International Journal of Retail & Distribution Management

The changing structure of distribution channels in Pakistan

Asad Aman Gillian Hopkinson

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Asad Aman Gillian Hopkinson, (2010),"The changing structure of distribution channels in Pakistan",
International Journal of Retail & Distribution Management, Vol. 38 Iss 5 pp. 341 - 359
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The changing structure of

distribution channels in Pakistan

Distribution
channels
in Pakistan

Asad Aman and Gillian Hopkinson

Department of Marketing, Lancaster University Management School,
Lancaster, UK

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Abstract
Purpose The purpose of this paper is to consider the impact of the entry of international
wholesalers upon existing fast moving consumer goods (FMCG) channel structures and the
relationships between channel members in Pakistan.
Design/methodology/approach The paper draws on primary and secondary data. Industrial and
published sources are used to describe the retail industry and traditional channel structures in
Pakistan. Semi-structured interviews with industry experts and channel participants (manufacturers,
distributors, local and organised wholesalers and retailers) over the period illustrate the perspectives
of different channel members.
Findings Although currently holding small market share, the entry and growth of international,
consolidated wholesale has opened alternative channel structures. This poses a threat to some channel
members and creates relationships that alter the distribution of power in the channel. In this fluid
situation, there is the possibility of substantial change in Pakistans FMCG retail.
Research limitations/implications The nature of the Pakistan retail market creates difficulties
in compiling statistics or generalising from observations. The paper uses published statistics, industry
reports and interviews to nevertheless be able to comment on this important market.
Originality/value The paper looks at an under-researched market and comments upon the first
steps in that market towards consolidation and internationalisation. In looking at the reactions of
extant market players to this recent development, the paper provides useful insight and guidance to
those (manufacturers, retailers and analysts) interested in retail in Pakistan.

341
Received December 2008
Revised September 2009
Accepted January 2010

Keywords Fast moving consumer goods, Emerging markets, Wholesaling, Pakistan

Paper type General review

1. Introduction
The nature of retailing and the structure of retail channels have changed considerably
over recent years in many developing countries, in part through inward retail
investment. Where there has been sizeable inward investment this has attracted
academic interest and led to country-specific analyses of retail, most especially in China
(Goldman, 2001; Hingley et al., 2009) and India (Sengupta, 2008; Srivastava, 2008). In
contrast, there has been very little published about retail in Pakistan where
multinational investment in distribution and retail is more recent despite a longstanding
presence of multinational fast moving consumer goods (FMCG) brands. The first
substantial inward investments in FMCG and grocery retail sectors occurred at the
wholesale level with the entry of Makro and Metro in late 2006 and mid-2007,
respectively. Accordingly, this paper uses secondary and primary data to look at
FMCG retail structures in Pakistan with a particular focus upon the entry of these
The authors would like to thank two anonymous reviewers and the Editor for their insightful
comments and assistance in this paper.

International Journal of Retail &

Distribution Management
Vol. 38 No. 5, 2010
pp. 341-359
q Emerald Group Publishing Limited
0959-0552
DOI 10.1108/09590551011037572

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342

international wholesalers. There are two related aims of this paper. First, to consider the
impact of the entry of international wholesalers upon existing channel structures and
whether it is leading to changes in this structure. Second, to consider how the entry of the
international wholesalers has influenced relationships between channel members
reflected in issues including margins at different levels, bargaining power and trust
between members. Additionally, the paper provides a description of FMCG and grocery
retail in Pakistan as the context of the study since this is not available elsewhere.
The paper is organised as follows. Section 2 introduces the sources and methods we
used in our research and writing the paper. In Section 3, we outline contemporary FMCG
retailing in Pakistan and discuss recent trends. Section 4 describes the market entry of
Makro and Metro. Section 5 considers the perspectives of FMCG channel members to
their market entry both at the time of entry and subsequently. In conclusion, we
comment upon the changing perceptions noting the implications of these for the future
structures and relationships of FMCG channels in Pakistan.
2. Methods and data sources
The data used in this paper are drawn from both secondary and primary sources.
Secondary sources were used in order to assemble a picture of retailing in Pakistan.
These include sources relied upon by policy makers and practitioners and published by
organisations such as the World Bank and market research companies such as Planet
Retail, AT Kearney and EuroMonitor. We also drew on relevant press comments in
Pakistan. We used these sources for statistical evidence and comment. It is worth noting,
however, that considerable and problematic variation exists between estimates of the
market. There are several reasons for this which we expand upon in Section 3. However,
briefly stated, the traditional retail and wholesale sectors in Pakistan are extremely
fragmented and comprise very small firms that enter and exit the market rapidly and
often do not register for tax purposes. Within the trade it is common to talk of
disorganised retail and the extent to which this is appropriate is reflected in the
difficulty of providing definitive statistics.
The published statistics provided a context within which we could assess the likely
accuracy of statistics upon which the multinational FMCG companies base their
distribution strategies. The FMCG companies provide more comprehensive statistics that
cover all levels of the channel and break these down geographically. They also were able to
provide data concerning levels of recommended margin available to different channel
members. These sources therefore provide data regarding channels more broadly rather
than being limited to retail. We were able to access data from four such manufacturers and,
since these did vary by about 25 per cent, we chose to use the data provided by one
manufacturer that represented a middle ground estimate of market size. We stress that we
regard these necessarily as an estimate but one that is broadly consistent with the picture
depicted by sources such as the World Bank. Therefore, we work with this data in order to
be able to comment at all upon channel structures in this commercially important country.
The primary data are drawn from two tranches of interviews conducted at multiple
levels in Pakistan retail channels with the aim of understanding the perspectives of
various participants upon the entry of Makro and Metro to the Pakistan market. Hence,
semi-structured qualitative interviews (Kvale, 1996) were conducted both at the time of
(2007) and subsequent to (2008) the entry of Makro and Metro. The interviews used a
similar format in order to uncover how participants believed the entry of Makro and

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Metro would and subsequently had affected their ways of operating and their activity.
The interviews took place at the work premises of participants, lasted approximately
half an hour and extensive notes were taken the interviews are shown in Table I. The
2007 interviews were conducted by a group of MBA students from Lahore University of
Management Sciences under the supervision of the first author (Sajid et al., 2007). Those
of 2008 were conducted by the first author. An endeavour was made to select the same
respondents for interviewing in 2008, however, due largely to changes in the industry, a
little less than half of the respondents had to be replaced with the equivalent role holders.
In 2007, the first author worked for a multinational FMCG company, he had left
industry by 2008 but the interviewees were aware of his previous involvement. It is not
possible to know what effect this involvement had upon the interview content.
3. A background to retail in Pakistan
Our primary concern is with FMCG channels in Pakistan so we commence at the
consumer end of the channel by providing a brief introduction to Pakistan and depicting
retailing in Pakistan including developments within retailing over the past decade.
Pakistan is the sixth most populous country in the world with 175 million inhabitants
(US Census Bureau, 2009). The population of Pakistan is predominantly rural (66 per cent)
but with major urban centres such as Karachi and Lahore which are the 13th and 37th
most populous cities in the world, respectively, (Worldatlas, 2009). Owing to economic
growth and rising consumer spending the retail industry has surged; retail sales have
risen 68 per cent by value between 2004 and 2008. As would be expected in a developing
economy, grocery sales have risen at a somewhat slower rate of 60 per cent by value in the
same period but remain the most important component in retail sales (Planet Retail, 2009).
This substantial and growing market is reached through an extremely fragmented
retail market with formats that would scarcely be recognisable in some Western
countries. According to data reported by the World Bank there were 2.4 million retail
outlets in 2003 of which 99 per cent were small, one-two person operations (Foreign
Investment Advisory Service (FIAS), 2005). The prevalence of these micro-enterprises
within retail is in keeping with size of the informal economy and high levels of
involuntary self-employment in developing countries (Henriques and Herr, 2007) and the
heavy representation of retail within Pakistan micro-business (Khawaja, 2006). This
composition of retail business owners leads to volatility with rapid entry and exit so that
over half micro-enterprises have been in business for less than five years (World Bank
Report, 2007). The prevalence of micro-businesses also influences the dominant formats
which comprise general stores (63 per cent), mobiles (22 per cent) and kiosks
(15 per cent)[1] (FIAS, 2005). In line with the growth of retail turnover, the number of
retail outlets has grown by about 15 per cent in the last decade (Shah et al., 2007). This
has occurred in part through the use of funds remitted by emigrants to family members
and largely within the traditional formats as outlined above (FIAS, 2005).
There is concentration at the retail level in some sectors in Pakistan. The FIAS (2005)
reported two clothing and footwear chains, Bata and Service, as having over 200 outlets
each. Concentration in FMCG and grocery is, however, at a very low level as indicated in
the same report where Aghas is cited as the largest FMCG retailer by turnover yet
having only one retail outlet. Whilst the growth of chains is not a major trend, the
introduction of a supermarket style format is an important recent feature (Guitard et al.,
2005) albeit that these continue to be operated largely as independent stores.

Distribution
channels
in Pakistan
343

Table I.
Number of semi
structured interviews
conducted in 2007 and
2008

2
2
1
5

1
2
1
4

3
1
0
4

3
1
1
5

3
1
1
5

2
1
1
4

Modern
retailers
2007
2008
2
1
0
3

2
2
1
5

Traditional
wholesalers
2007
2008
N/A
2
N/A
2

N/A
2
N/A
2

Organised
wholesalers
2007
2008

5
N/A
N/A
5

6
N/A
N/A
6

Manufacturers
2007
2008

15
7
2
24

2007

Total

Note: N/A, not applicable, as manufacturer and organised wholesaler interviews were conducted in their head offices in Karachi and Lahore

Karachi
Lahore
Islamabad
Total

Traditional
retailers
2007
2008

344

City

Distributors
2007
2008

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14
8
4
26

2008

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The supermarkets are referred to locally within the trade as modern or organised
retail and thus differentiated from traditional and, by implication, disorganised stores.
These terms are widely used in other developing countries see, for example, Sengupta
(2008) and Srivastava (2008). The modern, supermarket format is in its infancy but has
been introduced in the major cities of Karachi, Lahore and increasingly in the capital,
Islamabad (Farrukh and Dever, 2000). These are self-service stores with multiple
check-out counters and over 1,000 square feet in size. Typically, they provide branded or
packaged grocery items including foods, personal care and household goods (Ghani,
2005). The modern format has enjoyed considerable success (Ashraf, 2007) with sales
through the format rising by 360 per cent between 1999 and 2003 (EuroMonitor, 2004).
Nevertheless, in 2003 the modern sector accounted for less than one half of one per cent of
FMCG retail sales (FIAS, 2005). The modern format is associated with increased
efficiency having, for example, higher sales per employee (FIAS, 2005) but similarity
with retail organisations in more concentrated markets should not be overestimated.
There has been no development of own brands (FIAS, 2005) or of direct purchasing and
logistic systems. Many factors have been cited that are expected to limit the growth and
development of modern retail including consumer preferences for daily shopping of
perishable items due to low refrigerator and car ownership and dietary preferences
(Planet Retail, 2009), high import taxes on key retail equipment and the favourable
pricing available in the traditional and in many cases untaxed sector (FIAS, 2005).
Additionally, the advantage that the modern sector could generate, particularly in the
event of the growth of multiples, is reduced by the lack of organised, efficient supply
chains for many items (Shah et al., 2007).
The factors that may inhibit the growth of the modern format provide some explanation
for the absence of international investment in FMCG retail. The Pakistan Government has
adopted a liberal policy on foreign direct investment, allowing 100 per cent foreign
ownership in retail. Despite this encouragement and the size of the market (measured by
population) Pakistan is seen as a less favourable area for retail development having been
ranked in AT Kearneys Global Retail Development Index only in 2005 (AT Kearney,
2005). Therefore, despite favourable investment policies, investment has been far slower
that in some developing countries that are more restrictive (Mukherjee and Patel, 2005).
The first entry of a multi-national in Pakistan in FMCG and grocery retail is scheduled for
2009 when Carrefour, run by Majid Al Futtaim Group of Middle East is due to enter the
Pakistan market (Haider, 2009). Therefore, the first multi-national investment in the sector
took place at the wholesale level with the entry of Makro and Metro as we shall discuss.
In overview, Pakistans retailing is characterised by extreme fragmentation,
dominated by traditional formats and micro-businesses. A modern sector had emerged
at the retail level prior to the entry of Makro and Metro and this is operated largely by
independents and by Pakistan nationals. This sector had seen impressive growth
although factors limiting its eventual growth have been identified. These factors include
the absence of efficient supply organisations and infrastructures further up the
channels the relevance of this will be considered further as we discuss the upstream
members of FMCG channels.
4. The entry of Makro and Metro
In late 2006 and in mid-2007, respectively, Makro and Metro[2] entered the Pakistan market
operating a cash and carry format. Their investment models differed. Makro entered

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346

through a joint venture between the House of Habib and SHV of The Netherlands
as Makro Habib Pakistan Ltd Metro entered without local collaboration. Both have sales
areas of 8-11,000 square meters per outlet and have released growth intentions of 30 stores
throughout Pakistan in the case of Makro (Associated Press of Pakistan, 2008) and
20 outlets in the long-term located predominantly in the more populous Punjab province for
Metro (Planet Retail, 2009)[3]. To date, both wholesalers have focused upon the major cities
that have attracted most attention from multi-national businesses including manufacturers
and brand owners and, more recently, Carrefour. Whilst the planning laws were supportive
of market entry and in some cases government land was made available to lease, the
companies faced challenges in obtaining appropriate land. Lower cost land in city outskirts
suffers from poor security, making retailers and potential customers wary of doing
business there (FIAS, 2005). Where government land was provided in residential areas
they faced opposition from local residents of Karachi and Lahore (The Nation, 2008;
Cowasjee, 2009).
Both, Makro and Metro operate in three broad categories which are fresh produce, dry
food (FMCG) and durables (non food). FMCG represents approximately 30-40 per cent of
revenue both sell these in bulk packs. Both target diverse markets comprising
traditional retailers, industrial buyers and hotels, restaurants and cafes (HoReCa). The
two businesses differ slightly, however, in terms of customers served and marketing
communications.
Makross core target market is professional customers (that is, mostly retailers), yet,
according to their management in interview, in practice they also sell goods for personal
consumption to customers registered under a business name. Metro strives to provide
lowest possible price to its customers and takes more steps to discourage all B2C
activity.
In the two years since the entry of these international formats at the wholesale level,
data from one of the FMCG manufacturers show that these organised wholesalers
have gained a share of the FMCG market equivalent to 1-2 per cent in urban Pakistan,
rising to around 4 per cent in those cities where they have focused greater investment
(Tables II and III). In this time they have expanded and they continue to expand the
number of stores. Whilst the presence of these wholesalers remains small in terms of the
number of stores and current market share, their success to date is noteworthy. Their
long-term success depends upon the extent to which they are assimilated and possibly
alter the structures of FMCG channels in Pakistan. We therefore turn now to data
provided by an FMCG company in order to consider the channel structure that Makro
and Metro entered and their subsequent impact upon this. As previously outlined, we

Cities

Table II.
Number of channel
members in the three big
cities

Karachi
Lahore
Islamabad
Urban Pakistan

Makro
Distribution companies
employed by FMCG
Local
Traditional Modern cash and
carry
manufacturer
wholesalers retailers retailers
6
3
1
10

6,876
3,128
387
10,400

44,342
25,467
3,789
73,500

3,521
1,487
97
5,200

3
1
0
4

Metro
cash and
carry
0
1
1
2

Source: 2008 industry data supplied by an FMCG manufacturers dealing in household and personal
care brands

Cities

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Karachi
Lahore
Islamabad
Urban Pakistan

Distribution
companies
(%)
96
98
96
97

Traditional
Local
retailers
wholesalers
(%)
(%)
35
28
20
32

51
58
55
54

Modern
retailers
(%)

Makro cash
and carry
(%)

Metro cash
and carry
(%)

10
12
21
11

4
1
0
2

0
1
4
1

Notes: This table depicts the flow of value of goods to the extent these are known by the FMCG
manufacturer. Hence, circa 3 per cent of value sales are made to Makro and Metro, 97 per cent are made
via distributors. Columns dedicated to local wholesalers, traditional retailers and modern retailers
show the flow of goods from the distributors and thus round to 97 per cent
Source: 2008 industry data supplied by an FMCG manufacturers dealing in household and personal
care brands

draw on interview data taken at the time of market entry and subsequent to market entry
to demonstrate perspectives upon Makro and Metro and the changing relationships
between channel members enabled by their entry.
5. FMCG distribution structures in Pakistan
The distribution structure in Pakistan has long been constituted by different players
namely, FMCG manufacturers, distributors, wholesalers and diverse types of retailers
These relatively long distribution channels which are, as discussed, fragmented at the
retail level are also fragmented at the wholesale level (Ghani, 2005) as shown in Table II.
The simple flow of goods through the channel (prior to the entry of Makro and Metro) is
shown in Figure 1 and a brief account of the role of these channel members is now given.
All statistics quoted are based upon figures provided by one FMCG company, as
discussed in our methods section.
5.1 FMCG manufactures
Both multinational and local or national brand owners operate through a similar channel
structure and employ multiple distributors. The few exceptions include P&G and Dabur
(of India) where brand owners use a sole distributor. The extent to which the brand
owner takes channel leadership and therefore determines the flow of product and funds
through the length of the channel differs between local and multinational brands. The
latter generally are able to act as channel leaders to a far greater extent than can local
brand owners. Our primary focus is upon the multinational FMCG manufacturers. In
these cases, Pakistan is a manufacturer dominated market where brand owners can act
as channel steward (Rangan, 2006) heavily influencing the overall channel strategy.
5.2 Distributors
Distributors are organised according to geographic territory and typically the country is
partitioned into around 300 exclusive territories serviced by local distributors. These
territories may centre upon one town and include some outlying districts or may relate to
one defined area within the largest cities. Each distributor is an independent, appointed
intermediary who purchases goods from the manufacturers and sells and delivers these
goods to wholesalers and also to some retailers, most notably urban retailers. Many
distributors work with multiple FMCG manufacturers.

Distribution
channels
in Pakistan
347
Table III.
Percentage of FMCG
value share of channel
members

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FMCG
manufacturer
(National)

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348

Distribution
company

Local
Wholesaler

Figure 1.
The distribution structure
prior to the entry of
modern wholesale

FMCG
manufacturer
(MNC)

Modern
retailer

Traditional
retailer

Consumer/customer
Arrows reflect simple flow of goods

Distributor/manufacturer relationships are governed by contract which stipulates the

distributor margin and requires the distributor to implement various trade and
consumer promotional activities for the manufacturer. Moreover, the distributor is
responsible for the sale and delivery of goods to all economically feasible outlets in the
agreed territory. In return, the distributor receives the manufacturer goods exclusively
in a particular area[4]. This exclusivity renders the manufacturer highly dependent upon
the efforts of distributors to maximise sales. This dependence is mitigated, however, by
contractual terms and the manufacturers brand power. In turn distributors accept
control which is mitigated by exclusive access to a geographic market with respect to
popular and well supported brands.
The manufacturer communicates with some wholesalers and retailers, most notably
the modern retailers with whom they, for example, organise promotions. However, (prior
to the entry of Makro and Metro, as we discuss) the distributors acted as intermediaries
who facilitated the flow of goods in all cases to the next level of the channel. Additionally,
they add value in the channel through their local knowledge and relationships with
down-stream members (wholesalers and urban retailers). This enables them to develop the
market locally and to develop the confidence to extend credit to down-stream partners.
5.3 Wholesalers
Wholesalers are important in developing economies, bridging the market gaps of such
economies and providing support to their fragmented customer base (Samli and
El-Ansary, 2007). This is reflected in the fragmented character of the wholesale level in
Pakistan with over 10,000 such businesses in the three metro cities (Table II).
Wholesalers are not contractually bound to any other channel member. They buy the
goods from the distributor and sell to retailers and sometimes to end customers.

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Thez primary customers of these wholesalers are rural retailers who are not serviced by
distributors and hence must visit wholesalers to obtain supplies. Additionally, urban
retailers may choose to visit the wholesalers despite being on the calling lists of the
distributors. This may occur where wholesalers undercut the manufacturers
recommended price. A third source of trade at the wholesale level comes from sales
made between wholesalers. Strong networks of relationships can develop between
wholesalers which enable a level of cross territorial sales sometimes in order to take
advantage of quantity-based trade promotions. Thus, the wholesale level gives rise to
parallel distribution systems that operate alongside the official, territorially based
channel structure of the official distribution system.
5.4 Retailers
In the first tier cities Karachi, Lahore and Islamabad alone there are approximately
80,000 (Table II) independent retailers. We have noted the variety of traditional formats
and the distinction between traditional and modern or organised formats. As previously
noted, the modern format has outperformed the growth of the market although its
absolute level remains small.
Both modern and urban traditional retailers are serviced directly and at the retailers
premises by the distributors sales forces. Some retailers of either category chose,
however, to buy from the wholesalers often in order to obtain a more favourable price as
previously noted. A majority of retailers in urban areas source from both distributors
and wholesalers.
In summary, then, the distribution structure at the time of entry of Makro and Metro
was fragmented and operated through multiple levels. Strong international brands were
able to provide channel leadership and sought to promote orderly marketing through a
system of exclusivity with their immediate partners, the distributors. However, the vast
numbers of wholesalers and retailers also gave rise to out-of-system sales creating
unofficial alternative channels along which products and payments flow.
The entry of Makro and Metro at the wholesale level brought alternative channels
to the Pakistan FMCG market (Figure 2). They sought to buy directly from the
manufacturers and thus compete directly with distributors who formerly had sole reseller
rights within defined territories. Their stance, vis-a`-vis wholesalers was more ambiguous.
On the one hand, they offered an alternative source of supply for wholesalers and thus may
be seen as partners to the wholesalers. On the other hand, Makro and Metro offered a more
direct channel to retailers and thus could be seen as competitors of the local wholesalers.
The entry of these multinational, organised wholesalers thus may substantially
re-shape Pakistans retail channels and, indeed, their success depends upon the extent to
which they are assimilated in extant or new channel forms. Whilst the changes that they
will bring cannot yet be predicted, we are interested in the perspectives of the various
sets of channel participants at and since the time of entry to see how they are reacting to
the entry of Makro and Metro as an indicator of the changing shape of retail structures.
6. Perspectives on the entry of Makro and Metro
We divide our discussion into two sections. The first is based on interviews from 2007
and illustrates perspectives of channel members at the time of Makro and Metro entry.
The second part describes perspectives of the same channel members in 2008, i.e. after
Makro and Metro started their operations.

Distribution
channels
in Pakistan
349

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FMCG
manufacturer
(National)

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350

Distribution
company

Local
wholesaler

Figure 2.
The new distribution
structure

FMCG
manufacturer
(MNC)

Organised
wholesale
(Makro/Metro)

Modern
retailer

Traditional
retailer

Consumer/customer
Arrows reflect simple flow of goods

6.1 Pre Makro-Metro entry perspectives

6.1.1 FMCG manufacturers. In 2007, multinational FMCG companies were keen to
expand their business with these organised wholesalers, keeping in view the success of
Makro and Metro in other countries. The multinationals developed local key accounts
departments that received training from global teams and which would negotiate terms
of trade with Makro and Metro. The key accounts departments operated independently
in that they did not report to the global key accounts structure. FMCG manufacturers
were, however, acutely aware of the pressure that organised cash and carry may place on
existing distribution channels. These existing channels were and would remain over the
short and medium term the main source of business for them. Whilst the manufacturers
therefore did not want to disrupt the traditional structure, the organised wholesale
formats also provided an opportunity to overcome the informal distribution systems
that the local wholesalers operated.
In view of these mixed concerns, the FMCG manufacturers placed importance on the
negotiation of trade margin with the new entrants, especially since this would determine
the extent of impact these wholesalers could create on the traditional distribution
channel. An overview of the intended margins for one FMCG is shown in Figure 3
these approximate the margin levels operating with respect to popular FMCG products.
The margins are structured at each level taking into account the effort of each channel
member. Thus, the distributor margin is greater when a distributor performs the
broader functions involved in selling to individual retailers (7 per cent) than when some
of these functions are performed by wholesalers (4 per cent). As we have seen in
discussing the trade between wholesalers, these intended margin levels do vary to a
limited degree, for example, where trade promotions may be introduced.
The alternative channel via Makro and Metro brought changed cost structures
and re-apportioned tasks and also presented a challenge in terms of pricing through

Channel member
FMCG
manufacturer

SP*

Channel member

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Distribution
company

Distribution
channels
in Pakistan

PKR* % margin
100

351

PKR % margin
PP*
SP

100
107

7%

Channel member
Local
wholesaler

Channel member
Retailer

PP
SP

PKR
107
120

PP
SP

PKR % margin
104
3%
107

% margin
12%

PP = Purchase price
SP = Sales price
PKR = Pakistan rupee
Notes: 125 millimetres shampoo bottle; margins were calculated from the price list of a manufacturer.
Similar proportions of trade margin distribution are present for all other FMCG products

the channel. Makro and Metro, as consolidated wholesalers could bring efficiencies and
higher bulk purchases and thus requested a purchase price lower than that operating at
the wholesale level (at Pakistan rupees 104, as given in the example in Figure 3). If
granted, however, this would pose a large threat to existing members of the channel.
Makro and Metro could more rapidly erode market share of both distributors and
traditional wholesalers by offering lower prices to the retailers. This ultimately might
adjust the retail structure by increasing opportunities for efficiency amongst those
developing growth plans. Given the prevailing competition laws, the manufacturers key
means to gain some control of these dynamics rested upon their operative pricing with
Makro and Metro at or near the wholesale price level and their ability to influence Makro
and Metros prices according to their power. As we have discussed, these multi-national
brand owners had previously been able to operate as channel captains but the new
phenomenon of consolidation could, over time, place their position in question.
Overall, FMCG manufacturers felt very positive about Makro and Metro and looked
forward to entering into a collaborative relationship with them but were highly attuned
to the issue of pricing with respect to these companies.
6.1.2 Distributors. Distributors, prior to entry of Makro and Metro, did not consider
these cash and carry chains as a threat to their business and supported this view through
several arguments. First, they argued that retailers would not purchase from the
organised wholesalers who did not extend credit which was seen as an important facility
for cash poor retailers. Second, the distributors argued that customers will not take the

Figure 3.
An example of trade
margin structure of an
FMCG product

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352

risk of carrying cash to these wholesalers given the law and order situation in Karachi.
According to the distributors, their ability to maintain strong customer relationships
even during the most adverse law and order situations had engendered a level of trust
amongst those customers that Makro would be unable to replicate. Moreover, they were
sceptical that consumers would shop from Makro in view of the bulk sales policy. Thus,
in part the immediate perceptions of distributors were based upon their estimation of
their own local and cultural knowledge and cultural-based practices which they believed
provided a high level of protection.
Distributors also mentioned the criticality of their business for the manufacturers and
the dependence therefore the FMCG manufacturers had on them. Thus, they were
hopeful that manufacturers would not facilitate operations of Makro and Metro at the
expense of distributors business. They also cited their importance in the extant
structure as a factor that would lead to protection by the FMCG manufacturers.
Finally, and possibly less optimistically since it does suggest their own
marginalisation, distributors said that Makro would be unable to serve the entire
fragmented market so that distributors will retain penetration of less accessible markets.
6.1.3 Wholesalers. Local wholesalers considered Makro and Metro to be a threat to
their business but were doubtful about the future of these organised wholesalers. Local
wholesalers considered their relationship with the customers and extension of credit as
very important factors. They were of the view that Makro and Metro would not be able to
extend credit to their customers since they lacked local knowledge and depth of
relationship with retailers. Additionally, the wholesalers readily referred to Metros
limited gain of share from local wholesalers in India.
6.1.4 Retailers. Mixed opinions were expressed by retailers. Modern retailers did
perceive some threat from Makro and Metro. With their growing market share they had
traded directly with distributors and communicated directly with FMCG manufacturers
in a way that the traditional retailers would not. At times, therefore they had negotiated
favourable conditions through the extant system. Their concern thus focused on the
possibility that the organised wholesalers would also make sales to end consumers and
that the affluent class of the cities might turn to Makro and Metro for an international
shopping experience.
Conversely, traditional retailers did not view Makro or Metro as a threat but rather as
an opportunity. They saw that the operations of Makro and Metro in their cities has
giving them more choice. Moreover, they also thought that they could buy imported
assortments from Makro and Metro which were otherwise unavailable. Traditional
retailers said that lower prices, transparency in billing, ambience and availability of
choice could compensate for the lack of credit facility at organised wholesalers. Hence,
according to comments collected at the time of Makro and Metro entry, these traditional
retailers, through whom the vast majority of retail sales are made (Table III) perceived
less value in their relationships with wholesalers/distributors than the latter perceived.
6.2 Post Makro-Metro entry performance and perspectives
6.2.1 Makro and Metro. Makro cash and carry personnel were obviously very optimistic
about future of the business in Pakistan. Makro, in its earlier phase had the objective of
abolishing the existing distribution setup and the ambitious goal of becoming the
distributors for FMCG products in the three large cities of Pakistan. Both objectives
would have been supported by achieving favourable trade margins (Figure 3).

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Makro cash and carry in its initial phase tried to stick to its original target customers,
retailers. However, in a few weeks time of its first store opening, Makro removed the
restrictions on purchases and allowed anyone, including end consumers to shop from
their stores. This, according to them was essential to support high infrastructure
maintenance costs and led to the introduction of smaller bulk quantities. This business
also provided massive in store advertising opportunities for FMCG manufacturers
forming another source of revenue for Makro. This re-defined their relationships with
other channel members in several ways. They became competitors to the retailers,
especially to modern retail. Additionally, they could add more value in relationships to
brand owners through the promotional opportunities they supplied. Additionally,
Makro have adapted their original model to include the provision of delivery to local
wholesalers and larger retailers and, in some cases, credit arrangements.
Like Makro, Metro also wanted to sell at lower prices and sought a greater
distribution margin. However, upon entry they developed the market in several respects
that differed from Makro. Metro wanted to ensure that only genuine retailers or
businesses could purchase from Metro. Strict criteria were implemented for customer
registration and minimum purchase values along with the exclusion of children from the
store were enforced. Metro was critical of Makros moves towards consumer retailing
since they felt that if they started selling to the end consumer it would harm their original
customers, that is, the retailers. Moreover, Metro did not provide any advertising space
for the manufacturers, as they wanted to provide genuine cash and carry ambience to
their customers. We thus see Metro as more concerned to preserve their initial (entry)
position in the channel structure.
Possibly, Metros greater fidelity to its entry model is associated with a commitment
to slow market growth. According to Metro the business will not have a significant
impact on the traditional distribution structure of manufacturers since the market is
extremely fragmented.
6.2.2 FMCG manufacturers. According to manufacturers, Makro has shown great
flexibility in adapting to local market dynamics. Their joint venture with Habib group has
helped them in comprehending local customer needs. This is evident from the fact that
Makro has relaxed its customer entry requirements based on the heavy end-user traffic
and has changed the layout of its stores according to the location and customer base.
Metro, comparatively, is committed to strong wholesale concept and multinational
company (MNC) manufacturers usually have a very professional relationship with Metro.
In terms of the effects of Makro and Metro, generally, manufacturers believe that
there has not been any significant impact on the traditional trade structure as such. One
of the reasons is that many multinational manufacturers have ensured in the terms of
trade agreed with Makro and Metro that a minimum floor price is maintained in these
stores.
Thus, we can see Makro, Metro and the FMCG manufacturers tending to downplay
the impact that the new entrants will have on the total structure of retail in Pakistan. The
new entrants themselves emphasise the competitive situation between the two of them
rather than their ability or ambition to change the extant structure. By comparison, other
sets of channel participants are rather more likely to emphasise current changes.
6.2.3 Distributors. Various FMCG distributors representing the multi-national
brands were interviewed in the three major cities to gain insights into the impact of
Makro and Metro and also to understand how their relationship with manufacturers has

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been affected in the process. Needless to mention, in the traditional retail setup, the
distributors play a pivotal role in the distribution strategy of manufacturers. They feel
that due to Makro and Metro, their market share has been affected adversely and note
shifts of power across the channels towards these global wholesalers.
Whilst the distributors consider the terms of trade to be dictated by the manufacturers
to them, they consider the balance of power to be tilted towards Makro and Metro in their
relationships with the manufacturers. Accordingly, they see themselves as the FMCG
manufacturers second priority with respect to stock allocation during stock outs.
Distributors in Karachi consider their advantage of door step delivery to have been
eroded through Makros introduction of delivery and credit for high volume customers.
With aggressive telemarketing services, order taking and delivery of goods, Makro is
operating on lines close to the distributor business model and distributors do see their
position as therefore being directly challenged. On top of this, according to distributors,
manufacturers in some product lines are selling imported products to Makro and Metro,
which are not made available to distributors. According to the distributors such changes
in manufacturers policy have come about because manufacturers benefit from the
single channel of Makro and Metro by reducing their large sales forces.
Thus, at the current time the distributors feel that the aspects they previously saw as
insulating them, to some extent, from the new entrants have been undermined especially
through credit and delivery services but also they feel less secure in the value of their
position to FMCG manufacturers.
6.2.4 Wholesalers. The entry of Makro and Metro has had an interesting influence
upon the wholesale business. Traditionally, wholesalers tended to consider their
relationship to FMCG manufacturers as problematic in that they received little support
and were placed under considerable pressure in a system that afforded them few options.
Wholesalers believe that Makro and Metro are able to pass better margins because
terms of trade agreed by manufacturers favour the organised wholesalers. The
perception of quality of goods supplied to distributors has also deteriorated, as the local
wholesalers think that Makro and Metro are provided with better quality products.
Wholesalers in Karachi cite reasons for sourcing from Makro that include door step
delivery, superior availability of fast moving and more scarce stock keeping units,
availability of regular trade promotions and better margins at Makro since price increases
are minimised. However, many wholesalers still do not buy from Makro and Metro.
Reasons mentioned by these wholesalers include the old relationship with the distributors,
cash only policy of Makro and Metro and difficulty in leaving the shop unattended to visit
these stores.
Wholesalers therefore currently perceive the possible impact of Makro and Metro
as being higher than they had initially thought. In particular, they are beginning to see
Makro and Metro as offering a superior source of product and as, in some cases, having
made adaptations that enable trade in the local conditions. It is possible that they perceive
these new entrants as opening channels that address some of their previous concerns.
6.2.5 Retailers. There has not been any significant change in the perspective of
traditional retailers. Modern retailers, however, have felt that their business is being
affected since the ambience and assortments appeal to the affluent class who would
otherwise shop at the modern formats. These retailers, like distributors also felt that
manufacturers are providing huge favours to Makro and Metro by giving them better
margins and by giving them first priority in stock allocation. The retailers also feel that

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the advertising budget spent by manufacturers on in store promotions in modern

formats has also declined. They attribute over-spending by manufacturers in Makro in
store as the primary reason for this decline.
7. Conclusion
Despite the small market share possessed by the organised wholesalers in the Pakistan
market the changing perceptions of market participants is suggestive of the
fundamental changes that they could bring to channel structures in Pakistan.
Specifically, the potential of the format is now more broadly recognised with less
scepticism about their ability to operate in the local conditions. Additionally, the extent
to which they are considered to pose a threat or opportunity has changed amongst
market participants. Most specifically the distributors feel more threatened than initially
whilst local wholesalers are moving towards recognition of opportunities. We thus
consider the entry to have led to a dynamic situation in which market participants come
to re-interpret their position and to envisage new methods of relating to other parties
within a channel system (Table IV).
The fluidity of the current situation may be seen as disrupting power patterns in the
extant channels. How power will be distributed in the future is not yet clear but we can
see that some channel participants will be eager to preserve or enhance their position in
the midst of change. In particular, we note threats to the distributors position.
Indifference to Makro and Metro and confidence in the strength of their relationship with
the manufacturer has given way to greater concern. In a similar vein, we note the
perception amongst wholesalers and retailers of the benefits of greater options which
shows the distributors position to be under threat. We also note that the manufacturers
have, in the past, had considerable power vis-a`-vis their immediate channel partners, the
distributors. Their power with respect to consolidated, organised wholesalers is less
clear and we have seen the manufacturers more cautious approach to these partners
especially with respect to pricing. Despite this caution, the growth of major wholesale
partners may allow manufacturers more indirect influence upon trading further down
the channel. In particular, it may open up a structure that removes some of the confusing
patterns of unofficial trading between wholesalers and between wholesale and retail
levels. Hence, it is impossible to predict how relationships will be re-shaped over the
coming years but the introduction of new wholesale channels has brought in the
possibility of considerable realignment of power within the total structure.
For the moment and as a result of the fluidity of the situation it is possible to see the
relationships between FMCG manufacturers and other channel participants as under
considerable strain. Distributors are less confident in the value of their relationships and
there is a widespread perception that the new entrants are receiving favourable
treatment from brand owners. These traditional partners still represent the bulk of trade
and are likely to retain that status in more rural areas for some considerable time.
Managing transition and across a plethora of channel types is therefore a challenge to
the FMCG brand-owners and one in which they may draw upon knowledge generated
in other markets.
Finally, we expect the complexity of channel management in Pakistan to increase into
the future. Although factors have been suggested that gravitate against consolidation of
the retail sector in Pakistan, as we have previously noted, there is also reason to project
increased consolidation (if modest in comparison to Western markets) not only at the

Distribution
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355

Table IV.
Summary of channel
member perceptions 2007
and 2008

FMCG
manufacturers
Makro
Metro
Distributors
Wholesalers
Modern
retailers
Traditional
retailers

Neutral
Positive
Positive
Negative
Negative
Neutral
Positive

Opportunity

N/A
N/A
Indifference
Threat
Threat

Opportunity

Medium

Medium
Medium
Strong
Medium
Strong

N/A

Opportunity

N/A
N/A
Threat
Neutral
Threat

Opportunity

Positive

Positive
Positive
Positive
Positive
Positive

Positive

Medium

Strong
Strong
Weak
Weak
Medium

N/A

2008
Perception of Mako/ Perception regarding Perception of
future of Makro and relationship with MNC
Metro as threat/
manufacturers
Metro
opportunity

356

Channel
member

2007
Perception of Mako/ Perception regarding Perception of
future of Makro and relationship with
Metro as threat/
manufacturers
Metro
opportunity

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wholesale level but also at the retail level. This consolidation may occur to some extent
through the growth of indigenous modern chains since we have seen the popularity of
the modern format. Consolidation is, however, to be expected also as international
players enter the retail market. Carrefour is the first such market entrant and this may
precipitate further international interest. Further consolidation cannot be considered in
isolation from the progress of Makro and Metro but is likely to be influenced both by
perceptions of the success of these actors and by extant players understandings of the
changes and reactions to these. These changes include threats they present to some
levels of the channel and opportunities for greater choice, efficiency and price
competitiveness that they present to other channel members.
Notes
1. Mobiles are a traditional form of retailing where outlets are not only confined to open air
stalls, but also include operators who knock on car windows to sell their products. Kiosks are
located in streets or parks, mainly selling confectionary, newspapers and tobacco (FIAS,
2005, p. 31).
2. The official web sites of Makro and Metro (as seen on 23 December 2008) are www.
makropakistan.com/index.htm; www.metro.pk/servlet/PB/menu/-1_l2/index.html
3. Owing to a long established strategic relationship between Makro and Metro these
wholesalers do not generally operate in the same country and Pakistan is the only country
where they have entered almost simultaneously. The ownership structure of the two
businesses in Pakistan may prevent them from coming into direct competition and reflect
Metros longer term plans in Pakistan. Planet Retail (2009) points to Makros divestment
strategy in Asia where most of their investments in Taiwan, Malaysia, Philippines, China
and Indonesia have been sold mostly to Asian conglomerates, and links this with some sale
of ownership of their Pakistan operations to their local partners, House of Habib.
4. Competition laws in Pakistan were revised in 2007, previously the competition authorities
limped along and failed to do anything substantive or worthy of mention (Mirza and
Daudpota, 2007). The current law is modelled on European competition law and, inter alia,
prohibits agreements that fix purchase or selling prices or divide and share markets
(Competition Commission of Pakistan, 2007). Of the few cases so far pursued, none are of
immediate relevance to this sector.
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About the authors

Asad Amans research interests lie in evolving FMCG distribution channels in Asian markets.
He has worked for several multinational FMCG manufacturers in senior management positions,
where he managed business relationships with local as well as international/organised
wholesalers and retailers. He has also supervised various academic researches. He currently is
pursuing his PhD in the Marketing Department of Lancaster University Management School.
Asad Aman is the corresponding author and can be contacted at: a.aman@lancaster.ac.uk
Gillian Hopkinsons interests are in channel management and in inter-organisational
relationships within distribution, interests which arise from her previous career in purchasing
and selling in the travel industry. She has researched channels in contexts that include
hospitality, FMCG and car distribution and published in journals including The Journal of
Management Studies, Psychology & Marketing, Industrial Marketing Management and The
European Journal of Marketing. She is a Senior Lecturer in Lancaster University Management
School.

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