MILKPAK: THE KARACHI MARKET

In early 1984, Omar Raza, the Marketing Manager of MILKPAK (Pvt) Limited, was
sitting in his Lahore office perusing the results of a consumer survey conducted
recently in Karachi, Pakistan. Omar wanted to use the survey results to improve the
company’s sales strategy in Karachi for the current year.

COMPANY BACKGROUND

MILKPAK started operations on September 1, 1981, in Lahore, the second largest city
in Pakistan, in collaboration .with Tetra Pak of Sweden and Packages Limited.
Packages was a company which produced and printed paper and board material. This
material was used by several companies and organizations for packaging their products.

In 1978, Packages Limited test marketed a hygienically- packed ultra high temperature
(UHT) homogenized milk, under the brand name of MILKO, in Lahore to determine
the demand for such type of milk in Pakistan. The UHT process involved raising the
temperature of milk to 145°C and holding it there for 3 seconds. At this temperature all
bacteria die. The milk was then homogenized by forcing it through a very narrow slit.
The success .of MILKO in Lahore led to the creation of MILKPAK, which started
marketing the UHT milk under the brand name of “Milkpak”. This milk was packaged
in various sizes of 200, 250, 500 and 1000 milliliter tetrahedron (tetra) and brick packs
made of laminated paper. This laminated paper was provided by Tetra Pak of Pakistan,
a joint venture between the Swedish parent company and Packages Limited. The paper
could be used to package any type of food product including sterilized milk.

The initial investment cost of M1LKPAK’s plant was Rs 9 million. The plant had a
production capacity of 100,000 liters of milk per year, and was located 50 kilometers
from Lahore. The location of the plant was chosen for its proximity to the dairy farms
as well as the urban areas. It was expected that most of the demand for Milkpak was to
come from the city. The location also made it possible to attract managers to work for
MILKPAK, as they could commute easily to the plant daily from Lahore. Since the
plant was located in the industrial development zone, there was no duty on the import
of machinery. (The organization chart of the company is provided in Exhibit 1).

In 1982, MILKPAK’s nation-wide milk sales were 16.88 million liters. By the year
1983, sales had grown to 23.3 million liters (see Exhibit 2). In 1984, MILKPAK
expanded its product line by introducing a packaged fruit drink named “Frost” in 250
ml packs. MILKPAK had plans of extending their product line even further by
introducing other packaged dairy products such as butter, desi ghee (clarified butter)
and yoghurt.

THE PRODUCT

Being a perishable product, fresh milk had virtually no shelf life without refrigeration.
Pakistan experienced long and hot summers. The prolonged heat greatly limited the
marketing of unpacked milk. Pakistan was also a low per capita income country. Most
people could not afford refrigerators to store milk, thus necessitating its daily purchase.

Prior to Milkpak’s entry into the market, the major milk suppliers were the traditional
“gowallas” (milkmen), who provided unpacked fresh milk from their buffaloes. The
majority of fresh milk sales were made by gowallas supplying directly to consumers in
their home. Milk was sold in shops that also retailed other freshly made dairy products
like cream, yoghurt, lassi and occasiona1ly some traditional sweetmeats. These shop
owners and the gowallas were generally known to adulterate milk with water. This
adulteration increased the volume of milk enabling them to meet the excess demand.
Because of adulteration there was no consistency in the quality of fresh milk available
to consumers. Middle and upper class consumers considered fresh milk to be
unhygienic. They boiled the milk after purchasing it to ensure its safety for
consumption.

Given these circumstances, MILKPAK identified a demand for high quality, bacteria-
free milk which could be stored over a long period of time without refrigeration.
MILKPAK proceeded to position itself as a producer of pure, hygienically-packed,
long-life milk. The UHT treatment sterilized the milk without altering its taste too much
and rendered it safe for direct consumption.

The biggest advantage of the packaging was that the shelf-life of this milk was
prolonged to three weeks without refrigeration. The shelf-life of milk packaged in this
manner depended on the type of lamination used on the packaging paper. Till 1984,
MILKPAK used plastic lamination which gave a shelf life of three weeks to the milk. If
more expensive aluminum lamination was used, the life of the milk could be extended
to three months.

COMPETITION IN KARACHI

MILKPAK faced competition from imported powdered milk, fresh milk and other
brands selling similarly packaged UHT milk.

Powdered Milk

In 1971, when East Pakistan was separated from West Pakistan, many private trading
companies diverted shipments of powdered milk from East Pakistan (now Bangladesh)
to Karachi. This introduced powdered milk to people in Karachi. In 1974 when the
monsoon floods hit Pakistan, the traditional channels of milk distribution, the gowallas,
broke down and powdered milk was imported to overcome the milk shortage. Hence,
Karachi was the first market for powdered milk in Pakistan. Because the people in
Karachi had earlier sampled powdered milk, they were more amenable to its use. By
1980, powdered milk had firmly established a place for itself in the Pakistani market,
especially in Karachi. Despite tariffs and duties, the prices of the imported powdered
milk were much lower than the prices for locally produced UHT milk because the EEC
countries were generously subsidizing their milk industry. The margins that the
distributors and retailers received from the, importers of powdered milk were 5-15%
more than what MILKPAK offered. Omar felt there was a high degree of brand
awareness and product category acceptance of powdered milk among consumers
because many of the powdered milk importers advertised heavily on television.

According to Omar, the fresh milk market in Karachi was 1 million liters per day
representing 60% of the total milk market. The rest of the market was shared between
powdered milk (35%) and UHT milk (5%). The relative share of UHT milk in Lahore
was much higher, being about 15% of the total milk market.

Fresh Milk

Fresh milk constituted the bulk of the milk market all over Pakistan. In Karachi, unlike
Lahore when Milkpak was introduced in 1982, the traditional channels of milk
distribution were already established. Over the years these channels had improved, and
in many residential localities, people from neighboring villages would sell milk daily by
truck-loads to residents of the locality. In 1984 the price of fresh milk in Karachi was
Rs 5.00 per liter. This price was lower than that of any other type of milk available.

Contrary to MILKPAK’s experience in other cities, the quality of fresh milk provided
by gowallas in Karachi was found to be high, and a thick layer of cream (a mark of
quality) could be seen on its surface. This was discovered when MILKPAK conducted a
study on the quality of fresh milk from various areas in Karachi (see Exhibit 3). In fact
in 1982, after the introduction of Milkpak in Karachi, the gowallas stopped adding
water to milk because Milkpak had started to fulfill the excess demand which the
gowallas previously handled by adulterating their milk with water. As a consequence,
the quality of fresh milk improved considerably.

UHT Milk

In 1982, MILKPAK’s Karachi sales were 2,384,834 liters. By the end of 1983 the sales
shot up to 4,450,907 liters. Nevertheless, MILKPAK felt it had hardly created a dent in
the total milk market of Karachi. Management had assumed that a larger portion of the
population would buy Milkpak in preference to the milk they ordinarily consumed. In
December 1983, Milkpak faced direct competition for the first time in the UHT milk
category in Karachi from Milkpure and PuraBrand. Milkpure and PuraBrand not only
competed directly with Milkpak but started spending huge amounts of money on trade-
promotion, thus beginning a trade-war. They offered incentives ranging from free tea
bags to raffle draws of free air tickets to lure consumers from Milkpak. Trade
incentives, like higher margins and gifts of video cassette recorders, were given to
retailers and distributors to encourage exclusive distributorships.

Despite the differences in the margins, market prices of Milkpure and PuraBrand were
generally the same as Milkpak’s.

MILKPAK’S MARKETING STRATEGY

Price

In 1981, Milkpak was introduced at Rs 4/liter at a 20% premium over the price of fresh
milk in the market. Milkpak was also priced higher than most of the powdered milks
available in the market, with the exception of Nido instant milk, which had the same
price per liter as Milkpak.

In 1984, MILKPAK fixed the price for a liter of milk at Rs 6.50 in Karachi and Rs 6.00
in Lahore. According to Omar the additional amount of Rs 0.50 fully covered the extra’
expenses of transportation to the distributors’ go downs, payment of taxes (octroi) and
the spoilage costs to be borne by MILKPAK during transportation of the product from
Lahore to Karachi.

Distribution

MILKPAK first marketed its product in Rawalpindi in September 1981. Firstly,

Rawalpindi was considered by MILKPAK to be an easier market to introduce Milkpak,
since it was a smaller city than Lahore. At that time MILKO was still in the process of
winding up its operations in Lahore, and management felt the introduction of Milkpak
was likely to cause brand confusion among consumers. Milkpak began to be marketed
in Lahore in the second week of October, 1981. By the end of 1981, the distribution had
been extended to Gujranwala, Faisalabad and Peshawar. All these cities were within a
radius of 500 kilometers from the Milkpak plant in Lahore. In early 1982, MILKPAK
commenced its operations in Karachi.

MILKPAK marketed its product in each city through independent distributors, who in
turn sold it to retailers. The usual retail outlets were bakeries, groceries and general
stores. These stores carried all brands of UHT milk. In Karachi, the supermarkets were
also an important outlet for sales of UHT milk. Initially in 1982, MILKPAK’s
distributors serviced 2500 retail outlets’ in Lahore and 600 in Karachi (see Exhibit 4).

MILKPAK’s retail margin in both the cities was Rs 0.32 per liter. On the other hand, the
margins given by MILKPAK to its distributors varied from city to city. The margin
given to a distributor was Rs 0.15 per liter in Lahore and Rs 0.20 per liter in Karachi.
This differential was mainly due to longer distances in Karachi entailing higher
transport costs for the distributor. Yet the margins given by MILKPAK were 5-15%
lower than that offered by competition to its distributors in Karachi. Before any price
increase, the importers of powdered milk would allow their distributors and retailers to
buy up as much stock as they could at the old price. Later these distributors and retailers
were allowed to sell the powdered milk at the new price, thus automatically giving them
greater margins.

Advertising

Considering MILKO’s success in the market without the aid of advertising, MILKPAK
management believed advertising would produce sales of such large volume that the
Lahore market alone would absorb the total initial production of the, plant. Though
MILKPAK supported its sales launch in Lahore with media advertising, sales did not
reach expected levels. Consequently, MILKPAK decided to market its product in other
cities earlier than originally planned. The management continued to support Milkpak’s
expansion to other cities with media advertising. In 1982, Milkpak’s introduction in
Karachi was supported by heavy advertising on local television, in various Urdu and
English magazines, and at points of sale. In view of the low profit margins in the
industry, consumer discounts were not given.

MILKPAK increased its advertising budget in the next two years. In 1983, a special
television campaign was started in Karachi to boost Milkpak’s sales. The expenditure
on advertising was increased substantially for Karachi that year. Approximately 50% of
MILKPAK’s annual national advertising budget went into this campaign. In 1984
Karachi’s share, of the total advertising budget was 30%. Of this amount, nearly 40-
50% was allocated for Milkpak.

THE KARACHI CONSUMER

Karachi was a rapidly expanding, ethnically diverse port city. It was Pakistan’s major
industrial centre drawing migrants from all parts of the country. Omar felt that the
money the Karachiites saved was invested either in business or was sent “back home”
to the northern region of the country. On the average, a family of seven persons in
Karachi earned Rs 2111 per month or Rs 304 per person. The poorest stratum of society
earned Rs 160 per month per person. MILKPAK’s estimate of the per capita
consumption of milk in various cities of Pakistan has been given in Exhibit 5.
MILKPAK’s target market was essentially the middle class and the lower middle class.
Omar was aware that the milk consumer was price sensitive. They tended to buy either
the lower priced fresh milk or powdered milk which could be bought in bulk, packed in
cheap polyethylene bags, resulting in price savings.

The consumer judged the quality of milk from the thickness of the “balai” (Cream)
which gathered on its surface. By this standard, the fresh milk in Karachi was found to
be of high quality. Omar believed powdered milk was popular in Karachi, because the
residents had become accustomed to it. Powdered milk was also in significant demand
in offices, where it was convenient to use as a tea whitener. It was difficult for the
consumer to judge the quality of Milkpak. No balai appeared on it because it was
homogenized, and its sterility could also not be perceived. Omar also felt that Milkpak’s
reputation had suffered when the company had used skimmed powdered milk as a
constituent to meet government specifications. The government required fat content in
the milk to be 3.5% and the solid content 8.9%. Usually the milk that MILKPAK
received for production purposes was somewhat diluted and had only 7.5% solid
content. This was because the ice added to the milk to keep it cool melted during
transportation. Hence, skimmed powdered milk had to be added to bring the solid
constituents to the required level. Omar realized that the consumers felt that if they
were going to get powdered milk, they would rather buy it cheaply, conveniently, and in
its original form from the market rather than consume it through Milkpak. Also,
Milkpak was a relatively new product, it was still regarded with suspicion by the
consumer. Part of this suspicion arose because people felt that Milkpak was not truly
natural as it was produced by “tampering” with fresh milk.

THE SURVEY

At MILKPAK, the criterion of success in a city was that everyone should buy Milkpak
because it fulfilled all the needs of the consumer. Ever since MILKPAK started
operations in Karachi, the sales had never really “picked up” according to the
management. MILKPAK had been expecting a breakthrough in Karachi and when this
did not happen, measures were taken to assess the reasons for failure. MILK.PAK sent a
team to Karachi in 1984 to investigate the causes of low sales. This investigation was to
ascertain opinions and buying habits of consumers regarding Milkpak and other types
of milk available in the market. The team first prepared a questionnaire to examine the
household consumer market. The questions were deliberately kept open-ended because
it was felt that close-ended ones would not portray the consumer’s real state of mind.
Next, they commissioned a professor from the Karachi University to assist them in the
formulation of a sampling design and apprised her of their target market - the middle
income groups. The professor then decided on the total sample size, and accordingly
allotted weights to the priority segments given to her by the team. A total of four
segments, A, B, C and D, were created by stratifying the population according to
localities. This stratification had two assumptions. First, there was a correlation between
the income levels and the residential localities. Second, a relationship existed between
the buying behavior of consumers and their income level. The segments ranged from
the higher to the lower classes, with A representing the top of the range, and D
representing the bottom of the range.

Next a team of field workers was sent out to conduct a random door-to-door survey.
The field job was completed within a week. Afterwards the data was analyzed by
developing different attributes which best described the consumer’s attitudes to all types
of milk. The total money spent on this survey amounted to Rs 15,000. ‘For survey
results refer to Annexure A.

THE PROBLEM

Since its inception in Karachi, MILKPAK had expected to absorb the majority of the
city’s demand for milk. It was thought that Milkpak could displace powdered milk and
fresh milk because it was superior to both. This ambition was based on the assumption
that Milkpak was a better substitute product. When the expected sales, did not occur,
Omar considered alternative strategies for the remaining year. He was also concerned
whether Milkpak had established a market niche. He was beginning to doubt whether
Milkpak could ever displace other sources of milk as originally conceived. Omar was
also concerned about the criterion of success used at MILKPAK. Lastly, he was worried
about the impact the new competition would have on MILKPAK’s sales.

Omar turned to the survey results hoping to get some inspiration which might help him
understand the Karachi market, leading to development of a better plan for Milkpak.