FMCG Industry in Pakistan:

The consumer market especially FMCG is one of the fastest growing industry in
Pakistan and there are many players of global fame like Uniliver, Nestle Pakistan,
Colgate Pamolive, PEPSI CO, Kraft Foods and well established local contributors for
instance, Tapal Tea Pakistan Pvt Ltd, Engro Foods, Seasons Canola Pakistan( Wali
Oil Mills).
Food products and personal care together make up two-third of the sectors
revenues as can be seen from the market break-up by revenue statistics. In 2011,
rural-urban market breakup was 33.5% and 66.5%. Now, rural and urban markets
account for 50%-50% of the FMCG market, signalling a shift towards rural markets.
While online sales channels are available, grocers still are the most preferred sales
channel for FMCG.
Porters Five forces Model:
Porter five forces analysis is a framework that attempts to analyze the level of
competition within an industry and business strategy development. It draws
upon industrial organization (IO) economics to derive five forces that determine the
competitive intensity and therefore attractiveness of an Industry. Attractiveness in
this context refers to the overall industry profitability. An "unattractive" industry is one
in which the combination of these five forces acts to drive down overall profitability. A
very unattractive industry would be one approaching "pure competition", in which
available profits for all firms are driven to normal profit.
Michel Porters five forces include:
1. Threat of new entrants
2. Bargaining power of customers (buyers)
3. Bargaining power of suppliers
4. Intensity of competitive rivalry
5. Threat of substitute products or services

Five forces analysis of Pakistan FMCG industry:

Threat of new entrants.
Because of the large size of the Pakistani market and the high level of growth,
Pakistan should be considered attractive for most major international FMCG
producers. Such firms not yet in the country should thus be considered potential
entrants. In addition to the major international players on the FMCG market, Pakistan
has a large number of regional producers serving narrow geographical markets due
to the poor infrastructure in rural areas. These regional firms have adapted to the
specific demands of consumers and the difficult conditions for efficient distribution in
less developed areas. As the infrastructure in rural areas is unlikely to be improved
significantly in the foreseeable future due to investments being concentrated on
highway construction and urban areas, such producers can continue to emerge and
offer considerable competition locally.
While Pakistans poor infrastructure leads to an increased threat of domestic
entrants to the FMCG market in the country, it is on the other hand also likely to
dampen the eagerness of foreign companies who are considering a market entry. At
the same time, the lack of an organized retail sector is also likely to keep possible
international entrants out since this can make it necessary to deal with a very large
number of small retailers. These problems as well as the problems with poor
infrastructure can be amended by entering major metropolitan areas in the country;
the so-called market hotspots.
Rivalry among existing competitors.
The Pakistani government has attempted to deny entry for foreign retail giants like
Wal-Mart and Carrefour by excluding multi-brand retailers. With regard to producers
on the other hand, Pakistan is more open to FDI. Therefore, a considerable number
of large well-known MNEs are active in the country including Procter and Gamble,
Nestl, Cadbury, Unilever as well as PepsiCo and Coca-Cola.

Pakistan also has a large number of regional FMCG producers in addition to the
multinational producers. These serve narrow geographical markets, predominantly in
rural areas, and as they are adapted to the characteristic of their local markets they
will often have a competitive advantage. This advantage is likely to be based on a
well-established and intensive distribution system thus reaching a large number of
consumers in their region. For others, the competitive advantage is not so much in
distribution but instead in their ability to skilfully copy the brands of the well known
MNEs. The presence of a number of large multinational producers in combination
with a large number of regional producers should lead to a relatively low industry
concentration in a nationwide sense.
However, the focus on hotspots for multinationals may lead to high industry
concentration in the major metropolitan areas while diversified regional producers
can result in high industry concentration in rural areas. This means that while the
industry concentration may be low in a national sense signifying a very competitive
market, the competitiveness of the market is in fact likely to be somewhat lower due
to the difficulties of reaching the final customer for MNEs in less accessible areas.
Bargaining power of suppliers.
Pakistan produces a wide range of agricultural products due to the countrys size
and its diverse agro-climatic conditions, and is ranked 3rd or fourth in the world when
it comes to the production of livestock, milk, sugarcane, rice, wheat, fruits and
vegetables. Additionally, the country has an abundant supply of the raw materials in
the production of soaps and detergents. Consequently such products, which are
used extensively in the production of many forms of FMCG, are widely available in
the country and potentially at low prices due to low wages , although agricultural
productivity is low in comparison to neighbouring countries.
Suppliers of FMCG firms are also likely to be unorganized, as it is the fact among
retailers, resulting in low concentration and thus limited supplier power. This is
certainly the fact among producers of food products. While the majority of raw
materials should be available internally in Pakistan, some products may need to be
sourced from abroad or may be available at a lower cost elsewhere.

In order to protect local businesses however, Pakistan has maintained tariffs on a

number of imports, especially on agricultural products where tariffs average 30-40%.
Nevertheless, Pakistan has reduced controls on foreign trade and investment in
recent years and if this development continues, sourcing from abroad should
become easier in the coming years.
Bargaining power of buyers.
As mentioned previously, the neighbourhood karyana stores and street vendors are
the dominant retailers in Pakistan. They have very limited buyer power due to their
small size and because they are unorganized. If these retailers were to organize joint
buying they would be able to increase their buyer power and achieve quantity
bonuses as well as better terms. Such initiatives could also help in the competition
against organized retail chains which are expected to show considerable growth in
the coming years.
In any case, the level of organization of the Pakistani retail sector will rise in the
coming years. This rising share of organized retail will increase average buyer power
in the future as order sizes increase and suppliers become increasingly dependent
on a number of large retailers. The move from independent stores to chains can be
speeded considerably if global retail giants such as Wal-Mart and Carrefour are
allowed to enter. Currently only single brand retailers are allowed to conduct foreign
direct investment in the country which has kept out the likes of WalMart and
Carrefour, as they offer a large number of different brands . It remains to be seen
whether the legislation limiting FDI will persist or will be softened with time.
Threat of substitute products.
The presence of substitute products in FMCG lowers industry attractiveness and
profitability because they limit price levels. The threat of substitute products depends
on:

Buyers willingness to substitute

The relative price and performance of substitutes

The costs of switching to substitutes

Being an essential commodity the demand for consumer products is elastic. Several
brands are positioned with narrow product differentiation. Companies entering a
category /trying to gain market share compete on pricing which increases products
substitution. Hence, threat of substitute is high in the FMCG industry in Pakistan.
Illegal copying of products and fake brands is not only a problem in fashion,
electronics and music in Pakistan but also within FMCG, especially in rural areas
with a low education level. The loss of revenue caused by copy producers is not the
only problem for original manufacturers as such copy products will often be of inferior
quality compared to the original products. This is likely to give consumers negative
experiences which could transfer to the original product by reducing brand image
and customer loyalty.