An interview with Salman Hussain, CEO Lucky Foods Private Limited 'With price fixation, government is incentivising milk adulteration'

Lucky Foods is part of Yonus Brother’s Group. Mr. Mohammad Ali Tabba established this company in 2015 with Salman Hussain as its first CEO. Salman graduated from IBA in 1996 and worked at Citibank N A till 2014. He started his career at the consumer division of Citibank and served as the Head of all branches and Retail Bank Head. In the last 3 years of his career at Citi, he worked as the Director Corporate Banking Division at Citi.

BR Research recently had a conversation with Salman Husain in his capacity as the CEO of Luck Foods, edited transcripts of which are produced below:

BR Research: There are different estimates for market size of milk industry and market share of UHT milk. What’s your reading? And what is the scope for pasteurised milk as against UHT? The argument often made is that it is easier with UHT given electricity shortage and absence of cold chain in Pakistan.

Salman Hussain: Milk industry is very unstructured and undocumented; every number out there is actually just a hunch. The size of fresh milk production cannot be ascertained with accuracy. However, I would think that inclusive of value-added dairy products, and not just milk, the share of packaged milk has gone beyond 10 percent.

But Mr. Muhammad Ali Tabba, the owner, strongly believes that UHT milk is a dying product all over the world. For the time being given the constraints of electricity and various other issues, UHT looks like the most viable proposition as far as dairy is concerned. However, on long term basis, looking at the advanced economies or even India, UHT is losing its market share very rapidly; not against the fresh milk, but other options that are in processed milk, primarily pasteurised milk.

This has come about due to increasing awareness that UHT milk contains preservatives; it must contain preservatives to prolong the shelf life. Pasteurised milk, which is fresh and does not have any preservatives, is the future.

BRR: In the wake of pandemic an argument is being made that supply of fresh milk is risk prone since milking, collection and distribution of fresh milk involves a lot more people and bazaars than the UHT. Do you think after over the course of pandemic and right after, demand for UHT will shift up significantly due to structural change and change of habits?  

SH: If we strictly talk from the perspective of crisis management then probably this argument would hold. But the economy and regular usage patterns are not only determined by crisis situations. It is important that economy should have some capacity of processed milk, and in certain situations yes, that’s a very plausible solution. But you can’t make consumption patterns and your regular patterns on the basis of crisis management only; there are lot of other factors.

For example, processed milk is blended and manufactured. In a country like Pakistan which is the fifth largest producer of milk in the world, especially in these days when the government is trying to go for import substitution, milk is something which we can have in ample quantity. If you allow companies to ignore local milk production and import powdered milk from outside, and make people switch from fresh milk to imported milk, it has a very dangerous consequence, not just from foreign exchange perspective but also local unemployment as well and the local potential of developing this industry.

BRR: The demand for milk is high in summer while the animal does not produce as much milk; in winters, demand is less but production is high. Is there truth in this? If so, then why can’t we make milk powder out of our own domestic milk production so that we do not have to import?

SH: Yes, there is truth to that. The people of India and Pakistan are not milk drinkers. Culturally, we like dairy products; we don’t drink milk per se. We consume milk through tea, yogurt, lassi, sweets, and milk-based chilled drinks. People tend to eat just yogurt with roti, especially in villages. In winters consumption is lower because there is a perception that yogurt and milk cause cold. Basically, these cultural factors and perception drives our consumption pattern.

Lucky Foods has not worked or looked at detailed feasibilities per se, there seems to be industry consensus that there is not enough demand for powdered milk locally and for exports for a milk powder industry to thrive in Pakistan.

All of milk in Pakistan is hand-milked; the bacteria load is so high that even after pasteurization, it does not meet international standards. In Australia and New Zealand, there are only cows which are completely milked at the parlour. In Pakistan, we have 80 percent buffaloes, which are not being milked at the parlour. Until it is hand-milked, international standard powder milk cannot be made.

BRR: Do you have crude estimates of total milk consumption pie in Pakistan? How is milk used across various sectors or products?

SH: These numbers are also not well researched by anyone in the industry. But I can share crude market estimates only for Karachi. It is said that Karachi cattle colony produces three to five million litres of milk per day, which implies that Karachi produces five to six million litres per day. Of this, domestic use is 40-45 percent while commercial use is around 55-60 percent. Commercial use is concentrated in tea and yogurt whereas the share of milk in tea in both domestic and commercial use is around 60 percent of total milk consumption. The share of ‘mithai’ i.e. sweet shops should not be more than 3 percent.

May I remind that with tea stalls, ‘dhabbas’ and hotels closed, milk sales have slashed by 50-55 percent. A few days ago, milk from Karachi cattle colony was thrown into the drains because it was not sold. Around 7 to 8 million labour has also moved away from Karachi after this lock down.

BRR: Can you walk us through your own business model. We are told that unlike other formal milk players, you are going towards buffalo milk model as against cows. What are the reasons behind this move?

SH: We are not trying to reinvent the wheel. When you say that fresh milk market is around 90 percent of total milk industry, then why should we enter the market of just 10 percent. That 90 percent milk market is basically buffalo milk. And almost 100 percent of the packaged milk market is cow milk.

Other formal milk players don’t want to get into open milk, so they use cow milk. But cow milk doesn’t cater to taste buds in Pakistan, which is why they’ve been unable to increase their share. The reason being that cow milk has 3 percent fat whereas buffalo milk has 7 percent fat. Our population is accustomed to drinking tea made with thick milk, which can only come from higher fat content of buffalo milk.

BRR: Can you make UHT version of buffalo milk?

SH: Yes, but companies producing UHT milk purchase milk at a throw away price. Buffalo milk is too expensive. A farmer who has a buffalo does not sell milk to companies; they find better price in the open market because that’s where the demand is. Secondly, buffalo’s yield is one third that of cow’s, hence the cost is quite high. Those who have cows are aware that there is no demand in the open market, so they sell it to UHT players.

BRR: What are your expansion plans with regard to herd size and retail network? Do you sell more through delivery or through retail, and is it only fresh and chilled category?

SH: The only thing we are planning right now is value added products. We wanted to offer top quality fresh milk to the market to get our brand noticed. But Mr. Muhammad Ali Tabba is very clear that the way forward is value added products.

BRR: Could you walk us through your cost components. Cost is driven by the yield of the animal, and the feed, because feed is a big component of the cost. You have a buffalo farm so that separates you from the lot?

SH: As far as buffalo farming is concerned, you cannot compare us with those who have imported cows. There are many farms in Pakistan that have imported cows from Australia, Canada, and Europe. Their cost structure is completely different, because their cows produce 30-40 litres per day. What they produce is different from what we produce. They do not have a retail proposition while we work through retail. They mostly do wholesale for UHT processers whereas we do it for our own brand, in the retail space.

We are the only formal sector farm that breeds buffalo. The most important thing we have is not milk or milk related products. Our real products are the offspring. Animal husbandry is the business of multiplication; it is not the business of selling milk. Milk is only there to sustain expenses. The herd gets multiplied by five or six in ten year’s time. It’s a painfully long drawn process but you cannot stop it if you keep at it. It’s a natural life progression.

Over the last 3-4 years, we have greater number of calves and heifers than the herd size which is in production. You buy buffalo when she is three years old, that’s her age to reproduce. It yields calves for ten years. By then she has given birth to eight females. So our cost structure is terrible at the moment because in the first four to five years, we have heifers which are not producing. These heifers don’t only drink milk from milking animals on the farm, which reduces our milk sale potential but also consume fodder, medicine etc.

BRR: Can you talk about your feed costs and costs related to health of the animal?

SH: There is a misconception that Pakistan is an agricultural country and we have sufficient amount of feed. As per National Agricultural Research Centre (NARC), Pakistan only grows 45 percent of its total fodder requirement for all its animals. Despite this, the government has allowed to export fodder and hay. Because of feed deficiency there are two problems. The meat yield and milk yield per animal is 50 percent of our potential. Instead of feeding our own animals and exporting meat and milk, we export fodder.

The second problem is that the remaining 55 percent of the animals which have to be fed are fed through imports. We import palm meal, soybean, canola meal; soybean is raw material for all these professional cow farms. If soybean is not fed, the cow will not even give half of its existing yield. The same goes for buffalo.

BRR: How much is the imported portion of your costs?

SH: The imported component is more than 55-60 percent. In addition to the oilseed-based meals, we also have pulses related meals. Medicines are 100 percent imported. In recent years, the cost of animal husbandry, especially professional farms, have risen as much as rupee devaluation.

In this situation, our feed cost has risen by 35-40 percent in these two years, and government’s price rate is still fixed at the level of 2018. Milk is one product which maintains price because adulteration levels goes up every year. With price fixation, the government is incentivising milk adulteration. The government official who sets prices doesn’t consider aspects of milk quality, even though he knows that if you add 80 percent water to milk, it will still remain white.

BRR: Do you have plans to venture towards developing the pedigree of buffalos at your farms?

SH: Breed development is not in my hands because it has no commercial viability. It requires a lot of research efforts that the government needs to undertake. I only ensure that breeds at my farm don’t get mixed, but I don’t have its genetic structure.

BRR: What do you think is the buffalo herd size in Sindh? There was a survey done in Punjab in 2016 which said herd size is much less what’s reported in federal government’s annual economic survey.

SH: Unfortunately, buffalo genocide is happening in all of Karachi’s cattle colonies. They slaughter five- day old calves because they would rather sell the milk in the market than feed those calves. In the long run that model is very unsustainable.

The business model at cattle colonies is also unsustainable because they do not keep the animal during its dry stage – which is about three months. Nor do they let them be impregnated because milk supply during pregnancy is reduced; they also give oxytocin to their animals, which prevents pregnancy.

The fact that the cost of the buffalo has doubled over seven years ago is a reflection of all this – the falling herd size. If more companies like Lucky Foods don’t come in to buffalo farming, the stock will be depleted in ten to fifteen years.