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Consumer goods firms raking in profit

GOOD times are rolling for the consumer goods companies with rising corporate profits recorded for December 31, 2011.

Nestle (Pakistan), the dairy producer, earned profit after tax amounting to Rs4.7 billion on sales that topped Rs49 billion for the latest year ended Dec 31, 2011. Bata (Pakistan), the shoe maker, made profit of Rs617 million on sales of Rs5 billion; Engro Foods, in the dairy to ice-cream business, launched only eight years ago, earned Rs1 billion on sales of Rs20 billion.

The company with the largest fast moving consumer goods (FMCG), —Unilever Pakistan— that sells butter, soap, shampoos to tea and ghee, sold more than Rs52 billion worth of consumer products, earning a cool sum of Rs4 billion in profit for the year 2011. And GlaxoSmithKline, the biggest pharmaceutical company in the country sold drugs worth Rs22 billion and earned profit of Rs1 billion, last year.

Many people believe that ‘Consumerism is leading the consumer sector’.

Analyst Zeeshan Afzal, at stock brokerage firm Topline Securities, identifies 25 consumer goods companies listed on the Karachi Stock Exchange. He calculates that on average the stock prices of those companies climbed by 48 per cent to date in 2012, outperforming the KSE-100 index gain of 36 per cent. Unilever is the most expensive share among the 574 companies listed on the KSE and currently trades at Rs8,800 for a share of par value of only Rs10.

Analyst Zeeshan says that limited free-float of shares, with three-quarters or more controlling equity held by mainly foreign parents, is often cited as a reason for the stock price spiral of those, mainly multi-national companies. “But consumer stock out-performance is also on account of phenomenal growth. In the last four years (2008-2012) the consumer goods companies have returned, on average, an enviable 20 per cent growth in sales and 19 per cent in earnings”, he calculates.

Economists suggest that the increased consumerism stems from burgeoning middle class, rising health awareness, decreasing family size, improving literacy rate and strong growth in rural income.

In cities, women are more inclined to work, which is augmenting income for families to go for shopping. And above all, the population of Pakistan is the fastest growing in the region at two per cent a year, with already 179 million mouths to feed.

Professor Hasan Zaidi, who teaches economics in a recognised University, says: “Consumerism increases consumption, more consumptionrequires more production, more production means more jobs and more income in society, and more income means more consumption”. He stresses that it is the cycle which ,if managed properly, can bring growth and prosperity to society, adding that although essential to our economy, there should be rules and laws to check profiteering.

The chairperson, Competition Commission of Pakistan (CCP), Ms. Rahat Kaunain Hassan, when asked to comment said: “While enforcement of competition law is indeed for the public good and protecting consumers from anticompetitive practices — controlling or regulating prices does not fall within the CCP’s purview”.

However, the consumer protection and competition law complement each other. Directly or indirectly elimination of anticompetitive practices (i.e. breaking cartels, preventing abuse of dominance and preventing deceptive marketing) result in lowering of prices, encouraging competition, innovation and promoting and enhancing economic efficiency.

Companies complain that high government levies lead to high consumer prices, while smuggling of certain items to neighbouring countries mainly Afghanistan, create shortages in the country.

Muzzamil Aslam, MD, Emerging Economics Research, says that the increasing use of FMCG is a healthy sign, for it creates uniformity and price stability in products of everyday use. He subscribes to the view that the recent phenomenal growth in use of packaged products is due to its earlier low penetration.

“A couple of year ago only five per cent of the population used packaged milk, compare it with the current household usage”, he says.

Yet he argues and several other economists admit that consumerism for goods that are not produced in the country, but only assembled are a burden on the economy.

Luxurious automobiles, several sets of cell phones in one pocket and non-essential electronic items were nothing but lavish consumer habits that fatten import bills, resulting in wider current account deficit.

All of that puts pressure on the foreign exchange reserves, causes currency devaluation, which leads to higher inflation and forces the central bank’s hand in raising interest rates. “When people begin to spend more, they do so by compromising savings”, said a banker.

But economists say that the GDP growth rate of the country was a stunted three per cent in the four years (2008-2012) that saw stellar growth in sales and profits of FMCG companies. The economic growth, therefore, does not support consumerism. So where does the bagful of money spent on consumer goods come from? The increasing remittance of expatriate workers to their families is one known source of rural and urban peoples’ spending on consumption of quality goods.

But many suspect that the massive undocumented and unregulated economy provides the funds that lead to growing public spending on durable and consumer goods.

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