While buying a majority stake in Engro Foods at the end of 2016, the Dutch investor expected to surf on the front edge of a wave that was to knock the traditional milkman off his central perch in the retail milk market.

Three years on, the foreign investor is still dog-peddling at the tail end of that wave, leaving little impact on the overall consumption pattern of loose milk. Meanwhile, its 2016 bottom line of Rs2.4 billion turned red in 2019 with a loss of nearly a billion rupees. Its share price almost halved to Rs62.76 from Rs123 over the same period.

Following one of the biggest foreign investment deals worth about Rs48bn, the rechristened FrieslandCampina Engro has gone from being the poster child for Corporate Pakistan to a cautionary tale for global smart money.

“In capital terms, there is an unrealised loss (for the foreign investor). In terms of the bottom line, the company has faced challenges, particularly last year. Before that, we were at least profitable. Last year was a serious hit,” Ali Ahmed Khan, managing director of FrieslandCampina Engro, told Dawn in a recent interview.

‘Would I be willing to put up 30 more plants to service just Lahore? The answer is yes,’ says FrieslandCampina Engro MD Ali Ahmed Khan

Pakistan is desperately seeking foreign direct investment (FDI) to create jobs and generate non-debt–creating dollar inflows. The chairman of the Board of Investment (BOI), federal body tasked with bringing foreign investors to Pakistan, resigned last week. He was the third BOI chairman to step down since the PTI government came to power in August 2018. FDI amounted to $1.66bn in 2018-19, down almost 52 per cent year-on-year. Net inflows in the first seven months of 2019-20 rose 66pc to $1.56bn.

Game of volumes

FrieslandCampina Engro’s flagship product — UHT-treated Olper’s milk — enjoys a market share of 45.4pc in the packaged milk segment, which makes the brand “a little bit ahead” of its main rival, Mr Khan said while citing a recent report by Nielsen, a market intelligence company.

Olper’s along with its rival Milkpak by Nestle Pakistan control more than 90pc of the market in the UHT-treated milk segment. Nestle Pakistan recorded a decline of 3.9pc and 36.6pc in its sales and profit, respectively, last year.

The share of packaged milk is less than one-tenth — around 2bn litres a year — of the annual tradable production of 25.5bn litres, according to the company’s estimates.

Although the net profit margin of FrieslandCampina Engro hit a multi-year low in 2019, it registered sales growth of almost 20pc.

“The volume decline was already in place when the acquisition happened (in late 2016). It accelerated in 2017 and part of 2018. Towards the end of 2018, we started a volume recovery while 2019 was a serious volume recovery,” Mr Khan says.

“We’re entering 2020 in much better shape as far as our margins are concerned versus the second half of 2019. We’ve grown volumes.”

The company increased the retail price of the one-litre pack of Olper’s to Rs150 from Rs130 in July-Sept 2019. In contrast, the retail price of loose milk ranges from Rs80 in rural areas to Rs110 in urban centres.

“This is not the last price increase that you’re going to see,” he says, noting that the company has yet to pass on the full impact of the “massive cost increase” in two of its major inputs.

The packaging cost grew 30pc last year because of the devaluation, he says. More significantly, the company had to pay farmers a 15-20pc higher price for milk. In absolute terms, that translates into an average 10-rupee increase to Rs60 per litre, he adds.

A milk-deficient country

Contrary to the general perception that Pakistan is the third largest milk producer worldwide, a claim validated by the website of FrieslandCampina Engro’s parent company, Mr Khan asserts that the country is actually milk deficient.

“Before the devaluation, Pakistan’s was certainly the most expensive milk in the world. We were buying milk for about 50 US cents per litre. In the West, farmers are getting 35-40 cents per litre and even that is surplus milk that their governments buy to maintain the price,” he says.

Domestic cows and buffalos produce on average five litres of milk a day as opposed to around 35 litres in the West. Mr Khan says farmers should try to double the production of milk by feeding their animals sufficiently instead of raising the per-litre price by Rs2-5 every year. “That is the biggest issue in getting affordable (packaged) milk to people.”

The dairy industry is in the middle of yet another campaign against loose milk producers. Aesthetically appalling images of actors spitting into loose milk drums draw consumers’ attention to unhygienic practices of the commodity’s primary producers. Doctors in white lab coats proselytise viewers about the dangers of loose milk.

“Those are facts. It’s not something the doctors have made up,” he says about industry-funded research with a whiff of frustration. The dairy industry makes no secret of its objective to have the consumption of loose milk banned altogether. So what should the hundreds of thousands of ragtag milkmen do to get out of the hair of a handful of corporate Goliaths?

“Farmers don’t sell milk to consumers. It’s the middleman who is destroying the quality of milk in this country. We’re willing to be the middleman,” he says.

But the dairy industry is ill-prepared to meet the demand, at least in the short run, even if loose milk consumption stopped suddenly. For example, Lahore alone consumes 180 million litres of milk every month. The total milk processing capacity of FrieslandCampina Engro is 250m litres for the whole year and for the entire country.

“Would I be willing to put up 30 more plants to service just Lahore? The answer is yes. That’s the opportunity FrieslandCampina sees in this country when it invests. We will bring the cost of packaged milk significantly down, near the level of loose milk, if the share of packaged milk doubles to 4bn litres a year.”

Published in Dawn, The Business and Finance Weekly, March 16th, 2020

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