficient leverage for expansion.

Although National Foods has aggressively expanded its network outside Pakistan — increasing its presence to over 40 countries across five continents to tap into the strong presence of the subcontinental diaspora through wholly owned subsidiaries in Dubai, Canada and England — its exports still constitute less than 10pc of total sales.

The firm’s annual report for FY15 says, “National Foods has over 250 different products in 12 categories. [It] successfully established itself as a multinational food company with an independent subsidiary, National Foods DMCC, in 2013, catering to the market in Dubai. This structure was further expanded with two more subsidiaries in Canada (National Epicure Ltd) and United Kingdom (National Foods Pakistan UK Ltd), catering to the North American and European markets.”

Analysts say rapid urbanisation, with more women joining the workforce, and the rise in purchasing power of middle-class households offers a ‘great opportunity’ for National Foods as well as other food companies to expand and grow their sales.

“The slowdown in the pace of growth in the first quarter of this financial year is a temporary phenomenon and I expect National Foods to perform much better during the rest of the year,” contends another analyst working for a brokerage company in Karachi.

“The firm has been one of the fastest growing food companies in the country with a potential to grow its sales by a quarter a year as it does not face much competition in the branded convenience food segment. The only snag in its quicker expansion in the domestic market comes from the unbranded segment of spices, which has thrived because of its ability to manipulate consumer prices,” he concludes.

Published in Dawn, Business & Finance weekly, December 21st, 2015