engro foods ltd. - strategic management
DESCRIPTION
A Strategic Management research paper on Engro Foods Ltd.TRANSCRIPT
Engro Foods Ltd.
Strategic Management
Zohaib Anwar
Athabasca University
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Table of Content
Executive Summary 3
Introduction 4
Company Overview 5
Mandate 8
External Analysis 10
Internal Analysis 12
Strategic Options 14
Recommendations and Implementation 18
References 20
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EXECUTIVE SUMMARY
Engro Foods Ltd. is a subsidiary of Engro Corporation Ltd., a holdings company with majority
stakes in fertilizer and chemicals industry. Engro Foods was incorporated on April 26th, 2005 as
a part of diversification strategy at Engro Corporation. The principal activity of Engro Foods is to
manufacture process and sell dairy, ice-cream, juices and frozen desserts. Engro Foods
launched its flagship brand Olpers all-purpose Milk in 2006 and received phenomenal success.
Its flagship Ultra high Temperature Processed milk brand has managed to capture the market
share of close to 43 percent by early 2012.
The remarkable success of Engro Foods lies in the fact that Pakistan is the 4th largest Milk
producing country in the world and there are few Companies in the market. Milk industry in
Pakistan has great prospects for growth. Packaged milk only has around 9% market share rest is
just unbranded open/lose milk sold by dairy farmers directly to the consumers or distributors
who sell it to consumers. Pakistan milk industry volume comprising different dairy is estimated
to be approx. US$26 billion.
Food industry is a growth industry in Pakistan with immense potential for growth prompting
the high threat of entry. Engro Foods was able to gain a big market share due to a set of
interrelated resources and capabilities such as an extensive milk collection network and ability
to innovate new products which are well received by the consumers and became an instant hit.
Engro Foods has many strategic options to create competitive advantage over its rivals such as
related diversification of its products to capture market share of the open/lose milk. Another
option is to adopt un-related diversification by introducing products in those segments of food
industry where Engro Foods currently does not operate. Lastly, Engro foods should adopt
backward integration by expanding acquiring/establishing a dairy farm which provides it with a
steady supply of high quality raw material.
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In this report we recommend that Engro Foods adopt the strategy of related diversification by
introducing a product to penetrate the open/lose milk segment of the milk industry.
INTRODUCTION
Engro Foods essentially is a part of the food industry of Pakistan which has an immense
potential for growth. Engro Foods operates in various segments of food industry such as dairy
and juices but its major stakes are in dairy segment. Pakistan is the 4 th largest milk producing
country in the world and dairy industry is estimated to be worth about USD $ 26 billion. Engro
Foods Ltd. face a stiff competition in the industry and its major competitors are Nestle, a world
renowned multinational corporation and Haleeb foods a local corporation with considerable
market share. Since Engro foods operate in juices and nectar segment of the food industry as
well, it also has competitors like Coca Cola, Pepsi and other local beverage manufacturers.
Another significant competitor of Engro Foods is Unilever, world's largest maker of ice cream
which dominates the ice-cream segment in Pakistan.
This report provides a thorough internal as well as external analysis of Engro Foods, identifies
its mandate, along with certain strategies that would help it increase its profitability, profit
growth and sustain its competitive advantage in the dairy and beverage segment of the food
industry. The limitations of this report are due to the fact that it primarily relies on the
information available online. Information contained in this report was sought from the 2011
Annual Report and quarterly reports for the year 2012; Engro Foods Ltd. website was also used.
Other resources used are as follows:
1- A research report on Engro Foods, 2012 - by Macquarie Equities Research
2- In depth report on Engro Corporation, 2009 - by BMA Capital
3- “Dairy Development in Pakistan, 2011” by Food and development organization of the
United Nations
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COMPANY OVERVIEW
Engro Foods Ltd. is a subsidiary of Engro Corporation Ltd., a holdings company with stakes in
various industries such as Fertilizer, Chemicals, Power Generation, Business Automation
Solutions and Food. The principal activity of the Holding Company is to manage investments in
subsidiary companies and joint ventures.
Fig 1 - Source: BMA Research, 20091
Engro Corporation follows a business philosophy of diversification which led to its foray in to
Food industry in 2005. Engro Corporation formed Engro Foods Limited incorporating it on April
26, 2005.
Engro Foods first investment was to build an Ultra High Temperature (UHT) processing plant
known as South Plant in Sukkur region in the Sindh Province of Pakistan. South Plant covers an
area of 23 acres and has raw milk reception capability of 300,000 liters per day and UHT milk
capacity of 200,000 liters per day. In December 2007, Engro Foods launched a second plant
known as North Plant in Sahiwal region of Punjab Province of Pakistan. This plant covers an
1 Chart as of 2009, Engro Corp now owns 89% of Engro Foods after Engro Foods IPO in 20115 | P a g e
area of 33 acres of land; it mainly produces Omore Ice-cream along with other dairy products
with an annual capacity of 36m litres. Adopting the business strategy of backward integration,
Engro Foods also ventured in to dairy farming business when it formed its own Dairy farm
called Nara Farm also in the Sukkur Region near its South Plant. The Farm currently produces
25,285 litres per day with a total herd size of 3,444 animals of which 1,707 are part of the
milking cycle. This Farm currently houses world class high yielding breeds of cows imported
from Australia and Europe. This is the first corporate run dairy farm in the country. Also, Engro
Foods currently has about 900 milk collections centres and its distribution network is spread
across 310 cities of Pakistan.
Engro operates in various sectors of dairy industry. Engro Foods range of brands and products
summarized in the table 1 below:
Brand Description
Olper’s Milk All-purpose UHT Milk – Launched in 2006
Olper’s Lite Low Fat UHT Milk – Launched in 2011
Olper’s Flavored Milk UHT Milk in three different flavors Rose Hip,
Almond and Saffron Launched in 2011
Olper’s Cream Rich Cream – Launched in 2006
Tarang Tea Creamer (Whitener) - Launched in 2007
Omung Dobala high nutrition vegetable, fat cream - combines
vegetable oil with excess fat extracted from
milk
Olfrute Fruit juices in flavors red grape, apple, guava,
green cock-tail, mango, apricot and orange –
Launched in 2010
Dairy Omung Processed Milk marketed to low income
consumers with same nutritional value as
open milk. Competitively priced - launched in
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2011
Tarrka Clarified Butter – Launched in 2007
Omore Ice-cream
Omung Lassi Buttermilk, 2 flavours i.e. sweet and sour –
Launched in 2011
Table 1 - Source: Company Website
The Company is the leader in Ultra High Temperature (UHT) processed milk with over 44
percent market share while it is the second largest player in ice cream segment with market
share of 24 percent. Engro Foods has grown exponentially in the UHT milk market and managed
to become an industry leader in the short span of only 7 years. But Engro Foods’ market share is
only 2.8 % of dairy industry; as 93 percent of the industry is dominated by the unbranded and
the open un-packaged milk sector (delivered door to door every morning by the local milkman
who collects it from a dairy farmer) otherwise known as open/lose milk while branded
packaged milk is only 7%. Hence, the opportunity for Engro Foods is enormous. Other segments
where company expects growth are Ice-cream (US$133mn) and the North American Halal meat
market (US$256bn).
2011 has been the most significant year for Engro Foods since its inception as it went public by
offering its shares in Karachi Stock Exchange. Along with launching its IPO, Engro Foods for the
first time in its history witnessed a profit in its business which was incurring a loss in its previous
years to due to a heavy investment in marketing, branding and R&D costs associated with
launching a new company. Furthermore, Engro Corporation, Engro Foods’ parent company also
ventured into International Markets by acquiring a halal food business, Al Safa Halal, Inc. (Al-
Safa) in North America at the total cost USD $6.3 million. Al-Safa halal foods will also be
managed by Engro Foods Ltd as entire shares of Al-Safa are proposed to be acquired by Engro
Foods from Engro Corporation at cost subject to requisite approvals from the regulators.
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Engro Foods plans to invest PKR (Pakistani Rupee) 8.7 billion in 2012 to enhance its milk
collection capability, increase powder plant capacity by 200 % (from 5,000 tonnes to 15,000
tonnes) and increase its footprint in the ice cream business. The company currently has 916
milk collection centres which collect 89 % of company’s total milk. With the expansion, which is
being financed by PKR (Pakistani Rupee) 5 billion of debt (57%) and PKR (Pakistani Rupee) 3.7
billion of internal funds (43 %), the company expects to significantly increase its milk collection
infrastructure which will help sustain future growth.
Engro Foods strategy from the very beginning was to make heavy investments in the
infrastructure development and brand building in the initial years. At present, the Company has
reached a point where it has built the critical mass in terms of its infrastructure and significant
top of mind with consumers. With established leadership in the Ultra High Temperature
Process market, well diversified product portfolio and strong top of mind brand awareness, the
Company is poised to normalize its marketing investments in line with the industry standards
and benefit from the momentum built in the recent years.
MANDATE
The vision of the company is to “elevate customer delight worldwide”. This vision of the
company is seen in extensive range of products offered by the company in Pakistan. Some of
the brands and products of Engro Foods are first of its kind in the local market.
The mission of the company is to “go above and beyond conventional standards by redefining
quality benchmarks, exceeding consumer expectations and delivering the greatest value to all
our stake holders”. Engro Foods seems to have well incorporated its mission statement in its
operation as evident by its meteoric rise in the food industry.
The core values of the company revolve around the consumers, innovation, employees and
social responsibility. These values are:
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Consumer Centric - “We believes in redefining industry benchmarks and exceeding consumer
expectations to create the ultimate brand experience. The consumer is discerning and aware;
therefore all our products must be created after a thorough research of changing consumer
needs and market expectations”.
Innovation – “Innovation is at the heart of all we do. It is valued, encouraged and rewarded in
all aspects of our operations. To deliver quality products and real value to our customers, we
strive to think outside the box to create products that can help us deliver a memorable brand
experience that elevates consumer delight and exceeds market expectations at every step in
every way”.
Our People – “Passionate people with a positive and proactive approach are critical to our
success. To empower and engage our people, we provide them with challenging opportunities, a
stimulating environment and all the necessary tools to help them reach their full potential.”
Integrity – “We care how results are achieved and ensure the highest standards of integrity in
all our undertakings”.
CSR – “The triple bottom line approach is widely apparent in all our strategic undertakings –
except that our consideration for people and the planet goes well beyond our need to fixate on
profits.”
Engro Food’s stakeholders are its customers, shareholders, employees, suppliers and
communities in which it operates. Engro Foods customers are the ones who ultimately use the
products and consumers are one the most important stakeholders of the company and it
acknowledged the consumers in its core values, mission and vision statement. The shareholders
invest in Engro Foods providing the company with capital and the company rewards them by
consistently creating and increasing the shareholder value, Engro Corporation is the largest
shareholder of the company as it holds more than 89 % of its shares. Engro Foods employees
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worldwide are considered its most important asset; they expect ethical treatment along with
fair wages and good working conditions. Another important stakeholder of Engro Foods is its
suppliers; mainly dairy farmers who rely on the business agreements with Engro Foods, and the
businesses who sell and distribute Engro Foods’ products. Also, different communities all over
the Pakistan from Sukkur, Sindh to Sahiwal, Punjab to many communities in Pakistan who are
provided with jobs, employee education and stability.
EXTERNAL ANALYSIS
Competitive Rivalry
Food industry is highly competitive due to immense potential of growth. A food company with
the low cost structure, greater efficiency and better customer service will have an edge over
competitors. Food industry in Pakistan has many players but majority of the market share in
packaged food is dominated by 3 major companies. In the dairy segment, rivalry is high and
competition is intense as 91% of the market is dominated by small scale farmers who sell
open/lose milk directly to the consumers. Food companies not only compete against each other
in processed milk sector but also competing to tap in to open milk market by investing heavily
in to R&D and marketing. In the long run, industry is likely to be more consolidated but for now
it is in its growth stage.
Threat of New Entrants
Due to the immense potential in growth of the dairy segment, the threat of new entrants is
high. The amount of investment required in starting a large operation with various plants, a
trained work force deters many entrepreneurs from entering the market segment of packaged
milk. But the threat of other corporations with stable financial position, human, technical, and
marketing resources can decide to enter this market as a part of diversification strategy. The
dairy market is dominated by small scale farmers, who own their own farms and sell directly to
the consumers. The ease of entry into this market as evident by many small scale farmers also
intensifies the threat of new entrants as they will compete directly with the processed milk
segment.
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Bargaining Power of Buyers
Food industry has many buyers which include distributors across the country, average
consumers, hotel and airline industry that buys packaged food products. Fortunately, the sales
of the food industry are scattered evenly across the board and no one buyer amounts for a
larger numbers of sales. This puts the bargaining power of buyers at low.
Availability of Substitutes
There are plenty of substitutes of various segments of food industry such as animal fat (lard) for
butter in dairy segments, coffee and tea for beverage segment etc. This combined with the low
switching costs the threat of substitutes is deemed to be high. But it should be noted that most
of the players in this industry have a very well diversified line of products, such as Unilever that
owns Lipton brand is the largest maker of Ice-cream.
Bargaining Power of Suppliers
The suppliers of food do not pose a big threat, because the sheer number of suppliers. Raw milk
is standard commodity and is available in the open market from a large number of dairy
farmers. If anyone refuses to sell its product then company can buy it from others who are
willing to sell. Suppliers also have less leverage to bargain over price because major competitors
buy in large volumes giving them buying power over suppliers.
Macro-Economic
Processed Food Industry has an immense potential for growth in Pakistan, an emerging market.
As literacy rate improves in Pakistan (currently at about 50%), it will increase awareness of
standardized packaged milk and its benefit when compared to open milk which is often
unhygienic and adulterated. With the passage of time, increase in literacy rate and subsequent
improvement in the economy will contribute towards better buying power of the consumers
which will also contribute enormously towards the packaged food industry.
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Technological changes such as exponential growth in internet and ecommerce provides a great
platform to this industry to market its products directly to target demographics and also to raise
awareness of its products. Improvements in packaging along with advancements in processing
of food will contribute enormously towards the growth of packaged food industry.
Political stability or lack thereof is one of the most important factors that affect businesses in
almost all emerging markets. The country has been marred with rounds of political instability as
it went through a mix of democratic and military governments. Democratically elected
governments have been toppled overnight by military dictators leading to a drastic change in
laws and regulations which govern businesses.
INTERNAL ANALYSIS
Engro Foods has seen a phenomenal growth since its inception in 2005 becoming an industry
leader in a short span of time. Engro Foods has many resources that contribute towards gaining
and maintaining competitive advantage over its rival. Engro Foods success to date is
attributable to two distinctive competencies. The first of these, and perhaps the most
important, is innovation which allows the company to diversify its products according the needs
of the consumers. And the second distinctive competency is the company’s ability to meet or
exceed whatever pricing and/or quality its competitors offer. In essence, the company’s
competitive advantage can be described as diverse range of products which cater to all
demographics at no additional cost. Following this model, Engro Foods successfully launched its
UHT Processed Milk brand Olper’s Milk which was able to capture 44% of the UHT market by
2012.
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Mar
ket
Sh
are
(%)
UHT Milk Market
100
90
80
70
60
50
40
30
Nestle & Haleeb Nestle Engro Foods Limited Haleeb Others
90
38 36
16
20
10
0
Source: BMA Research
10 10 2003 2009
Fig 2 – Source: BMA Capital, 2009
The company is constantly investing in product innovation and improving its current line of
products. The company over the past years has successfully launched and managed many new
products in various segments such as Ice-cream, beverages (juices), powdered milk etc. As such,
P&G has the ability to push for innovation and ensure faster commercialization than any of its
competitor in the industry. This investment in improving brands and innovation also promotes
brand loyalty.
Engro Foods competitive advantage can be traced to a set of interrelated resources and
capabilities. The first of these is modern milk collection method employed by Engro.
Traditionally, milk processing plants collect milk from many distributors with an extensive
network of milk collection. These distributors collect milk from dairy farmers across the country
and dairy farmers less than industry standard prices and in turn sell that milk to processing
companies at a higher rate. Engro foods have essentially devised its own milk collection
network which collects milk directly from dairy farmers. The Company gained a very important
resource in the form of an extensive network of milk collection, which removed middlemen
from the milk collection cycle. Engro Foods established a good relationship directly with the
farmers by paying them industry standard wages and treating them ethically. Another
important resource of Engro is its advanced processing plants which have a higher capacity than
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rivals. Engro Foods also owns its dairy farm which supplies it with high quality milk. This dairy
farm is an important resource for the company which leverages its competitive advantage.
Efoods products covering the entire economic pyramid
Olw ell Milk Ow s um
Flavored milk
Olf rute
Omore
premium dairy ic e c ream
Olper’s c ream
Tarang Olper’s milk Tarrka Omore ic e cream
Dairy Omung Tarang Dobala
Ice lollies
Fig 3 - Source: Macquarie Research, 2012
Another one of Engro Foods important resource is its highly effective marketing and branding
division. Engro Food’s marketing department was able to market its products in such an
effective manner that in a short span of time it became one the most recognized brands in
Pakistan which is evident by its meteoric growth in sales.
There are some weaknesses and threats for Engro Foods as well. The experience of its
competitors in Consumer Goods industry is extensive, especially corporate giants like Nestle
and Unilever. Engro needs to invest heavily in research and development unlike its competitors
like Nestle which relies on parent company for research with its global product portfolio.
Another major threat is entry of other big corporations who can enter this market due to
potential high returns.
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STRATEGIC OPTIONS
Backward integration to strengthen Supply Chain – In this strategy, Engro will own and
operate its own dairy farms which will provide it with high quality milk from animals with high
yield per animal. Currently, Pakistan is the 4th largest milk producing country but it yield per
animals is quite low. Engro spends a lot of money in order to maintain an extensive network of
milk collection from dairy farmers across the country, it currently gets 89% of its milk from dairy
farmers. By harboring this strategy, Engro Foods can decrease costs associated with raw
materials such as milk.
Backward integration strengthen Supply Chain
Arena Dairy farming market
Differentiator Quality, costs
Vehicles Acquisitions, Signalling
StagingVertical integration to strengthen supply by less reliance on
suppliers
Economic ModelLower cost of raw material will translate into higher profits
ProsEnhances existing capabilities and resources
Low Risk
Cons
Short to Medium term solution because overtime costs
associated with owning and operating a large dairy can
increase such as animal feed etc.
Table 2
Related diversifications to penetrate open milk/loose market - Loose milk market represents
the biggest segment of dairy industry. So far Engro Foods has only entered UHT and Powder
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milk industry. Loose/open milk refers to the regular milk which is delivered to the doors of
average consumers every morning. Majority of the country’s population lives in rural areas
where almost all localities/villages etc. have local dairy farmers who provide a constant supply
of Milk to the residents. Consumers tend to prefer local dairy farmers mostly because of the
taste of the milk. UHT processed milk is standardized and processed which alters the taste of
the milk. Many consumers do not prefer this milk due to the taste. There is an immense
potential in this market if Engro Foods can innovate a product that is similar in taste and quality
as regular milk.
Due to the lack of cold facilities for storage and constant shortage of power in Pakistan,
providing fresh milk to consumers through regular channels is extremely difficult and costly.
Hence, businesses prefer to manufacture processed milk because of its longer shelf life than
regular milk.
UHT milk in Pakistan has grown at a five-year CAGR of 12%
Loose milk is the real opportunity in Pakistan (2011)
mn litres 1,000
900
800
700
Am biant U H T
5%
Pow ders
3%
600
500
400
300
200
100
-
CY06 CY07 CY08 CY09 CY10 CY11
"The
Opportunity"(u nbranded)
92%
Fig 4- Source: Macquarie Research, 2012
In this strategy, Engro should invest heavily in R&D to innovate a product which is similar in
quality and taste as regular milk. This will give Engro a chance penetrates loose/open milk
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market which has immense potential for growth. Engro can even collaborate with other
businesses which it competes against in UHT milk market to share the R&D costs.
Related diversifications to penetrate open milk/loose
Arena Dairy Market
Differentiator Quality and taste
VehiclesCollaborations, Divesture from other businesses to fund Research
and Development
StagingInitial collaboration with competitors in UHT market to penetrate
the open milk market. Funding its own R&D
Economic ModelProvide quality milk with the same taste and quality as regular
open milk at reasonable price to consumers
ProsGreat long term potential
Enhance current capabilities and resources
ConsRisk involved in collaboration
Significant R&D costs
Table 3
Some the cons associated with this strategy are in collaborations with other businesses. The
potential cost of Research and development in this industry are quite significant which Engro
Foods might not be able to withhold. Collaborations with competitors in UHT industry has risks
associated such as legal issues revolving ownership of patents of such technologies.
Unrelated Diversification in to other segments of the food industry – In this strategy, Engro
foods should enter other segments of food industry such as rice processing plants, sugar mills
etc. Pakistan has an agriculture based economy and it is the 14th largest rice producer of the
world. Engro Foods can also tap in to this market and process rice to produce edible rice. China
is the largest consumer of rice along with other Asian countries. Pakistan’s geographical
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location is an advantage in this case as Engro Foods can also export rice to Asian markets with
high demand for rice.
Diversification in to other segments of the food industry
ArenaPakistani Food Market with the potential of exporting to
Asian markets
Differentiator Quality, price
Vehicles Acquisitions, Signalling
StagingAcquisitions of major business involved in rice processing,
investment into a rice plant
Economic Model
Sell rice to consumers across the local market to meet the
growing demand at competitive price to gain a market
share
Pros
Leverages existing resources and capabilities, protects the
company against any slump in the local economy
Long Term potential
Cons
High Risk with acquisitions and high cost associated with
setting up plants
Exports to other countries might be regulated by those
countries to protect local companies
Table 4
RECCOMENDATIONS AND IMPLEMENTATIONS
We recommend that Engro Foods implement the Innovation to penetrate open milk/loose
market strategy for the reasons described above. This strategy has an immense potential to
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provide Engro Food with a resource to enter and gain market share of loose/open milk which
makes up 91% of dairy milk industry of Pakistan worth about USD $26 billion.
In the first phase of the implementation, Engro foods should divest from some of other
segments of the food industry such as ice-cream segment where it is competing against world
largest ice-cream manufacturer Unilever or it can divest from its beverage businesses where it
is facing a stiff competition from competitors like Pepsi and Coca Cola. This divesture will
provide Engro Foods with much needed capital which should be invested in to R&D unit under
R&D division dedicated solely to product innovation to target open milk industry.
To implement this, a functional structure should be adopted so as to allow for a coordinated
approach to increase the pace of innovation. Since the focal point of this strategy is R&D
division, it should be supported by all division. Different division such as R&D, plant operations
division should have an effective communications channel where flow of information such
exchange of ideas and feedback takes place with ease.
Another major challenge that Engro Foods will face is attracting and selecting qualified team of
scientists in Pakistan where higher education in dairy technology is almost non-existent. Engro
foods will have to hire mostly expatriate staff or select the best candidates from its pool of R&D
staff to go overseas for advanced education in dairy technology. The time involved in the
educating a staff and then implementing that education to innovate a product is very long
hence hiring a qualified staff from across the globe is a much better option. After hiring
qualified personnel, Engro should research on innovation of a product which has an extended
shelve like UHT milk along with the quality and taste like regular milk.
Engro foods must protect all its trade secrets and product formulas to avoid losing competitive
advantage over its rivals. Since Engro Foods as extensive experience in product diversification,
and implementation of strategies related to product diversification, this is a rather easy option.
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REFERENCES
Annual Report (2011) Retrieved from http://www.engrofoods.com/pdf/engro-foods-annual-
report-2011.pdf
A research report on Engro Foods, 2012 - by Macquarie Equities Research. retrieved from
http://xa.yimg.com/kq/groups/15240720/327693974/name/EngroFoods240512e117710.pdf
In depth report on Engro Corporation, 2009 - by BMA Capital retrieved from
http://research.bmacapital.com/1/researchreportsfiles/BMA_Efoods%20Report_6-Apr-12.pdf
“Dairy Development in Pakistan, 2011” by Food and development organization of the United
Nations. Retrieved from http://www.fao.org/docrep/014/al750e/al750e00.pdf
“26 billion Industry” 2011 Retrieved from
http://www.thenewstribe.com/2012/03/09/pakistans-milk-and-dairy-products-industry-reach-
26-billion/
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