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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