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Acknowledgment
We would like to express our gratitude to all those who gave us the best support to complete this report. First, we want to thank Almighty Allah who gave us the strength to work on this report and made it successful. Sincere thanks to all the people who have contributed to and worked on this. We are deeply indebted to our instructor Mr. Michael Simon whose help, encouragement and stimulating suggestions have been the best motivator for us. He helped us each time we went to him for discussion on the report and writing of this report. Last but not the least I would like to appreciate the efforts put up by my colleagues who were always ready to provide every sort of help in every context of this report, with which we were able to make this report a success.
Table of Contents
ECONOMY OF PAKISTAN.................................................................................................................1 REPORT ON .........................................................................................................................................1 BEVERAGE INDUSTRY IN PAKISTAN...........................................................................................1 Table of Contents...................................................................................................................................3 1.Executive Summary.............................................................................................................................1 Beverage Industry in Pakistan................................................................................................................2 2.1 Slower Growth with Decreasing Purchasing Power....................................................................4 2.2 Increasing Consumption of Diet Products and Bottled Water.....................................................4 2.3 Increasing Purchases at Department Stores and Discounters.......................................................4 3.The Scope............................................................................................................................................6 Problems of the Beverage Industry during the Current Socio-Economic Situation...............................7 SWOT Analysis......................................................................................................................................9 Production of Beverages.......................................................................................................................10 Major Players of the Beverage Industry...............................................................................................12 Pepsi ................................................................................................................................................12 7.1.1 Pepsi Pakistan......................................................................................................................12 7.1.2 PepsiCo Inc Remains Market Leader with New Product Launches....................................13 Coca Cola Company.........................................................................................................................14 7.2.1 Coca Cola in Pakistan..........................................................................................................14 7.2.2 Production Capacity and Sales............................................................................................15 7.2.3 Kinley..................................................................................................................................15 Fruit Juices............................................................................................................................................16 8.1 Fruit Juice Industry Potential Barriers.....................................................................................18 Trade Statistics and International Target Customers............................................................................19 Prospect for New Entrants................................................................................................................20 Conclusion............................................................................................................................................21 Bibliography.........................................................................................................................................22
1. Executive Summary
Pakistans Beverage industry is one of the top industries. Its operating with around 170 units. And its sales volume is up to 30.5%. The beverage industry in Pakistan, currently having a size of little over 120 million cases per annum with an annual growth of around 10-15 per cent, has the potential to double its size in the next 3-5 years, if the government's taxation policies towards this industry are corrected. Tea which is the second largest segment of beverages, share in net sales and operating profit during 2008 was at 32% and 18%, respectively. Among carbonated drinks, about 84 million cases 70% per cent are Pepsi products; about 26 to 28 per cent are Coca-Cola products and remaining are other local cola drinks. Challenges faced by beverage industry are the high prices and unavailability of sugar and also the taxes and excise duty, subjected at the rate of 12.5 percent and sales tax at the rate of 15 percent on the retail price. This is the reason that beverage industry at the moment has very low per capita consumption of 20 serves whereas in other countries of our region it varies from120250 on the basis of single serve of 250 ml. Growth of the industry is slowed due to intense competition from the foreign products and also because of the decreasing purchasing power. Competition is also because of the large number of hyper marts which offers greater variety of carbonated drinks to consumers. Soft drinks market in Pakistan has increased at a compound annual growth rate of 6.4% between 2004 and 2009. And the carbonated category is the leader in the soft drink market with a share of 63.7 %. Pakistans Soft Drinks Industry Is Set to Experience Volume Sales Growth of 30.5% to 2010.This reflects such a huge market to cater.
About 84 million cases 70% per cent are Pepsi products; about 26 to 28 per cent are Coca-Cola products and remaining are other local cola drinks. Due to the Afghan and Iraq wars, local Cola did get a little footing especially in the frontier and Islamabad area but still they are not immensely popular. Success of the cold drink industry is depends on the sugar as it is the key input in beverages. According to the Federal Bureau of Statistics the production of beverages declined by 3.7% as the prices of sugar rose sharply in recent months. Another challenge faced by the beverage industry is the taxes and excise duty. Beverages are subject to excise duty at the rate of 12.5 percent and sales tax at the rate of 15 percent on the retail price. In addition to a 16 percent sales tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages. Therefore, high duties on machinery and raw materials, which are not available locally, are a disincentive to companies that want to establish manufacturing facilities. The beverage industry at the moment has very low per capita consumption of 20 serves whereas in other countries of our region it varies from120-250 on the basis of single serve of 250 ml. This is definitely due to the heavy taxation, as the price of the product is very important and especially in our country where clean drinking water is not available and our products has to be affordable to a common man which it is not at moment. Report revealed that US investors in Pakistans beverage sector, for instance, are targeted with higher taxes than domestic companies and those from third countries that manufacture competing beverages such as fruit juices, tea and bottled water. In addition to a 16 percent sales tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages. Therefore, high duties on machinery and raw materials, which are not available locally, are a disincentive to companies that want to establish manufacturing facilities.
POLITICAL 1. Political instability may affect: the ability to acquire of form a strategic business alliance with suppliers, activities that make necessary infrastructure enhancements to production facilities, distribution networks, sales equipment and technology. 2. The security measures taken by the government have increased the cost of doing business. The anti-terrorism campaign has caused inefficiency in allocation of resources, as increasingly resources have been diverted to security matters at the expense of economic development. 3. In addition to a 16 percent sales tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages. (High Taxation figures can be double checked) SOCIAL 1. Practice of healthy life-styles has led to a shift in consumption of Carbonated Soft Drinks switching to bottled
ECONOMIC 1. The cost of raw materials e.g. soda ash for glass manufacturers, HDPE for plastic bottles and sugar have increased to further impact the price of the cold product. Production of beverages (weight, 0.28%) declined by 3.7% as the prices of sugar, one of the key inputs in beverages rose sharply in recent months. (ESP - 2008-9)
3. The Scope
Soft drinks market in Pakistan has increased at a compound annual growth rate of 6.4% between 2004 and 2009. And the carbonated category is the leader in the soft drink market with a share of 63.7 %. Pakistans Soft Drinks Industry Is Set to Experience Volume Sales Growth of 30.5% to 2010.This reflects such a huge market to cater. Coca-Cola and Pepsi are two companies that have fought hard to be on top in the beverages and nonalcoholic industry. Scope of beverage industry is very vast in Pakistan as there is sluggish but potential growth in the market. Other companies like Redbull bringing in new drinks that are targeting the youth. According to the statistical bureau of Pakistan, Pakistan youth is composed of 70% of the total population. Hence there is a huge market potential
SWOT Analysis
STRENGTHS Renewal and investment Innovation and Technological development Experience in searching for new markets, niches and partners Availability of key raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage.
WEAKNESSES Old technologies and poor work organization Insufficient pace of creation and implementation of innovations Insufficiently effective activities of small and medium-sized businesses Change in household consumption patterns
OPPORTUNITIES Presence of a favorable market Market globalization Foreign direct investment promoting knowledge and developing export channels Transfer of production to the countries with smaller labor costs Well established distribution network
THREATS Unfavorable market trends in energy resources Increasing competition among exporters and decreasing dependency on one market Intense competition between the organized and unorganized segments and low operational cost. Water scarcity in Pakistan Implementation of Goods and Service tax by 2011
Production of Beverages
According to Economic Survey of Pakistan 2009-2010
Pepsi
Pepsi International is a world most admired company. It is a very well organized multinational company, which operates almost all over the world. They produce; one of best carbonated drinks in the world. Pepsi is a symbol of hygiene, quality and service, all over the world. Pepsi is producing Cola for more than 100 years and it has dominated the world market for a long time. Its head office is in New York.
PepsiCo is an international cold drink brand and the leader of Pakistani beverage industry. Their vision is to be the world's best beverage company. Being the best means providing outstanding quality, service, cleanliness and value, so that their every customer is satisfied and happy with their products.
7.1.2 PepsiCo Inc Remains Market Leader with New Product Launches
PepsiCo Inc has introduced new diet product that has been well received and supported by good marketing activities. This new launch will help PepsiCo Inc to increase its share in the market and prove to be tough competition for Diet Coke. Juices manufacturers have taken their lead from Nestle by offering 100% concentrate products across the country. Bottling companies are facing stiff competition from local unregistered companies that sell a class, urban areas. (Pepsi, 2010)
7.2.3 Kinley
Kinley water understands the importance and value of the life giving force. Kinley water comes with the assurance of safety from the Coca-Cola Company. Coca-Cola introduced Kinley with reverse osmosis along with latest technology.
Fruit Juices
The fruit juice coupled within beverage industry is considered to be one of the largest industrial sectors in Pakistan. It is expected to be growing at a robust rate of 20-25%. Modernization of this industry, in consonance with the change in urban life style, massive shift of rural population to the urban areas, growth in population, etc., predict a growing potential for instant solutions in fruit juice segment of the beverage industry. Traditionally in Pakistan and generally all over the world people prefer to use natural drinks rather than carbonated soft drinks and this perception is gaining more currency day by day which also adds to the advantage of the fruit juice industry. Around 70% of the total fruit juice market is accounted for by 250ml tetra pack servings while the rest 30% includes 500ml and 1000ml packs. This shows significant convenience (from consumers perspective) and high sales frequency in 250ml package category. Based on this market situation, it could be observed that the entrepreneur should focus more on small serving packs rather than one liter or other serving sizes. Currently in Pakistan, there are 24 fruit juice/pulp processing units and a number of small units in the informal sector are working. The present installed capacity is estimated around 400,000 metric tons per annum with an estimated growth rate of 20% to 25% annually (EAC-2003 and discussions with the industry experts). The fruit juice market is estimated around 2.5 billion to 2.8 billion Rupees. Common people especially young generation is inclined to have ready to consume drinks; in addition hotels, hospitals are also expanding day by day where juices could be marketed successfully. Moreover the global trend of preferring fresh fruits and juices also marks possibilities of growth in this sector. Furthermore, the growing exports volume and withdrawal of CED (customs and excise duty) on fruit juices (produced locally) could further supplement significant growth in the fruit juice industry. For industrial scale manufacturing of fruit juice, pulp is used which is available round the year; on the other hand, fresh fruits are also being used for 100% pure juice production. However, based on our discussions with industry experts, we understand that business viability could be a question mark when fruit juice business starts with fresh fruits processing.
It is absolutely necessary for someone starting a juice manufacturing operation to be familiar with the regulations and requirements of the market. For commercial purposes, it is important to define the differences (from other juice products) carefully and ensure that specifications and labeling are correct. There are circumstances where a 100 percent juice or puree product is impractical while dilution with other juices and/or water and sweeteners are practical, as long as the products are correctly identified. Water, sugar, organic acids and low cost bulk juices are much cheaper than higher value fruit solids. Most of the fruit juice manufacturing units are operating in Lahore, Sargodha, Bahawalpur, Hyderabad, Gujranwala, Hattar NWFP and Karachi. The following table presents a synopsis of some well known local and imported brands:
Following are considered to be the major players of fruit juice industry. Some of them have closed their operations due to political instability during the last five years e.g. Monalisa and Sunflo Cit-Rus:
Currently Shezan is giving tough time to other fruit juice manufacturers due to its quality and huge export volume as well as capturing local fruit juice market where it has competition with Nestle. Most of them offer fruit juice in tetra packs where squashes and syrups are available in glass bottles.
Exports
4,583
3,792
3,965
5,357
5,864
Imports
1,063
743
848
836
722
In Mt
Conclusion
Pakistan at this point in time is facing dire socio-economic problems. However, in the face of natural calamities and social unrest the country is still moving forward, with an economic growth rate of 3.2 percent. This shows the potential that this country has and its capacity to deal with and move forward towards a positive direction in the worst circumstances. In a similar way, Pakistan has one of the lowest per capita consumption of soft drinks which makes a huge potential for the beverage industry to grow, in fact grow manifolds in the next ten years. Therefore, the government and CBR should abolish excise duty as we have sales tax on the products as well which is double taxation, this in turn will allow to readjust the retail price and maintain at an affordable level which will make sure that the industry grows at a faster and higher rate which ultimately will increase the total revenue of the government which at the moment is over Rs5.2 billion. "It must be noted here that the beverage industry is the 3rd largest revenue participant of CBR. Beverage industry has tremendously changed in the last 10 years due to more aggressive participation and marketing strategies of the two multinational brands known all around the world i.e. Pepsi and Coke. Currently, 95 per cent of the market share is held by these two brands and the rest by some other foreign and local brands, therefore, your point of view is correct as the local brands of this country are also not being given any special incentives to grow. The focus of the government and its economic policies is on export-oriented industries only which we believe is correct but at the same time the government and policy makers should also keep in mind that all those industries which may not be export oriented but to generate economic activity inside the country should also not be neglected, that is industries like construction and consumer product industry such as confectioneries, food and beverages. "Due to the economic downturn the government should provide special incentives to the beverage industry by way of reduction in taxes to provide a chance for them to push forward their growth by maintaining affordable prices to generate maximum economic activity, especially the food items which can be kept within the reach of common man".
Bibliography
http://www.finance.gov.pk/survey_0910.html www.google.com www.wikipedia.org www.sbp.org.pk www.pepsico.com.pk www.thecoca-colacompany.com