Milk Pasteurization Unit - Research Proposal Example

Business Pure Milk (Pvt) Ltd Nature of Business: Milk Pasteurization Unit Methodology of Approach: Why did you decide on this company: Currently, there are basically three types of milk producers: Traditional milk-men, pasteurized milk producers and UHT milk producers. Traditional milk-men have been on the decline in recent times primarily due to customer complains of low-quality and poor hygiene. This hardly comes as a surprise because traditional milk-men do not undertake any testing practices to ascertain the quality of the milk. Furthermore, in order to maintain the quality of the milk, milk-men use blocks of ice to keep its temperature at the prescribed level. This causes dilution of the milk, which reduces the quality of that milk by a considerable amount. Also, the packaging and handling of the milk is atrocious, which leads to the innumerable hygiene problems. UHT treated milk is beyond the reach of ordinary consumers due to exorbitant prices charged by the UHT milk producers. Additionally, UHT treated milk is heated up to 135'C, due to which all the lactobacillus in milk are killed: this has a perverse effect on the milk in that, once contaminated; it spoils much more rapidly than pasteurized milk which caused increased wastage of milk. Most importantly, however, Milk dairy is an economically and financially viable project in the Pakistani market. According to Remy Montavon, in his book "Nestle in Pakistan", Pakistanis have been big milk drinkers with a per capita milk consumption of 200 kg per capita in 2004. Therefore, we believe that setting up a milk-pasteurization unit would be a viable and profitable option, as the consumption of milk is enormous in the Pakistani market, and all the customers in the milk market want to consume high quality and hygienic milk at reasonable prices. Proposition of establishment: The project would be a small scale milk pasteurization unit with facilities for plastic pouch packaging. Our intended dairy unit would constitute a 3000 litres milk intake capacity per hour which is a distinctly economical size for setting up a milk processing business. However, due to the time required for installation and running of the unit, it is expected that the plant would achieve 100 percent efficiency in the 2nd / 3rd year of operations. Horizontal growth in the market is initially considered the next step in the project, as the demand for milk is expected to rise with time; increasing capacity or increased number of pasteurization units are considered the immediate growth steps. However, horizontal or vertical integration are not ruled out, and all favorable partnership and/or merger deals shall be given due consideration. INDUSRTY ANALYSIS The demand for processed milk industry depends on these factors: GDP growth and increase in per capita income. Population. Degree of Rural-Urban Migration. Degree of dissatisfaction with local milk men or gowallas During the last three years, Pakistan's economy has witnessed an average real GDP growth rate of almost 7.5 percent (See Exhibit 1 for real GDP growth rate). This had made Pakistan one of the fastest growing economies in the Asian region. This massive growth is backed by massive progress in the industrial and agricultural sector. Moreover, there has been this emergence of a new investment cycle with investment rate reaching new height at 20.0 percent of GDP. Thus time is ripe for investing in the country. GDP shows the total purchasing power of consumers. The higher the GDP, the greater would be the demand of goods and services; thus a greater demand for pasteurized milk that our company would be producing. Furthermore, the per capita income of the people in Pakistan has undergone a 13.6 percent increase (See Exhibit 2). This has led to an increase in the spending of the people. A factor which may hamper consumer spending in light of increasing GDP Growth is inflation. Inflation presented an increasing trend during the fiscal year 2004-05 and reached a high of 11.1 percent April 2005. However the state bank has instituted strict monetary control procedures by means of which inflation would soon be put in control. Besides this the consumer spending has been robust ensuring a healthy demand by consumers. Lahore has a total population of 5,903,900 and this is continuously increasing due to increased rural to urban migration in Pakistan. Moreover the per capita consumption of dairy products in Punjab is much higher compared to other regions. These two reasons result in a large demand for milk in Lahore. Historically, the traditional milkmen or gowallas have been fulfilling most of this demand for milk. However lately, the consumers have been increasingly health conscious. The milk provided by the gowallas is not only impure - in hot summer months they usually put in blocks of ice to keep the milk cool; huge blocks of ice which have been stored on muddy ground and thus covered with dirt. Allegations of intentional dilution and low quality milk powder mixing are also widespread. Thus consumers are increasingly becoming dissatisfied with their milk. Switching to UHT Treated milk is an option, however this type of milk is not in the reach of most consumers. The Tetra Packaging is effective in preventing bacteria attack and provides a three month shelf life for the milk, but the downside being that it ends up raising the price of milk which gets beyond the reach of common consumers. However the company by simply pasteurizing milk and packaging it in plastic pouches, plans to be affordable to the middle class consumers as well. COMPETITOR AND MARKET ANALYSIS In Lahore, milk has traditionally been distributed through milkmen (gowallas). Due to their relatively low priced milk, they are still the most dominant players in the Lahore milk market. Presently, they account for eighty eight percent of the market share (See Exhibit 3 for market share) of the Lahore milk market. The twelve percent decrease in the market share of gowalla milk can be partly associated with the rise of milk processing industries. Milk processing industry has shown a growing trend in the country during the last decade. Milk processing plants have been established in various parts of the country, while the majority of these plants have been installed around the various urban cities, especially in Lahore. Nestle Milkpak and Haleeb are the big players in the market of processed milk, with a thirty to forty percent share (See Exhibit 3) in the market for processed (pasteurised and UHT) milk. They produce UHT milk, which is extremely hygienic, but has a relatively high price. Small pasteurisation units, which include Halla, Prime Dairies, and Nurpur Dairies, are running successfully and are giving a tough competition to other milk industries. This is because pasteurised milk is hygienic and is cheaper as compared to UHT milk. Also, pasteurised milk is being supplied to the Lahore Market and is sold at milk centres. Following their success, many bakeries and small milk outlets have also opened, which sell fresh milk (fresh milk is slightly different from gowalla milk as it has presumably no additives such as water and is chilled properly) to the customers at a low price. As some milk outlets supply fresh milk directly to the homes of the customers, these outlets and bakeries are expected to give tough competition. Overall, there is a lot of competition in the milk industry and the nature or type of competitors is very varied. An increase in the awareness of the unhygienic nature of gowalla milk and if the processed milk industries can lower prices, we can predict that in the future, the market share of processed milk in the market will increase. In addition to this, in the current year, two reputable Pakistani companies, Shakarganj and Engro ventured into the processed milk business by launching Good Milk and Olpers respectively. Recently, Gourmet Milk and Farm Milk have also entered into the business. All this indicates, that the processed milk industry is going to burgeon in the future and many new industries are going to venture into this business. Thus, this will lead to further competition in the processed milk market. Milk is a consumer product which is not subject to any distinct consumer base, therefore, we do not wish to ascertain certain age groups and/or gender groups as a target for our product; however, the distinction between urban and/or rural market is something which we shall be forced to undertake. Our objective in this project is to provide hygienic and pure pasteurized milk at conservative prices. Therefore, in order for consumers to buy our product, they must understand the argument that we are proposing; the untreated milk provided by local gowallas is unhygienic and unhealthy, whereas UHT treated milk is being charged at exorbitant prices. Unfortunately, this objective is hard to achieve in the rural parts of Pakistan, largely due to a lack of awareness on the matter due to illiteracy in the rural parts, and also due to the price aspect of the argument. Milk provided by local gowallas is available at extremely low prices, therefore, to convince these people to leave the untreated milk for a more expensive but clean and hygienic brand of milk is very difficult. Also, most of the people living in rural areas own their own animals which produce milk; therefore, they rely on these animals for fulfilling their requirements of milk and their dependence on all types of different milk vendors is distinctly small. In particular, if we could target an age group, then that age group would be young growing children, which are an integral component of our consumer base. Clean and hygienic milk is very important for their growth and general health, which is why parents are keen in trying to provide the best and most hygienic milk for their children. So, we could target the parents by creating awareness in them about the quality of our milk and thus the health value for their children. In Urban Lahore, for the customers, both the hygiene and price are key factors for customers when they decide on what type of milk to consume. Especially, the contemporary generation in urban Lahore is very particular about what they intake, giving particular importance to hygiene. Therefore they serve as the target base for our product, as they understand the central premise behind our product. Now we shall discuss our target market in urban Lahore at a more microscopic level. We can divide urban Lahore in three categories. Consumer's belonging to the first category are in the high income segment and they reside in areas like Defence, Gulberg, Cantt, Johar Town and Model Town. Consumers in the second category belong to the medium income segment and reside in areas like Samanabad and Allama Iqbal Town. The third type of consumers are grouped into the low income segment and reside in areas like Ichra, Mughalpura, Sandha, Multan Road, Chauburji and Purani Anarkali. We plan to target them in a way that in the first year of our operations we plan to target about 1000 households, all in the high income segment. In the second year the total number of households targeted would be increased to 2500, expanding our customer base to the medium income segment. Finally, by the third year 4500 households would be targeted. By this time, we shall target the entire market, regardless of income group. After analysing the market, industry and the competitors, we can now look at the probable opportunities that our industry could capitalise and also the threats our industry could face in the pursuit of achieving the desired goals Opportunities: 'Capture market with the right emphasis on nutritional value, quality and price. 'Exploit potential to improve animal yield through better feed availability and breeding. 'Induce productivity and quality specific farmer cooperation around collection and possibly milking and support efficient collection at larger scales. '''Capture market by providing personal attention to our customers by providing them with milk at their doorsteps. 'Government is interested and willing to contribute to the growth of industries in Pakistan. So, we can use this willingness on the part of the government to our good effect. Threats Farmer cooperation around collection is expensive and difficult to manage. Lack of breed management at the macro level and low potential of indigenous animals. Unregulated imports of dairy products and additives. Competition with milkmen supplying adulterated milk at extremely rates. Rapid increase in the number of processed milk industries, which increases competition. Appendix Exhibit 1 Real GDP Growth SOURCE: Economic Survey of Pakistan Exhibit 2 per Capita Income SOURCE: Economic Survey of Pakistan Exhibit 3 Market Share Type of Milk Sale Price Rs./Ltr Daily Market Share Litres Gowalla Milk 17-22 1,760,000 88.00% Open Pasteurised 27 80,000 4.00% Pasteurised Pouch 30 10,000 0.50% UHT Tetrapak 37 80,000 4.00% UHT Polypak 34 7,000 0.35% Fresh to Home 20-22 40,000 2.00% Fresh Open 24 19,600 0.98% SOURCE: Tetrapak, Pakistan ASSUMPTIONS FOR GROWTH OF SALES The sales growth rate in the industry model is based on the following reasons: The population of Lahore is growing at the rate of 4.5 percent. Though, this does not apply that the demand for pasteurized milk is growing. Furthermore, as population growth is asymmetric that is it is higher in low income areas of Lahore and low in higher and middle income groups which will initially be our target market. So it will have a twelve percent effect in the sales growth rate. The real GDP growth rate is an indicator for increase in the income of the people. Like population growth, the growth of income is also asymmetrical, which means that the income growth is higher in high income areas and low in the lower income ones. So an increase in the target market of our milk would mean a greater probability for the people living in these areas to switch to pasteurized milk. So it will have an eighteen percent effect in the sales growth rate. An important indicator for measuring the demand of milk is per capita consumption of milk. So an increase in the per capita consumption means an increase in the demand for milk. This would be a better indicator of increase in the demand for pasteurized milk than the above two indicators, so it have a thirty percent effect on the sales growth rate. The dissatisfaction with gowalla milk is the most important reason for the decrease in consumption of gowalla milk, which is our main competitor. More probably, dissatisfaction with gowalla milk will force the customers to leave consuming gowalla milk and switch to the consumption of pasteurized milk. So, it will have a forty percent effect on the consumption of milk. On the other hand, our marketing strategy is as follows: We plan to target our customers in a way that in the first year of our operations we plan to target about 1000 households, all in the high income segment. In the second year the total number of households targeted would be increased to 2500, expanding our customer base to the medium income segment. Finally, by the third year 4500 households would be targeted. By this time, we shall target the entire market, regardless of any income group. This implies that the growth rate of sales for the first three years is based on our marketing strategy. After the first three years, the growth rate of our sales would be dependent on the sales growth figure determined by our industry model. KEY ASSUMPTIONS For the projection for our model, a large number of assumptions have been made. Some key assumptions that have been made are: Machinery Assumptions Maximum capacity Utilization 100% Waste Production (% of units produced for sale) 1% Total Capacity intake per hour (Litres) 3000 Total Capacity production of units per day (Litres) 18000 Operating Assumptions Annual Production capacity (Litres) at 100% capacity 6048000 Hours operational per day 8 Processing Hours 6 Cleaning Hours 2 Days operational per month 28 Days operational per year 336 Economy Related Assumptions Electricity price growth rate (first 5 years) 0% Gas price growth rate (first 5 years) 0% Wage growth rate 2% Revenue Assumptions Sale Price per (litre) 27 Sale Price growth rate (first five years) 0% Expense Assumptions Selling and Administrative Expenses (% of Sales) 1% Insurance (charge) 12 months Insurance rate (% of net fixed assets) 3% Raw material price 14 Raw material price growth rate (First 5 years) 0% Cleaning Cost (per day) 1000 Petrol, Oil and Lubrication (% of sales) 0.5% Packing Cost per pouch (in Rs) 2 Direct Gas (per day) 300 Direct Electricity (rate in KWH) 7 Transport Cost (per Km) 2 Transport cost growth rate 0% Financial Assumptions Project life (Years) 10 Debt 50% Equity 50% Interest rate on long-term debt 16% Debt Tenure 10 Debt payments per year 1 Traveling Distance in transport cost is subject to the marketing strategy whereby certain areas are targeted in the first year, and other areas are included in due time. Fixed Electricity is charged at a rate of 34.119% to Direct Electricity in Industrial Areas where we plan to install our production unit. Depreciation is charged according to the straight line method at 10% per year with no salvage value. Pre-paid Expenses are to be charged evenly throughout the entire project life. All sales and purchases are made on cash basis, but accounts are kept in accord with the Matching concept. Therefore, there are no accounts receivables or payables; hence, no ratio analysis can be conducted from these two figures. No inventory shall be kept in record. All excess raw milk shall be stored in the chiller and processed milk shall be stored in the storage tank. Most Importantly:- All sales and purchases are made on cash basis, but accounts are kept in accord with the Matching concept. Therefore, there are no accounts receivables or payables; hence, no ratio analysis can be conducted from these two figures. Land has been included in the entire cost of machinery and depreciated accordingly, because of the sole reason that the land on which the project is installed will be rendered useless for any other installations of the same kind i.e. no other pasteurization units can be set-up on that piece of land. Therefore, we expect the land also to have no salvage value. However, as this is not actually possible, and we can expect some cash windfall at the end of our project for this land, we have decided that the long-term loan payments that have to be made every year, shall be made at the start of the next accounting period i.e. the loan repayment for 2006 shall be done on 1st January 2007, so we can appropriate a certain liability to the cash windfall that we shall gain from the land at the end of the project. The statements, however, have still been made in line with the matching concept. Read More