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CONTENTS

10 How will Pakistanis get vaccinated for Covid-19? 13 Najam Sethi's turnaround of Mitchell's off to slow, but promising start

14 14 Tripack Films swings back to profitability in 2020 16 Daraz is number one in Pakistani e-commerce. Can it stay that way?

23 23 In 2020, Big Fauji does alright, while Little Fauji has a blowout growth year 25 Fauji Foods losses continue, despite revenue growth

26 Why are advertisers in Pakistan investing in eSports?

31 31 With high-end, value added products, Challenge Fashion propels Pakistanâ€™s textile industry to do better 34 Pakistanâ€™s urban upper middle class obsession with luxury dogs is making people big money

Readers Say Clearly the fault lies with both the Board of Directors as well as the CEO. Without any vision and strategy, both were/are comfortable at the existing size of the bank. Not just Meezan, but all other Islamic Banks and windows have grown bigger, while Al Baraka has remained tiny in Pakistan. To grow, you need to make an extra effort, which it is clear from your own story that the CEO was not willing to make. Unfortunately, the CEO kept his position because he had the right ‘Arab’ connections as this was more important than making money. Cannot think of a single private entity in Pakistan where the CEO remained at the helm of a loss making entity for 25 years? Apropos: Al Baraka: the little bank that stayed little Faisal Malik, Website Looking at their balance sheet and approach towards business, even today you can rest assured they will remain the same as long as they are in business in Pakistan. No strategy, no vision, and absolutely no team and teamwork. Perhaps Arabs needed some place to sink their money and they have it in the shape of this entity in Pakistan. Apropos: Al Baraka: the little bank that stayed little Khurram Iftikhar, Website Well the reason is simple. No banker in Pakistan wants to go to Al Baraka. When you don’t attract the top talent in any field within banking, and all the posts are filled with old bankers that got the job through connection and are just happy to mark their presence day in day out without doing any work, then the result is obvious. Bank Al Baraka is the exact place an old school banker would go to complete his retirement years. Apropos: Al Baraka: the little bank that stayed little Shahid, Website Management. That is what it comes down to at the end of the day. Meezan has exceptional management and a solid culture. Very impressive. Islamic windows of conventional banks have done much better, but not at the scale of Meezan Bank. Either you are a tiger or a horse, difficult to be both without compromising your brand identity. Great article by the way. Apropos: Al Baraka: the little bank that stayed little Monis Rahman, Facebook

facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com

HOW TO CONTACT

Read this the other day and I just couldn’t with banks anymore! Do you know where your money is going when you are using these cards? No? Read this story to find out and then maybe you’ll want to call the State Bank and ask them what’s up. I am shook! So shook! Apropos: SBP wants the cheap PayPak to be the default debit card; the banks don’t @SaneelaJawad, Twitter

One major reason for their failure to rise to the occasion is missing from the article: They are not endorsed by any well known scholar. Meezan is endorsed by Mufti Taqi Usmani. Apropos: Al Baraka: the little bank that stayed little Junaid Awan, Facebook Fraud! Had an encounter recently. This bank stole my insurance money under the garb of ‘Islamic Banking.’ They would not budge until I escalated the problem and took it up with the CEO and threatened to relentlessly sue the bank big time. The bank has super ineffective staff, and no one till the very top is empowered. Apropos: Al Baraka: the little bank that stayed little Obaid Saleem, Facebook They must be following the strategies set by the sponsors and parent companies. They cannot do much about it. Apropos: Al Baraka: the little bank that stayed little Furqan Afridi, Facebook Unbelievable how much these banks are looting us. What a brilliant piece by Taimoor Hassan. An absolute must read this week! Apropos: SBP wants the cheap PayPak to be the default debit card; the banks don’t @saman_shafiq7, Twitter It is appalling to see how much banks charge for a debit card that does not cost much. Bank charges are incurred only once while a customer is charged for 5 years. 19banks made 22bn in 2020. Js bank earned over Rs580 mn in card fee while expenses were Rs8mn. Now that there is a cheap card, banks have increased prices ridiculously. Many users don't have much utility for Visa and Mastercard cards in Pakistan. Majority customers use debit cards for ATM transactions but banks give expensive debit cards to everyone. Apropos: SBP wants the cheap PayPak to be the default debit card; the banks don’t @ans_ghani, Twitter Author has not done proper research. There is also UnionPay which is an international payment scheme and is even cheaper from PayPak. Why should banks offer a debit card that is not accepted internationally nor online. All international payment schemes spend a lot to offer discounts and other value additions for its card members. PayPak, which is a 1Link ( private company) card has offered nothing and when they do it, they recover it from the banks. No reason for the banks to promote PayPak. Apropos: SBP wants the cheap PayPak to be the default debit card; the banks don’t Shahzad Munir, Website

COMMENTS

IN BRIEF

Rs1.4 trillion:

The federal budget deficit shot up to Rs1.4 trillion or 3.1 percent of gross domestic product (GDP) during the first half of the current fiscal year (H1FY21) as the centre and provinces prepare to meet this week for the National Finance Commission (NFC) meeting.

“More good news on the economic front. Our efforts to reduce inflation are now showing results. Consumer price index and core inflation are both now lower than when our government was formed. I have told my economic team to stay vigilant and ensure that inflation stays under control.” Prime Minister Imran Khan

The Drug Regulatory Authority of Pakistan (DRAP) has authorised AGP Limited, a Pakistani pharmaceutical company, to import and introduce Russian coronavirus vaccine, Sputnik V, in the country The Federal Board of Revenue (FBR) has ordered for penalties to be imposed on the corporate sector over nonfiling of returns and recovery of undeclared income for the tax year 2020. In this regard, the FBR has issued orders for all of its offices to collect fines from corporate taxpayers that failed to submit income tax returns.

Prime Minister Imran Khan has decided to immediately dissolve existing market committees in Punjab and Khyber Pakhtunkhwa, besides issuing directions for implementation of recommendations in the sugar commission report.

$2 billion:

Saudi Arabia and the United Arab Emirates (UAE) have not withdrawn loans worth $2 billion that matured last month, signalling that relations between Pakistan and the two key Gulf nations are getting better. Saudi Arabia had earlier withdrawn $2 billion out of $3 billion loans that it had extended in late 2018.

The federal cabinet is likely to approve the constitution of a ‘panel of neutrals’ to address controversies related to Independent Power Producers (IPPs). The panel comprises of Justice (r) Moulvi Anwarul Haq, along with Supreme Court advocates Tahir Abbasi, Shireen Imran, Tahir Abbasi, Humaira Masihuddin, Hafiz Arfat Ahmed, Hadiya Aziz, and Natalya Kamal.

By Taimoor Hassan

round October, more than six months after the still ongoing coronavirus pandemic became truly global, news started to surface that initial testing of different coronavirus vaccines was beginning to show promise. By December, less than a year after the virus became global, the first jabs have started with vaccination drives all over the world catching steam, and even Pakistan beginning its own drive in January 2021. Looking back, having gotten to this point has been a miracle. Hopes of a vaccine being ready in a year were slim, and everyone said so. They were not wrong either. Vaccine development is slow, it takes a lot of trial and error (which means a lot of money), and there is little motivation for the free market to develop vaccines since they do not translate to big profits. Despite this, because of the urgency of the pandemic and the push of different governments to usher along the vaccine development process, viable vials were made ready within a year of the pandemic having struck. On February 2, 2020, US pharmaceutical company Pfizer

forecasted $15 billion in Covid vaccine sales in 2021. The Pfizer vaccine is among the leading vaccines that have been approved for use in multiple countries. But here is the catch, where Pfizer has forecasted $15 billion in sales from Covid vaccines, Pakistani pharmaceutical companies have no idea if they will be able to get their hands on the vaccine in time, let alone earn profits from its sales. There is currently only one pharmaceutical company in Pakistan, Karachi-based AGP Ltd, that has been able to get permission from the government to import Russian Sputnik vaccine for Covid-19. The rest of the vaccines in

the country have been either bought by the federal government, or have been gifted from other countries and will be used to vaccinate front line medical workers and those segments of the population most vulnerable to the virus. So this is the situation – even though Pakistan’s vaccination drive has begun, there is little knowledge about what exactly the business potential of these vaccines will be. According to one BBC report, while investment analysts are forecasting that at least two companies, American biotech company Moderna and Germany’s BioNTech with its partner, US giant Pfizer, would be likely to make billions of dollars next year, not clear how much vaccine makers really are set to cash in beyond that. And with the government largely controlling the vaccines that come into the country, the private sector will not have a big role to play, but they will still have a role.

Vaccine roll outs

akistan was never going to be one of the leading countries producing their own vaccines. Our best bet was getting on board an experimental vaccine and hoping it works, as we did with a few Chinese vaccines. You see the problem is that vaccines need to be almost universally administered to have a lasting effect. Take for example Pakistan’s coronavirus testing capacity. Initially, the government was conducting a few thousand tests a day through tracking and tracing and eventually started doing free testing on request. The government, of course, was conducting these tests for free. Meanwhile the private sector was quick to get testing kits themselves and charge big sums of money for coronavirus tests. This is the same model that was being followed in the rest of the world as well.

Just like with the Covid-19 testing, the vaccination challenge is huge. And just like the Covid testing, the government was at the forefront and the private sector had a supporting role. In order of magnitude, the vaccination challenge is estimated to be bigger than the testing challenge. Testing was voluntary. Vaccination is mandatory Omar Chughtai, CEO of Chughtai Labs

If the government finds out you have been exposed to the virus, they will test you for free to mitigate the spread of the virus. However, if you need a test to travel, go somewhere, for work, or just for your own peace of mind, in that case you pay for the test yourself. And while testing capacity is important, vaccines have to be mandatory. Now, the problem is that the government has limited doses so give it to those that need it the most. Meanwhile, if private pharmaceutical companies can import vaccines, those that are lower down on the priority list can get vaccinated by paying these companies. “Just like with the Covid-19 testing, the vaccination challenge is huge. And just like the Covid testing, the government was at the forefront and the private sector had a supporting role,” says Omar Chughtai, CEO of Chughtai Labs. “In order of magnitude, the vaccination challenge is estimated to be bigger than the testing challenge. Testing was voluntary. Vaccination is mandatory.” Since Pakistan is not developing any vaccine of its own, the country will have to rely on imports from other nations that have production facilities and the research companies and

labs to produce such vaccines. But these vaccine producing companies have to vaccinate people of their own nations first. Vaccinating frontline health workers, the elderly, the young, in that order. What that means is that Pakistan will always remain dependent on vaccine producing nations, and it will remain dependent for some time to come. This is one of the key issues of global vaccination - developing countries are left for last. But as the process continues, the largest procurement of Covid vaccines is state to state or from company to state. “Governments are the largest purchasers and users of vaccines and I think that would be the case with Pakistan as well. What that means is that the government will try to vaccinate as many people as possible, and the rest will be catered to by the private sector, that is pharmaceutical companies will be providing vaccines into the market,” says Omar Chughtai. “The private market would be there to supplement the role of the government. Every person that we vaccinate is one less person for the government to vaccinate from taxpayer money.” But even this minimal role for the private sector is tricky. “When it comes to vaccines,

The situation is in a flux. Reportedly, private deployment will also be done by the government. What this means is that even if a third party imports the vaccine, the deployment is in the government’s hands Nadir Mumtaz, CEO of Sehat.pk

they are considered a public health good and governments are either the only customers of the vaccine or they are the majority customers, 90% or more. EPI (Expanded Programme on Immunisation) programmes in Pakistan are all government programmes,” explains Osman Waheed, CEO Of Ferozsons Ltd. This means that even in case private companies are able to import Covid-19 vaccines, it is probably going to be the government that is going to purchase the bulk of these vaccines from these companies.

Market potential

ut the government has to vaccinate a population of 220 million people, and the number of vaccines procured so far are much less. So it goes that the government would be happy if the private sector took over some of this burden. Presently, the leading Covid-19 vaccines are Pfizer-BioNTech, Moderna, Gamaleya, Oxford-AstraZeneca, Cansino, Johnson and Johnson, Vector Institute, Novavax, Sinopharm, Sinovac, SinoPharm-Wuhan, Bharat Biotech, Sputnik. The government of Pakistan has so far secured 500,000 doses of the coronavirus vaccine made by the Chinese firm SinoPharm to Pakistan in donation. That is besides a contract with SinoPharm for another 1.2 million. Covax, the global multinational initiative to provide equitable access to Covid-19 vaccines regardless of wealth of a country, 17m doses of Astra¬Zeneca would be provided to Pakistan in the first half of 2021. In collaboration with China, Pakistan is also conducting a Phase 3 trial of another Chinese anti-coronavirus vaccine from Cansino Biologics, Inc. Pakistan is also entitled to receive 20 million doses from Cansino Biologics provided that the results are positive and the vaccine proves to be effective. All in all, that is 38.7 million vaccines if Cansino Biologics proves to be effective. In a country of 220 million people, that is a shortfall of 181.3 million. That is the potential market of Covid vaccines for private pharmaceutical companies, but right now, there

PHARMACEUTICALS

When it comes to vaccines, they are considered a public health good and governments are either the only customers of the vaccine or they are the majority customers, 90% or more. EPI (Expanded Programme on Immunisation) programmes in Pakistan are all government programmes Osman Waheed, CEO of Ferozsons Laboratories

is no clue what is going to happen. “The situation is in a flux. Reportedly, private deployment will also be done by the government. What this means is that even if a third party imports the vaccine, the deployment is in the government’s hands,” says Nadir Mumtaz, CEO of Sehat.pk. Deployment comes second. What is still rather unclear is whether or not enough vaccines are going to be allocated to Pakistani companies. The CEOs that Profit talked to were all in talks with companies producing these vaccines and none of them could give us a concrete timeline of the availability of vaccines from the company, price of an individual vaccine dose, and number of people that would get the dose. That does not mean the companies are being secretive, but that the negotiations are in such a nascent stage that “We are in contact with various representatives of various vaccine options and our mission is to make it available in Pakistan as soon as it can be made available in Pakistan. And then to make sure it is utilised in a deliberate and careful manner so that there is no chaos,” says Omar Chughtai. “We have always maintained that with the limited information that we have, that it is probably going to be the second quarter of this year, April onwards, that we will have access to the vaccine. It seems to be playing out that way right now.” Normally, the government is not involved. Local parties register products with DRAP that they want to bring in a certain product and then they get permission from the government to bring this in. According to the demand that they have gauged, they bring in the quantity. They bring it in after fulfilling certain regulatory and quality requirements and then sell it to hospitals and pharmacists. It is sold via the existing pharmaceutical supply chain.

Who will get vaccinated?

s we have discussed earlier, the government’s priority in Pakistan is that they have started off with healthcare workers, which makes absolute sense, followed by vaccinating people that

are most vulnerable; people over the age of 60 because they are most likely to develop severe cases of Covid-19. But even if private companies are able to get their hands on the vaccine, private companies will also try to make the vaccine available to elderly population first. The problem at the end of the day is demand and supply. The magnitude of the disease is global whereas the production is not global. All the producers of vaccine candidates – Pfizer, AstraZeneca, Moderna and others – are facing challenges fulfilling the demand because of the scale at which the vaccine is required. It is just one of those unique situations where vaccine availability is going to be a challenge for sometime because of the demand. So people who are producing the vaccine are intelligent about who gets the vaccine first. Add to this the fact that vaccines are already a low profit margin production since they are only administered once to each person and developing countries have high demand but a lower ability to pay big prices. “Chughtai Lab is going to make vaccines, as soon as we have access to it, available to senior citizens on priority in the first phase. We want everyone to be vaccinated but it is going to be started from the elderly,” says a hopeful Omar Chughtai. “Vaccine rollout has to be managed carefully and deliberately. We are going to go about it in a streamlined manner where people can see that we are giving priority to those people that are most vulnerable to the illness,” he adds. As far as the number of people that Chughtai Labs plans to vaccinate, Omar says they are not shooting for a high or a low number. Because of the uncertainty around allocation, whatever becomes available, the Lab will try to get it utilised as quickly and fairly as possible. “There might be situations where we would not have access to enough vaccine doses and we would have to turn people away. Then there might be situations where we would have enough vaccines but we do not have enough infrastructure to get the vaccine delivered or get people vaccinated, in which case we might try to work with other vaccine providers so that they can use vaccines.”

When it comes to pricing, things are still very murky. Different numbers have been floated globally concerning the price of different vaccines. But negotiations might turn in different numbers. The rates that companies quote or government’s quote from state to state or from companies to state are very different when the volumes are in the millions or tens of millions. “A private enterprise will probably not have that kind of scale,” says Omer. “There is a lot of ambiguity right now, so it is hard to say what the price of Covid vaccine is going to be.” Then there is the supply chain. Normally, all the vaccines require storage at temperatures between 2 to eight degrees celsius. But there is a particular concern around Pfizer vaccine and the difficulties in making that available in Pakistan particularly because Pfizer maintains a very strict cold-chain protocol that requires the vaccine to be stored at -70 degree celsius. Nadir Mumtaz, the CEO of online pharmacy Sehat.pk, explained that because they are an online pharmacy that ships to many regions in Pakistan and have an efficient supply chain in place, they analysed how Covid-19 vaccines can be managed and kept. “We have almost two years of data on vaccines generally. The temperature requirement is different in winter and it is different in summer. In our supply chain, we developed protocols, tested by multinational companies, that makes our coldchain efficient. Most of the vaccines in Pakistan are required to be kept between 2 to 8 degree range but the Pfizer one is at a different level.” “We have a cold chain in place for 99% of the medicines that require a cold-chain. It is at 2-8 degrees celsius. That is the normal fridge temperature,” Nadir says. “Pfizer vaccine on the other hand is radically different that requires it to be stored at -70 degrees celsius and that is beyond what is commercially available in Pakistan,” he adds. “Not that the supply chain that supports keeping vaccines at -70 degrees celsius is not possible, it is simply difficult in Pakistan. On the other hand, the infrastructure for vaccines that require the temperature range to be between 2 and 8 degrees is in place and can be done properly.” n

Najam Sethi’s turnaround of

Mitchell’s off to slow, but promising start

The company has narrowed its losses and increased its firepower, setting itself up for a financial recovery

n the second quarter of 2020, Najam Sethi became the chairman of Mitchell’s. At first glance, it seems to make general sense: after all, Sethi is the husband of Jugnu Mohsin, who is the daughter of S.M. Mohsin, who is the son-in-law of Syed Maratib Ali. We explain this convoluted family tree because in 1958, Syed Maratib Ali,saw an opportunity. The famed businessman, who was the largest contractor to the British Indian Army troops in India during World War Two, bought Mitchell’s Farm from the Mitchell’s family. The farm had been present in the subcontinent ever since 1933, when Frances J. Mitchell decided to try his luck at making some money in India. So, you could say the farm runs in the family. But it is precisely this fact - the farm has been run by the family over generations - that has led to Mitchell’s problems in the first place. As a previous Profit article mentioned, Jugnu Mohsin blamed her brother Mehdi Mohsin,

FOOD

and her father, S.M. Mohsin for the company’s problems. Her solution was her husband, who has tried his luck with the family business. And so far, it has shown some promising results. To understand why the year 2020 is looking up for the company, it helps to have some historical context. Throughout the 60s and 70s, the company focused on its fruit jams and marmalades, but in 1980, the company diversified into confectionery, making sugar candies, milk toffees and chocolate eclairs, which resulted in its annual sales being doubled. In 1993, Mitchell’s was listed on the Karachi Stock Exchange. Five years later, in 1998, they became the first food processing company in Pakistan to get ISO 9001 accreditation. In 2001, the company began to produce its own chocolates. In 2008, the company went through a packaging upgrade, prompted in part by competitor National Foods’ entry into the jam and jellies segment. It was generally a good time: between

1996 and 2008, Mitchell’s had grown its revenues from Rs309 million to Rs1,039 million, at an average growth rate of 10.6% per year. The subsequent years were perhaps even better, led as they were by CEO Mujeeb Rashid, who had previously worked between 2004 and 2008 as the chief operating officer at Packages Ltd, also owned by the Syed Maratib Ali family. Between 2008 and 2013, Mitchell’s grew its revenues even faster, at an average of 14.9% per year, to reach Rs2,084 million by 2013. The company reported a profit every year he was the CEO, except 2016 (which was the first loss since 2006). The company had some exceptional years in 2012, 2013 and 2014, reporting a profit of Rs108 million, Rs132 million and Rs107 million, respectively. But declining profits going towards definite losses in 2015 and 2016 meant that he was removed in 2016, in favour of Muhammad Zahir, the former director of marketing and sales at the Fatima Group. It turns out that Zahir did

not end up staying too long, and was only the CEO between May 2016 and September 2018. Meanwhile, the company reported another loss of Rs30.8 million in 2017, and then another loss of Rs292 million in 2018. Mitchell’s then replaced Zahir with Mujeeb Rashid, hoping he could bring back the growth spell. But the company still reported a loss of Rs80 million at the end of 2019. What happened? Most point to Mitchell’s management’s lack of understanding of how to market their brand. They relied far too much on their product’s historical legacy, did not spend enough on ads (particularly in an era when other brands were investing in name recognition), and had a somewhat misplaced distribution strategy. In fact, between 2007 and 2014, distribution costs rose at an average of 22.4% per year (distribution costs went from 7.8% of revenues in 2007 to 14.2% of revenues by 2014). Business operations were not improving during this period; instead, distributors were making money, which yielded no tangible benefits for the company in terms of increased sales. As mentioned before, since 2016, Mitchell’s has lost money every single year, which has resulted in rising indebtedness for the company. As recently as 2013, the company had just Rs97 million in debt. As of June 30, 2020, the company has Rs805 million in debt, of which Rs150 million was pumped in by the Mohsin family itself. It is in this tense climate that Sethi finds himself in. Sethi first set about hiring a new CEO in 2020, Naila Bhatti, who was previously the director of sales and marketing for the Pakistan Cricket Board, where Sethi was her former boss. The idea is that a marketing executive will know how to spend on ads, and create brand awareness. And so far, it seems to have worked. In the latest financials for the year ending September 30, 2020, the company increased its revenues to Rs2,112 million, the highest it has ever been. The company’s losses, which had al-

ready narrowed from the peak of Rs293 million in 2018 to Rs80 million in 2019, have further decreased to Rs55 million. Perhaps most excitedly, distribution costs have actually decreased. Distribution costs as a percentage of revenue declined from the 2018 peak of 25.1% down to 14.1% of revenues in 2019, and further narrowed to just 12% for the

full year ending September 30. Are the numbers fantastic? Not really. But are they worthy of praise? Yes. If Sethi and Bhatti can continue along this path, perhaps the storied farm will make it through. Not to forget, Mitchell’s is also cash rich now, having recently raised Rs750 million through a successful rights issue. n

Tripack Films swings back to profitability in 2020

Despite the pandemic causing a significant slowdown in consumer spending, the packaging company was able to put last year’s losses in the rearview mirror

f there ever was a company that took itself seriously it was TriPack films. In the last eleven years, Tri-Pack films has had only two years where it ever made a loss: 2014, and 2019. As it happens, all eyes were on the year 2020 to see what would happen next. In the financials for the year ending December 2020, released to the Pakistan Stock Exchange on 29 January, Tri-Pack films managed to make a comeback. After posting a loss of Rs310 million in 2019, the company made a profit after tax of Rs614 million in 2020. You can thank Tri-Pack’s slow,

methodical expansion over the last few decades, for its surefootedness when it comes to running its affairs. First, some context. Tri-Pack Films is a joint venture between Mitsubishi Corporation of Japan and Packages Ltd of Pakistan. It was set up in April, 1993 as a public limited company – today, the two companies hold 19% and 33% respectively, while IGI Holdings, another Packages company owns 10%. Its head office is based in Karachi and regional offices are located in Karachi, Lahore and Hattar. The company started off making Biaxially Orientated Polypropylene (BOPP) films. BOPP is derived from polypropyl-

ene, which is the world’s second most used commodity plastic. The ‘biaxially-oriented’ part comes from the fact that the polypropylene is stretched flat in two directions. BOPP films can be white, metal-colored, or clear. That is why it is often used to make transparent labels for clear containers. The material is also waterproof, and non-toxic, which makes it very useful as bottle labels, jar labels, and canning labels. The company also makes CPP film, which is cast polypropylene. It is also derived from polypropylene, but has gained some popularity over the more widely used BOPP because it has a soft film, and some small barrier property differences. Since inception, the company has always had a steady expansion plan. It commissioned its first BOPP line in 1995, of 5400 tons, and then made a second one in 2001. It built a metallizer in 2002 (used for metallized BOPP film, which is used as a replacement for foil), a third BOPP line in 2004, a second metallizer in 2006, and a third metallizer in 2009. It also commissioned a CPP line in 2008. This decade has seen a new BOPP line in 2013, two new metallizers (2013 and 2014), and a second CPP line in 2014. Today, the four BOPP lines manufacture 68,800 tons, while the two CPP lines manufacture 17,000 tons. Today, BOPP sales contribute to 74% of total sales, while CPP makes up 26%. The

share of BOPP is expected to only increase: in late 2020, the company announced a Rs9 billion project for a new BOPP line, which is likely to start production in 2023. So, what is all of this film used for? According to Tri-Pack, the products are used for food and beverage applications, such as snacks, confectionery, dairy food, fresh cut vegetables, and beverages; and non-food applications, such as overwrapping, lamination, and bag making etc. Over the years, the company has fared well. Its revenue in 2009 stood at Rs5,686 million, but quickly crossed the Rs10,000 million mark in just two years later. Revenue hit a new high of Rs13,597 million in 2014, falling to the Rs11,000 million range in 2015 and 2016, before crossing the Rs12 million mark in 2017, the Rs13 million mark in 2018, and finally, at Rs14,683 million in 2019. Interestingly, the years with the highest revenue (2014, and 2019) actually correspond to the years that the company made a net loss of Rs200 million and Rs310 million respectively. Those two years saw higher financial charges, mainly because of an increase in the State Bank of Pakistan’s interest rate, and the depreciation of the Pakistani rupee. Except for 2017 and 2018, overall gross profit has increased over the years. “In the year 2019, the profitability of the Company further deteriorated on account of volatile raw material prices, slow business

conditions and exchange rate hike and supply overhang situation in the market,coupled with the initiative taken by the new government to bring the economy back on track,” the company’s latest annual report ending December 2019 said. The year 2020 has been an achievement for many reasons. First, it is the highest revenue ever posted by the company, at Rs15,089 million. Miraculously, the company also managed to decrease its costs of sales, which meant the highest gross profit the company has also witnessed - in fact, a whole Rs1,000 million more than the previous year. This gave the company some leeway to deal with higher administrative and distributions costs (indeed, at Rs958 million, it is the costliest it has ever been since the company’s inception). There are some clues to the company’s turn around. According to the quarterly report ending September 30, tri-Pack credited a significant improvement in demand once markets reopened after the Covid-19 lockdown. This led to a higher sales volume, particularly in the third quarter. Given the company’s ability to recover so quickly from the impact of the lockdowns, the management’s claims that they are likely to have a good year in 2021 carry significant credibility. While the company’s stock was once a darling of investors, it has recently fallen out of favour, not having very many analysts who cover the stock. n

PACKAGING

COVER STORY

By Ariba Shahid and Farooq Tirmizi

ost business students in Pakistan are familiar with the phrase “first mover advantage”. The concept is simple enough: if you want to succeed in a business, be the first one offering the product or service in question. It is a rule that works well enough in most industries. Just not in tech. In the tech industry, entrepreneur-turned-venture capitalist Peter Thiel (co-founder of PayPal and earliest investor in Facebook) popularised a different concept: last-mover advantage. The idea is counterintuitive at first blush, but important to understand: in an industry like tech, where the landscape keeps evolving, the business model most likely to succeed is the one that comes in after the failed business models have already been tried. In other words, the one to succeed is the one who comes after others have already shown what does not work, so that they can then figure out what will work. And of course, if that is what it takes to succeed, then moving first is not an advantage. Moving last is. Because in technology, there is not one but two simultaneous sets of competition that are taking place. The first is the competition between the technology companies themselves. The second, often ignored but much more important competition, however, is that between the new business models and the old way of doing things. For a tech company to build a truly valuable platform, they need to win both. If that is the case, what then to make of Daraz, Pakistan’s largest traditional e-commerce marketplace, one that was founded by the Germany-based Rocket Internet, but was acquired by Alibaba in 2018. Can it stay atop this growing sector of the economy, or will it become one in a long line of companies whose business models had to fail in order for the market to discover the one that will be

We’ve invested $50 million to date and we’ve allocated more than $100 million for Pakistan over the next three years for logistics infrastructure, localised tech solutions, expanding Daraz University, and upgrading the customer experience.” Bjarke Mikkelsen, global CEO of Daraz

successful. In this story, Profit takes a look the evolution of e-commerce, both in Pakistan and outside the country, to gauge the direction of the industry and to assess where the market might be heading. We then examine Daraz’s business, its current and potential future competitors, to arrive at a view of whether Daraz can maintain its market-leading position. For this story, we gained unprecedented access to Daraz Pakistan’s financial statements, which gave us an in-depth look at the company’s financial health and the success of its strategy. We also interviewed Bjarke Mikkelsen, the global CEO of Daraz and Ehsan Saya, the managing director of Daraz Pakistan.

The evolution of Daraz and Pakistani e-commerce

e will skip the usual history lecture on how Pakistan’s e-commerce market evolved because it is not much of a history. For a long time, nobody sold anything

on the internet in Pakistan because we are an exceedingly low-trust society and we all listened to our risk-averse uncles who said, “nobody buys anything on the internet in Pakistan”. Then a few brave souls decided to try anyway. There was HomeShopping.pk and Liberty Books and then a few others jumped into the fray. But the market was virtually nonexistent until Germany’s Rocket Internet jumped into the fray and launched Daraz.pk. Rocket Internet is a company whose business model is relatively simple: take the best ideas of internet companies in the United States and Europe and try to recreate them in emerging and frontier economies, eventually selling those clone businesses to the original companies in advanced economies or anyone else who might be willing to pay up. Daraz.pk was Rocket Internet’s first investment in Pakistan and started in 2012. Rocket began recruiting people with foreign college educations and LUMS, the kind that would be just as home at a Silicon Valley startup as they would in an office in Karachi. Rocket made it clear that they wanted to move

People are hesitant to use their cards online in Pakistan for two main reasons: firstly, they do not find paying digitally as convenient – refunds with cards can take several weeks. We introduced the Daraz Wallet to make refunds instantaneous and solve this issue. And secondly, people still prefer to see the product before they pay for it despite that we offer Purchase Protection on all orders Ehsan Saya, managing director of Daraz Pakistan

fast, and wanted people who would be fast learners. Daraz followed the Amazon strategy for Pakistan: it started off with one vertical before expanding its offerings. In the case of Amazon, it was books. In the case of Daraz, it was apparel. Daraz started offering clothing and shoes from well-known brands to Pakistan’s affluent upper middle class. And like Amazon, Daraz started off as a direct seller first. Within the first three years, the company grew its revenues substantially. By the fiscal year 2015 (Daraz’s financial year ends June 30), the company had Rs491 million ($4.9 million) in revenues in Pakistan. That is when Daraz decided to substantially expand by opening up its platform to third-party sellers, allowing them to sell their products via Daraz. This was an era when the Facebook and Instagram-based sellers had just started taking off, and Daraz wanted to capitalise on

that opportunity by having as many of them move over to its platform – and pay it a fee for the services of listing and, in some cases, fulfillment services – rather than continuing to operate independently. In many ways, they are still a big part of the company’s competition. “If you look at our biggest competitor its people that sell on Instagram and Facebook. And unfortunately, there is very little governance on those platforms. You could order something online from one of those and you could get scammed which really hurts [the e-commerce industry],” said Ehsan Saya, managing director of Daraz Pakistan, in an interview with Profit. That, in turn, gets to the heart of the challenge of growing an e-commerce business in Pakistan: we are a low-trust society, which means that people remember scams much more than they remember a good experience. That has implications for the e-commerce growth model.

Marketplace: solving the trust vs growth trade-off

ne of the ways in which in which Daraz differed from the Amazon model was the speed with which it decided to create a marketplace. Whereas Amazon did not create a marketplace until its seventh year of operations, Daraz did so in its third year (2015), and that move was likely responsible for turbocharging the company’s growth. There is no question that the marketplace resulted in significantly faster expansion of the size of Daraz’s platform. From just $4.9 million in 2015, the company was able to grow its gross merchandise value (GMV) to $118 million in 2018, growth that came almost entirely on the back of its third-party marketplace business. At this point, Daraz is really an e-commerce platform with a small direct sales business. Those numbers alone seem to justify the pivot away from direct selling to the platform business. That Daraz can earn substantial revenues from opening up its platform without having to tie up large amounts of its capital in inventory (that capital instead comes from the smaller third-party sellers using the Daraz platform) seems like an excellent move to turn what would otherwise be a capital-intensive business model into a capital-light business. However, it comes at a cost: Daraz has far less control over the behaviour of third-party sellers, some of whom engage in fraudulent or otherwise unethical activities. Now, every business faces at least some fraud, but in a low-trust society like Pakistan, the stories of that behaviour travel fast, despite Daraz’s best efforts to curb them and create policies to stamp them out. “If something goes wrong and the problem is not resolved, no matter whose fault it is, the customer will blame the e-commerce business,” said Hamaad Ravda, the former chief marketing officer of Daraz.pk and one of the

COVER STORY

leading architects of Pakistan’s e-commerce industry, in a 2018 interview with Profit. That means that Daraz has a trust perception problem, despite actively putting in place several policies to combat bad behaviour on its platform. That trust deficit is a key area of focus for the management, and one on which they say they have been able to make some strides. “We do definitely [have a trust problem] and over the last 12 months we have made huge progress,” said Bjarke Mikkelsen, global CEO of Daraz, in an interview with Profit. “There are a couple of different things that we track but one of them is our customer satisfaction score. If there is an interaction with customer through customer service or anything, afterwards we always ask the customer if you are satisfied with the solution and that is the most immediate impact. And here we have made huge progress. In 9 out of 10 cases, customers are satisfied with the interaction they have with Daraz. We still want to get this higher but 9/10 is a big improvement over the last 12 months.” “And then the second is the NPS, the Net Promoter Score, and over there as well we have made huge progress. We are now at around 50 for the NPS and we want to bring it around to 60+ in the coming year. That is also a massive improvement even over the last 12 months. We are making great progress. I am not worried about getting there. And the word is also spreading. It takes up a little bit of time to bring brand perception to also catch up to the significant investments we are making to service quality.” Net promoter score is a measure of how much a company is trusted and liked by its customers. It is the result of a survey of customers, who are asked to rate their interaction with the company on a scale of 1 to 10, with 10 being the best and 1 being the worst. The net promoter score is then calculated by subtracting the percentage of customers who rated the interaction 6 or below from the percentage of customers who rated the interaction a 9 or a 10. Daraz has attacked the trust issue in a couple of different ways: it has tried to pay

The fact that cash-ondelivery is still the preferred mode in Pakistan for ‘online shopping’ just exemplifies we majorly lag behind in everything technology, and economy Ammar Habib Khan, economic analyst at Karandaaz

attention to customer complaints more, and it offers a purchase protection program where a dissatisfied customer is entitled to a refund. “We’re the only player we have to push the narrative to the customer that no, look, you are protected. If something does go wrong, we have your back and we will fix it. Unfortunately, we are the only player that is pushing the narrative,” said Saya. This does not always work out well in practice, however. Social media is rife with customer complaining about how Daraz’s refund policies are slow and difficult to navigate. To their credit, the management is aware of those complaints and says they are working to improve upon customers’ perceptions. “People are hesitant to use their cards online in Pakistan for two main reasons: firstly, they do not find paying digitally as convenient – refunds with cards can take several weeks. We introduced the Daraz Wallet to make refunds instantaneous and solve this issue. And secondly, people still prefer to see the product before they pay for it despite that we offer Purchase Protection on all orders,” said Saya. Here is a measure of just how few customers use the return policies: in 2019 – the latest year for which Profit was able to obtain financial data – refunds amounted to just 1.6%

of total revenues for that year. That low number is likely driven by a lack of awareness about the refund policy, difficulty or delays in getting refunds processed by both Daraz and the banks, and one other factor that nobody seems willing to say out loud: maybe fraud is not a bigger problem in Pakistan than in any other country. According to ACI Worldwide, a payments software company, globally, as of April 2020, e-commerce companies face fraud rates equal to approximately 4.3% of revenue. Fraud, in other words, happens everywhere, but in Pakistan, consumers tend to panic about it and then engage in behaviour that shifts the onus of fraud prevention onto themselves rather than the e-commerce company. They do this by relying heavily on cash-on-delivery, which in turn creates a significant bottleneck for the growth of e-commerce in Pakistan.

Can e-commerce grow past cash-on-delivery?

“T

he fact that cash-on-delivery is still the preferred mode in Pakistan for ‘online shopping’ just exemplifies we majorly lag

TEXTILES

behind in everything technology, and economy,” said Ammar Habib Khan, an economic analyst at Karandaaz, a venture capital firm, on Twitter. The problems with cash on delivery are well-documented, but deserve a recap. Briefly, there are four major issues: customer returns and cancellations are much higher, cash cycles are much longer, delivery costs are much more expensive, and the customer experience is worse. In terms of returns, according to Ravda, cash-on-delivery customers have return and rejection rates as high as 30% at some Pakistani e-commerce companies, compared to just a 7-10% rate for customers who pay by credit or debit card. And while the e-commerce company receives the cash immediately for card-based transactions, the logistics companies can hold the cash-on-delivery revenue for several weeks, even months, at a time, which creates a significant cash-flow problem. Delivery costs can be as much as three to four times higher for cash-on-delivery compared to card payments, and that higher cost actually mean that even accounting for the fees that sellers have to pay credit and debit card issuers and other electronic money providers like EasyPaisa, it is more profitable for e-commerce companies to sell via credit and debit cards than by cash-on-delivery. And of course, cash-on-delivery also requires the person who made the purchase to be home when the delivery comes, which creates a significant coordination issue that results in a massive headache for most people. All of these issues mean that the e-commerce experience in Pakistan is extremely painful, and most people associate memories of significant annoyances with a transaction conducted online. That, in turn, increases the appeal of going to a physical store, which then slows down the growth of e-commerce in the country. In short, e-commerce cannot possibly grow on the back of cash-on-delivery. It needs the trust issue to be resolved, which will then also result in the payments issue to be resolved. Going back to what we said earlier: an individual e-commerce business can win big against

If something goes wrong and the problem is not resolved, no matter whose fault it is, the customer will blame the e-commerce business Hamaad Ravda, former chief marketing officer of Daraz.pk

other e-commerce businesses while relying on cash-on-delivery, but the industry e-commerce will not win against brick-and-mortar retail without electronic payments. Whoever can solve the payments pain point – which is really a product of the trust issue – will win the race and create a natural monopoly in e-commerce that will be very difficult to beat. Can Daraz become that company? The early data suggests yes, but it will have to invest heavily in the right strategy if it is going to be that company because it faces more competition than meets the eye. One caveat: part of the challenge is out of the industry’s hands because of the low financial services penetration rates in Pakistan. “Generally, the number of banked people in Pakistan is significantly lesser than other more developed countries,” said Saya. “About 1% of Pakistanis have credit cards - and this includes individuals with multiple cards.”

The future of Pakistani e-commerce and Daraz

s stated above, a key factor in building a successful e-commerce business with be overcoming the trust barrier and getting more people comfortable with the idea of parting with

their money before they have the product in their hands. Daraz’s Wallet and Purchase Protection programs are designed to help give customers that confidence, though they appear to be less well-advertised, perhaps because the company fears that they will be gamed by unscrupulous people. Then there is the fact that Daraz’s parent company – Alibaba – owns one of the largest fintech companies in the world, Ant Financial, which in turn owns a controlling stake in Telenor Microfinance Bank, in which it bought a 45% share for $185 million in March 2018. The Ant involvement likely helped Daraz boost the development of Daraz Wallet, which would allow people to get more comfortable with buying stuff online. An integrated payments system is often seen as a way to solve the challenge. It explains why Souq – the now-Amazon-owned e-commerce marketplace in the Middle East – owns its own payments platform as well. And why Jumia – Rocket Internet’s e-commerce marketplace for sub-Saharan Africa – also owned its own payments company until relatively recently. But this is by no means the only strategy. Indeed, one other strategy would be for tech companies that sell entirely different services to enter the e-commerce marketplace and leverage the trust they have built in other areas towards getting people to

COVER STORY

buy and sell goods online. Indeed, the single biggest company that sells services online in Pakistan is actually Careem, which has gross billings to customers that are more than twice those of Daraz’s gross merchandise value (more details on Careem’s financials will be the subject of next week’s cover story). And Careem is actively developing its own payment platform as well in addition to its existing prowess over logistics. It is unclear if Careem can successful-

ly enter the kind of e-commerce space that Daraz occupies, or even if it wants to, but the fact that it has such a large market of people who are willing to transact with it online suggests that there are more ways to solve the trust factor than the ones that Daraz is trying. For its part, Daraz is not sitting idly by on its lead. It continues to invest heavily in maintaining its market position. “We’ve invested $50 million to date and, to be honest, $50 million is a lot of money of course but in the grand scheme of things,

what it cost to build an e-commerce marketplace when compared to other markets it could easily go into billions,” said Mikkelsen. “We want to do it much more efficiently. We’ve allocated more than $100 million for Pakistan over the next three years for logistics infrastructure, localised tech solutions, expanding Daraz University, and upgrading the customer experience.” That war chest – backed as it is by Alibaba’s resources – is likely to be quite intimidating to any prospective competitors. And Daraz remains as aggressive as ever in its ambitions to grow in the Pakistani market. In a pre-pandemic internal projection – obtained by Profit – the company’s management had projected hitting $1 billion in gross merchandise value by 2023. The company is a little more circumspect about that goal now, but is still aiming high. “A $1 billion GMV for 2023 will be challenging but not impossible. Our focus in the coming years is first and foremost building a healthy marketplace business and great customer/seller experience,” said Saya. That focus is likely the right one: because Daraz is not just competing against all of those e-commerce companies on Facebook and Instagram. It is also competing against every physical retail store in the country. It is a daunting market to take on, and one that will take monumental effort to maintain a lead in. The competition for the crown of e-commerce royalty in Pakistan is by no means over. n

COVER STORY

In 2020,

Big Fauji Little Fauji does alright, while

has a blowout growth year The two fertilizer companies owned by the military have had a good run this past year, with a recovery from a bad year in 2019 helping Fauji Fertilizer Bin Qasim’s growth numbers

“Mein bara ho kar fauji banoon ga”

hances are, if you have grown up in Pakistan, you have probably heard the above sentence. The army is so intertwined with the very fabric of the country (for reasons beyond the scope of this magazine), that it is not uncommon for children to want to join the sixth largest army in the world (ranked by military personnel). Except perhaps if you really want your kids to succeed, maybe that adage should

FERTILIZERS

be amended to “mein bara ho kar Fauji mein kaam karoon ga”. In 1954, the Pakistan Army set up the Fauji Foundation, as a charitable trust initially designed to help provide welfare for the army’s retired soldiers as well as their dependents. In 2020, this charitable trust is almost unrecognisable. It has sprawled into a massive conglomerate, that runs 21 associated companies, and three fully owned companies, in industries as varied as fertilisers, cement, power, oil, gas, food, grain, and even banking (Askari Bank). On top of that, it operates 15 medical facilities, 100 schools and colleges, 65 vocational train-

ing centers and nine technical training centers across the country. By its own estimates, its welfare programs serve 9 million beneficiaries. And where is the money for this welfare program coming from? The two most important, and most lucrative, of those companies are Fauji Fertilizer Bin Qasim Ltd (FFBL), and Fauji Fertilizer Company (FFC). Fauji Foundation owns 18.3% share of the former and owns 44.4% of the latter. FFC in turn owns 49.9% of FFBL. In market parlance, FFC is known as “Bara Fauji” and FFBL is known as “Chhota Fauji”. At Profit, we like to adhere to market

principles, which is how we will also refer to the two companies. Big Fauji is the older of the two, and was founded in 1978. Domiciled in Rawalpindi (big surprise), the principal activity of the company is manufacturing, purchasing and marketing of fertilizers and chemicals. It is the largest urea manufacturer in the country, has two production plants in Ghotki, Sindh, and Sadiqabad, Punjab, and 63 district offices and 183 warehouses. Meanwhile, Little Fauji was initially formed as a venture between Big Fauji and the Jordan Fertilizer Company, to make a complex that would manufacture diammonium phosphate (DAP) and granular urea in Pakistan. It started production in the year 2000, and is still the only manufacturer of those two products in the country. On January 28 and 26, both Big and Little Fauji respectively released their financial statements for the year ending December 2020. The results are quite divergent: Big Fauji just managed to scrape through a profit, but overall had less sales than the previous year. Meanwhile, Little Fauji had a blowout growth year, going from a loss in 2019, to a sizable profit in 2020. First, let’s take a look at Big Fauji. Its sales have been generally in the same ballpark: In 2014, its sales stood at Rs81 billion, before dropping to Rs73 billion in 2016. In 2018, sales

crossed the Rs100 billion mark, before dropping to Rs98 billion in 2020. The company’s net income, however, has not followed this trajectory. In 2014, the company’s profit after tax stood at Rs18 billion, a figure it would not cross again until 2020. In 2016 and 2017, the company’s net income tumbled to Rs12 billion and Rs11 billion, before steadily climbing again in the subsequent years. In 2019, net income stood at Rs17 billion; it rose to Rs20 billion the next year. What happened? According to Big Fauji’s 2019 annual report, the net profit fell between the years 2014 and 2017, due to a litany of problems: “persistent government intervention in product pricing under the subsidy scheme, levy of discriminatory GIDC, higher finance cost, lower dividend income and higher taxation charges”. In addition, cost of sales shot up in 2017, while gas costs increased in 2018, somewhat jolting the company. Still the company scraped through in 2018 and 2019, due to an improvement in fertilizer selling prices and “record” income from investment. As for the year 2020, the company’s gross profit is actually similar to last years (Rs32 billion, compared to Rs31 billion). The difference is, in 2020, BIg Fauji gained almost Rs6 billion from the extinguishment of the GIDC liability. This helped make up for other losses, which is why that year’s profit is higher than 2019’s.

Now, look at Little Fauji. Between 2014 and 2020, the company’s sales have only fallen year-on-year once. In 2014, sales stood at Rs49 billion; 2017, sales stood at Rs53 billion, climbed to Rs67 billion in 2019, and then wildly jumped to Rs83 billion in 2020. But the company’s net income tells a different story: it hovered around the Rs4 billion mark in 2014 and 2015, fell drastically to the Rs1 billion mark for the next three years, and then actually went negative in 2019, with a loss of Rs6 billion. The year 2020 is remarkable because the company actually made a profit of Rs2 billion. Over here, the story is a bit simpler: that the year 2019 was an awful outlier in an otherwise healthy company. Little Fauji’s annual report pointed out several problems: soaring exchange rate which increased the costs of imported raw material; inflation increasing the costs of local material. Meanwhile, the import and sale of cheaper DAP hampered Little Fauji’s fertilizer off-take, forcing it to carry an inventory of 189 thousand tonnes at the year end. In comparison, the year 2020 was a much better year. The company’s finance and administrative costs were lower, other income was higher, and it even gained Rs2.7 billion from the GIDC gain. But fundamentally, it just happened to sell a lot more this year, resulting in the highest profit it has seen in five years. n

FERTILIZERS

Fauji Foods

losses continue, despite revenue growth In a great year for its parent conglomerate, the food subsidiary continues to struggle as it faces stiff competition

auji Foundation: the name instantly conjures up some of Pakistan’s most successful business (indeed, much of this week’s issue covers what the conglomerate has been up to). One can look at Fauji Fertilizer Bin Qasim Ltd, or Askari Bank; even Fauji Cereals commands 70% of the breakfast cereal market. But every parent company has that one problem child, and Fauji is no exception. Try as it might, and no matter how much money it throws at the problem, Fauji Foods cannot get its act together. On January 25, the Fauji Foods released its financials for the year ending December 2020. Despite some revenue growth, the losses at the company continued – now, for the ninth year running. How did it get to this point? Some quick history: the Fauji Foundation was founded in 1954 as a charitable trust, and was initially designed to help provide welfare for the Pakistan Army’s retired soldiers as well as their dependents. By 2020, this “trust” now runs 21 associated companies, and three fully owned companies, in industries as varied as fertilisers, cement, power, oil, gas, food, grain, and even banking (Askari Bank). Fauji Foundation owns 44.4% of Fauji Fertilizers, which in turn owns 49.9% of Fauji Fertilizer Bin Qasim (FFBL), which in turn owns 50.6% of Fauji Foods. To bring it full circle, Fauji Foundation also owns 12.8% of Fauji Foods. Despite being nestled deep within the Fauji family, Fauji Foods actually began its life in 1966, as part of the Noon Group of companies. Their main arm was the food arm, also known as Nurpur, the beloved and well known dairy brand that produced milk, butter, cheese, desi ghee, honey, and jam. Brand recognition aside, Nurpur did abysmally. Between 2006 and 2011, the company did not crack a net income above

FOODS

Rs45 million. And between 2012 and 2015, the company posted consecutive losses (loss of Rs128 million in 2013, and loss of Rs142 million in 2014). At the time, company management blamed rising costs, and a lack of financial support. Competitors like Nestle and Engro were also expanding rapidly during this time period and closing in on the space. Enter the Fauji Group, who bought the company in 2015, clearly thinking they could do a better job. And, initially, they tried quite hard, throwing money at the problem as a solution. According to the company’s annual report, the management spent Rs7,260 million between 2015 and 2018 modernising the existing infrastructure. As of 2020, FFBL’s financial liabilities that arise from its ownership of Fauji Foods stands at a hefty Rs9.5 billion. Yet, if anything, matter only got worse. The company has made a loss every single year since 2015 (an astonishing loss of Rs2,849 million in 2018, and shocking loss of Rs5,789 million in 2019). According to its most recent annual report of 2019, Fauji’s current liabilities exceeded its current assets by Rs8,789 million in 2019, while its total debt amounted to Rs13,638 million. The only thing positive about the year 2020 is that it is not like the year before it marginally. In 2020, revenue stood at Rs7,373 million, which is greater than 2019’s Rs5,745 million, and comparable to 2017 and 2018 revenue levels of around the Rs7,000 million mark. This is how, despite costs of sales increasing in 2020, the company still managed a positive gross profit. But that jump in revenue was not enough to overcome other costs. Yes, administrative costs and distribution costs were somewhat lower; but finance costs and other expenses actually increased, while ‘other income’ stayed stagnant. That is how the companies’ net income in 2020 stood

at Rs3,058 million - the second biggest loss after 2019. So, what happened? As Profit has previously pointed out, Fauji always had an uphill battle when it came to its foray into fast-moving consumer goods (FMCGs). Fauji Foods would require the fertiliser experts – more attuned to the industrial engineering challenges of manufacturing fertilisers – to suddenly learn an entirely new type of business – one focused on consumer preferences – essentially from scratch. Analysts had previously pointed out that simply trying to copy Engro Foods, for example, will not work. FMCGs are predicated on quick decision making, and relatively quick marketing strategies to accommodate changing trends and stay ahead of the competition. And yet the Fauji Foundation has a culture where decisions took time to be approved and went through levels of bureaucracy. Despite recent aggressive hiring from the private sector, that mindset is hard to change. When throwing money did not seem to work, Fauji tried another tactic: sell the business. In 2018, the Chinese company, Inner Mongolia Yili Industrial Group, wanted to buy a 51% stake in Fauji Foods, but withdrew the offer in 2019. Turns out, Fauji Foods has so many problems that even a well-capitalised state-owned company from China did not want to take it on. That means Fauji Group will have to inject in yet more money and take on more financial risk. It has gotten to a point where the bailouts may begin to threaten the financial stability of the parent companies. But if no one wants to take the problem off their hands, Fauji is stuck with their problem child for now. Expect more financial headaches in the future. How much longer is hard to say, though a full recovery is also possible. n

Why are advertisers in Pakistan investing in As CPG marketers in Pakistan look to replicate the same old tired formula of a music platform, an Indian company is laying the groundwork for the eSports ecosystem through PepsiCo. 26

By Babar Khan Javed

n the 6th of January 2021, Taimoor Salahuddin hosted the first eSports awards in Pakistan. The event recognised various stakeholders such as organisers, streamers, designers, players, and teams that participated in the Dew Gamers Arena (DGA). Referred to in India as Dew Arena, the eSports competition was first launched in the second-most populous country in 2016 backed by both PepsiCo India Holdings Private Ltd and Nodwin Gaming Pvt. Ltd. In the Pakistan market, the DGA was first announced in October 2018, with two of the most popular multiplayer games at the forefront: Defense of the Ancients (DOTA) 2 and Counter-Strike: Global Offensive (CS: GO). By mid-2019, the second season of the DGA was announced and the mobile version of PlayerUnknownâ€™s Battlegrounds (PUBG) was added to the games slate. The third season of the DGA, announced in April 2020, added free-to-play multiplayer tactical first-person hero shooter Valorant and the mobile version of Call of Duty (COD), with the pandemic attracting new audiences that were otherwise starved for PSL 2020. According to the 2020 terms & conditions for the DGA, the event is jointly led

that an audience is growing for an alternative entertainment platform.

What is eSports?

orecasted by Insider Intelligence to be worth $1.5 billion by 2023, eSports is the term used to describe a competition using video games. Given that these competitions attract large audiences either at a live event and/or via live streaming, coupled with the amount of time required to master any particular type of game, and the size of the gaming market, the phenomenon is referred to as eSports. According to a market report from research firm Newzoo, the eSports industry brought in $865.1 million in revenue in 2018 and is predicted to rake in $1.79 billion in revenue by 2022. With the number of eSports fans estimated at 200 million viewers, the average revenue in 2019 was $5.45 per user according to Newzoo. Drawing over ten thousand competitors, the first documented major video competition appears to be the Space Invaders Championship organised by Atari in 1980. Flash forward nearly four decades and The League of Legends World Final in 2016 was conducted live at the Staples Center in Los Angeles with 43 million more viewers watching online and a sold-out crowd of over twenty thousand spectators.

Reasons to watch

I by PepsiCo Pakistan and Nodwin Gaming Pvt. Ltd, the latter of which is an Indian-owned subsidiary of mobile games company Nazara Technologies. According to a draft red herring prospectus filed with the Securities and Exchange Board of India (SEBI), Nodwin Gaming Pvt. Ltd manages online and offline gaming leagues and cups across different games such as DOTA 2 and CS:GO. The filing refers to both Dew Arena by ESL and Mountain Dew Arena has intellectual property owned by Nodwin Gaming. In a country where one consumer packaged goods (CPG) company after the other is investing in replicating the Coke Studio model with a music platform - be it Nescafe Basement, Velo Sound Station, Kashmir Beats, or the lazily named Bisconni Music - it takes an investment from across the border to prove

n the 2020 research report “What Is eSports and Why Do People Watch It?”, academics from the University of Tampere found ten motivational factors which predict the frequency of watching eSports. These were vicarious achievements, aesthetics in the gracefulness inherent in the eSport being played, physical attractiveness of the eSports athletes, drama of the uncertainty of events, the escape and distraction spectating eSports offers, the acquisition of knowledge, the skill of eSports athletes, social interaction, novelty, and the enjoyment of aggression. “Vicarious achievement has a strong social component, as it relates closely to feeling a sense of community and belonging with the players and teams the spectator is rooting for,” the report says. “Due to the fact that many professional players are also active streamers, this allows for an easy channel of communication between the spectators and professional players. We argue that this factor may allow for a deeper connection between spectators and the players and teams they follow, thus leading to a higher sense of vicarious achievement.” Predictably, the majority of identified motivational factors are similar to that of watching regular sports with the exception of aesthetics and the acquisition of knowledge,

the latter of which rarely transfers over with regular sports unlike eSports, due to the intense physicality and subsequent conditioning required in regular sports.

The business of eSports

lobally, the eSports ecosystem relies on the existence of tier 1 and tier 2 teams, gaming engines, game developers, game publishers, game platforms, gaming agencies, event organisers, industry associations, both demand side platforms (DSPs) and supply side platforms (SSPs) to help advertisers support events, telecom companies, and streaming companies. The more advanced an eSports ecosystem, the greater chances they also include tier 1 and tier 2 influencers and consumer electronics companies, the latter of which supply the hardware for the desktop and smartphone players themselves. The monetisation model of eSports stems from the unblinking attention captured of the audience watching a game play out, with advertisers contributing as sponsors, event organizers cashing in on selling media rights to media agencies or networks, various advertising formats baked into the live broadcast, the revenue generated through ticket sales and merchandise, and the fees paid to game publishers for using their games. The sports entertainment product faces many of the same challenges present throughout the sport industry, one that seasoned firms in athlete management are equipped to address. The expertise required to capitalize on the audience and reach relates to events, merchandising, sponsorship, endorsements, governance, legal issues, celebrity culture, and athlete well-being. In the Pakistan market, Electronic Sports Nectar is an eSports organizer and production company that produces video game competitions nationwide.

Audience landscape in Pakistan

ccording to data from Sensor Tower, 90% of the top 100 downloaded paid apps in 2020 for Pakistan were categorised as gaming apps across genres such as action, adventure, arcade, casino, puzzle, racing, and strategy. Covering nearly 25 million devices across the country, with each paid app priced at $1 on average, Pakistanis are spending over $25 million on mobile gaming apps. This number does not include the value of in-app purchases, only the price of the app itself. As of the 31st of January 2021, the top five mobile gaming apps in Pakistan according to Sensor Tower are PUBG Mobile, Grand

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Theft Auto: San Andreas, Hitman Sniper, COD Mobile, and Marvel Contest of Champions, the majority of which have a multiplayer element for eSports and all being consumed by global audiences via live streaming. “The barrier to entry for mobile gaming is nanoscopic and has a low hardware requirement by its nature,” said Jahanzaib Shafique, co-founder of JBnJaws Events, the production company behind the physical version of the DGA in 2018 and 2019. “To play on a desktop, the hardware requirement and monetary commitment is different.” As of the 1st of February 2021, the Facebook Audience Insights tool shows that 25 million Pakistani users of the social networking app identify as gamers, with men and women making up 84% and 17% of the respective audience. The data further reflects that 77% of this audience has a bachelor’s degree with roughly 18% working in the healthcare sector, 14% in the entertainment sector, and 12% in the financial services sector. Roughly 50% of this audience is split between Karachi, Lahore, Peshawar, Faisalabad, and Multan at 22%, 16%, 5%, 4%, and 3% respectively. The analytics tool further infers that the gaming audience members on Facebook are growing by 14% in Quetta, 12% in Abbottabad, 11% in Peshawar, 9% in Bahawalpur, and 6% in Islamabad. “When it comes to mobile gaming, around five to ten thousand people registered as game players for the 2019 Dew Gamers Arena which was seven to eight times the number of eSports athletes planned for” said Shafique. “The kind of response PepsiCo got on PUBG Mobile was unequalled, it’s a household name in the game scene.” Shafique told Profit that Nodwin Gaming, which has the license for PUBG and the Electronic Sports League, handled the initial

Sometimes you look at the consumption moment, as well. Where is the audience consuming the brand? Purchase behavior? But if I could only choose two things, it would be audience and brand aspiration Falak Jalil, a branding doyen within the consumer packaged goods space

screening of eSports athletes in the preliminary rounds with JBnJaws Events taking over the semi-finals and final live game events. He said that on average ten thousand spectators attended the live events in both 2018 and 2019. Grey Density, the digital agency used by PepsiCo Pakistan for the 2020 DGA, was contacted for aggregate data on online viewership, which was not provided at the time of publishing. When asked to provide additional data to measure the effectiveness and reach of supporting eSports in Pakistan, both PepsiCo Pakistan and Telenor Pakistan also declined to respond in time. Based on publicly available information across Facebook and YouTube for the four qualifier events and the one grand finale, the 2020 DGA appears to have attracted nearly 250 thousand unique spectators on YouTube and 1.92 million unique spectators on Facebook. It’s worth noting that Facebook

The barrier to entry for mobile gaming is nanoscopic and has a low hardware requirement by its nature. To play on a desktop, the hardware requirement and monetary commitment is different Jahanzaib Shafique, co-founder of JBnJaws Events

counts a view after ten seconds whereas YouTube counts a view after 30 seconds, hence the disparity. “Advertisers and agencies in Pakistan are still trying to understand gaming & eSports and the role their brands can play in the ecosystem,” said a source that asked not to be quoted who works with an eSports organizer and production company that produces video game competitions nationwide. ““Advertising agencies in Pakistan think that gaming & eSports are indistinguishable. Most of the brands and agencies looking for esports but what they actually want is gaming & entertainment, this can be seen in the recent ongoing campaigns as well where you will find tiktokers and non-gaming influencers instead of esports players. The source told Profit that the aforementioned groups wouldn’t fit what he believes to be an eSport athlete, stating that the level of in-game skill and singular focus required to excel at a game is missing among the YouTube vloggers and TikTok stars posing as eSports athletes to be part of the AFP trend towards the alternative sport competition. “The data we have for the year 2019 suggests that there were over 150 gaming zones operating in Pakistan, raking in over a billion rupees annually ,” said the source, alluding to dedicated spaces filled with desktops upgraded for gamers on which groups of people compete within multiplayer games. “On the micro level with CS:GO and DOTA 2, you would see between two to five thousand participants for gaming tournaments.” The source told Profit that eSports athletes from Pakistan are frequently ranked among the top 100 of the Asia Pacific region, adding that data from NewZoo suggests that there are upwards of 50 thousand highly

skilled eSports athletes in Pakistan alone across the top multiplayer games. “From an audience size perspective it’s tough to give solid numbers because each game creates a different following,” said Zaayer Ali Merchant, project manager at Z2C Limited “There’s a big difference in who follows PUBG vs who is following Tekken. The audiences will vary from Tekken which is in the tens of thousands to PUBG which is in the millions.”

It’s easy to recommend a music platform or a sports tournament, but the challenge comes in proving how an untested platform such as eSports will actually uplift the brand image or will destroy it altogether

AFPs of eSports in Pakistan

he first documented instance of eSports being considered as a viable community investment appears to be the inaugural Djuice National Gaming Championship 2009 by Telenor. While it was a one off event, the Norwegian multinational telecommunications company set a new precedent in Pakistan when it came to advertiser funded projects (AFP), which till then were relegated to music and sports. To understand how brand marketers pick their AFPs, Profit asked seasoned brand builders. “So it starts with the target audience: who are we talking to,” said Falak Jalil, a brand development doyen within the consumer packaged goods space. “We will have a well defined core audience; demographics, attitudinal, psychographics, the media they consume, aspirations, the whole shebang.” To determine whether a brand should align itself with any event or platform, Jalil said it must first look at the brand space; brand values, brand key, the essence of the brand, adding that a great way to start is to look at what a brand can and cannot talk about. “Cornetto can’t talk about politics or religion, no matter how charged the teens are these days,” she said. “Sometimes you look at the consumption moment, as well. Where is the audience consuming the brand? Purchase behavior? But if I could only choose two things, it would be audience and brand aspiration.” This explains why youth segment products such as Djuice and Mountain Dew have prominently aligned themselves with the gaming ecosystem in Pakistan, with target audiences creating positive associations with advertisers that support their form of escapism. “As a strategist, my first and most important objective is to see that the activity I am recommending will actually resonate with the overall brand persona or not,” said Sheikh Danish Ejaz, co-founder & CEO of Madvertising. “It’s easy to recommend a music platform or a sports tournament, but the challenge

Sheikh Danish Ejaz, co-founder & CEO of Madvertising

comes in proving how an untested platform such as eSports will actually uplift the brand image or will destroy it altogether.”

The cosmic ambitions to grow eSports in Pakistan

ollowing the path of vertical integration through its investments across OTT, CTV, FinTech, and eCommerce, industry sources shared that Z2C Ltd has a task force for determining the role the holding company will play in exponentially growing the eSports category. The company is reportedly laying the groundwork for an intelligent content distribution network, while determining the paths of least resistance in monetising merchandising, sponsorship, endorsements, and athlete well-being. “Z2C is currently working on building an eSports team with the goal of representing Pakistan on an international stage as well as providing a pathway into eSports for more players,” said Merchant. “Concurrently, BSports is working on creating eSports content and broadcasting different tournaments to engage and grow the community.” Indeed, the holding company was forced to scrap PSL 2020 amid the pandemic, the eSports version of which - had it existed would not be canceled due to a pandemic due to the nature of the platform. In the wake of COVID-19 and the realisation that a vaccine rollout will likely be delayed, media agencies told Profit that an AFP platform such as eSports may be their best bet to attract a large existing audience hungry for entertaining alternative athletes and a format that is mobile-first.

“There are of course barriers to entry from a consumer tech perspective where gaming systems and computers are prohibitively expensive for a big chunk of the population which is why mobile gaming is going to continue to be a key of growth,” said Merchant. “On the flip side there’s also an issue of server connectivity where developers need to come in to establish local servers to encourage a more competitive side [which PUBG has done with a Pakistani server].” Merchant told Profit that in the eSports ecosystem of Pakistan, stakeholders will have hybrid roles and will need to work with game developers to host tournaments and show participation and which pushes the developers in turn to establish servers to further encourage growth. He said that the first step will be to keep creating tournaments and garner more followers. Billed as the top sports oriented YouTube channel in Pakistan, BDigital subsidiary BSports is also an app that combines live streaming with social media and data feeds which enrich broadcasting of sports. Through its ultimate parent company Z2C Ltd, BSports has streaming rights to the PSL, Lanka Premier League, and is now adding eSports into the mix. The app was notably selected as the broadcast partner for the inaugural Pakistani edition of Red Bull Flick in 2020, streaming the final CS:GO match live on its YouTube channel and app.

What is next for Pakistan?

n the absence of a proactive regulator for eSports, it will undoubtedly be the investment of a media agency to create a talent agency focused on brand safe eS-

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Z2C is currently working on building an eSports team with the goal of representing Pakistan on an international stage as well as providing a pathway into eSports for more players. Concurrently, BSports is working on creating eSports content and broadcasting different tournaments to engage and grow the community Zaayer Ali Merchant, project manager at Z2C Limited

ports athletes across various games around the country, bringing in advertisers as endorsers and sponsors with contextual integrations, sort out team branding and merchandising, and pull off events through dedicated partnerships across telecom, hardware, and software companies. “Ever since major sports events canceled due to COVID-19, we saw a huge boost in global eSports media rights revenues,” said a source who requested anonymity. “Traditional media outlets were having an increasingly difficult time advertising to Generation Z and millennials, where many international linear media outlets experimented with eSports during COVID-19 situation. Large media & broadcasters have noticed that and are showing their interests to explore eSports products where media rights are the second-largest source of revenue after sponsorships for an eSports organizer and production company in Pakistan.” Profit was told that the console gaming

market may far outweigh the mobile gaming market in Pakistan in terms of revenue per user and that both advertisers and media are interested to participate in city-to-city tournaments concerning gaming franchises such as Tekken and FIFA for local area network based gaming. The unnamed source said that in the coming years, energy drinks companies will also likely tap into this growing interest segment as likely sponsors. He said that due to the swell of popularity for soccer in general, FIFA likely has a larger spectator audience in Pakistan than a fighting game such as Tekken, with very few data points suggesting that MMA and combat sports are practiced en masse in Pakistan. “Globally, advertisers and agencies respect and understand their strengths and limitations - recognising that only a specialised eSports organizers and production company can manage leagues and tournaments about the alternative competition format,”

said a prominent name in eSports production management who asked to remain anonymous. “In Pakistan, agencies try to micromanage the entire process, offering uninformed and unqualified perspectives on how the event should be managed or structured. If brands and their agencies continue to waste time in experimenting with such flaws, it will be very difficult for eSports to reach the potential it has.” The anonymous source told Profit that in many instances the need to micromanage and insert inane brand integrations within an eSports event has often led to outright delays and cancellations, which hurts the entire ecosystem especially the eSports spectators and players. He said that his eSports production company does its best to offer stakeholders the insights and education they need to participate in these events as equal partners and learn to respect the experts. The testimony provided by the anonymous sources was mirrored by multiple eSports organisers in Pakistan, the majority of which produce console oriented tournaments for fighting video and arcade games. Choosing the stay anonymous, the respondents told Profit that many events have been shelved because an advertiser or an agency attempted to insert non contextual brand integrations within the event as if it were a cricket match or morning show. This consortium said that advertisers and agencies need to be reminded that they have not created any entertainment platform from the ground up organically and the eSports ecosystem does not need an outsider to micromanage the community that has been built without outside help. “The advertising ecosystem needs to know its place,” this consortium said. “If it wants to align itself with the largest population group that is tech savvy and helms from demographics that will be its future customer, it must behave like its global counterparts and behave itself. We don’t tell you how to run your business, do not pretend you understand a particle of ours.” n

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With high-end, value addition products,

Challenge Pakistan’s Fashion propels textile industry to do better

The company hopes to be able to export $1 billion worth of high-end sportswear and outdoor apparel

By Abdullah Niazi

n Pakistan, one of the answers to the country’s persistent economic problems that many have touted as game changing are Special Economic Zones (SEZs). SEZs are designated areas in which the business and trade laws are different from the rest of the country. SEZs are located within a country’s national borders, and their aims include increased trade balance, employment, increased investment, job creation and effective administration. Again, this is the textbook definition of SEZs. In Pakistan, the reason they are even more important are because they are at the center of the China Pakistan Economic Corridor (CPEC). The SEZs along CPEC routes and at crucial points, particularly in the North, not only have different laws, but have been massive undertakings in setting up infrastructure, housing, power, markets, communication systems, and anything else that might be needed to turn these SEZs into juggernauts of economic growth. These SEZs are supposed to give Pakistan a new industrial identity, in which the country is supposed to stand side by side with Chinese companies to embark on exciting new economic activities in these zones.

There are a number of opportunities available for Pakistan to capitalize on with these zones, especially in partnership with China. For this article, we want to look at a new business venture that is hoping to capitalize on the SEZ model. While the company in question has a definite Chinese connection, it is by no means a part of CPEC and is a private undertaking. Challenge is a Chinese company operating in different parts of the world and has a number of umbrella organizations working underneath it. The interesting thing about Challenge is its customers. Already, even though it is new to Pakistan, thanks to their Chinese affiliation Challenge Textile has among its customers global clothing and accessories brands Adidas, Icebreaker, Polartec, The North Face, Smartwool, Uniqlo, Primaloft and very recently, Reebok. With these companies as their customers, Challenge has already made contributions to Pakistan’s export friendly outlook, by exporting textile products worth $45 million each year since it started operations in Pakistan. Now, they want to get permission to set up their operations into an SEZ, which may result in another boost to Pakistan’s export goals. Even more importantly, Challenge brings to Pakistan a different kind of company. You see, all industries in Pakistan have a

horrible habit - demanding things of the government as if they are their God given rights. This tradition of whining in all Pakistani industries makes for painful copy when you interview a CEO or an association chairman. But Challenge is different because they are not asking for anything, but only showing what they have managed to do up until now. Instead of demanding favours, they try to focus on what they can bring to the table in Pakistan. What they claim to bring now, especially if they get their SEZ, is $1 billion in exports. Here is what they are all about.

The company in question

ow has the Challenge Group managed to attract high profile customers like Adidas and The North Face? Well, before operating in Pakistan, the group has been one of the most acclaimed, well recognized and lauded apparel producing companies in China. Essentially, the business is that they produce quality apparel that big name brands like Adidas would be happy slapping their name on and selling. The group deals mostly in outdoor and sports apparel, and has been in the technical circular knit business for two decades, starting out in 2001. Circular knit is made with a machine that knits the fabric in a continuous circle (tube); the weight is “light.” The fabric is thin. T-shirt fabric is the best example of circular knit fabric. All of these qualities make circular knit products ideal for sportswear. They are capable of producing the lightest and finest items that are required in the market. In China, they have been declared one

of top three most innovative companies in the textile industry because of their creative product lines. China’s ministry of industry and information technology has also declared them one of the four most sustainable companies in the textile industry. In coming to Pakistan, the company has shown great trust in the market, and has seen the potential that Pakistan has as a textile exporter. Their investment through Challenge Fashion has been significant, but what is even more heartening is that the investment seems to be a long term one.

Currently, the group’s plan is to invest $150 million into Pakistan over the course of the next three years. This injection of investment would mean the creation of nearly 20,000 jobs in Pakistan, and exports worth $1 billion over the next five years that would help Pakistan’s balance of payments significantly. The company’s argument, as it has been communicated to Profit, is that they are exactly the kind of company the Pakistan government wants to foster, because it will be good for business and good for the country’s

economy. It is a simple two way equation the government gets an improved economy, jobs, and a company of recognition working peacefully in Pakistan, and the Challenge Group continues to churn out profits. Currently, Pakistan’s economy needs a kick start with abundant foreign investment, and this has been the strategy of the federal government as well. This is exactly what the group brings to the table. The investment will not only improve Pakistan’s standing as a location for foreign investment and encourage others to join the fray, but it will also be

Model picture of new textile park which Mr Haung says will be ready within 3 years from today

a major asset for the government to have a company working with it that sees eye to eye on its vision of how to improve the economy in Pakistan. That is why the company now wishes to build a Special Economic Zone. Now, a single company getting one and for something like apparel would be interesting, especially since they are asking for one very close to Lahore. However, this is exactly the kind of innovation that was the hallmark of the group in China as well, and what won them all of their major clients. By making an SEZ in the vicinity of Lahore, according to the company, they will be encouraging other national and multinational business groups to expand in Pakistan. Other than the growth of foreign investments and a better balance of payments, the forming of this SEZ, as with most SEZs, hopes to bring about modernization in the industry in Pakistan because of increased competition. It will also quickly develop and urbanize areas surrounding the 80 acres of land on which the group is planning to build their SEZ. This will also result in a higher standard of living in these areas, and encourage people there to set-up ancillary businesses.

Viability of the SEZ

very district of Pakistan has an industrial estate or area with infrastructure that offers a variety of benefits. In Punjab, there are 26 industrial estates, 30 in Sindh, seven in Baluchistan and 12 in Khyber Pakhtunkhwa. The problem on evaluation, however, is that these estates are failing miserably. They have been badly placed in remote areas, and because there are no incentives to move there, a lack of skilled labour and basic facilities plagues these estates. These estates were an early precursor to

By making an SEZ in the vicinity of Lahore, according to the company, they will be encouraging other national and multinational business groups to expand in Pakistan. Other than the growth of foreign investments and a better balance of payments, the forming of this SEZ, as with most SEZs, hopes to bring about modernization in the industry in Pakistan because of increased competition SEZs. Some of them have been more successful, mostly the ones in larger cities that have significant populations and facilities. Perhaps the best example is Sialkot, which is famous for its sports goods and surgical instruments. The reason Sialkot has become famous for these products is exactly because it is a special industrial estate. The same goes for Faisalabad and textiles and engineering related products in Gujranwala. Now, SEZs are planning to improve on the industrial estates model. Under the current SEZ act, the Federal or Provincial Governments themselves or in collaboration with the private sector under different modes of public-private partnership or exclusively through the private sector. The fiscal benefits under the SEZ law include a one-time exemption from custom duties and taxes for all capital goods imported into Pakistan for the development, operations and maintenance of a SEZ (both for the developer as well as for the zone enterprise) and exemption from all taxes on income for a period of ten years. For any business looking to set up at low cost, this is a great deal. These SEZs, according to the act, need to be set up in an area of at least 50 acres, with no maximum limit. The group fulfils these requirements, and is also setting up close to Lahore, which should keep them away from worries of falling to the problems of the old industrial estate model.

The company already has 80 acres of land near the Lahore-Kasur road that they want to dedicate to the development of an SEZ. The area is well above the required area for an SEZ, which means that there will be more than enough space for related businesses to also set up in the area eventually. However, the land is currently categorized as agricultural land, and is yet to be converted to Industrial land by the Lahore Development Authority. The company is now looking to get this final step done and dusted. In a recent letter to the Prime Minister, the company pointed out that as per the promise of their Chairman in China, Mr Huang, back in April 2019, Challenge Fashion has already begun the process of setting up a state-of-the-art knitting, dyeing, and apparel manufacturing park in Pakistan. According to the letter, in addition to their initial investment of $50 million, the company is getting ready to put in another $100 million into Pakistan over the next three years. Up until now, the project has progressed at a breakneck speed. In Phase one of their attempt, in only eight months, they have been able to establish a 370,000 square feet stitching facility that houses 4000 employees. Through this new facility, their exports are already going up to $70 million from $45 million last year, and are estimated to go up to $100 million next year if work continues at this rate. n

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By Shahab Omer hen Ameer Hussainâ€™s three month old German Shepherd puppy fell ill, taking him to the vet resulted in two different blows. The first one was that treatment for the sick puppy would cost anywhere between Rs5,000-7,000. The second was that the puppy he had bought for Rs15,000

Breeders bring their animals to these markets, but stolen animals are also sold on a large scale in these markets. For example, there are people in a particular mindset whose hobby or job is to steal expensive pets. Such people keep an eye on every house or place where there are expensive pets Naveed Hussain, dog breeder

thinking it was a German Shepherd, was not a German Shepherd at all – it was a half breed. So what did Ameer Hussain do? He sold the puppy using OLX, which is where he had found it in the first place. Of course, when he sold it, he tried to keep hush about the fact that the puppy was not a purebred German Shepherd. Pet animals can be status symbols for a lot of people. In Pakistan, there is very little culture of adopting or rescuing animals from shelters when you want to get one. People want the most colourful parrots, Persian cats, and German Shepherds and they are willing to spend good money on these animals, both in buying them, and in the expenses that mantining them incurs. From an animal rights perspective, this presents a grim picture. Breeding for purity is a tiring process for the animals, they are domesticated and bred for attributes that often decrease their quality of life (some punch nosed cats have severe breathing difficulties for example) and it promotes in the general public hubris rather than a love for animals. Having a pet is a beautiful and humbling experience, but when those pets begin to be kept to denote class status, it turns a wonderful part of the human experience into a capitalist mechanation. However, it is a lucrative business to serve pet-owners and in this story, we examine how much money people are willing to pay for these ‘purebred’ animals, who is making bank on these, and what corolary businesses have thrived as a result. The tale that follows, unfortunately, is often one of deception - and one in which the animals end up taking the brunt of the burden.

A cottage industry

f you have ever kept pets, particularly cats or dogs, then you will probably know a cat uncle or a dog aunty. These are people that have pets of their own and breed them so that they can then sell the litters that these pets produce. A cat can give birth to up to six kittens at a time, and a German Shepherd can have up to eight puppies in a single litter. The first kind of people that do this operate on a very small scale. Two families with a male and female cat, for example, arrange to have their pets mate and then either the female cat’s family pays the male cat’s family, or they split the kittens that come out of the union. The other kind are people that operate on a much larger scale. They have houses full of animals and breed them incessantly and dangerously so that they can have a large number of kittens and puppies and sell them to prospective buyers either through existing

connections or over the internet. However, this has caused more confusion than anything else. Veterinarian Dr. Haseeb Qayyum believes that since newcomers have started breeding animals in their own homes, new enthusiasts often face deceptions with regards to the purity of breeds. “In the pet business, breed is the most important thing. In Pakistan in particular, having pets was considered the hobby of the rich who kept expensive breeds of dogs and cats. So people continue to breed and sell these animals at high prices beyond the reach of the common man,” says Dr Haseeb. The trend, while not relatively new, is one that has seen a surge since the 1980s. Back around the time when the British took control of India in the late 19th and early 20th centuries, most animal breeding in India was for cattle and other farm animals. The only kind of breeding for sport or status was horses, which is something that had been happening for centuries before that and continues to happen (horses were bred both for speed, strength and beauty depending on whether they were for work, racing, or showmanship). Pets like cats and dogs had been around in India forever, as with any other culture since bonds between humans and animals are normal, but the trend for purebred dogs as pets came with the British, and having such animals as pets became a status symbol among the Indian gentry that wanted to emulate the British. “Even after Partition, the trend was for people to adopt or rescue stray animals. There was no focus on breeds as such other than among people that had either lived or had colonial pretenses,” says Yaqub Khan, a dog breeder that has been operating in Khyber Pakhtunkhwa for the past 20 years. “Then in the 1980s, as people began consuming mass media, there was a demand for purebred dogs.” Even back then, as Yaqub explains, the prime breed of dog in Pakistan was the German Shepherd, which was a preferred dog of the English and was an excellent guard dog. As time went by and more people began to feel the need for the dog, people began to focus on making sure they had the purest breed of the dog since a lot of people began breeding their German Shepherd dogs with local species to produce half breeds. Thus with the increasing demand, the business for ‘purebred’ dogs became huge in Karachi, then Lahore and eventually in Islamabad, and then in almost all small and large cities and villages. Eventually, after generally steady demand, breeders and pet shop owners saw an increase in demand with the advent of social media, as people began posting about their pets, causing more people to want to have

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them. And since social media is often a subtle competition, the purity of the breeds became all the more important. This is also where for the first time people began using social media as a platform to sell purebred pets online.

Enter social media

“A

s the trend grew, so did the business, then when we started using YouTube, Facebook and other social networks, it became even more popular to adopt pure breeds. Because through these social network platforms, people show off their precious animals and explain their characteristics,” explains Yaqub. “Recently, we saw another upsurge with the coronavirus pandemic that caused people to be stuck at home. The demand for pets was so high during the lockdown that breeders ran out of stock. Since people were at home and not having long engagements, they started considering keeping pets.” “The pet business is not very difficult. Every city usually has a pet and bird market from where people can easily get anything, but now if you look at these markets, you can’t find pure breeds here, especially dogs and cats and it seems very difficult to find pure breeds from here. Meanwhile, breeders who used to breed pets also began to use platforms such as OLX and Facebook. Dogs of all breeds are currently being sold on OLX and Facebook, and it is easy for enthusiasts to get their favorite animal directly from a breeder,” explains Khan. “Similarly, there are several groups on Facebook where the breeders of each city are advertising to sell their breeds. Although Facebook has banned groups from doing any kind of buying and selling in groups, people still post their numbers stating the availability of animals and customers call and reach the desired breeder or animal.” Another breeder, Naveed Hussain, agreed that social media networks have undoubtedly expanded the business. “Earlier, even people from small towns had to go to big cities to get a good breed of animal. For example, in the Tollington market in Lahore, there is a large scale sale and purchase of animals and birds. There are markets in major cities including Empress Market in Karachi and Birds and Pets Market in Saddar area, Pet Market in Peshawar, Pet Market on College Road in Rawalpindi,” he says. “Breeders bring their animals to these markets, but stolen animals are also sold on a large scale in these markets. For example, there are people in a particular mindset whose hobby or job is to steal expensive pets. Such people keep an eye on every house or place where there are expensive pets.” When Profit conducted a survey to find out which are the most popular and fast

selling pet breeds in Pakistan, it was found that many foreign breeds are being sold in Pakistan but Labrador, German Shepherd, Rottweiler and Siberian Husky are the most popular among dogs. Khan believes that some of Pakistan’s most popular breeds still include German Shepherds and Labradors but these days, Siberian husky is also gaining popularity in Pakistan, despite the fact that they do not do well in the Pakistani climate. “The popularity of the Labrador had skyrocketed in Pakistan in the 1990s, and given the increase in demand, almost every third person who had a male or female Labrador got it bred and sold them in the market. Usually, a Labrador with normal quality sells anywhere between Rs12,000 to Rs20,000 depending on whether it is fawn, chocolate brown, what colour its eyes are etc. These are the qualities breeders aspire towards.” Similarly, some other breeds fetch even bigger prices, such as the Golden Retriever. in the Labrador, one category is known as the Golden Retriever. There are not many Golden Retrievers in Pakistan because, on the one hand, they are very expensive and because it is a technical breed which demands a lot of time and attention so they are bought only by those who can afford them. This is followed by the Pedigree Labrador Puppy or Dog category. “Interestingly, the price of a pedigree puppy is also determined by the association that registers its papers. For example, the Labrador Puppy or liter that gets registered by Kennel Club Pakistan (KCP) is priced between Rs50,000 and Rs80,000,” Khan explains. “I will say this again, this price is for its quality and color and quality is always determined keeping in view the bone structure and bloodline of the animal. Similarly, if the litter of the same breed is pedigree from Pakistan Kennel Club (PKC), its price will be between Rs25,000 to Rs40,000. However, local breeders also sell Labrador puppies in Pakistan for up to Rs250,000 just because of its quality and blood line.” The prices we were told for pedigree puppies continued to be staggering. A normal German Shephard puppy costs between Rs20,000 to Rs25,000, and a good quality one can go for as much as Rs40,000. If the same puppy is registered with PKC, its price should be Rs60,000 and if it is registered with KPC, it will be sold for Rs80,000. However, those who have show-quality liters and have very good blood lines and quality are selling the same puppies for Rs200,000 to Rs250,000. “Dogs of other breeds including American Mastiff, Pug, American Poodle, Bulldog, Doberman, Russian Poodle, Shihtzu are also valuable breeds but their breeders are few and

these dogs are expensive. Now, some breeders are raising their breeds so that they can be sold in the market at good prices. What happens now is that if anyone has a non-pedigree Labrador female, he is also earning almost Rs250,000 a year from the litter he gets from his bitch,” Khan added.

The pedigree question

et us put this out there once again: buying an animal for its pedigree and breed is a vain, selfish, and completely unjustifiable act. There is no other way to spin it. Animals get mistreated in the process, the commodification of a natural process, and the use of animals as status symbols is the most banal way to show off one’s riches. However, once again, it is something that happens and is in fact a common practice. “Having a dog is a hobby as well as a great business. I have earned Rs1 million from my German Shepherd liter in three years. The money I earn by selling her litter I spend back on her because I love her and take special care of her food, supplements and medicines but not everyone does the same,” says Arsal Chauhan, a dog lover that has a single German Shepherd. “Those who have a female dog make a profit by selling her puppies and the most earners are the stud service providers. Those who have male dogs do not have to wait for puppies all year round. They sell their dog’s stud and in return receive either Rs10,000 to Rs50,000 or a puppy of their choice.” Within this business, of course, the most important thing is bloodline and appraisal. So if a litter is coming from a dog that has won awards at dog shows, the price of the puppies will be much higher. Similarly, as mentioned before, depending on what kennel association rates the puppies, the price will go up. Thus the competition to curry favour with these clubs and judges of these competitions is high since the stakes are quite high. Of course, the business is not the simple money maker that most people make it out to be. As another breeder from Lahore, Ahmed Ghauri, explains, getting good breeds and selling them is not an easy task and requires patience, and at times the loss incurred can be up to 200 percent. “We have four breeds of dogs and two breeds of cats on our kennel which are very popular in Pakistan. I have German Shepherds, Labra, Husky and American Mastiff pedigree dogs. If you look at my investment in this business, I had invested about Rs1.5 million just to buy good quality animals. Now, if I give these dogs home-cooked food, it will make their quality worse and they will not be able

A representative of our association visits the kennel before registering it and checks the proper way the animals are kept. It also looks at what breeds Kennel has and what their quality is. We follow international rules before registering any kennel, dog or puppy Imtiaz Shah, Chairman KCP

to breed well. So when it comes to good food, Royal Canin’s dog food is available at a minimum of Rs1,200 per kg. Now, if I feed my dogs an average of five KGs of dog food a month, then the whole cost of Rs150,000 comes only on dog food. In addition, they have to be given other foods such as chicken, beef or other items that cost separately. Add vaccination and doctor’s fees to this and you have a pretty big and constant investment on your hands,” he says. “There are other risks too. For example, if a puppy is infected with parvo virus, the whole litter can be infected with the virus and die. These infected puppies can infect all the dogs and cats in my kennel, no matter how much I have vaccinated them. In such a situation, not only do all the animals die but also the entire investment is lost. Similarly, sometimes if we have to have a very outclass breed, we get our female dog mated with a dog with a good blood line and people charge between Rs40,000 to Rs100,000 for the male stud service. But if the female dog has any problems during pregnancy or birth, all of the risk is for us to bear.” Of course, there are other considerations as well. One thing that works for breeders is that they have a steady customer base that can afford these luxury pets. “Most of the people who buy these breeds are the ones who know them. Husky puppies, for example, can only be bought by those who can afford a puppy worth between Rs90,000 to Rs250,000. They also have to manage their food and a certain temperature for living later, as the name suggests they are Siberian, so they need AC in the summer and not everyone in Pakistan can afford an AC for their pet. Enthusiasts of these dogs do not need to be persuaded much, they find their way to the kennel themselves and even get their rates reduced,” he explains. Similarly, with more common breeds like Labradors and German Shepherds, new enthusiasts or the first time pet owners also choose these breeds. “In order to reach both types of customers, we viralize our kennel and the pictures of puppies and their parents

available to us in different groups of Facebook and WhatsApp and also give our mobile number. The result of all this activity is that we start receiving calls on a daily basis and customers start coming. On the contrary, if we take these puppies to the market, the shopkeeper will exploit us and ignore our hard work and think of his own profit. Our puppy that sells for Rs20,000 to Rs25,000 online is hardly bought by a market shopkeeper for only Rs10,000. Therefore, it would not be wrong to say that 70 per cent of this business is run on social media. In this business, we do not have many regular customers but only one-time customers.”

The kennel clubs

hese are where the money is at in many ways. On the surface, they are private associations working for the betterment of the animals, but they are also where all the money moving around is decided. New breeders only later find out that if they are to make it in this business, it is important to either get the approval of the earlier mentioned PKC or the KCP. “I first tried to get my dogs registered with the KCP. The procedure for the KCP is that they charge Rs3000 for litter registration, the fee for pedigree per dog is Rs1000, dog transfer fee is Rs2,000, single dog registration fee is also Rs1,000 whereas the kennel name registration fee is Rs15,000 and to register export pedigree the fee is Rs2,000. Similarly, according to their terms and conditions, if anyone wants to register a non Pedigreed dog, he can obtain the form from the KCP office and after filling it along with two pictures of the dog it will be sent to the KCP.” The process does not end here. After all this money is submitted, the KCP will appoint a judge to make an opinion about the dog and if the judge thinks that the dog is a true representative of its breed, KCP will register the dog with unknown parents. Their application fee is not refundable even if the dog is not approved for registration and such registration does not apply on GSDs and Rottweilers breeds.

Provided that for each type of registration, a fee has to be paid first and the decision has to be made by the judge of KCP. It seems that the KCP process is very difficult. However, the PKC procedure is simpler than that and the membership fee of PKC is only Rs2500 and the advantage of this is that it is easy for the member to register a litter. But because of this, dogs approved by them do not go for as much money as the ones appraised by the KCP. However, both the associations charge all kinds of registration fees and it is not known where the fees go later. When dogs are registered through these associations, it has the advantage that their breed, bloodline and parent quality are assessed. A member of KCP informed Profit that KCP is a non-profit making club and as laid down in the memorandum of its constitution, its surpluses cannot not be used for any purpose other than the objectives of the club and welfare of dogs. “KCP is endeavoring, in every way, to promote the general welfare and improvement of dogs, dog shows, working trials, field trials, obedience classes and tests. The club is responsible for framing and enforcing the rules governing conduct of members, exhibition of dogs and conduct of all shows, trials and tests. The membership of KCP is restricted to five hundred members,” the KCP member revealed. “Initially, a person is enrolled as a temporary member and after one year is eligible to become a permanent member. However, KCP is devoted to looking after the canine interests in Pakistan. It is a non-profit organization, having reciprocal arrangements with the two biggest Kennel Clubs in the world i.e., the American Kennel Club and the Kennel Club of England. KCP is the primary registry body for purebred dogs in Pakistan. It is dedicated to encouraging, guiding, and advancing the interests of purebred dogs and their owners and breeders in Pakistan and promoting the knowledge and understanding which dogs can bring to the society. Besides registry, it provides governance and approves dog shows.” The chairman KCP Imtiaz Shah told Profit said that some people are fond of

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breeding dogs as keeping dogs is also a hobby of the people but in recent times the trend of doing business by breeding dogs has increased significantly. “A representative of our association visits the kennel before registering it and checks the proper way the animals are kept. It also looks at what breeds Kennel has and what their quality is. We follow international rules before registering any kennel, dog or puppy.” The breeders, however, are not particularly fond of these kennel clubs. Ghauri argues that both associations provided a platform where business could actually take place. “If we talk about the role of both the associations, then these people are doing the real business. Col Roy of KCP sells the puppy of Labrador’s breed which he has for Rs200,000 to 250,000. Has anyone ever asked him about taxes?” “Similarly, Imtiaz Shah, who has a Labrador breed, also sells its puppy for between Rs150,000 to 250,000. The dogs of these people are already booked before delivery. Of course, the quality that they both have is very good, but they have also been earning. These associations hold pet shows in the name of encouraging breeders and these shows are big business points. The blood line value of each show-winning or prize-winning dog increases and that’s where the booking of its litter or stud service begins. Because most dog shows are sponsored by different dog food companies so these people also get free dog food from there. It would not be wrong to call dog shows a commercial activity because if you look at most dog shows, there are more breeders than enthusiasts who do business,” Ghauri claimed. A senior FBR official believes that the business of not only dogs but also cats and birds has grown in recent times and if this business is brought under the tax net, not only the people involved in this business can be encouraged but also good revenue can be collected in the public exchequer. “Kennel associations and government bodies can work together to register businesses but since people have started this business indoors, it is difficult to guess whether someone has kept a dog as a hobby or for business purposes. However, a policy can be formulated for the buyers in which the attraction is such that only the registered kennels can be approached and purebreds should be sold cheaply on these kennels so that the business people are also encouraged and the customer’s interest is met in a reasonable way,” he suggested.

The pet food business

W 38

hile the expensive pet business is booming, the culture of imported dog feeds has grown to the point where

this feeds, which used to be seen only in big stores, now appear in almost every pet shop. How many of these feeds are real and how many are fake is a separate debate but many dog breeders and enthusiasts believe that it is only possible to get some real feed at large stores or a trustable pet shop as it is very difficult to get real imported dog feed from the general market or shop. One breeder thinks that copying the packaging of big brands in Pakistan and making replicas of their products is not a difficult task and if you go to buy Royal Canin’s dog food at Shah Alam Market in Lahore, you will find three qualities and it is very difficult to differentiate, but the price is different for each. Some shopkeepers there call it Iranian smuggled food, some call it Afghan smuggled food and some sell it as real import. The breeder thinks that by the time you first recognize a fake dog feed, your pet is sick and the dog food seller will not take any responsibility. Similarly, many local brands are also available in markets but not trusted by breeders because of the general market and breeders’ perception that food ingredients are imported from China or any other country and then packaged here and sold in the market. This impression of breeder’s circles is also correct somewhat. The quality of this dog food is sometimes so poor that the animal’s health deteriorates to a dangerous level. Even though this is food and its price is very low compared to imported food, still people do not pay attention to it. Dogs and cats food were recently launched in the market by the Seasons Group of Companies and many breeders believe that it is cheaper and gives good results. For example, a three-kg pack of Season Group’s dog food available in the market under the name of Woof costs around Rs1,150, now, if the same price and weight is compared with any imported dog food, the price of imported is more than double to three times more. The company’s Puppy Food, Adult Dog Food and cat food under the name ‘Flufffy’ is gaining ground in the market. This dog food can be seen in pet stores and many veterinarians’ clinics, as well as being sold online. As the company already has a good position in the market due to its other products and having a good market share, some breeders expect that the local dog feed may now replace the imported dog feed. However, the entry of local companies into the dog/cat food business also indicates the extent to which the pet business has grown. The Executive Manager of New Business Development of Seasons Group Wasif

Ali, believes that bringing dog food to market was more of a corporate social responsibility than a commercial activity. Speaking to Profit, Ali informed that imported dog food was undoubtedly popular in Pakistan, which was largely due to the fact that no company had ever manufactured dog food in Pakistan before because it was a highly technical product. “Now we are in this market and if the price is compared then it is easy to know that our price is very low compared to any good quality imported dog food available in the local market. Similarly, if anyone compares or evaluates imported dog food and our food from any local or international lab, it will be clear that there is very little difference between us and their product,” he added. When Ali was asked if veterinarians often insist on using imported dog feed, he replied, “It may be true to some extent that doctors insist on using imported dog food, but this is because of the higher profit margins than the nutrients in the food. If you look at the price of imported dog food, it is very high and its actual price is not mentioned anywhere on its packaging, so it is easy to sell it at a higher price or make more profit on it. Anyway, we have a tradition that people with certain mindsets like imported things while better quality is being produced in our country. The most senior vets also recommended and declared our product as a first class product because they have seen the good results of this food. Our product is also available and sold at good veterinarian clinics in Lahore, Karachi, Islamabad and Rawalpindi. We do import some ingredients for this food but 80 per cent of the product is manufactured here,” he maintained. Speaking about the marketing strategy of the product, Ali said that the company focused more on BTL activities to market the product. “We developed informational posters and other printing materials for our products and introduced them to good veterinarians’ clinics, which resulted in the product not only being sold but also we are also receiving great feedback from the public. Our company already has relevant experience in preparing other feeds. Since the government is also reluctant to import luxury items, we thought that since imported dog food is becoming very expensive, we should bring our product to the market which is also cheaper in price and of best quality. We launched this product with our corporate social responsibility in mind, although compared to other products of our company, this product does not sell very well, but still we want to keep it available in the market,” he concluded. n

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