International Trade - Research Paper Example

Introduction: The purpose of this paper is to outline a business development opportunity for a company. For this matter, I have chosen the milk industry of Pakistan, specifically Lahore, which many consider to be the consumption hub of the country as the modus operandi; and the report has been formulated with an opportunity centric outlook rather than a company specific outlook i.e. the paper will target on the consumers and the market and not on the profile of the prospective company which might wish to undertake this opportunity. This would enable any organization to successfully incorporate this business opportunity into its plan of action provided it is related to the food processing industry i.e. any company with a history or expertise in food processing can undertake this business opportunity. Pre-Investment Feasibility The real meaning of a milk pasteurization unit is the warming up of every article or the smallest element of milk for a particular timeframe to reduce or eliminate the unwanted enzymes and bacteria to the least levels. It is also essential to note that pasteurization is not the same as milk’s sterilization. It is also vital to note that pasteurization is a purpose of time and temperature, and not only temperature. The project would be a small scale milk pasteurization unit with facilities for plastic pouch packaging. Pasteurization is the procedure of warming the milk till the temperature of 70°C for a definite period of time and then cooling it back to a temperature of 4°C. The warming action must conform the devastation of unneeded pathogenic microorganisms and should not alter the taste and nutritional worth of milk. The commercial importance of pasteurizing milk is to enhance the shelf life of milk up to 3 days at cooling temperature. [1] Investment Opportunity Milk dairy is an economically and financially viable project. 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. In Lahore, milk has traditionally been distributed through milkmen (dhodhies). He is the direct middleman between the consumer and the farmer. When he buys the milk he makes no specific control of its freshness, fat or non-fat solids content. Water, ice, vegetable oils or preserving agents may have been added but he simply checks the quality of milk he buys by sniffing it, looking at it or in times of doubt, tasting it. The freshness of his milk depends on his honesty and the distance he has to travel from his village to the city, in torrid summer months, as he has no means to keep the milk temperature down. As an attempt blocks of ice may be added, from the many ice factories present in Punjab. A 120 kg block of ice may be added in a single tank of milk. These factories have been present since colonial times, often badly maintained and using water from wells or more often, from the irrigation canals so abundant in Punjab. To make matters worse this ice was dumped on ground and earth intentionally rubbed on to make these big blocks of ice less slippery and therefore easier to handle. Moreover under the hot sun these blocks of ice would melt away, giving a first dilution with water, before the next and least honest middleman would add more for a good measure. It is noticeable that pasteurized milk is a product that can be marketed, while its demand is increasing every day as the awareness is increasing in various consumer groups. [2] Projections of UHT milk Production and Consumption up till 2010 Furthermore, the sale of adulterated milk by local milkmen is moving the urban low income section to move from home-delivered adulterated milk to self-purchased pasteurized milk from branded milk shop. [3] Future Outlook and Trends The external environment for business can be termed as pretty favorable. Pakistan currently has a very narrow export base and the government today is desperate to expand it. Thus it would be more then happy in any Economy: The GNP is expected to grow at 5.3% per year. This would result in increased income for households in the future and is an encouragement for new ventures in milk-processing. [4] Culture: Massive rural to urban migration in recent years has increased the demand for milk, so much that it far outstrips the supply. The result has been an increased adulteration of milk by milkman (dhoodhies). Many, who can afford, have switched to more expensive UHT Pasteurized Tetra Pack milk. The massively increasing population ensures that the demand would continue to outstrip supply. [5] Technology: Pakistan Agricultural Research Council (PARC) advises farmers on new techniques for increasing milk yield. The required machinery needs to be imported, mainly from China, but the government continues to maintain liberal policies in this regard (PARC Annual Report, 2004, 2005) Legislation: The government has made several laws regulating the Tetra Pak industry. Fresh Milk contains on an average around four and a half percent of fats and approximately six and a half percent of solids. Nonetheless, according to the statistics by the Food Act of 1965, the government requires 3.5% fats and 9.5% Solids Non Fat (SNF) in Pasteurized Milk. There is no requirement of obtaining a license to system a dairy unit in rural surroundings. [6] Industry Demand: In Pakistan milk demand is 25.5 billion liter per year, valuing at Rs. 210 billion. Processed milk has about 2% of the share while rest of the market is with the informal (Dhodhi) sector. Presently the demand is growing in double digit figures and is expected to continue doing so in the near future. The growth in supply is at 9.5 % annually and this causing an excess demand situation. This space is satisfied by means of adulteration and milk powder imports. Even though Pakistan is the seventh biggest milk manufacturer in the world milk market today but still they import powder milk to satisfy the local demand. Every year, around 30,000 tons of milk is imported from European countries. Although processed milk has been available in Pakistan since 1977 the processed milk market is still relatively small with sales of only 478 million liters or less then 2% of the share. Of the total processed milk category, 50% is processed UHT (Ultra High Temperature treatment), 40% in powdered milk and 10% into pressurized milk. [7] Market share of different channels in urban dairy market After analyzing the dairy market in general we proceed to analyze the milk market. Segments of Pakistani Milk Market Market Share in % Market Size (litres per year) Type of Milk 100 25,566,000,000 All types 98.13 25,087,915,800 Unprocessed 1.87 487,087,200 Processed 0.93 237,763,800 UHT 0.75 191,745,000 Powdered 0.19 48,575,400 Pasteurized Lahore Market: The total size of Lahore Market is approximately 2 million liters per day or 730 million liters per year, which is less then 3% of the entire market of the country. However it accounts for the significant chunk (11%) of the total urban market for the milk. Segments of Lahore Milk Market Market Share in % Market Size (litres per day) Type of Milk 90 1,800,000 Open Gawala 2.5 50,000 Open Pasteurized 1.52 26,800 Pouch Pasteurized 4.98 99,600 UHT Tetra Pack 0.02 400 Direct to home 0.09 19,600 Open milk sold at milk shops Competition: Milk processing industry has depicted a growth line in its trend in the past decade in the country, with the development of diary plants across the country. The major chunk of the milk processing units has been planned near the urban cities. Lahore is a place where majority of the units are located. Nestle Milkpack and Haleeb are the major players, which are presently catering to various product categories of milk and other diary products like tetra-pack UHT milk, yogurt, milk powder and other products. Furthermore, some smaller units of pasteurization including Halla, Prime, Nurpur Dairies, Dairy King, Butt Dairies are also running successfully and are expected to give a harsh competition. At present, pasteurized milk is provided in Lahore Market at open milk centers with an average daily volume of around 80,000 liters. [8] Following is the pricing of various milk types: As the milk industry has evolved, alternative supply chains have developed to supply milk and dairy products to rural and urban consumers. The alternative supply chains have the following approximate shares; Share of Alternative supply chains Many new entrants have come into business, for example Olpers and Good Milk in the Tetra Pack packing, while Gourmet Milk and Farm Milk in the plastic pouch packing. Recently, consumer demand has been much more specific with different kinds of milk being demanded for specific requirements. Many people prefer to use powdered milk in their tea while the diet conscious people prefer skimmed milk. This had led to the emergence of new milk suppliers. [9] Customer Profiles: Three consumer profiles are usually used by milk producers as part of their consumer segmentation strategy and the same can be applied here as well. Consumers belonging in the first category are in the High income segment and reside in areas like Defence, Gulberg III, Gulberg II, Cantt, Johar Town & 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. By our first year of operations we plan to target about 1000 households, all in the high income segment. 500 hundred houses are being targeted in Defence, 250 in Gulberg and 250 from model town and adjoining areas. 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. [10] Marketing Plan – 4 Ps The nature of my business is such that it requires intensive marketing efforts. We are basically targeting dissatisfied consumers of milkmen (Dhodies) who are sick of their milk adulteration techniques. Therefore, it needs to be marketed to housewives how our milk is superior to the product of these milkmen. The benefits of pasteurization need to be highlighted, the purity of our milk needs be stressed – so that they are able to forego the small price difference for the higher quality. [11] Price: According to Pakistan Dairy Strategic Working Group milk prices are highest in Karachi at Rs30/liter where producers tend to have vertically integrated businesses incorporating transport and marketing of milk directly to consumers thus achieving a premium over farm gate prices. The vast population of Karachi at 17 million people also influences demand and hence price of milk. No seasonal price variation was reported at Karachi however, prices between producers varied by up to 19% (Rs4/l). Milk prices in the Punjab are generally lower at around Rs17/liter with highest prices of Rs22/liter again paid to farmers directly marketing milk to consumers. Lowest prices, Rs14/liter, are paid for milk supplied to processors who in turn incurred processing, packaging and marketing costs but had to compete in the market with direct suppliers. Seasonal premiums of Rs4/liter are paid in some areas for summer milk, recognising higher feed costs incurred during this period. One liter Fresh Milk pouch would cost Rs. 25. Compared to this Milkmen sell at Rs 22-24 per kg, UHT treated milk sells for Rs. 36 per litre whereas Pasteurized milk sells at Rs. 27-30. Milk would be purchased at around Rs 15 from the local milkmen at the factory site. It is important to analyze the trend in milk prices in recent years. Real milk prices have remained virtually unchanged with a slight drop by around 10% recorded in 1997, followed by an upward movement between 2001 and 2002. UHT treatment and Tetra Pack packaging are costly, though they increase shelf life of milk to several months. Fresh Milk would be able to maintain such low price by pasteurization and using low cost plastic pouches instead of the three layered, aluminum foiled Tetra Pack packaging. Moreover advertising expenses would be reduced to the minimum and the company would concentrate on letting its low price advertise for itself. Moreover the company would outsource all work except processing and packaging of milk, achieving economies of scale and reducing its cost in these two processes. Many competitors keep their own herds and produce milk themselves, however Fresh Milk realizes that by diversifying early on, its cost may be increased and liquidity reduced. Moreover the distribution process would be outsourced for the same reason. Most of the managerial work would be done by the owner and so the salaries paid would be minimized. [12] Place: The company would not require retail outlets as the plastic pouch packaging would not provide a long shelf life. Thus, initially, milk would only be distributed door to door in mini-vans equipped with chiller units. These vans would be of private contractors and the company would install them chiller units. The contractors would be bound by a five year contract and would be paid Rs. 0.70 for each pouch sold. To establish a credible cash control system, the milk distributors would be provided milk vouchers. Every household would purchase milk vouchers at the beginning of month and then buy milk against these vouchers. At the end of each day the money collected would be deposited with the Finance Manager and the vouchers audited by the Distribution Manager. [13] Promotion: Before launch, free milk samples of 250ml of size would be distributed amongst the target market, i.e. middle and upper class households in D.H.A, Gulberg III, Gulberg II, Cantt, Model Town and Johar Town. These households would be provided a package containing a milk pouch, a phalmphlet detailing the production process and information about company rates. The pamphlets would be air dropped in targeted areas once a week during the first month of operations. Advertisement would be aired on FM radio, weekly for the first three months. Consumers who pay a six months advance would be provided a discounted rate of Rs. 24 per litre and those paying a one year advance would be provided a rate of Rs. 23 per liter. [14] Product: The major producers of Pasteurized milk like Chaudary Dairies (manufacturers of Haleeb and Candia) and Nestle Milkpack are selling milk UHT treated milk in expensive Tetra Packs. This increases their costs to Rs 36 per litre, though their products have a long shelf life. We on the other hand plan on saving the costs of UHT treatment and expensive Tetra Packaging and passing the benefits on to the consumers. Our milk would be packed in plastic pouches and would only be pasteurized and not UHT treated. Result being that the shelf life at room temperature for this milk would only be about three hours. Consequently what the business requires is a marketing strategy, directly targeting a certain locality and trying to win over a specified number of households to be supplied, rather then bonding with supermarkets and local tuck shops. Moreover government regulations require that excess fats in the form of cream be removed to maintain a specified level. Fresh milk contains about 5% of fats, whereas the government requires 3.5% fats in processed milk. The cream removed would be sold to sweet shops like Fazal Sweets and Rahat Bakery at Rs. 45 per litre. [15] SWOT Analysis Strengths Large population and high per capita consumption of dairy products, ahead of other regional markets in Asia. A soaring fraction of agricultural land to agricultural population. Large aggregate supply and breed potential of indigenous cattle/buffalo. Regular culling of less productive/unproductive animals. Internationally cost competitive farm types already exist in Pakistan. Willingness of processors to develop infrastructure linking them to the farmer because of consumer preferences against reconstituted milk. Larger and smaller processors are willing to invest given the right support. Central geographic location with easy access to large, potential regional markets Weaknesses Consumers are price sensitive & ignorant of quality requirements. Significant cost variation in milk production across sizes and types of farms. Poor quality of milk. A long chain of middlemen operating without regulations leading to significant value destruction. The presence of the bandi system (in which the middleman predetermines the producer’s selling price for the entire twelve months period at the rate that is most beneficial to him). Low animal productivity, no breed management and little productivity support services to farmers. Farmers not organized, general lack of able management structures in sector Poor quality of animal health care and breeding services. Support structure and industry is not well developed to support animal productivity. Seasonality leading to fluctuations and uncertainty in feed supply and quality. Under-developed cold chain to consumers. Poor physical infrastructure. Small-scale and fragmented animal holdings. Lack of remunerative producer price for milk. Low utilization of installed capacity of dairy plants. Absence of a properly defined national policy for dairy advancement. Evening milk is usually consumed by the farm household and not sold. There appears little appreciation in the country that the evening milk is the higher test milk, i.e., higher fat and protein content. (Pakistan Dairy Strategic Working Group, 2006) Opportunities: Consumption can be increased with the right emphasis on nutritional value, quality and price. Capitalize on traditional nutritional value placed in milk and related products. Exploit potential to improve animal yield through better feed availability and breeding. Induce productivity & quality specific farmer cooperation around collection and possibly milking and support efficient collection at larger scales. Encourage large farm types as well as give incentive to subsistence farmer to invest in productivity. Appearance of large scale commercial dairy farms within the region. Large aggregate production of milk. Develop rural and urban markets to sell milk and dairy products from adjacent milk pockets Joint ventures based large potential and access to regional markets. Government interest and willingness to contribute. Build on consensus to develop and implement quality standards. Consolidation and improvement in retail segment in large cities. 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. Vested concern in perpetuating the reliance on imports of dairy commodities. Competition with milkmen supplying adulterated milk. Conclusion The ever-increasing demand of milk makes it viable proposition to undertake this venture and I am confident that with the aim to focus on customer satisfaction strategy, the returns on investment in a considerably short period of time. Bibliography: 1. Pakistan Agricultural Research Council (2005) “Annual Report 2004-2005” Available at http://www.parc.gov.pk/AR/AR200405.html [Retrieved April 15, 2009] 2. 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(2005). “Strategies that fit emerging markets.” Harvard Business Review, 83(6): 63-76. 15. Cuervo-Cazurra, A., Maloney, M., and Manrakhan, S, (2007) “Causes of the difficulties in internationalization.” Journal of International Business Studies, 38 (5): 709-725. Appendix Source: Pakistan Dairy Strategic Working Group: Strategic Plan 2006 Read More