Retail Food Sector - 2011

An Expert's View about Small Retail in Pakistan

Last updated: 11 Jul 2011

The traditional food retail sector (small neighborhood stores, street vendors, “mom & pop” stores, etc.) comprise about 95% of all food retail stores in Pakistan while the modern retail sector (hypermarkets, supermarkets, discount stores, etc.) make up the remaining 5%.

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Voluntary Public - Date: 6/23/2011 GAIN Report Number: Pakistan Post: Islamabad The Retail Food Sector - 2011 Report Categories: Retail Food Sector Approved By: Joseph M. Carroll, Agricultural Counselor Prepared By: Rashid Y. Raja, Ag Marketing Specialist Report Highlights: The traditional food retail sector (small neighborhood stores, street vendors, ?mom & pop? stores, etc.) comprise about 95% of all food retail stores in Pakistan while the modern retail sector (hypermarkets, supermarkets, discount stores, etc.) make up the remaining 5%. Over the past few years international retailers have taken advantage of the growing opportunities in this market. Well-known European retail giants Makro, Metro, and Carrefour (Hyperstar) have opened stores in all major Pakistani metropolitan cities. The port city of Karachi alone has at least five large retail stores that serve more than 19 million people. With a growing middle-income class (estimated at about 25% of the total population), increasing urbanization, increasing popularity of international food products, and a growing number of international restaurants and fast food chains, Pakistan is emerging as an expanding market for U.S. high-value agricultural products. The overall food retail and wholesale business accounts for 17% of Pakistan?s GDP. (Pakistan Economic Survey 2009/10) General Information: SECTION I. MARKET SUMMARY GENERAL ECONOMY: In FY 2010, Pakistan?s GDP was estimated at $175.4 billion. (Pakistan Economic Survey 2009/10) Despite a global recession Pakistan?s economy has been growing at about 3% over the last three years. Foreign exchange reserves are estimated at more than $16 billion in FY10. Pakistan has a population of over 170 million, (Pakistan Economic Survey 2009/10) with a large and growing consumer middle income class estimated at about 25% of the total population. Pakistan?s consumers spend a large share of their income on food, with a share of expenditures on food and beverages estimated at 42%. With a growing middle-income class (estimated at about 25% of the total population), increasing urbanization, emerging trends of the food retail sector, increasing popularity of international food products, and a growing number of international restaurants and fast food chains, Pakistan is emerging as an expanding market for U.S. high-value agricultural products. Snapshot: Pakistan Food Retail Sector Pakistan?s food retail sector is unorganized and largely dominated by traditional independent small ?mom and pop? stores. These stores, locally known as ?kiryana stores,? comprise of 95% of all Pakistan?s food retail outlets with an estimated annual turnover of $3 billion. The overall share of imported food products in Kiryana stores is about 1%. Kiryana stores are located in all parts of the country with an average floor area of 3,000 to 6,000 square feet. In contrast, the concept of modern retail chains has only recently been introduced to Pakistan in the past several years and has elicited a positive customer response. These larger stores make up 5% of all Pakistan?s retail food stores. There are two segments of modern food markets. One segment is dominated by the international groups and there are also domestic food retailers that are also utilizing new modern retail formats. For example, large food retail stores (Metro, Makro, and Carrefour) comprise about 2% of all Pakistani food retail outlets with an estimated annual turnover of $176 million. The overall share of imported food products in the large retail stores is about 5.6%. The average floor area for these stores ranges from 25,000 to 100,000 square feet. The numbers of these stores are expected to increase over the coming years as modern distribution channels and competition develops. On the other hand domestic convenience stores (utility stores, csd?s, domestic cash & carry?s) comprise about 3% of all Pakistani food retail outlets with an estimated annual turnover of $200 million. The overall share of imported food in the convenience stores is about 6%. These stores are located in big cities and the average floor area for these stores ranges from 3,000 to 6,000 square feet. Share of Imported Food Products in the Total Retail Sales (million dollars) The large European food retail giants such as Makro, Metro, and Carrefour have all opened stores in Pakistan?s major metropolitan cities (Karachi, Lahore, Faisalabad, and Islamabad) in the past 6 years. These large retail stores have been able to tap into the changes in consumer lifestyles and higher disposable income. Emerging technologies have also contributed to the emergence of the large food retail superstores, which offer a wide range of value added products and services to price conscious middle income consumers. Convenience stores in Petrol/Gas stations are also providing an additional option for consumers and their popularity among Pakistani consumers is rising. Consumer Demographics Pakistan has a large and growing middle-income class (estimated at about 25% of the total population). It also has a large and growing young population and over 55 percent Pakistani?s are in the 10-40 years age bracket. The upper middle-income class is currently estimated at 17 million, with relatively high per capita income which favors consumer spending. Since 2000 demand for specialized products targeted at the middle-income consumers have increased significantly. The upcoming changes in the Pakistani consumer demographic will create opportunities and challenges for companies doing business in Pakistan. For example, companies like Uniliver and Engro Foods Ltd have increased their production of Olfrute juices & nectars to meet the upcoming market demand in summers. Consumer Food Purchasing Behavior The average Pakistani consumer spends 42% of his income on food. Consumption of imported processed and ready-to-eat food is greater in urban areas because of higher disposable incomes and access to modern style of food. A typical Pakistani household makes regular purchases of staple foods (i.e., wheat flour, pulses, edible oils, fruits, vegetables, milk, meat, etc.) several times per month from neighborhood stores due to convenience, perceived freshness, and limited storage space at home. A growing number of young Pakistani professionals (male/female) generally prefer making monthly food purchases from modern retail stores due to greater variety of products, satellite stores, and to enjoy food services all under one roof, thus providing the opportunity of combining ?one stop shopping? with a family outing. Affluent Pakistani families are attracted towards modern retail stores due to their affordability, strategic locations, access to the imported processed food, and available choices for multiple product range. In comparison the rural consumer prefers homemade products, organic fruits & vegetables, and has limited access to processed food. The demand for imported food such as dates, cereals, beverages, chocolates, almonds, cakes, fruits and fruit juices reaches its peak during the festive season, especially at Eid and Ramadan. Organized Retail and Neighborhood Stores A young population, a growing middle class, a larger number of working women, increasing media penetration, and expanding exposure to a western lifestyle are all factors fueling the growth of Pakistan?s modern food retail sector. The transformation of the food retail industry is evident in the entry of European hypermarkets and new shopping centers with food courts, family entertainment, and parking facilities. There has also been a gradual shift from the traditional to the organized format of shopping in the urban areas. Traditional stores are still the dominant market leaders in the food retail sector. However, in order to keep pace with the rise of larger and modern food retail stores, traditional store owners have gradually reformatted their operations by increasing floor space, instituted price discounts and other value added services. In addition, to remain competitive, local retailers have turned to professional consultants for advice on managing their businesses. Advantages of neighborhood stores Advantages of Modern retail stores Easily accessible Convenient shopping under one roof Credit is extended based on social relationships Consumer friendly atmosphere Affordable prices due to the lower cost of business Discounted prices Due to limited storage and inadequate refrigeration at home, the Large storage and average Pakistani customer still prefers buying perishable items on adequate refrigeration a daily basis Import Food Market Pakistan is a net food importing country and a growing market for consumer-ready food products. In 2009/10 Pakistan?s agricultural imports totaled more than $6.0 billion. Major agricultural imports include vegetable oil ($1.8 billion), milk products ($600 million), cotton ($590 million), sugar ($288 million), tea ($264 million), pulses ($262 million), dry fruits ($85 million), and spices ($79 million). Agricultural trade between the United States and Pakistan in FY 2010 totaled $385 million. The leading U.S. agricultural exports to Pakistan were cotton ($123 million), consumer oriented products ($38 million), wheat flour ($34 million), pulses ($27 million), and planting seeds ($23 million). Imported foods are normally procured by modern retail stores to cater to high end consumers in the urban areas. Demand for domestic and imported foods continues to show considerable growth in all parts of the country. A variety of imported food (given below) can be easily seen on shelves of modern retail stores. Beverages and fruit juices Jams, jellies and marmalades Dairy products (dry milk, cheese, yogurt etc) Ice creams Confectionary items (almonds, pistachios, nuts etc) Biscuits, cookies and wafers Processed fruits and vegetables Soups, syrups and seasonings Chocolates Breakfast cereals Honey Tea and coffee Pasta and noodles Baby food Pet food Most of Pakistan?s food retailers purchase their imported products from Dubai, primarily because it is the regional trading hub for sourcing assorted consignments of imported food products. Dubai?s consolidators and suppliers are also known to have the capabilities to meet Pakistan import requirements at much lower cost than its competitors. The larger modern retailers import food products directly from abroad due to better linkages and market knowledge. The decision to import any specific product from a specific market is based on multiple variables like cost of product in different markets, freight charges, quality, and consumer preferences. Impediments to Imported Food Products Retailers face enormous challenges importing food products into Pakistan. Some of the primary obstacles include: inadequate cold chain infrastructure, lack of storage and handling facilities, and deficient transportation networks. Layers of intermediaries (middlemen/brokers) also add to the cost of importing products and cut into profits. Corruption is a major problem. In addition, imported food items are subject to tariffs ranging from 25 percent to 65 percent. Non-tariff barriers are also major obstacles to importing to Pakistan. The procedure for sampling and testing of food products at the port of entry are not well defined, thus, creating barriers for the imported food market. Agricultural Imports from the U.S. (Oct ? Sep/ USD thousand) Products 2007 2008 2009 2010 Dairy Products 9,935 15,758 9,882 33,923 Tree Nuts 2,946 4,301 7,246 12,599 Vegetable Oil 5,568 18,571 12,579 11,253 Eggs and Products 216 158 120 2,046 Processed Fruit & Vegetables 1,588 1,089 990 1,022 Snack Foods 1,490 1,209 603 866 Breakfast Cereals 138 264 235 247 Fruit & Vegetable Juices - 30 20 18 Peanuts - 16 14 17 Source: Department of Commerce, U.S. Census Bureau, Foreign Trade Statistics Advantages and Challenges for U.S. Consumer Food Products in Pakistan Advantages Challenges Urban consumers prefer healthy food Poor infrastructure for importing food and and health supplements. agricultural products. U.S. products have a reputation of high Greater geographic distance to the U.S. relative to quality and reliability. other major suppliers (e.g., UAE, UK, EU, CIS, China, Malaysia, and Indonesia) results in higher transit and storage costs for U.S. products. Foreign direct investment (FDI) in US exporters? unwillingness (both perceived and retailing permitted. real) to spend time and resources in developing business relationships in Pakistan due to instability and security concerns. Availability of inexpensive labor is Traditional food habits are difficult to change. conducive to agricultural and industrial joint ventures. U.S. popular culture and products, Retailers and consumers have limited knowledge of including fast foods, have growing the variety and quality of U.S. products. appeal. Plenty of opportunities for new-to- Limited knowledge of U.S. exports practices and market products like new range of procedures. Importers seek exclusive distribution juices, cereals, chocolates, and dairy to protect investment. products. The popularity of imported brands is Reforms required as tariffs are still high and need increasing. reduction. Large numbers of Pakistani expatriates Lack of credit and financing. settled in the United States are potential source of promoting U.S. brands in Pakistan. The rapidly changing dietary patterns of Competition from domestic supplier and the gray affluent and upper middle income-class market, preference for traditional Pakistani savories favors introduction of U.S. processed (confectionary products) food brands in Pakistan. SECTION II. ROAD MAP FOR MARKET ENTRY Entry Strategy: Having a local representative in Pakistan is key to a product?s successful entry into the Pakistani market. The local representative should have a thorough understanding of the product, import regulations, pricing strategy, labeling requirements, etc. More importantly, the local representative should understand the local market and consumers? preferences. It should also have an efficient distribution network and committed to marketing a product. U.S. exporters also have to perform due diligence prior to entering the Pakistani market. To increase the chance of success, exporters should: o Survey existing and potential markets for their products before initiating sales; o Research the agent?s background and reputation through local industry/trade associations and other foreign companies; o Market the product through in-store promotions or online marketing channels; and o Contact FAS/Islamabad for assistance in setting up initial meetings with potential importers or representatives. Most Pakistani retail food importers prefer to: Import products through agents that organize market promotions and have strong ties to local retailers; Promote a product with exclusive distribution rights to protect their investment; Concentrate on a reasonable entry pricing strategy to target the price sensitive consumers; and Import products through traders or agents who may also be wholesalers or distributors and are familiar with the country?s current food laws. MARKET STRUCTURE Market Channel for Imported and Domestic Foods Modern retailers normally import products directly through an exporter, distributor or manufacturer. Larger retailers source products directly while smaller retailers seldom import products due to the lack of financing. Traditional stores source most products domestically and usually do not feature imported food products. However, in the pass several years, several traditional outlets located in the metropolitan cities, have begun to sell a limited number of imported food products to cater to upper middle income consumers. Market Channels in the Food Retail Sector Organized Sector The modern/organized retail sector in Pakistan includes hypermarkets, supermarkets, convenience stores, gas marts-kiosks, etc. This sector is dominated by national chains like utility stores and international players like Makro, Metro, and Carrefour. (Hypermarkets, Supermarkets, Superstores, Convenience Stores) Number Name of Retailer Type of Retai Ownership of Location Purchasing ler Ou Agent tlets Ut Manufacturer/ Government Directly from local ility Stores C Retailers/ of Pakistan 5,700 Nationwide manufacturers orporation Distributors (GOP) and suppliers Canteen Stores Manufacturer/ Directly from local Department Retai Pakistan lers/ 103 Nationwide manufacturers (CSD) Distribu Military tors and suppliers Manufacturer/ Retailers/ K&N? Distributors/ s ani 100 Nationwid Own farms and e Fro Pakistzen and locally Ready to Eat Poultry Wholesalers/ Islamabad/ M Mainly local etro Importers/ German/ Lahore/ manufacturers (Cash & Carry) Distributors/ Pa kistan 5 Faisalabad/ Hypermarket Karach and importers i Harrold Super Retailers/ Pakistani 6 Islamabad/ Distributors, local Store Importers/ Rawalpindi manufacturers, Supermarket and importers (including direct imports) Distributors, Shah Pharmacy/ agent, and een Pharma Ret Islamabad/ ailers/ Pakistani 5 ers cy/Retailers Di Rawalp import indi stributors (including direct imports) Distributors, D Pharmacy/ -Watson ad agent, and / Pharmac Ret Islamab ailers/ Pakistani 5 y/Retailers Di Rawalp importers indi stributors (including direct imports) Retailers/ Makro Importers/ Netherlands/ Karach Mainly local i/ (Cash & Carry) Distributors/ Pakistan 5 manufacturers Lahore H and importers ypermarket Mainly local Rah Confectionery/ slamabad/ at Bakers Retai Pakistani 4 I lers Rawalp suppliers and indi importers C Mainly local onfectionery/ amabad/ Fresco Bakers Retai Pakistani 4 Isl lers Rawalp suppliers and indi importers Mainly local Ni Confectionery/ rala Sweets Ret Pakistani 4 Major cities suppliers and ailers importers Distributors, local Karim Bu et manufacturers, ailers/ ksh (HKB R) Pakistani 3 Lahore and importers Importers (including direct imports) Retailers/ Carrefou Mainly local r Importers/ French/ Lahore/ (Hyperstar) Distributors/ Pa kistan 1 Karach manufacturers i H and importers ypermarket Distributors, local B Retailers/ manufacturers, est Price Sup Importers/ Pakistani 1 Islamabad and importers ermarket Supermarket (including direct imports) Distributors, local COSCO Retailers/ manufacturers, Importers/ Pakistani 1 Islamabad and importers (Cash & Carry) Supermarket (including direct imports) Distributors, local Retailers/ manufacturers, Agha Supermarket Importers/ Pakistani 1 Karachi and importers Supermarket (including direct imports) Distributors, local AI Retailers/ manufacturers, -Fateh Sup Importers/ Pakistani 1 Lahore and importers erstore Supermarket (including direct imports) Source: Market sources Gas Marts and Kiosks Several oil companies have recently introduced convenience stores or gas marts in major Pakistani cities. Product lines in these stores are usually limited and include both domestic and imported retail food items. These mini-food stores are in the early stages of development and sale volumes are small. These stores purchase their products from distributors, local manufacturers, and importers and usually employ marketing strategies similar to supermarkets. Major Gas Marts Name of Type of mber of urchasing Retai cation P ler Retai ership Nu ler Own Outle Lots Agent Pakistan State Oil Distributors, local (Shop Gas mart r and stops) Ret Pakistani 30 Majo manufacturers, ailers Cities importers Shell Gas mart Pakistani/ M Distributors, local ajor (Select manufacturers, and Sh Retailers Netherland 28 s Cities ops) importers Caltex- Distributors, local Ch Gas mart Major evron Ret Pakistani/US 20 ailers C manufacturers, and ities (Star Marts) importers Source: Market sources The organized retailers have various formats of retail stores usually classified by the category of store and floor area. Format Average Size (Sq.Ft.) Hypermarkets/ Supermarkets 25,000 ? 100,000 Utility/ Convenience Stores 3,000 ? 6,000 Gas Marts/ Kiosks 200-500 Source: Market sources SECTION III. COMPETITION European and Asian suppliers are major competitors for U.S. companies. The competition offers a variety of products and almost all of the competitors have a freight advantage over U.S exporters. Products from Asian countries also often have a price advantage due to their geographic proximity to Pakistan. Pakistani retailers mostly purchase U.S. food products indirectly through consolidators in Dubai. The general practice for importers is to visit or place orders with foreign wholesalers. Importers increasingly prefer to look for companies with new brands and products that offer exclusive distribution rights. Several new products have been successfully introduced and promoted under these agreements. For example, European honey and cooking oil have developed a strong consumer preference due largely to promotional efforts by the exclusive distributor. SECTION IV. BEST PRODUCT PROSPECTS Products with Good Sales Potential Total Total Imports Imports Key Constraints Market Description (2009/10) (2009/10) Over Market Attractiveness for Quantity Value Development USA Tons $ 000 Price competitiveness, freight advantage for countries like Pulses 445,000 262,000 pulse-growing Local production is countries like inadequate and more Myanmar and India than 37% of total consumption is met through imports Biscuits, Wafers, Rusk?s, Compet Preference for ition from Toasted imported brands. B domestic suppliers, read & Products, and 13,968 24,644 EU, and Gu Growing bakery & lf other retail industry and Bakery products increased popularity of processed foods Consumer Competition from preference domestic and for imported Cocoa products, Ovaltine, foreign suppliers products/brands Chocolate like EU Crumbs/Confectionary, 4,977 14,443 and Gulf states and Ot her Food Prep Cocoa etc Comp Increasing health etition from Gu awareness lf states, South Fruit Juices 18,224 12,770 A among middle frica, and domestic income suppliers consumers Good market prices; Compe increasing interest in tition from A quality fruits among fghanistan, China, Grap Pakistan's middle es, Fresh 61,782 10,980 Iran, and domestic marke income consumers t and growing organized retail sector Rapidly increasing Competition from demand, growing Almonds 5 Afghanistan, Iran, food retail market, ,540 8,885 Australia, and health domestic market consciousness, and value additions Competition from Preference for Fruits, Gulf and domestic imported brands, prepared/preserved, M suppliers high demand, and ixture of Fruit/Other 6,582 4,299 health consciousness Plant Parts, and Other Fruits, Nut/Edible Plants Good market prices; C increasing interest in ompetition from quality fruits among App Afghanistan, China, le, Fresh 11,939 2,233 Pakistan's middle Iran, and domestic mark income consumers et and growing organized retail Competition from Preference for Cornflakes, Cereal flake, Gulf and domestic imported brands, and other food obtain by 701 2,083 suppliers high demand, and cereal health consciousness Consumer Competition from preference Wh domestic and for imported ite Chocolate and other Sugar Con foreign suppliers products/brands fectionary 1,261 2,082 like Gulf states and and shortage of EU quality domestic product Instan Comp Preference for etition from t Coffee (in bulk & 318 imported brands and 1,718 Gulf states, EU, and retail) shortage of quality domestic suppliers domestic product Soya Sauce, Tomato Competition from Ke Preference for tchup/Sauce, Mustard flour/me Gulf states and imported brands, al, Mix domestic suppliers S 903 1,629 high demand, and easoning, Soups, and H health consciousness omogen ize composite food prep Source: Ministry of Commerce, GOP Products Not Present in Significant Quantities with Good Sales Potential Total Total Imports Imports Key Constraints Des t Attractiveness cription (2009/10) (2009/10) Over Market Marke Quan for USA tity Value Development Tons $ 000 Competition from Good market prices; Pear, Afghanistan, China, increasing interest in Fresh 3,731 914 Iran, and domestic quality fruits among market Pakistan's middle income consumers and modern food retailers Competition from Shortage of quality Potatoes (fresh or domestic suppliers products in the local market 58 806 chilled 7,2) Pet Food (Dogs & C 198 346 Competition from Preference for imported ats) domestic suppliers, brands, shortage of quality EU, and Gulf states domestic products Competition from Increasing popularity; Pasta EU and domestic growing food processing (uncooked/stuffed) 199 186 & suppliers sector Macaroni Ice Creams 27 145 Competition from Preference for imported domestic suppliers, brands, shortage of quality EU, and Gulf states domestic products Coffee (roast not decaffeinated and Competition from Preference for imported not roasted 26 143 Gulf states, EU, and brands and shortage of not decaffeinated, domestic suppliers quality domestic product husks etc) Competition from Preference for imported James, Jellies 9 domestic suppliers, brands & Marma 39 6lades EU, and Gulf states Source: Ministry of Commerce, GOP Products Not Present Due To Significant Barriers The importation of food products containing pork or pork products is prohibited. Meat and dairy products may be imported if certified to be "Halal". Commercial import of alcoholic beverages or products containing alcohol is also prohibited. SECTION V. POST CONTACTS If you have questions or comments regarding this report or need assistance exporting to Pakistan, please contact the Office of Agricultural Affairs, Islamabad at following address: Agricultural Counselor Foreign Agricultural Service Embassy of the United States of America Islamabad, Pakistan Ph: (92-51) 208-2274, Fax: (92-51) 227-8142 E-mail: agislamabad@usda.gov For more information on exporting U.S. agricultural products, please visit the Foreign Agricultural Service's home page at: http://www.fas.usda.gov
Posted: 11 July 2011, last updated 11 July 2011