ECONOMY OF PAKISTAN

REPORT ON

BEVERAGE INDUSTRY IN PAKISTAN

 Acknowledgment
We would like to express our gratitude to all those who gave us the best support to complete this

report. First, we want to thank Almighty Allah who gave us the strength to work on this report and

made it successful. Sincere thanks to all the people who have contributed to and worked on this.

We are deeply indebted to our instructor Mr. Michael Simon whose help, encouragement and

stimulating suggestions have been the best motivator for us. He helped us each time we went to him

for discussion on the report and writing of this report.

Last but not the least I would like to appreciate the efforts put up by my colleagues who were always

ready to provide every sort of help in every context of this report, with which we were able to make

this report a success.

Table of Contents

ECONOMY OF PAKISTAN.................................................................................................................1
REPORT ON .........................................................................................................................................1
BEVERAGE INDUSTRY IN PAKISTAN...........................................................................................1
Table of Contents...................................................................................................................................3
1.Executive Summary.............................................................................................................................1
Beverage Industry in Pakistan................................................................................................................2
2.1 Slower Growth with Decreasing Purchasing Power....................................................................4
2.2 Increasing Consumption of Diet Products and Bottled Water.....................................................4
2.3 Increasing Purchases at Department Stores and Discounters.......................................................4
3.The Scope............................................................................................................................................6
Problems of the Beverage Industry during the Current Socio-Economic Situation...............................7
SWOT Analysis......................................................................................................................................9
Production of Beverages.......................................................................................................................10
Major Players of the Beverage Industry...............................................................................................12
Pepsi ................................................................................................................................................12
7.1.1 Pepsi Pakistan......................................................................................................................12
7.1.2 PepsiCo Inc Remains Market Leader with New Product Launches....................................13
Coca Cola Company.........................................................................................................................14
7.2.1 Coca Cola in Pakistan..........................................................................................................14
7.2.2 Production Capacity and Sales............................................................................................15
7.2.3 Kinley..................................................................................................................................15
Fruit Juices............................................................................................................................................16
8.1 Fruit Juice Industry – Potential Barriers.....................................................................................18
Trade Statistics and International Target Customers............................................................................19
Prospect for New Entrants................................................................................................................20
Conclusion............................................................................................................................................21
Bibliography.........................................................................................................................................22
1. Executive Summary

Pakistan’s Beverage industry is one of the top industries. It’s operating with around 170 units.
And its sales volume is up to 30.5%. The beverage industry in Pakistan, currently having a size
of little over 120 million cases per annum with an annual growth of around 10-15 per cent, has
the potential to double its size in the next 3-5 years, if the government's taxation policies towards
this industry are corrected.

Tea which is the second largest segment of beverages, share in net sales and operating profit
during 2008 was at 32% and 18%, respectively.

Among carbonated drinks, about 84 million cases 70% per cent are Pepsi products; about 26 to
28 per cent are Coca-Cola products and remaining are other local cola drinks.

Challenges faced by beverage industry are the high prices and unavailability of sugar and also
the taxes and excise duty, subjected at the rate of 12.5 percent and sales tax at the rate of 15
percent on the retail price. This is the reason that beverage industry at the moment has very low
per capita consumption of 20 serves whereas in other countries of our region it varies from120-
250 on the basis of single serve of 250 ml.

Growth of the industry is slowed due to intense competition from the foreign products and also
because of the decreasing purchasing power. Competition is also because of the large number of
hyper marts which offers greater variety of carbonated drinks to consumers.

Soft drinks market in Pakistan has increased at a compound annual growth rate of 6.4% between
2004 and 2009. And the carbonated category is the leader in the soft drink market with a share of
63.7 %. Pakistan’s Soft Drinks Industry Is Set to Experience Volume Sales Growth of 30.5% to
2010.This reflects such a huge market to cater.
Beverage Industry in Pakistan

Running a business in today's globalized world does not often offer easy times, as Pakistan
normally scores quite low on global competitiveness indicators. One such industry in Pakistan,
that seems to be bucking this trend however, is the Beverage industry. According to the
“www.accountancy.com.pk” the growth in the production of beverage industry is 30.5% during
2008-2009.

The beverage industry in Pakistan has grown over the time. The industry produces soft drinks,
juices, syrups, milk, and squashes. With about 170 units currently in operation throughout the
country, both upstream and downstream industries have grown and are flourishing. Pakistan’s
soft drinks industry is set to experience volume sales growth of 30.5% till 2010.

The beverage industry in Pakistan, currently having a size of little over 120 million cases per
annum with an annual growth of around 10-15 per cent, has the potential to double its size in the
next 3-5 years, if the government's taxation policies towards this industry are corrected. There
are 34 beverage plants in the country and this is one industry, which is very well organized. Job
oriented in nature, the beverage industry employees over 500,000 people directly and indirectly
and also supports many other up/down stream industries such as crown corks, glass bottles,
plastic shells, sugar, transport, advertising and media, P.E.T bottles, concentrates etc. due to this
industry a huge number of outlets/shops are supported to generate wide-spread economic activity
in the country

Beverages, the second largest segment consists of various brands of tea. Beverages share in net
sales and operating profit during 2008 was at 32% and 18%, respectively. Net sales of the
segment posted a healthy growth of 22% in 2008 to PKR 9.6 billion. Sharp increase of 24% in
Kenyan tea prices as well as depreciation of domestic currency reduced the margins of the
segment to 23% in 2008 from 28% in 2007. Lipton is the key brand in beverages segment of
Unilever Pakistan. A leading carbonated drink brand has its annual sale up to 175-180 million
crates.
About 84 million cases 70% per cent are Pepsi products; about 26 to 28 per cent are Coca-Cola
products and remaining are other local cola drinks. Due to the Afghan and Iraq wars, local Cola
did get a little footing especially in the frontier and Islamabad area but still they are not
immensely popular.

Success of the cold drink industry is depends on the sugar as it is the key input in beverages.
According to the Federal Bureau of Statistics the production of beverages declined by 3.7% as
the prices of sugar rose sharply in recent months. Another challenge faced by the beverage
industry is the taxes and excise duty. Beverages are subject to excise duty at the rate of 12.5
percent and sales tax at the rate of 15 percent on the retail price. In addition to a 16 percent sales
tax, carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on
soft drink concentrate and a 12 percent tax on finished carbonated soft drink beverages.
Therefore, high duties on machinery and raw materials, which are not available locally, are a
disincentive to companies that want to establish manufacturing facilities.

The beverage industry at the moment has very low per capita consumption of 20 serves whereas
in other countries of our region it varies from120-250 on the basis of single serve of 250 ml. This
is definitely due to the heavy taxation, as the price of the product is very important and especially
in our country where clean drinking water is not available and our products has to be affordable
to a common man which it is not at moment.

Report revealed that US investors in Pakistan’s beverage sector, for instance, are targeted with
higher taxes than domestic companies and those from third countries that manufacture competing
beverages such as fruit juices, tea and bottled water. In addition to a 16 percent sales tax,
carbonated soft drinks are subject to double taxation with a 50 percent input tax levied on soft
drink concentrate and a 12 percent tax on finished carbonated soft drink beverages. Therefore,
high duties on machinery and raw materials, which are not available locally, are a disincentive to
companies that want to establish manufacturing facilities.
2.1 Slower Growth with Decreasing Purchasing Power

The economic crisis hit Pakistan hard, and the consumer purchasing power dropped significantly.
Carbonated drinks volume growth slowed down due to increasing poverty, and rising unit prices
have also put downward pressure on volume growth. Competition has increased with the wide
availability of imported products and additional products from local manufacturers at the rate of
25 per cent every year but now this growth has gone down instead, because of excessive taxation
policy on this industry, which is 36 per cent of the retail price.

2.2 Increasing Consumption of Diet Products and Bottled Water

The beverage industry at the moment has very low per capita consumption of 20 serves whereas
in other countries of our region it varies from120-250 on the basis of single serve of 250 ml.
Consumer demand for ‘diet’ products has increased. New products from international companies
which are major share holders in carbonates have been well received and imported products in
the juices category have also attracted a lot of consumer attention. On the other hand, bottled
water consumption has increased with the deteriorating water supply in urban areas and
increasing health consciousness. This is definitely due to the heavy taxation, as the price of the
product is very important and especially in our country where clean drinking water is not
available and our products has to be affordable to a common man which it is not at moment due
to 36 per cent of taxation, whereas in this region taxes vary from 8-15 per cent of the retail price.
Today when the economical conditions all around the world are in recession and this product
price is very much sensitive and elastic to the retail price.

2.3 Increasing Purchases at Department Stores and Discounters

Department store chains are aggressively opening up branches in different areas of the country.
This gives consumers a choice, but creates a competitive environment for carbonated drinks
manufacturers. With rising poverty and reduced disposable income, people prefer to shop at
Government owned discount stores and big departmental stores that give discounts on bulk
purchases like Makro and Metro.
 POLITICAL ECONOMIC
1. Political instability may affect: the 1. The cost of raw materials e.g. soda ash
ability to acquire of form a strategic for glass manufacturers, HDPE for
business alliance with suppliers, plastic bottles and sugar have increased
activities that make necessary to further impact the price of the cold
infrastructure enhancements to product. Production of beverages
production facilities, distribution (weight, 0.28%) declined by 3.7% as
networks, sales equipment and the prices of sugar, one of the key
technology. inputs in beverages rose sharply in
2. The security measures taken by the recent months. (ESP - 2008-9)
government have increased the cost of
doing business. The anti-terrorism
campaign has caused inefficiency in
allocation of resources, as increasingly
resources have been diverted to
security matters at the expense of
economic development.

3. In addition to a 16 percent sales tax,

carbonated soft drinks are subject to
double taxation with a 50 percent input
tax levied on soft drink concentrate and
a 12 percent tax on finished carbonated
soft drink beverages. (High Taxation –
figures can be double checked)
SOCIAL TECHNOLOGY
1. Practice of “healthy life-styles” has led 1. New Marketing Techniques and E-
to a shift in consumption of Carbonated Commerce
Soft Drinks – switching to bottled 2. Introduction of bottling technology is
 water and diet colas. hindered by duties on machinery and raw
2. High Population Growth Rate . materials – not available locally.

3. The Scope

Soft drinks market in Pakistan has increased at a compound annual growth rate of 6.4% between
2004 and 2009. And the carbonated category is the leader in the soft drink market with a share of
63.7 %. Pakistan’s Soft Drinks Industry Is Set to Experience Volume Sales Growth of 30.5% to
2010.This reflects such a huge market to cater.

Coca-Cola and Pepsi are two companies that have fought hard to be on top in the beverages and
nonalcoholic industry. Scope of beverage industry is very vast in Pakistan as there is sluggish but
potential growth in the market.

Other companies like Redbull bringing in new drinks that are targeting the youth. According to
the statistical bureau of Pakistan, Pakistan youth is composed of 70% of the total population.
Hence there is a huge market potential
Problems of the Beverage Industry during the Current Socio-
Economic Situation

Primarily, this industry faces three issues.

1. The first issue is the security concern which is hampering business all over the country. In
Karachi, for instance the sales volumes have considerably decreased due to security issues.
The last two years for the Coca Cola Company have been quite testing. If the situation does
not improve, the foreseeable future business will further go down in these areas.

2. Secondly, the taxation structure on the beverage industry has also been a cause for great
concern. When compared with other countries in the region such as India, Sri Lanka, Nepal
and Bangladesh; Pakistan has the highest taxation rates on beverages. This in a way is
discriminatory as other industries in Pakistan are not taxed at the same ratio. For the last eight
years, the beverage industry has time and again raised this issue with the government.
Reduction in taxes will give organizations more room to invest. Hence, with increased
investment and resultant increased production volumes the government stands to earn more
in taxes.

3. Third and the most vital issue is the presence of spurious and fake products in the market
which make up almost 8 percent of the total market share. These inferior quality drinks are
causing serious health concerns and also bring a loss of almost 650 million rupees annually to
the government in tax revenue.

The beverage industry has raised voice against these concerns several times and expects the
government to bring a law into place and levy punishments on spurious product producers. A
strict check and balance and punishment procedure from the government towards spurious
products producers is lacking which in the end is problematic not only for the beverage industry
but for the consumers as well.
SWOT Analysis

 STRENGTHS

• Renewal and investment

• Innovation and Technological development

• Experience in searching for new markets, niches and partners

• Availability of key raw materials, cheaper labor costs and presence across the entire value
chain gives India a competitive advantage.

 WEAKNESSES

• Old technologies and poor work organization

• Insufficient pace of creation and implementation of innovations

• Insufficiently effective activities of small and medium-sized businesses

• Change in household consumption patterns

 OPPORTUNITIES

• Presence of a favorable market

• Market globalization

• Foreign direct investment promoting knowledge and developing export channels

• Transfer of production to the countries with smaller labor costs

• Well established distribution network

 THREATS

• Unfavorable market trends in energy resources

• Increasing competition among exporters and decreasing dependency on one market

• Intense competition between the organized and unorganized segments and low
operational cost.

• Water scarcity in Pakistan

• Implementation of Goods and Service tax by 2011

Production of Beverages
According to Economic Survey of Pakistan 2009-2010
Major Players of the Beverage Industry

The two major players of the beverage industry are Pepsi and Coca Cola. They have more than
75% market share. In addition fruit juices are also gaining their market share slowly as people
are learning more about the disadvantages of using a carbonated drink. The companies are
having large annual turnovers with wide range of product portfolios which include all kinds of
beverage drinks from soda to energy drinks. These companies are having a large variety of
products like soda, water, Colas, Fruit based drinks, Milk beverages.

Pepsi

Pepsi International is a world most admired company. It is a very well organized multinational
company, which operates almost all over the world. They produce; one of best carbonated drinks
in the world. Pepsi is a symbol of hygiene, quality and service, all over the world. Pepsi is
producing Cola for more than 100 years and it has dominated the world market for a long time.
Its head office is in New York.

7.1.1 Pepsi Pakistan

Pepsi started its operations in Pakistan in 1971. Pepsi was put up their first plant of Pakistan in
Multan. Pepsi is the first choice of every one in soft drink. Pepsi is popular in all age groups due
to its distinctive taste. As compare to the other Cola brands in the market, it is bit sweeter which
contributes greatly to its liking by all.

Against the biggest competitor Coca Cola, Pepsi use its aggressive marketing planning and
diversification in creating and promoting new ideas is successfully maintaining its No.1 position
in Pakistan. Pepsi strong their portfolio by adding new brands of cold drinks which make them
stronger than their competitors. Due to the strong portfolio Pepsi enjoy 70% market share in cold
drink industry where as its strong competitor coke just has 28% market share.

To maintain the power of brand name Pepsi make sure the availability of their products so that
they can gain edge over their strong competitor Coke. Pepsi also advertise their brand creatively,
which stands Pepsi apart from competitors.
PepsiCo is an international cold drink brand and the leader of Pakistani beverage industry. Their
vision is to be the world's best beverage company. Being the best means providing outstanding
quality, service, cleanliness and value, so that their every customer is satisfied and happy with
their products.

7.1.2 PepsiCo Inc Remains Market Leader with New Product Launches

PepsiCo Inc has introduced new diet product that has been well received and supported by
good marketing activities. This new launch will help PepsiCo Inc to increase its share in
the market and prove to be tough competition for Diet Coke. Juices manufacturers have taken
their lead from Nestle by offering 100% concentrate products across the country. Bottling
companies are facing stiff competition from local unregistered companies that sell a class,
urban areas. (Pepsi, 2010)
Coca Cola Company

The Coca Cola Company started its operations in Pakistan in 1953 with the first bottling and
concentrates plant in Lahore. The organization then gave out franchises taking the number of
bottling plants to six. Fifteen years ago, the company acquired back the bottling plants and today
all of them are owned and operated by the company itself. This gives them the benefit of
controlling the quality of product and also to bring about efficiency in overall operations and
procedures of the company.

As far as the beverage industry in Pakistan is concerned, Coca Cola is the second largest player
in the market. The local beverage market is primarily dominated by carbonated soft drinks with
each company having its own strategy of acquiring the market share. Coca Cola currently holds
31 percent of the overall beverage market share and aims to increase this share further through
increased investments.

In the last five years the organization has invested over 220 million dollars and has committed
publicly to invest another 250 million dollars in the next three years.

7.2.1 Coca Cola in Pakistan

Being the largest beverage name in the world, the core business line has always been beverage
and the focus still remains. The Coca Cola Company is ranked high in terms of innovation.
Globally, the organization is producing more than 3500 products with diverse ranges such as
dairy drinks, coffees, sports and energy drinks.

Currently in Pakistan, there is a very interesting product range which comprises of carbonated
soft drinks and juices. Minute Maid, which was launched two years back, has been extremely
popular with the consumer. Owing to the positive response from the consumer, the organization
is expanding its range and introducing new flavors for the product in the next year.
7.2.2 Production Capacity and Sales

In the last ten years, Coca Cola has nearly doubled their sales. The organization is expanding
with two new production plants being established, one in Karachi and the other in Multan. These
production plants are expected to increase the growth in double figures in the next year. This
gives the organization an edge as it will be better equipped to serve the consumer with increase
production as well as more portfolios.

Coke and Sprite dominate overall sales of the organization. On the other hand Minute Maid, the
juice brand, which is relatively new in the market, has also been extremely successful.

7.2.3 Kinley

Kinley water understands the importance and value of the life giving force. Kinley water comes
with the assurance of safety from the Coca-Cola Company. Coca-Cola introduced Kinley with
reverse osmosis along with latest technology.
Fruit Juices

The fruit juice coupled within beverage industry is considered to be one of the largest industrial
sectors in Pakistan. It is expected to be growing at a robust rate of 20-25%. Modernization of this
industry, in consonance with the change in urban life style, massive shift of rural population to
the urban areas, growth in population, etc., predict a growing potential for instant solutions in
fruit juice segment of the beverage industry. Traditionally in Pakistan and generally all over the
world people prefer to use natural drinks rather than carbonated soft drinks and this perception is
gaining more currency day by day which also adds to the advantage of the fruit juice industry.

Around 70% of the total fruit juice market is accounted for by 250ml tetra pack servings while
the rest 30% includes 500ml and 1000ml packs. This shows significant convenience (from
consumer’s perspective) and high sales frequency in 250ml package category. Based on this
market situation, it could be observed that the entrepreneur should focus more on small serving
packs rather than one liter or other serving sizes.

Currently in Pakistan, there are 24 fruit juice/pulp processing units and a number of small units
in the informal sector are working. The present installed capacity is estimated around 400,000
metric tons per annum with an estimated growth rate of 20% to 25% annually (EAC-2003 and
discussions with the industry experts). The fruit juice market is estimated around 2.5 billion to
2.8 billion Rupees.

Common people especially young generation is inclined to have ready to consume drinks; in
addition hotels, hospitals are also expanding day by day where juices could be marketed
successfully. Moreover the global trend of preferring fresh fruits and juices also marks
possibilities of growth in this sector. Furthermore, the growing exports volume and withdrawal
of CED (customs and excise duty) on fruit juices (produced locally) could further supplement
significant growth in the fruit juice industry.

For industrial scale manufacturing of fruit juice, pulp is used which is available round the year;
on the other hand, fresh fruits are also being used for 100% pure juice production. However,
based on our discussions with industry experts, we understand that business viability could be a
question mark when fruit juice business starts with fresh fruits processing.
It is absolutely necessary for someone starting a juice manufacturing operation to be familiar
with the regulations and requirements of the market. For commercial purposes, it is important to
define the differences (from other juice products) carefully and ensure that specifications and
labeling are correct. There are circumstances where a 100 percent juice or puree product is
impractical while dilution with other juices and/or water and sweeteners are practical, as long as
the products are correctly identified. Water, sugar, organic acids and low cost bulk juices are
much cheaper than higher value fruit solids.
Most of the fruit juice manufacturing units are operating in Lahore, Sargodha, Bahawalpur,
Hyderabad, Gujranwala, Hattar NWFP and Karachi. The following table presents a synopsis of
some well known local and imported brands:

Following are considered to be the major players of fruit juice industry. Some of them have
closed their operations due to political instability during the last five years e.g. Monalisa and
Sunflo Cit-Rus:
Currently Shezan is giving tough time to other fruit juice manufacturers due to its quality and
huge export volume as well as capturing local fruit juice market where it has competition with
Nestle. Most of them offer fruit juice in tetra packs where squashes and syrups are available in
glass bottles.

8.1 Fruit Juice Industry – Potential Barriers

1. A significant number of fruit juice manufacturers have imported cheap, second hand
machinery which is inefficient with high cost of production.

2. The packaging material, such as glass bottles are inconvenient and expensive.
3. Many manufacturers use small percentage of real fruit juice, rendering low quality product
not offering a long life.
4. Many units were established through bank loans. The project owing to various reasons could
not generate sufficient funds to repay loans and have turned into sick units.
5. Lack of infrastructure and limited budget for advertising & publicity.
6. Most consumers continue to show a preference for fresh foods.
7. High cost of processed food due to high input, processing & packaging costs.
8. Low income coupled with erosion in purchasing power
9. Inadequate infrastructure facilities including storage & transportation facilities.
10. Lack of awareness of standards required for processing of foods.
Trade Statistics and International Target Customers
There is a lot of potential to export fruit juice from Pakistan to other countries i.e. U.S., European
Union, South Korea and UAE etc., Five years summary trade data relating to fruit juice is
provided in the following table:

Year 2007 2006 2005 2004 2003

Exports 4,583 3,792 3,965 5,357 5,864

Imports 1,063 743 848 836 722

In Mt
Prospect for New Entrants

There is a huge potential for this business to grow in Pakistan as more than 60 percent of our
population is below 30 years of age. The initiation of this business depends on the level of
investment that an investor can make. Establishing a production plant requires ample investment;
however, other areas in the beverage industry such as distribution can be a great venture for
investors who do not have the resources to make huge investments.

In the last couple of years, we have seen a number of local brands come into the market and have
made a place for them on some level. However, what needs to be considered here is that it is not
just about setting up a business only; it is about getting into this business keeping in mind
international standards of product quality and production process.
Conclusion

Pakistan at this point in time is facing dire socio-economic problems. However, in the face of
natural calamities and social unrest the country is still moving forward, with an economic growth
rate of 3.2 percent. This shows the potential that this country has and its capacity to deal with and
move forward towards a positive direction in the worst circumstances.

In a similar way, Pakistan has one of the lowest per capita consumption of soft drinks which
makes a huge potential for the beverage industry to grow, in fact grow manifolds in the next ten
years.

Therefore, the government and CBR should abolish excise duty as we have sales tax on the
products as well which is double taxation, this in turn will allow to readjust the retail price and
maintain at an affordable level which will make sure that the industry grows at a faster and
higher rate which ultimately will increase the total revenue of the government which at the
moment is over Rs5.2 billion.

"It must be noted here that the beverage industry is the 3rd largest revenue participant of CBR”.

Beverage industry has tremendously changed in the last 10 years due to more aggressive
participation and marketing strategies of the two multinational brands known all around the
world i.e. Pepsi and Coke. Currently, 95 per cent of the market share is held by these two brands
and the rest by some other foreign and local brands, therefore, your point of view is correct as the
local brands of this country are also not being given any special incentives to grow. The focus of
the government and its economic policies is on export-oriented industries only which we believe
is correct but at the same time the government and policy makers should also keep in mind that
all those industries which may not be export oriented but to generate economic activity inside the
country should also not be neglected, that is industries like construction and consumer product
industry such as confectioneries, food and beverages.

"Due to the economic downturn the government should provide special incentives to the
beverage industry by way of reduction in taxes to provide a chance for them to push forward
their growth by maintaining affordable prices to generate maximum economic activity,
especially the food items which can be kept within the reach of common man".
Bibliography
http://www.finance.gov.pk/survey_0910.html

www.google.com

www.wikipedia.org

www.sbp.org.pk

www.pepsico.com.pk

www.thecoca-colacompany.com