The local scene i.e. Packaging sector in Pakistan is as chaotic, expanding, directionless and mostly undocumented as all other (or majority of) businesses in our country. Directionless spread, ‘follow the trail blazers’ brashness, no thinking or planning, no synergy or sector acumen, no experience or compatibility, it is fast turning into an abused sector in the country.
This, in turn, has created a ‘bonanza’ reflected in ‘annual clearance sales’ for the end-user of packaging materials. It is rumoured that some FMCG MNCs have been known to change their ‘global fairness practices’ to take unashamed advantage of the frenzied situation and add to their already burgeoning bottom lines.
Packaging sector is considered to be an ‘invisible’ industry, with a minimal knowledge and understanding by entrepreneurs, investors and people in general (I had never looked at packaging closely until the time I became a part of this industry).
Since the inception of Pakistan, till date, there are only three public limited packaging companies, the last entrant, went for an IPO only last year. There is one new entrant, putting up a plant in the north, which may also be a part of a public limited company, making a total of four till date. There is not a single MNC packaging company, worth its name in these parts. This is very odd in a country with close to 200 million souls and a young, aware and demanding population. Why is it like that?
The vexatious unorganised sector:
The industry is a blend of a few top-end technology savvy companies followed by a growing lot of smart, knowledgeable and wealthy players and then you have the last tier, a mammoth swarm of low-key, medium to small operators who have grown in numbers remarkably but technology and management wise operate in the 1960s era.
In Pakistan, it is indeed quite difficult in to find reliable industrial statistics and data. And the industry does not have an organized body for a collective voice. According to estimates, the organized packaging sector is only 45% while the remaining 55% remains unorganized. The latter operates under the radar, without any documentation, with unmarked factories and all-cash transactions. These low-end entities cater to a major segment of industries, mostly food and beverages, tobacco, biscuit, confectionery and tea.
Very interestingly, there is even a whole segment of low-end packaging converters catering to ‘Naswar’ (powdered tobacco snuff) and ‘Chalia’ (betel-nut shavings). In almost all cases the users of packaging materials from these suppliers also operate in the unorganised and undocumented sector.
Packaging is a difficult business and the margins are low, it is a game of volumes, supply chain efficiencies and operational excellence. Over time the volumes are reducing, putting the latter two under stress. Being a capital-intensive sector, the initial set up cost is quite high. Good European hardware is expensive, manpower required for running the operations is highly skilled and therefore also expensive. The operation is technologically highly complex, imported raw material content is high, varying between 20% to 80% for different lines of packaging, putting additional burden on capital requirement. Market credit is strikingly high, another very expensive consideration to keep in mind. By the time the operations enter the green zone, it is again time to invest for BMR and capacity expansion.
It quite a complex business with its unique oddities, compounded by the local B2B intricacies.
One of the major ironies of this sector is that most of the existing players and the ‘would be’ new entrants, especially the organized sector players, focus on a couple of well-known, mostly large MNCs for their business and profits.
This is either quite daring on their part, taking on a very challenging target or their business mapping and plan is just not right. Packaging suppliers expect to be treated fairly, professionally, on merit and most important, (particularly in local context) paid on time or within reasonable time. Unfortunately, one can count on fingers, the local and multinationals that fall in this category. This is giving these FMCG giants an undue advantage over packaging suppliers, leading to the exploitation, price wars, undercutting and unscrupulous practices, including an enlargement of the grey economy.
Healthy double-digit growth:
The sector’s estimated organic growth is a healthy 10-11%, but the supply is outstripping the demand. Capacity expansions and new players entering the sector are creating an over-capacity to a tune of 15-20%, raising a very pertinent question as to why is there so much interest in this particular industry?
The wisdom behind some of the investments made in the past or planned/under process are difficult to understand. The general interest and enthusiasm by investors in this sector is encouraging and converting it into a vibrant sector. The investment in technology is very impressive, most of the upcoming investments carry the latest brand new top of the line European hardware, custom-built factories, very expensive ERP systems, certainly a thriving sector with all the latest, bells, whistles and gadgets.
So back to our question, why is there so much interest in this sector?
I will say that the opening bell, goes to the pioneers in this sector mainly for two reasons. The small number of these pioneers in this sector players not only generated margins which were uncomfortably high but also bred arrogance and an attitude putting off buyers. Secondly sluggishness to invest aggressively as per the market needs and deny ‘opportunity gaps’ for others to fill, was lacking. This unusual success streak caught the attention of investors, probably re-enforced by the unhappy buyers, coaxing and supporting them with promises to venture into this area, causing the first ripple and with low capital cost, a booming FMCG sector, especially food, eventually turned it into a tidal wave.
The way this sector is booming is because of the following misconceptions.
Some very large consumers of packaging materials, i.e. match, laundry soap, oil and ghee, etc. erroneously assume that a substantial packaging spend can be saved by an in-house packaging unit and on top of that there is money to be made as well by supplying excess capacity to the market. It also helps to conceal real turnover of the company, keeping the magnitude of the operations under wraps from the authorities.
In majority of the cases this in-house converter discovers that packaging operations is a different ball game altogether. Quality of packaging is the first casualty of an in-house process and actual cost saving is a myth, with many cost heads not being accounted for in a hybrid setup. Running an alien operation and selling excess capacity in the market is another illusion, which looks very attractive on papers but very complex and unfamiliar in reality. Mostly these initiatives end up with a lot of compromises, diversion of core focus and splitting of resources, which focused and agile companies can live without.
Packaging is definitely not a ‘me too’ business, but some success stories, growth and margins (in the past) of the top few, continue to suck in investors, mostly with utterly incompatible background, in this sector. Parking black money in is another noteworthy reason for such chaotic growth. I know some packaging companies, offering ludicrously low prices, sometimes lower than the raw material cost of a reasonable quality packaging materials – incomprehensible to say the least. Only two reasons can explain away this phenomenon: either one is a fool or there is some ulterior motive behind it.
Some of their business plans do not make a lot of sense either. Logistics, proximity to the source of raw materials and buyers, availability of suitable manpower close by to run the plant, sales offices with appropriate hardware and software to facilitate the ‘speed to market’. These are the success factors which will determine the profitability and viability of these setups.
Packaging is not going to go away any time soon, its importance and use will grow, not only locally but worldwide. As the resources become scarcer, more and more packaging will be required to preserve, ship, transport, store, enhance shelf lives and feed the masses, adding to comfort in lives of people. Even the Damocles’ sword of cheaper import and FTA’s are unlikely to affect the local packaging sector due to the intrinsic advantage of geographical proximity to the users unless, they shoot themselves in the foot again, which is not entirely unlikely.
Regardless of the current muddled situation, there is plenty of money to be made in this sector. Elements like capital, technology and appropriate hardware, necessary for this take-off are already available, what is missing is the managerial and operational excellence.
Machines are the best money can buy, but these machines have to run at the designed maximum speeds, change overs have to be like pit stop racing and wastages have to be as per world class standards. There is no justification spending a fortune to buy the best hardware and not take out the maximum out of them. The foremost reason for this not happening is the ever-present intrusion and dictatorial control by the entrepreneurs.
Couple that with the disinterested workers who lack good salaries, conducive work environment, self-respect, motivation, training, delegation and ownership – altogether a lethal blend to kill initiative, morale, professionalism and quest for excellence. Sometimes one wonders why do the entrepreneurs like to hire the best people and then turn them into robots who will follow given directions.
Excellence can never be achieved by the entrepreneurs on their own. It requires relying on good people, a great team, motivated, happy and content led with a clear goal, along with the will and drive to reach the top.
Every time you hire a pair of hands, one brain comes free with it. Using these brains to your advantage will carve your success story.
A lot of these companies will unfortunately go out of business and die. The ones that will survive, compete internationally and grow will be ones who have created an ‘Edge’ for themselves by squeezing the last ounce of efficiency from their hardware and operations by focusing on their people.