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Engro Foods

By nadapervez Nov 03, 2014 2436 Words

ENGRO FOODS LIMITED (EFL) CASE STUDY
Vision Statement:
“To be the premier Pakistani enterprise with global reach, passionately pursuing value creation for all stake holders” _____________________________________________________________________________________ Engro Foods Limited is a wholly owned subsidiary of Engro Corporation. It started its operation just 7 years back with only 20 employees. In year 2013 EFL had 1300 employees with sales reaching Rs.40 billion. Engro Foods Limited (EFL) is considered as one of the fastest growing company of Pakistan and is already operating at global level. Engro Food Limited used dairy as a stepping stone to enter the food business. EFL has established state of art dairy processing units with multi product manufacturing facilities in Sukkur (Sind) and Sahiwal (Punjab)). Top dairy brands like Olper’s, Olwell, Tarang , Omore , Omang Lassi and Owsum have been launched under the category of dairy products. To support these brands and their higher standards of quality, Engro Food has invested heavily in milk processing and milk collection infrastructure. The company has also taken initiative to step out of diary sector with the launch of juices under the brand of Olfrute. The factory for Olfrute has been established in Sukkur along with the milk processing plant. The company has established state of art rice processing factory in Muridke ( Punjab). The company is also exporting high quality branded rice all over the world. The company is continuing its aggressive business strategy of growth and related diversification into new product ranges and is achieving high volume growth. Under the dairy category, Olper’s brand was launched first and is now considered to be the leading brand in UHT –processed milk category in Pakistan. Olper’s brand is known for several marketing campaigns which were larger than life and have completely redefined brand communication in Pakistan. EFL have invested heavily in infrastructure of milk collection. In year 2013 company has 1300 milk collection units which collected milk from 160,000 farmers. Through Eman program farmers are immediately informed about the quantity of milk collected through sms and payment details are also provided . Collection of milk, quality check and payment details are handled in a transparent manner. The most profitable brand of EFL is “ Tarang” this brand has 70% market share in tea whitener category. Marketing campaign of “ Tarang hi Tarang hai” was a phenomenal success . Marketing Association of Pakistan awarded Tarang the title of “ Brand most often used”. EFL Ltd has 51% market share in processed milk market and is consuming more than 1 billion tetra packs in one year. One market analyst was of the opinion that taste wise “ Olfrute” is not different than Nestle “Fruitavitals” but Olfrute carries unpleasant smell and price wise there is no significant difference. Nestle has been very successful with their “Getreal” campaign while brand communication of Olfrute has not been effective. It is important to be better in taste, smell and freshness for Olfrute to challenge Fruitavitals. The other advantage which Nestle “ Fruitavitals “ has got that they have huge fan following on the facebook with 750,000 likes while Olfrute presence is not really significant they have 30,000 fans. The company‘s model dairy farm “ Nara” has started functioning and is currently producing 21, 500 litres per day with a total of herd size of 2,591 animals of which 1,260 are milking. The farm has successfully provided a demo effect to encourage dairy farming in Pakistan. In the rice trading business Engro Eximp (handles rice export & marketing) successfully built relationships in international markets and exported 10,000 tons of rice during 2013. The company intends to export branded rice all over the world. EFL brand “Omore” is the second largest player in ice cream industry of Pakistan with a market share of 18%. In year 2013 EFL was still losing money in ice cream segment. One analyst said that company has been innovative but ice cream requires special management and break through innovations because of severe electricity shortage in the country. According to CEO of EFL the ice cream industry needs an uninterrupted power supply unlike the milk industry where it’s possible to manage with a fluctuating power supply. Mr. Rahman CEO of EFL stated that in this business “there is no shortcut. This problem will remain until our country comes out of the power crisis. Engro Corporation has also entered into an agreement with US-based Al Safa Halal to purchase its food business. Al-Safa Hilal has been paid US$ 6.3 million by Engro Food Limited, though the company stated that its acquisition, inventories and brand-building efforts would cost up to $15 million (Rs1.3 billion). EFL Limited floated 27 million shares to the public in the first week of July 2011 at a price of Rs.25 per share inclusive of Rs. 15 premium, Rs. 675 million was collected which according to the management has been used in financing the purchase and expansion of Al Safa Hilal at international level. One market analyst was of the opinion that Engro Food is expanding at a phenomenal pace, the company needs to consolidate their operations now rather than buying foreign companies which sells Hilal food while their strength in Pakistan lies is on dairy products. The analyst further stated that Nestle Pakistan has invested $413 million in Pakistan mainly to stop the growth of EFL in juice and milk sector. Engro has been voted as the best place to work for in the last two consecutive years. Management gives lot of importance to training of employees and work life balance. It is the policy of EFL to attract, induct, develop, retain and motivate high caliber talent who are qualified, capable and willing to contribute their best towards accomplishment of Company objectives. EFL always strives to think outside the box to create products that help gain preference and provides the greatest value to its customers. EFL is also the first company in Pakistan which has equipped its products with the Swedish packaging technology named as ‘Ecolean’. This technology gives you an option of light weight environmental packaging. EFL won the G-20 Award for ‘Inclusive Business Innovation’ at the prestigious G20 leaders’ 2012 summit in Mexico. With competition from 290 business models from emerging economies across the globe, EFL was among the 15 businesses selected for their innovative, scalable and commercially viable methods of working with low-income people in neglected communities. EFL has introduced a procurement and collection mechanism which is transparent and reflects the highest principles of responsible sourcing. In their efforts to bring innovation to the sector, EFL ensures that once milk is collected from farmers, payments are made directly through cash as credit to their accounts. By developing a system known as EMAN company is ensuring real time entry of milk collection and payment is done promptly to farmers. New marketing communication channels are being used by Egro Foods. Company launched a classic hit TV series “ Tanhaniyan” under the name of “ Olphers Tanhaniyan”. Now under the name of Tarang full house” the company made old successful movies like “ Arman” “ Dil Mera Dharkan Teri” and “Anjuman”. These movies were shown on GeoTv. Omang Dobala was initially launched as fresh cream in urban cities but after realizing the potential this was re-launched in tribal areas of Pakistan. Omung Dobala is now very successful in the labour segment of Pakistan. It is popular in rural segment of Quetta, Peshawar, Baluchistan and Afghanistan’s tribal regions. Omung Dobala is mostly consumed with roti and parata as a cheap alternative to natural butter. Dairy Omung has been launched to replace loose unhygienic milk . Dairy Omung price is less than loose market. Dairy Omung has been classified by the company as dairy liquid. One blogger Hina Safder writes that Dairy Omung 1 Litre is costing Rs. 65 while loose unpacked milk is available for Rs. 75 while branded packaged mil is available for Rs.85 to Rs.90 She has asked what is dairy liquid and how can a company sell pasteurized milk, after UHT process and tetra packing sell less than loose milk. Is it really milk? Overview of Instant Drinks and Frozen Foods Industry in Pakistan Pakistan is sixth most populated country in the world with an ever increasing population. The changing demographics and psychographics of the country owing to factors like an increasing rural to urban migration, rising income levels, etc. have contributed to a rise in the consumption of frozen food and instant beverages. Instant Drinks Industry

Instant Drinks can include cold and hot drinks both. Here, when talking about instant drinks we will only refer to instant cold drinks which comprise of powdered juices or squashes which need to be dissolved in water for consumption. Pakistan experiences long summers during which the consumption of juices is on the rise. These instant drinks refresh you during the extreme temperatures as well provide you with instant energy. It is highly probable that every middle or high class household in Pakistan would have one or the other instant juice pack available because children as well as adults like to consume these drinks at breakfast or when they get home after work or just generally when they want to consume something refreshing, cold or sweet. Moreover, as compared to soft drinks these instant drinks are healthier as well as cheaper. Similarly, the juices available in tetra packs are costlier than instant drinks. These are also easier to store because they do not require refrigerators nor do they occupy much space and you can make exactly as much juice as you require. Furthermore, these instant drinks are also available in sachet packs except for squashes which are only available in glass bottles. Some instant drinks available in the market are: Tang: It is manufactured by Kraft Foods Pakistan. It is the largest player in the market. It has been there for a long period of time so the consumers are well aware of the brand. The Orange flavor is highly popular. Sunsip: It is manufactured by King’s Food. It has been pitched against Tang in the market and targets the same segment. Its Limopani is the most popular variant of the brand. National Fruitily: It is manufactured by National Foods Limited Karachi. It is a comparatively newer player in the market. Energile: It is manufactured by Unilever. It is a very old player in the market. Frozen Food Industry

Frozen Foods are convenience foods that are ready to eat or cook for the end-consumers and they can easily be stored in freezers. The frozen food category is a fast growing segment due to the changing demographics of the country such as greater participation of women in workforce. The lifestyles of the Pakistani public, particularly in the urban areas have evolved to a great extent. Lives have become fast paced therefore people are looking for quicker and convenient foods so that more time can be spent out of the kitchen. This need has been fulfilled by frozen foods. Moreover, these foods provide value for money since they taste good and you do not need to put an effort into preparing a meal that is healthy and tasty as brands now offer wholesome and nutrient rich foods. Also, hospitality is a part of our culture so frozen foods help us when unexpected guests are visiting. In Pakistan, a few players in the frozen foods industry have formed an oligopoly. These players include K&N’s, Menu, Mon Salwa, and Dawn. Sufi is a new player in the market. These frozen foods can range from meat based products to wheat based products like Parathas,Kababs, nuggets etc. Other than this, the frozen foods industry requires proper facilities for transporting, storing, and marketing its products from the processing plant to consumers which involves a large amount of capital investment. Also, prolonged power outages in Pakistan require manufacturers to invest largely to develop their own cold chains. Moreover, retailers also have to have the knack of dealing with frozen foods so that they do not go bad if proper temperatures are not maintained. Expansion Dilemma and Challenges faced by Engro Foods Limited EFL Canada has already had a poor experience with its halal meat brand Al-Safa Halal in Canada and North America since it was established in 2011. The company is reported to have incurred a loss of Canadian $707 thousand in the first half year 2013 due to tough competition faced in the region and emergence of new players taking over the store shelf space & the brand is still unable to earn a profit. With this performance in frozen meat segment abroad, will EFL be able to compete in the local market? EFL has already established its pilot project in the meat category in Pakistan. Once this is established, it can move into the frozen meat segment. However, due to ongoing load shedding and severe power crises, its frozen food business might suffer, just like the ice-cream business which incurred a loss of Rs.125 million in2013. A complete new set up of production plant and machineries will be required to diversify into frozen food and instant drink segments which require very heavy investment in the production & manufacturing facilities. EFL is already struggling to develop the infrastructure & distribution network for its ice-cream industry; will it be able to further widen its marketing & distribution network for new product? Moreover, new labor force would need to be hired to carry out the business operations in the new products which demand the up-gradation of skills of existing labor force & the procurement of new training & research facilities. Top management of EFL is required to devise sound strategy to use its existing resources & to create more to expand its operations into other businesses but any decision regarding the expansion should take into account the overall strategy of the company . At the same time, future expansion program should maximize the overall value of the EFL. FINANCIAL POSITION OF ENGRO FOODS LIMITED (EFL) Rupees in Million 2006 2007 2008 2009 2010 2011 2012

Net Sales 1,506 3,631 8,173 14,665 21,050 29,859 40,169
EBITDA (509) (706) (323) 246 1,656 2,412 4,823
Net Profit/(Loss )for the year (428) (620) (554) (435) 177 891 2,595 Total Assets 1,987 4,329 7,326 9,004 14,031 16,639 22,189
Long term debt/ Equity ratio 23% 51% 50% 50% 47.5% 43.5% 37.5% Current ratio 0.92 1.38 1.96 1.26 1.53 1.80 2.1
Gross Profit Ratio 7.2% 12.8% 17.1% 21% 22.2% 25.7%
Net Profit to sales (17.5) (6.8) (3%) 0.8% 3% 6.5%
Return on equity (55%) (21%) (13%) 3.4% 12.3% 25.8%
Earnings per share (2.3) (1.0) 0.3 1.2 3.4
Inventory Turnover 8.6 10.1 10.2 9.8 9.7

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