Got milk?

After the restoration of zero-rating sales tax regime on ambient milk, dairy processors had promised to put in labour of love to expand the narrow base of processed milk consumers. Instead, a leading UHT player has just launched new category of "easy-to-digest" milk variant, priced at 25 percent premium to it's traditional UHT category. Does the processed industry really have any plans to cater to bottom of the pyramid?

Of course, the foremost duty of any commercially-minded player is to maximize shareholder wealth. It would be ludicrous to find faults with a private sector business for finding ways to innovate and improve profitability.

But tax concessions are extended with explicit objectives. How exactly does diversification into higher-end categories fulfill the stated zero-rating objective of expanding safe milk consumption to bottom of the pyramid? Do premium dairy varieties - catering solely to SEC A++ qualify as essential commodities worthy of GST exemption? This, at best, remains open to debate.

To date, UHT's selling proposition in the local market remains it's longer shelf life. UHT processors rightly maintain that the alternative - pasteurized milk - requires extensive development of cold chain infrastructure at micro-level; while UHT products can survive for up to 3 months at ambient temperatures. This makes UHT uniquely suited for peri-urban and rural markets, where last mile cold chain is simply non-existent.

Why then has the industry not leapt at the opportunity offered by zero-rating? Instead, if the latest innovation offers a sneak peek into industry’s vision, it remains enamored with high margin, low volume product categories. For any growth minded business, that’s not an awful strategy at all. But what will it take for formal dairy sector to bet big bucks on increasing safe milk consumption in Pakistan?

Figuring out why dairy processors refuse to traverse the road less taken is no rocket science. As in the case of other food commodities, the State retains discretionary powers to fix market prices of loose milk. This, in turn, exacerbates the ever-widening gap between prices of loose and processed milk varieties. Because bottom of the pyramid consumers are extremely price conscious, the differential ensures that processed players simply cannot compete on prices, in effect reducing the business to a margins driven play.

The argument makes perfect sense in theory. Moreover, since the incumbent regime has doubled down on price control measures, dairy players can comfortably take the plea that GST exemption alone is insufficient to build a business case for targeting bottom of pyramid consumers. But can removing price controls on loose milk alone increase processed milk demand?

According to Household Integrated Economic Survey 2018-19, the bottom two quintiles spend nearly 25 percent of their monthly food expenditure budget on milk and dairy products. If dairy processors are right, deregulating prices of loose milk will have two consequences: pure loose milk prices will reach at par with UHT, while incidence of adulteration will increase to reduce cost and maintain profitability. At that time, even if processed players temporarily reduce prices to capture market and bleed out competition, bottom of the pyramid will end up paying through their noses eventually; hardly a service to the cause of safe milk consumption.

Like most problems in life, then, addressing Pakistan’s dairy challenge requires a lot more nuance than tweaking the tax structure. If the government has fooled itself into believing that zero-rating will increase safe milk consumption, it has only herself to blame.