The business of consumer industry

Ehsan Malik is the Chairman and CEO of Unilever Pakistan, the countrys largest consumer products businesses with a brand presence that pre-dates the countrys independence. Malik has vast industry experience, including five years as Chairman and CEO, Unilever Sri Lanka Limited, as well as appointments at Unilevers businesses in Egypt, Lebanon, Jordan, Syria, Sudan and London.
Prior to joining Unilever mid-career, he held a senior position in media. Ehsan is a Fellow of the Institute of Chartered Accountants in England and Wales and alumni of the Wharton and Harvard Business Schools.
What is LSM? LSM or Life Style Measure is Unilevers unique way of segmenting the target market according to their spending patterns. LSM 18 is the highest on the scale, and most affluent in terms of spending, while the middle class would be around LSM 5.
To illustrate, a person who travels twice or thrice a year abroad, has more than 2 cars, at least two refrigerators, a TV in every bedroom, etc in the household would belong to LSM 18. On the contrary, LSM 5 will have a smaller car, one refrigerator, at least one TV, etc. One-third of Pakistans population is LSM 5+, as against India where 13 percent of the population is above LSM 5.
The economic slowdown in Pakistan has forced a number of businesses to turn sharply skeptical about the realisable market potential in the country. The consumer goods industry, led by Unilever Pakistan - the countrys biggest FMCG player, however, is an exception
"Consumption levels in Pakistan are low, relatively speaking and the market, particularly in rural areas, is under-served. If you can get even a few percentage points increase in consumption, accompanied by a small increase in market share, you can more than double revenues. So the potential is very much there in all our products," says Ehsan Malik, CEO of Unilever Pakistan.
That coming from a business which has already managed to grow its revenues from Rs20 billion in 2005 to Rs48 billion in 2010, shows the kind of scope the FMCG industry has in this country. And thats because, the Pakistani consumer is, what Malik terms, an aspiring consumer.
"Their expenditure is motivated by the aspiration we build through relevant and compelling advertising...if you show an ad showcasing a middle class house wife using a certain product, meant for someone of her social status, it may not necessarily work in the Pakistani context, because middle class consumers in this country aspire to emulate the lifestyle of better-off consumers," says Malik.
"Unlike an Indian farmer who prefers saving money, cash, at harvest times, burns a hole in the Pakistani farmers pockets," he added.
Despite these traits, however, Malik says that per capita consumption of FMCG products is very low in Pakistan, compared to a country like Indonesia, which has similar purchasing power parity.
"Per capita consumption of the same items in Pakistan is anywhere between 10-40 percent of what it is in Indonesia today," he said, while highlighting the low penetration of FMCG products, in the industry as a whole.
This means there is a huge opportunity to go out and do a better job at marketing and selling these products.
MARKETING STRATEGY The question, therefore, is whether marketing strategies will work in todays economic scenario, when real income levels are not seen growing at an attractive rate. Answering that, Malik is quick to break the myth.
"Consumption of the kinds of goods we are talking about does not have a linear relationship with income; if your income is twice mine, it doesn mean you consume twice the amount of soap or shampoo. Secondly, the total expenditure on our kind of consumer products, out of an average households total expenditure, is relatively low. People cut back on big-ticket items such as appliances. At economically difficult times, people appreciate small luxuries such as a bar of Lux," says Malik.
Many marketing companies used to segment the target market by using income as a criterion, says Malik, "but we stopped doing that, its outdated because the key is to look at the spending pattern".
"Ice cream and noodle consumption, for example, may be lower in a household with older people than one household with younger people, even though income levels are the same," explained Malik.
Marketing based on income levels also has other flaws. For instance, when demographic analysis was done using income levels, only the documented economy was analysed, whereas "the informal economy is now much bigger than the formal economy." So looking at spending patterns makes more sense, using what Unilever calls the LSM.
And thankfully for FMCG firms like Unilever, the money is growing where it matters the most. "Within Pakistan, the upper LSMs are growing at a faster rate....for example LSM-8 and upwards is growing at a faster rate than LSM 5-8. This means that spending patterns are growing where the ability to spend is also higher," says Malik.
THE UNILEVER EXPERIENCE After having successfully conquered the urban market, the company has been lately busy expanding its presence in rural areas.
"In the last two years or so, about 70 percent of our growth has come from what we loosely call the
ural sector," says Malik.
Assuming that a village is assumed to be a community where more than 1,500-2,000 people live, Unilever has direct presence in 18,000 out of the 48,000 villages in Pakistan - the rest are fed by wholesalers. Five years ago, the firms direct presence was confined to 5,000 villages.
Malik also stresses the need to apply a targeted approach by marketing through regional TV channels, alongside the national TV channels. "If a certain campaign is to target the Multan belt, then you will advertise the Seraiki channel...so you don have to have wasteful advertising and wasteful presence," says Malik.
Similarly, unlike past practises when a salesman used to go and try sell all the products at an outlet, Unilevers salesmen today, goes with a targeted list of no more than 50 SKUs (Stock-Keeping Units), and sell products according to the community and consumer characteristics of a particular locality.
"The productivity of the salesman has gone up. Weve also given salesmen hand-held terminals which are GPS enabled so live data is transferred to our accounts. This way, our direct sales network is about 250,000 outlets...and we know what is selling across 250,000 outlets across the country," explains Malik.
TEA NOT YET TEEING OFF According to rough estimates, only half of the tea consumed, i.e. 90,000 out of some 180,000 tons per annum, is obtained legally; the other half is smuggled. But apparently, unlike conventional wisdom, the Afghanistan Pakistan Transit Trade Agreement (APTTA) is only partly to blame.
"The APTTA is just a conduit, its not the reason. Even if you ban the import and transit of tea to Afghanistan through Pakistan, smuggling will continue. The reason is the high incentive to evade high tariffs and taxes, where the bulk of the impact comes from sales tax," says Malik, adding that his firm pays import duty and sales tax aggregating Rs90,000 a ton, whereas the smuggler pays less than a third of that by way of bribes. Smugglers are therefore able to sell tea at a discount, in the process sharing their margins with co-operating retailers.
For Malik, tea is a classic example of over-taxing a segment of a market and allowing the rest to go scot-free..
"We have been requesting the government to reduce the burden to taxes in order to create a level playing field...When taxes are reduced, the consumer will benefit from lower price - and tea is a staple drink of millions of Pakistanis. With reduced incentive to evade taxes, smuggling will stop. At half the tax rate, government will obtain the same revenue when official imports double. It is simple arithmetic," he said.
Malik says that some in government also think that if taxes are lowered and smuggling stopped, Pakistan would have to find twice the foreign exchange to cover official imports. "They forget that currently smugglers use havala to pay for imports, which comes at the cost of official remittances," says Malik.
Does this mean that Unilever will not expand its operations in Pakistan, for example by introducing some of the products not officially launched so far?
"Theres a market for some high-end products and we are looking into producing them locally. But as I mentioned earlier, there is significant scope for us to grow in the categories in which we are already present in the country.
Interview by Sijal Fawad