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In the current season of “unprecedented economic successes”, the formal dairy industry is also at the cusp of an unusual win. Fresh milk prices have touched Rs 140 per litre across several urban centres, bringing delta against processed milk to a multi-year low (as UHT litre pack is currently retailing at Rs 160). If the PTI government restores zero-rating regime for dairy sector in the upcoming federal budget, will UHT volumes finally return to accelerated growth mode?

It is highly likely that volumes will witness a substantive rebound. A lower price premium against loose milk may translate into increased demand from floaters: price conscious “occasional” consumers who may increase purchase frequency in response to improved affordability. But that’s akin to selling to the converted. Lest we forget, 15 years ago UHT milk processors had promised a “White Revolution” in the country through mass category conversion, not through sales volume growing at the same rate as GDP (pun intended).

So, has the industry failed to deliver on its promise? For many years, dairy industry players insisted that their competition was not with each other but the loose milk segment, which has 92 percent share in domestic milk consumption. Yet, for better part of the last decade, the two UHT giants have been fighting off each other to maintain market leadership, without meaningfully increasing the size of the pie.

What happened? While many would insist that the skewed regime in the form of taxes on input distorted the processed milk market, it would be wrong to lay the blame squarely at the altar of regulator. The packaged UHT milk also suffers from a marketing problem due to its poor positioning and public perception, which has only exacerbated in recent years. Here is how.

Two decades ago, the packaged milk industry captured the popular imagination with its promise of “safe milk”. Domestic khula doodh segment was riddled with a hygiene crisis, as stories of milk adulteration by gawalas became rife. Intermediaries aimed ‘to maximize their profits at the expense of unsuspecting consumers’, went the narrative. In a country where commercialization of pasteurized milk faced bottlenecks due to lack of cold chain infrastructure, UHT treated milk with its longer shelf life – and storage at ambient temperatures – came to the rescue.

But it seems that the processed milk industry lost the plot somewhere along the way. The re-positioning of UHT brands as “all-purpose” products targeting socioeconomic classes across various income segments meant that UHT was no longer just a “safe and hygienic” substitute to loose milk. It also became a “premium” product, speaking to the “image-conscious” urban consumer.

How did that happen? First came the tea-whiteners for the value-seeking consumers belonging to the lower income segments. Later, when price competitiveness against loose milk became increasingly difficult due to rising input costs, powder based dairy drinks were launched at a discount to loose milk.

This raised an existential question: if tea whiteners and dairy drinks targeted lower income segments, the higher priced flagship UHT brands must enjoy a distinct target audience. Naturally, that target audience must be the high-income, SEC-A segment. That – possibly unintended - repositioning became a costly and defining error.

Turned out, converting the premium consumer was an even harder task. First, premium consumer base was no uniform beast. It included both those traditional households which believed that unlike processed, “loose milk” was fresh, multi-purpose (used to extract ghee, curd, butter etc), and more trustworthy (known source of origin); as well as those who believed that UHT was inferior to pasteurized variants as UHT treatment killed “good bacteria, and removed all the good nutrition out of milk”.

As malicious campaigns against sanctity of UHT process gained momentum, came another challenge. The processed industry also saw mushroom growth of various localized pasteurized brands in major urban centres, which promised a healthier and more nutritious substitute. Overnight, UHT’s premium positioning became insecure as the high income, image conscious consumer abandoned it for the higher priced (and, perceivably higher quality) pasteurized alternatives. Meanwhile, the loose milk lobbyists managed to convince the legislators that since processed industry mostly targeted high-income segment, it deserved no special treatment or tax exemptions.

Much has changed since. A fresh government in Islamabad has made addressing “stunting and wasting” among Pakistan’s malnourished its top priority. The processed industry has also successfully showcased the loss of ambient milk volumes by attributing it to elimination of tax exemptions. As the return of “zero-rating” now becomes likely, it must be asked: have the UHT brands learned their lesson?

While the benefits of UHT against pasteurized may be debatable, UHT’s success in other regions has been predicated on confluence of several factors. Compared to pasteurized, UHT promises longer shelf life, crucial in markets where long geographic distances and challenge of refrigeration/cold-chain infrastructure persists. It offers convenience: consider drinking directly from carton storable at ambient temperature. But most importantly, it works for markets where large-scale dairy farms and dairy cooperatives are absent, and fresh milk is deposited by small farmers at collection centres for further processing.

It is no surprise then that even in developed regions such as North America, UHT cartons continue to be a staple in predominantly Black and Hispanic low-income neighbourhoods or in government-run meal programs in public schools. The message to the consumer? UHT’s single-minded promise to deliver safe, affordable, and nutritious glass of milk to the bulk of the population at the bottom of the pyramid, even if it is not ‘perceivably’ as premium as pasteurized variants.

For that to happen, the government must both restore zero-rating on inputs for formal dairy sector, and ensure implementation of minimum pasteurization law so that UHT can compete with loose milk on cost. However, unless UHT brands get their messaging right and resist the temptation to fight for high-end consumers in a highly fragmented premium market, they will continue to bleed from both ends. Meanwhile both “category conversion of the 92 percent”, and “safe milk for bottom-of-the-pyramid” will remain distant dreams.

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