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A Case Study on the Masala sector in Pakistan

(With Reference to National Foods)

Introduction

The food and its allied products industry is considered Pakistan’s largest industry, and is
believed to account for 27 percent of its value-added production. Trade sources estimate
the sector's total value of production is over Rs.46 billion. Pakistan’s food industry
produces cooking oils, hydrogenated vegetable oils, sugar, flour, dairy products such as
milk, butter, yogurt, cheese and ice-cream, biscuits, breads and confectionery, fruit juices
and fruit juice drinks, carbonated beverages, snack foods based on rice, potatoes, corn
and pulses, processed chicken, jams, jellies, squashes, sauces, pickles masala, and some
cereals, canned fruits. The fish, meat, fruit and vegetable sectors are underdeveloped
partly for lack of adequate infrastructure, including storage and transportation facilities.
Government policies and plans are expected to greatly increase the development of
seafood industry.

Masala sector in Pakistan is a thriving business with huge potential for development.
With an annual growth of 25%, it offers great opportunities for local and international
investors. Masala is an important ingredient of food in Pakistan; almost every household
uses Masala in its food to make it delicious. The raw material for manufacturing the
Masala is easily available locally so the transportation cost is comparatively manageable.

Surprisingly, there are just few companies that are doing business in Pakistani market
whereas there is immense capacity in the Masala market of Pakistan.

National Foods is the largest producer and manufacturer of Masala in Pakistan with an
estimated 47% of market share. With a significant market share, it is the leader in
producing and distribution of Masala throughout the country with a huge number of loyal
customers. There are few other companies like Shan Masala, Habib Masala and some


All the facts and figures mentioned in the case have been updated till 2007
unorganized groups, selling Masala in local market. Shan Masala is considered a very
close contender of National Masala with an estimated 37% market share.

National Masala has built strong reputation in the Pakistani households with its
exceptional taste and ubiquitous distribution network. National Masala has a highly
efficient management and hard working team of personnel. It has strong financial
support. It is listed at KSE and enjoys an excellent relationship with stake holders.

The food industry in general and masala in particular is at an expanding position in

Pakistani market so it is necessary to analyze its strategic position and also assess its
future options.

Industry Characteristics

The foods industry is classified as one of the most rapidly growing industries, which
depends on the food loving nature of the people of this country. The main products of
this industry are various but our focus is the masala sector. The marketing and
manufacturing of products in this sector are mostly carried out through the ubiquitous
channels to reach every shop and retail outlet of the country.

The dominant traits can be summarized as follows:

Market Size
• The Pakistani market comprises approximately 6 billion customers which is
considered as a large market.
Scope of competitive rivalry:
• Moderate local and minimal global competition
Market Growth:
• Market Growth rate is at 20% to 25% per annum
Rivals

• Shan Masala is the main rival along with house of Habib and few unorganized
companies
Distribution Channel:
• The industry is dominated by sales through the entire marketing channel

Capital Requirement:
• Modest capital requirement.

COMPETITOR ANALYSIS
1) Shan Masala
2) Habib Masala
3) Unorganized Sector
National Foods has a market share of 47% and Shan Masala has 37% market share. So
Shan Masala is a major competitor and poses real threat to the company.

SHAN MASALA
Shan Masala started its operations in 1980 and launched it products in Karachi. In 1994 it
expanded and introduced its products to other major big cities of Pakistan. It does not
market its products to smaller cities and has not further expanded. Moreover, its major
thrust is on Karachi. The Shan Masala’s recipe masala like “Qorma masala”, “Biryani
Masala”, “Achar Gosht Masala” etc. are more spicy in comparison to National Foods
recipe masalas, hence, Shan has been more successful in Karachi. The main reason is that
Karachiites like spicy foods.

Shan Masala pursues the strategy of cost leadership by focusing mainly on Karachi which
helps benefit it from serving a populous city. Within shorter distances it finds heavy
populace that lowers its distribution cost and is able to make sizable sales. Shan has better
management efficiency since its overhead costs are lower than National Foods.
National Foods recipe masalas are not as spicy as Shan’s. Sensing the competitive
advantage enjoyed by Shan in Karachi, National Foods launched a new product, three
years ago, under the name of “Ronaq” which has similar taste like recipe masala of Shan.
However, it has not been able to beat Shan in Karachi.
While National Foods is pursuing the marketing strategy of serving whole population of
Pakistan, as well as abroad including Middle East countries, it also increases its
distribution cost. National Foods has made strategic partnership with High Commissions
of Pakistan located all over the world and with some big hotels like Sheraton and others.
Shan, on the other hand, focuses on the local caterers of Karachi and exploits its spicy
taste of recipe masala, which is very much liked in dishes used in marriage and other
ceremonies. Hence both have differentiated their products by focusing on different
market segments.

By focusing on high income target market, it is imperative for National Foods to maintain
consistent quality in its masalas, which also increase its costs somewhat, whereas Shan
enjoys the advantage of low cost while serving the low or middle income group who can
tolerate low quality at times.

NATIONAL MASALA
National Foods Limited is a listed company and has been operative in Pakistan since
1970 for almost 37 years with strong capabilities in research & development,
manufacturing and marketing of food products in domestic as well as international
markets. Over this period, National Foods has achieved the distinction of being the fastest
growing food company in Pakistan and is now rated as the number one food company
among national companies in the country. Their strengths include:
• 38 years of innovation
• Rs. 4 billion in sales
• 300 SKUs
• 4 manufacturing units (Karachi, Bin Qasim, Lahore)
• Regional Warehousing (Lahore, Gujranwala, Multan, Islamabad)
• Rs. 1 million to the economy everyday in shape of taxes
• 350 towns covered across Pakistan
• 1500 employees
• Annual Growth Rate of 23% for the last 35 years
PRODUCT LINE
National Foods have a line of 100+ products for domestic market. Other than these
products, National Foods have 50+ exclusive products for International Market.

VALUE CHAIN ANALYSIS

Primary Activities
Purchase of Supplies

The company directly buys raw material from the suppliers and growers. The cost of raw
material is very low because there is no added transportation cost in handling products
due to the proximity of the plants. The company purchases in bulk quantity and maintains
long term relationship with their suppliers and growers. However, in case of low yield of
crops, as has been seen recently, its supply and cost is affected.

Operations
The suppliers are in close proximity of the plants, therefore, the transportation costs are
low because the raw material is ordered whenever production has to be started. The
quality control procedures are effective and quality is assured at every level. The plant,
machinery and offices, all are in good condition and according to the standards. It is also
ensured that no artificial flavor is added to single spice like salt, coriander etc. and recipe
masalas like “Qorma masala”, “biryani masala” are kept at normal level and not made too
spicy.
Distribution
They do not own any distribution channels and pursue outsourcing. Their target market is
whole Pakistan so they ensure presence of National Foods masala on almost every retail
outlet all over Pakistan.
They have warehouses located at Karachi, Lahore, Multan, Gujranwala and Rawalpindi.
These warehouses are used not only to keep finished goods for onward delivery to their
distributors but are also used for keeping the raw material in case of bulk quantity
purchase.
Marketing
National Foods are pursuing aggressive marketing strategy by engaging heavily in
advertising and sales promotion.
Advertising and Sales Promotion
It spent 9.7% and 11% of sales on advertising and sales promotion in the year 2006 and
2007 respectively. It engages all TV channels for advertising and regional channels are
also included in sales promotion. The print media like newspapers, magazines and
periodicals are also given their due share. The company also announces offers and
incentives for retailers.

Secondary Activities
Product Research and Development
The industry is not subject to rapid technological changes as it is not a hi-tech industry.
However automatic plants are bought to increase the efficiency of the company to fulfill
the demand within a short time period.
National Foods has a strong R&D department, which works in close liaison with
production department to ensure quality and its improvement. Three years ago, National
Foods launched it’s new product range under the name of “Ronaq” to compete against its
major competitor “Shan”.
Human Resources Department
HR department is one of the important functional units at National Foods since turnover
is very low and the company believes in hiring quality personnel and retaining them. It
pays competitive salaries. HR department organizes various training sessions and
seminars regularly for its employees to develop their skills. Their performance appraisal
system is also effective, stressing on feedback from employees and prompt actions are
taken to redress employee grievances.
Learning Organization
The employees of National Foods proudly name it as a learning organization and believe
in continuous improvement. The company was the first one in Pakistan to implement
ERP in 2001. National Foods also obtained the license of SAP in 2008 and have
successfully implemented it.

CORE COMPETENCY
According to there Director Marketing, National Foods has the advantage of first mover
i.e. of reaching to not only metropolitan cities but also to smaller cities. He also
mentioned the following as core competencies of National masala:
• Promotional Campaigns
• Distribution Network
• Brand Equity

Competitive Advantages
(According to the Director, Marketing)
a. National Masala has strong capacity of insulation from the competitors in
the shape of strong marketing strategy.
b. Being market leader National Masala always initiates action to produce
sustainable competitive advantage.
c. National Masala possess strong ties with the channel members
d. National Masala is also focusing on institutional buyers, which is not
considered by competitors.
Application of Strategic Tools and Techniques at National Masala

Table No 2
Regularly Frequently Somewhat Rarely Not
used Used Used Used Used
Swot Analysis
Portfolio
Analysis
CSF
Porter five force
analysis
Experience
Curve
What if Analysis
Stakeholder
Analysis
Value Chain
Analysis
Benchmarking
Product life cycle
Delphi

FINANCIAL ANAYSIS OF NATIONAL FOODS

National Foods Limited is currently a 3 billion company in terms of turn over and wishes
to become a 50 billion company in 2020. Its financial history reveals that it had grown its
assets by 224% from financial year 2001-2002 to 2006-2007. Its efficient operation is
exposed by its growth in net profit by 504% from financial year 2001-2002 to 2006-2007.

3.3 Sales Growth.

Table No.1 (Rs. in million)

Year 2000- 2001- 2002-03 2003-04 2004-05 2005-06 2006-07
01 02
Sales 915,13 994,63 1,135,64 1,273,03 1,533,87 1,847,70 2,391,05
6 7 1 2 9 0 8
Growth 8.68% 14.17% 12.09% 20.5% 20.45% 29.4%
(Source: Annual Report, National Foods Limit)

Figure 1 Sales Growth

35

30

25 29.41

20
20.49 Series1
20.46
15
14.18
10
12.10
5 8.69
-
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

It can be seen here that it had grown from 8.68% to 29.4% in seven years. On an average,
it had grown almost 3% each year in these seven years. However, on the basis of these
facts and figures, it does not seem likely that it will achieve its target of becoming a 50
billion company in 2020.

Growth in after tax net income

Table No.2 (Rs. in million)

Year 2000- 2001- 2002-03 2003-04 2004-05 2005-06 2006-07

 01 02
Net 27,227 21,413 20,013 46,299 30,653 70,364 129,292
Income
Growth -21.3% -6.53% 131.34% -33.8% 129.55% 83.75%
(Source: Annual Report, National Foods Limit)

Figure 2 Growth in after tax net income

GROWTH (%)

1
1
1 131.34% 129.55%
1
1 83.75%
0 GROWTH (%)
0
-21.35% -6.54% -33.79%
-
(0) 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
(0)
(1)

Again it can be seen here that the company has grown from -21.3% to 83.75% in terms of
net profit after tax. Although its growth in net profit of financial year 2006-07 had
declined from 2005-06, it is still a healthy figure. Below is the profit margin of the
company which shows a massive growth.

3.5 Profit margin

Table No. 3
Year 2000- 2001- 2002-03 2003-04 2004-05 2005-06 2006-07
01 02
Profit 2.98% 2.15% 1.76% 3.64% 2% 3.81% 5.41%
Margin
(Source: Annual Report, National Foods Limit)

Figure 3 Profit Margin

PROFIT MARGIN

6%

5% 5.41%

4%
3.81%
3.64%
3% PROFIT
3% MARGIN
2%
2.15% 2.00%
1.76%
1%

0%
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Growth rate of the company

Table No. 4

Year 2000- 2001- 2002-03 2003-04 2004-05 2005-06 2006-07

01 02
ROE 23.1% 16.93% 14.72% 27.32% 16.74% 28.47% 35.14%
Retention 53% 50% 36% 72% 45% 88% 93%
Rate
Growth 12.29% 8.53% 5.35% 19.8% 7.45% 25.04% 32.83%
Rate
(Source: Annual Report, National Foods Limit)

Figure 4 Growth of the company

100.00%

RETENTION RATE, 93%

90.00%

RETENTION RATE, 88%

RETENTION RATE, 72%
80.00%
RETENTION RATE, 53%

RETENTION RATE, 45%

RETENTION RATE, 50%

70.00%
RETENTION RATE, 36%

GROWTH RATE, 19.80%

GROWTH RATE, 32.83%

GROWTH RATE, 25.04%
GROWTH RATE, 12.29%

GROWTH RATE, 8.53%

GROWTH RATE, 7.45%

GROWTH RATE, 53.50%

60.00% ROE
50.00% RETENTION RATE
40.00% GROWTH RATE
ROE, 23.10%

ROE, 16.93%

ROE, 28.47%

ROE, 35.14%
ROE, 16.74%
ROE, 14.72%

ROE, 27.32%

30.00%
20.00%
10.00%
0.00%
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Growth rate of the company is another confirmation that it retains most of its income to
reinvest in some projects to pay higher dividends in some subsequent years. Although its
growth rate dropped in some years, it eventually reached 32.83% in 2006-07 which is
much higher than 12.29% in 2001-02. Growth rate of the company is equal to ROE x
Retention rate.

Du Pont Analysis

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Profit 2.98% 2.15% 1.76% 3.64% 2% 3.81% 5.41%
Margin
Total 285.84 276.8% 242.2% 225.4% 216.42% 190.88% 201.18%
Assets %
TO
Equity 271.65 284.02 345.0% 333.3% 387.07% 391.75% 323.05%
Multiplier % %
Return on 23.1% 16.93% 14.72% 27.32% 16.74% 28.47% 35.14%
Equity

Figure 5 Du Pont Analysis

450.00%
400.00%
350.00%
300.00% PROFIT MARGIN
250.00% TOTAL ASSET TO
200.00% EQUITY MULTIPLIER

150.00% RETURN ON EQUITY

100.00%
50.00%
0.00%
2000- 2001- 2002- 2003- 2004- 2005- 2006-
01 02 03 04 05 06 07

The Du Pont analysis finally gives the answer of ROE, which is equal to ROA x Equity
multiplier and ROA is equal to Profit Margin x Total Assets Turn Over. It is revealed
from the above table that the company had grown from 23.1% to 35.14% in terms of
ROE. Another indication of its good growth and reputation is the EPS which had also
grown from Rs.6.41 in 2000-01 to Rs.30.41 in 2006-07.

Its dividend pay out ratio was 47% in 2001-02 which had dropped to 7% in 2006-07. It
shows that it has now turned its attention to investing the money pumped in by its
shareholders in the company. The balance sheet of the company confirms these findings:
its Fixed Assets had grown from Rs.138,996 million in 2001-02 to 496,223 million in
2006-07.
REQUIREMENT:

1. Identify the Key Success Factors in the masala market of

Pakistan.
2. Compare the competitive/business scope of Shan & National
Foods.
3. Create an EFAS for National Foods.
4. Apply the Five-Forces Industry Attractiveness Model for the
masala market in Pakistan. Analyze each force separately and
then present a consolidated conclusion.