engro foods notes

1.1)         Engro foods product line

The product line include ambient UHT, powdered milk, tea whiteners, ice cream, juices & nectars, cream, flavored milk, hi-calcium milk for women. The brand names are Olper’s milk, Olper’s cream, Tarang tea whitener, Omore, Olfrute, Owsum, Lo-calorie Hi-calcium Olper’s Lite, DairyOmang.

1.2)         Competitive positioning

There are various aspects on which Engro Foods seems to stand strong among its competitors & overall in the industry. Firstly, it belongs to a very strong corporation, the giant Engro Corporation which is there since a long time now, & has achieved favorable results.

Secondly, Engro Foods has a broad range of its brands tapping various yet interrelated product lines, listed as above.Its heritage brand is one of the strongest parts of the corporation that is Olper’s because the brand has built a relationship with the consumers over the period of time through its promotion specifically designed according to the situational festivities like the aadvertisements in the holy month of Ramadan.

The corporation is quite successful in positioning its umbrella brands as well as other brands. The company is not targeting a single market segment, rather different strata’s through its brand range so that it may be in a position to grab the market share from the entire market. Besides, the advertisement also is designed &executed in a way that it hits the hard core target market. For instance, the TVCs of Olper’s&Tarang clearly portray their target profile’s lifestyle so that consumers may relate to their lifestyle and adapt its brands.

The company’s investment in farms & supply chain is definitely a smart move in the long run as it is beneficial for the time that is to come, keeping the world demand for dairy products under consideration. The company is not doing it just for the sake of business, but to make & retain the customers & consumers in order to stretch the consumer base over time, & for this, their check & balance on raw milk is really playing a vital role such as the concept of densometer introduced by EFL for the purpose of maintaining a level of 3% fat in every liter of milk that is sold in the market. In addition to that, EFL’s PR with farmers is also a big value addition to the business processes. In order to maintain a certain quality level & to look after the biological assets, EFL is pretty much concerned with keeping the vets available at any given time whenever & wherever a farmer needs them. That shows EFL’s dedication towards the business as well as its customers & consumers.

1.3)         Competitive advantage

·         Introducing yogurt in different flavors as compared to competitors

·         Shelf life of 1.5 Months

·         First Mover Advantage

·         Introducing flavored lassi for the first time in Pakistan

·         Introducing chocolate flavored lassi and yogurt for children first time in Pakistan

1)   THE PROJECT

As discussed above EFL previously playing as a major in Ambient UHT sector and got market leadership in Ambient UHT sector. The CFO of EFL during his presentation told us that EFL is planning to enter in the Chilled Dairy Sector in 2014 so, we  have decided to make a feasibility report of the entering into the chilled dairy sector.

2.1) Land

We have decided to buy a land adjacent to their old factory in Sukkur as we can use the existing facilities of Laboratory, Quality Control Cell, Finance office, Marketing Office and others.

2.2) Plant Installation

We are assuming that our plant will take 6 months for installation. The interest during construction is calculated on this assumption.

2.3) Capital Structure

CFO of EFL has also told us in his presentation that they are trying hard to reduce the level of debt and keep the debt and equity balance which is the ideal condition. In the starting the company took huge loans as EFL incurred losses continuously for 4 years and realized profit for the first time in 2010. But in 2010, the retained earnings was far less than what the required for keeping the same pace of growth that is why in 2011 they failed to maintain this. But we are forecasting that the net profit will shoot up and they will be able to retain the huge amount which results in the balance debt to equity ratio. That is why we have decided to finance this project with 50% debt and 50% equity.            

2.4) Rationale for investment

If we analyze the whole market of chilled dairy, there is only 1 giant Nestle is playing and capturing the share of that market. This ultimately means there is a chance to get the market share in this market easily as compared to others where many existing competitors are playing. The total market of chilled dairy in Liters is around 107,840,965 per year. There is huge chance in getting over the share of Nestle. We have planned to cater the weaknesses of Nestle as our strength and Inshallah we will get an edge over Nestle in very near future.

2.5) Legal status and existing operations

The group consists of Engro foods Limited (the company) and its 70% owned subsidiary company, Engro Foods supply chain (private) limited.

The company, incorporated in Pakistan on April 26, 2005, under the Companies ordinance 1984, is a listed company on Karachi stock Exchange and Lahore stock Exchange. The company is a subsidiary of Engro Corporation Limited (ECL) and its registered office is situated at 6^th floor, Harbour front building Plot no. HC-3 Block-4, scheme no. 5 Clifton, Karachi.

The principal activity of the company is to manufacture process and sell dairy, ice-crem, juices and other food products. The Company has been designated as part of the Group of Engro Corporation Limited by the Securities and Exchange Commission of Pakistan (SECP) through its letter dated February 26, 2010. Approval of the Securities & Exchange Commission of Pakistan (the SECP or the Commission) as required under Section 62, read with 57of the Companies Ordinance, 1984 (the Ordinance) has been obtained by Engro Corporation Limited the Offerer) for the issuance, circulation and publication of this Offer for Sale Document (OFSD)

2.6) Project investment and Financial Plan

Land & Building Cost	25,489,000
Plant & Machinery	400,000,000
Office Equipment	695,900
Furniture & Fixtures	8,621,000
Vehicles	19,200,000
Interest During Construction	17,959,450
Initial Working Capital	6,953,310
Total expenses	478,918,660

As we know that there are several source of financing amongst those debts and equity financing is most common, so we usually recommend them to get funds through 50% issuing shares and 50% through issuing bonds. By doing so, company would be able to stabilize them, because the default ratio would become equal on each side.

2.6) Proposed location-Land, building, its ownership status

As suggested by the company, their milk production plant is located at interior Sindh such as sukkur, becausethere are no of domestic animals that provide milk with a huge amount at a very less cost. However this would be best place because the company would be able to get raw material and labor at a very cheap cost as compared to installing it near the Metropolitan cities of Pakistan.

2)   BUSINESS OPERATIONS

3.1) Production process (the assembly line)

The whole process is all about making yogurt after using milk and different ingredient in a given standardized proportion such as fats 3.55 and SNF’s 8.2%. whileengro is using more than that. After standardization next step is pasteurization in which milk moves on to the filling machine and poured in the cup of bacteria. It then set at a temperature of 400c in order to make the bacteria grow. Then the cup moves to the glass chillers at a temperature of 40c.lastly chilled distribution vehicles are used for the distribution of yougurt. However, product has an expiry of 45 days.

3.2) Availability of water, power, gas and other utilities

There will no problem for making the necessities available as we have planned to install the plant where Engro Foods is successfully running the plant.

3.3) Child labor

As all know that Engro is now the largest corporation in Pakistan, in the history of Engro foods it has never committed any such act that harmed the society in any case and always tried hard to adhere all the government policies, laws and regulations. So concisely Engro foods in its expansion plan towards chilled dairy are not supposed to hire child for their work.   

3.4) Waste material disposal

There will be no such harmful material our waste from the production process of yogurt that can be dangerous for the society and environment in any case, even than there will be a proper disposal system for waste products (if any).

3)   MARKETING PLAN

4.1) Vision

“Elevating Consumer Delight Worldwide”

EFL is committed to its vision for launching new products to elevate consumer delight. We have drawn this idea of launching Yogurt and Lassi from their vision and this idea is fully in line with the vision of the company. CFO Mr. Imran during his presentation to CFA participant told that we will put all our effort to produce quality and delicious products to meet the requirement of the industry worldwide.

Our expansion plan is in line with the vision mainly because of two reasons. Firstly, Engro believes in doing things differently, we have decided to launch yogurt in different flavors as compared to those available and we have also decided to launch flavored lassi for the first time in Pakistan.   The second reason is that EFL believes in innovation rather than following the strategies of competitor, because of this we have decided to introduce new flavors which one might not have thought in his whole life (e.g. Chocolate Yogurt and Lassi)

4.2) Pest analysis

4.2.1) Political Analysis

EFL abides the rules of government and set its strategies according to the law and legislation. But unstable political conditions i.e. strike and road blocking may create obstacles in delivery on time.

4.2.2) Economic Analysis

Inflation in Pakistan has grown to 18.4% in 2010-11. It has a bad impact on the purchasing power of customers.  Processed milk industry is considered more costly as compare to open milk so people are unable to buy processed milk. As a result, pressure on these companies has increased either decrease their prices or to keep prices stable.

4.2.3) Socio-cultural Analysis

Common perception and norm in Pakistan is to get fresh yogurt and milk from Ganwala which is free from preservatives and healthy. To penetrate in a potential market processed milk and yogurt providers have to overwhelm all such perception and create awareness about safety and healthiness of packaged yogurt. However, it requires time to change this perception as most of people are not willing to spend on processed milk and yogurt.

4.2.4) Technological Analysis

New technology convention in effective way gives a competitive advantage. EFL only, has milk plant which uses Bactofuge Technology for bacteria eradication to ensure premium quality and hygiene. EFL use a latest technology to meet upcoming challenges. The idea behind UHT (Ultra High Treatment) investment was to provide best quality of processed dairy and food products to consumers.

4.3) Market analysis

In 2011 market size of chilled dairy was 107,840,965 liters per annum and has CAGR rate of 7%. Nestle is only player in processed chilled dairy sector and has a highest market share. As responsiveness increases and people are becoming more health conscious product buying trends are moving towards processed dairy product. Our strategy is to capture 4% of market share in initial year.

4.4) Swot analysis

4.4.1) Strengths

Ø EFL is well-established brand name.

Ø Group M is responsible for carrying out its marketing activities

Ø EFL has a patent over Mr. AsimRaza who is well known in the creative world

Ø There is a strong bond and long term relationship with farmers which is the key success factor for EFL.

Ø EFL products are swiftly adopted by consumers as they launched which indicates their satisfaction upon product taste, quality and trust in the brand name EFL

Ø EFL has done consumer and product research before and after launching new product. For future portfolio development EFL hired global research partners. (Mindshare, AC Nielson, JWT Asiatic and Mars marketing)

Ø EFL’s timely technological advancement always gave competitive advantage in the industry.

4.4.2) Weaknesses

Ø Large travelling distance from farmers to processing plant increases the distribution cost.

Ø EFL has to ponder over timely distribution as it is observed that customers walk in to nearest retailers where the product is not available.

Ø EFL is not creating awareness about benefits and premium features of their own products. EFL does not focus heavily to create awareness for the processed milk industry which is very crucial in raising demand.

4.4.3) Opportunities

Ø Emergent dissatisfaction with loose dairy products and increasing awareness about health and hygiene will lead to increase the consumption of processed milk and yogurt products.

Ø According to the statistics of 2011, 93% of the whole dairy industry is untapped, EFL has chance to explore the needs and penetrate in this segment.

Ø Price differential is the key factor for penetrating in the market. If EFL reduces the cost, then EFL can grasp much of the market share and can stand as a leader.  

4.4.4) Threats

Ø Price differential is a great threat for EFL that loose milk & yogurt are cheaper than processed milk & yogurt and people still prefer to buy loose yogurt.