ENGRO FOODS LIMITED CASE STUDY Vision Statement: To be the premier Pakistani enterprise with global reach, passionately

pursuing value creation for all stake holders _____________________________________________________________________________________ Engro Foods limited is a wholly owned subsidiary of Engro Corporation. It started its operation just 5 years back with only 20 employees. Now in 2011 it is considered as one of the fastest growing company of Pakistan and is on the threshold of becoming a global player. Engro Food Limited used dairy as a stepping stone to enter the food business. Engro Foods Limited has established state of art dairy processing units with multi product manufacturing facilities in Sukkur (Sind) and Sahiwal (Punjab)). Top dairy brands like Olpers, Olwell, Tarang , Omore and Owsum have been launched under the category of dairy products. To support these brands and their higher standards of quality, Engro Food has invested heavily in milk processing and milk collection infrastructure. The company has also taken initiative to step out of diary sector with the launch of juices under the brand of Olfrute. The factory for Olfrute has been established in Sukkur along with the milk processing plant.The company has completed the construction of its rice processing factory in Muridke ( Punjab). The company intends to export high quality branded rice all over the world. In 2010 the company continued its aggressive business strategy of growth and related diversification into new product ranges and achieved volume growth of 27%. The company increased its volume in 2010 to 310 million litres in milk category as compared to 243 million litres in 2009. The company achieved a market share of 40% in the processed milk segment. The processed milk growth is driven by tea creamers where Tarang maintained its leadership with segment share of 62%. Tarang grew its market share in 2010 by 47% to 169 million litres. Tarang was also awarded the title of Brand Used Most Often by Marketing Association of Pakistan. The company has also entered milk powder category with the launch of Tarang Powder in 2010 which achieved 4% market share. Olpers grew by 9% in 2010. Engro Food is the only company in Pakistan which has utilized one billion tetra packs in year 2010. The ice cream market grew by 20% to 71 million litres from 59 million litres in 2009. Company expects the market to grow faster in 2011 after the successful launch of Omore in Karachi. Volume growth in ice cream was driven by increased competitive activities between WALLs and Omore enhancing consumer awareness. Competitive pressure kept the ice cream prices down making the ice cream affordable for the customers. Omore volumes increased by 100% to 12.2 million litres in 2010 from 6.1 million litres in 2009. Omore has achieved 17% market share in Pakistan but made operation loss due to heavy investment in the brand by the company.

Engro Foods continued its efforts to become a significant player in the flavored milk segment for children with the launch of two new flavors for Owsum expanding the product portfolio to five. The companys model dairy farm Nara has started functioning and is currently producing 21, 500 litres per day with a total of herd size of 2,591 animals of which 1,260 are milking. The farm has successfully provided a demo effect to encourage dairy farming in Pakistan. Acording to the chief executive of Engro Foods Sarfaraz A. Rehman Presently, we consume 31 million litres of milk annually though we collect around 51 million litres, Out of this 40 per cent is wasted because of a lack of processing facilities. Due to these losses production ends up at being par with consumption. We expect shortage of milk will increase in the next couple of years to around 6 million litres. Despite Pakistan being among the top five milk producing countries, around 40 per cent of milk is wasted in Pakistan. The milk needs to be chilled in first three to four hours otherwise bacteria attacks and overcomes the milk. Our demand is continuously increasing while supply is short, Rahman said. The main purpose of starting our model farms is to educate the farmers and create awareness against the wastage of milk. Out of every 10 milk sellers 3 come late to us when the milk has already gone bad The growth in the population of cows and buffalos is comparatively less than the population growth of Pakistan. Most of our families in rural areas have 2-4 cows or buffalos and they sell their milk. Lot of milk producing animals have been lost in the floods last year. According to Sindh Board of Investment, only about 30 per cent of the total milk produced in Pakistan is sold and only 7% per cent is packaged . Australian buffalos give around 35 litres a day while in Pakistan average collection per animal is 5 litres a day. In the rice trading business Engro Eximp (handles rice export & marketing) successfully built relationships in international markets and exported 5,000 tons of rice during 2010. The company intends to export branded rice all over the world. State of art rice processing factory in Muridke has started working and the company is optimistic that demand for Pakistani rice exists world over you just need to tap it. Domestic demand is also huge but the company intends to concentrate on exports for the time being. One analyst said that company has been innovative but ice cream requires special management and break through innovations because of severe electricity shortage in the country. According to CEO of Engro Foods the ice cream industry needs an uninterrupted power supply unlike the milk industry where its possible to manage with a fluctuating power supply. Mr. Rahman added that in this business there is no shortcut. This problem will remain until our country comes out of the power crisis. Rahman insists that the problem is not insurmountable. We have taken some measures and gotten positive results. I was in Islamabad recently, where I saw some 90 per cent of our ice cream in good condition. Shopkeepers do not sell ice cream during power cuts so the ice cream remains frozen even during power outages, he explained. The company is going for market share in ice cream in the current

year 2011 and expect to make some profit while denting the growth of WALLs ice cream. Company officials say that that poor logisticsa hurdle in the way of promoting agro-based businessesthey have set up the Engro Foods Supply Chain Company which will manage the companys integrated supply chain throughout the country. Olpers targets the socio economic class of A and B, and Tarang has hit the B, C and D class. Its not an urban or rural divide but dependent on the spending capacity of our customers. Tarang was not especially targeted at rural areas, but its prices is 13 to 14 per cent lower than the more upmarket Olpers was stated by Mr. Rehman. Right now, the combined sales of Olpers and Tarang has hit the big Multinational Nestle very badly, Nestle is now working aggressively to safe guard their market share in juice and milk segment. Nestle has announced two new factories in Pakistan for juices, they are already market leaders and are determined to maintain the leadership position in this segment. According to Marketing Analyst, Mafia Jamal, Olfrute will no doubt provide cut throat competition for Nestle Fruitavitals but so far Olfrute hasnt been a big hit. Engro foods relied on the brand equity of Olpers by naming the juice Olpers Olfrute but this confused positioning. Olpers is a diary product and fruit juice is totally different category thus Olfrute should not have been leveraged on Olpers brand equity. She adds that taste is similar to Nestle Fruitavitals. It has nothing unique to offer to consumers. I dont think anyone would be able to distinguish between the two on the basis of taste alone. However, Olfrute does have a characteristically unpleasant smell. The price level of the new juice has been kept high. She adds that the introductory price should have been lowered to create a niche in the market. Besides this, the television commercial of Olfrute is absurd and fails to make any impact on consumers. During an interview Mr. Sarfaraz A. Rehman stated we have been consistent in our performance. We did our research and we knew the consumer insights and needs. And, finally we pitched it with emotional advertising. The ads were good, the product quality was good and these two things worked for us in all the brands launched by us. Now, people take more interest in real life experiences rather than watching ads on TV. This is why door to door advertising of our packaged milk has been successful. Our employees go door to door and serve tea at doorsteps. On our Omore launch at Karachi we arranged big festival on sea view beach and customers noticed us and response was tremendous. Engro Corporation recently announced an agreement with US-based Al Safa Halal to purchase its food business. Al-Safa Hilal will be paid US$ 6.3 million by Engro Food Limited, though the company stated that its acquisition, inventories and brand-building efforts would cost up to $15 million (Rs1.3 billion). The move comes as part of Engro Corporations goal to become the largest Pakistan-based multinational company. Engro Corporation Vice President Ali Akbar told The Express Tribune that the deal, which was signed on January 20, 2011 will help the company tap large and profitable markets abroad. When Engro Foods Limited (EFL) started, our vision was to make our mark in Pakistan and then go international, which I believe our brands have achieved, he said.

Once acquired, the company will be managed under Engro Foods Limited. We want to focus on the total value chain, said Akbar. He explained that the companys growth strategy had involved acquiring and building a brand. Owning a brand is where real profitability lies. We intend to export Halal items from Pakistan to Canada and USA where Al-Safa Halal is a famous brand. Al Safa Halal is a relatively small food company based in New York. However, its products are distributed throughout North America, primarily in supermarkets catering to the seven million-strong North American Muslim community. Engro Foods Limited floated 27 million shares to the public in the first week of July 2011 at a price of Rs.25 per share inclusive of Rs. 15 premium, Rs. 675 million was collected which according to the management will be used in financing the purchase and expansion of Al Safa Hilal at international level. One market analyst was of the opinion that Engro Food is expanding at a phenomenal pace, the company needs to consolidate their operations now rather than buying foreign companies which sells Hilal food while their strength in Pakistan lies is on dairy products. The analyst further stated that recently Nestle Pakistan has announced in August 2011 that $ 413 million will be invested in Pakistan over the next four years mainly to stop the growth of Engro Foods in juice and milk sector. Engro has been voted as the best place to work for in the last two consecutive years. Management gives lot of importance to training of employees and work life balance. Chief Executive of Engro Corporation Mr. Asad Umer insists we expect from our employees that quality work will be done during working hours eliminating the need for sitting late in the office. He ensures that every evening he should be back with his family at 5:00 PM and employees should follow him as role model for leaving office at the right time. All communication is done with the executives on e-mails and black berry. He said that decision making has been pushed to company level, otherwise it is difficult to run a diversified group. Only strategies are approved and endorsed by the Engro Corporation and the Board. Engro has 4 independent non executive directors sitting in the Board to improve Corporate Governance . Engro also gives stock options to senior executives of the company so the important managers with critical skills are retained. Engro Foods Limited contributes 27% in total revenue of Engro Corporation which is more than Fertilizer which now stands at 24%. Engro Foods Limited is without a mission statement and the board has asked its top management and employees to develop one which should be able to capture the spirit of the company and guide the employees and all the stake holders During the press conference of announcing financial results of 2010 the Chief Executive of Engro Corporation , Asad Umer stated that we owe success to simple formula Investments are designed around the core strength and needs of Pakistan economy. Agriculture is our biggest strength so investments in foods are designed to play on that strength and energy is the single biggest requirement. A shaky security situation, war on terrorism , chronic power shortages, high inflation and political uncertainty have put off long-term investors, but Engro continues to remain bullish on the country.

There are very real issues here, those are realities, but there are also opportunities, which people dont look at and recognise and, therefore, miss out, I am very bullish on Pakistan in the long run, but very concerned in the short- to medium-term, said Asad Umar. FINANCIAL POSITION OF ENGRO FOODS Rupees in Million 2006 1,506 (509) 428) 1,987 23% 0.92 2007 3,631 (706) (620) 4,329 51% 1.38 2008 8,173 (323) (554) 7,326 50% 1.96 2009 14,665 246 (435) 9,004 50% 1.26 2010 21,050 1,656 177 14,031 50% 1.43

Net Sales EBITDA Net Profit/(Loss )for the year Total Assets Long term debt/ Equity ratio Current ratio