Where Is the FMCG Industry Headed in Pakistan? and What Does It Mean for Our Economy?
Pakistan’s economy has had quite the turbulent journey for the past decade or two, as the state continues to suffer from a depreciating value of its currency. The problem has been intensified by the long history of political instability in our region. This combined with the government’s constant interference in the economy sees a thwarted mechanism for any sort of self-correction for market disequilibrium.
Locals can however find some hope in the recent multi-million dollars’ worth of foreign investments, targeted towards the booming fast-moving goods industry. One socio-economic class in particular has contributed the most to Pakistan’s retail market size of $152 billion dollars. It is our increasing middle class population that has led to the flourishing FMCG industry in recent years.
These working-class millennials with growing disposable incomes are seeking quality life-styles by increasing their consumptions every year, even despite the higher taxes on the goods and services since 2014. A shifting preference to consuming western products has also resulted in an upsurge of international brands setting up their businesses in the established parts of the country. Other prospects for the expansion of the FMCG sector can be found in the increase of population size overall and development of rural markets.
Recent Wins:
Foreign players have kept up with the consumer trends and announced to expand operations in the country. Unilever’s $120 million and Hayat Kimya’s $150 million investment to expand their operations in Pakistan, in addition to Friesland Campina’s $460 million worth of 51% acquisition of Engro Foods is a strong indicator of growing confidence of foreign players in the economic landscape.
The participation of such multinational giants along with local, smaller competitors in the FMCG segment requires much more than just a short-term view of the economy; it demands an opportunity for sustainable growth within the sector. Domestic firms have an advantage in this regard, as opposed to international players, as being close to the market allows them to be more knowledgeable of the customer’s buying habits and patterns. Hence, they have an upper edge over the MNCs that are faced with the struggle of staying relevant in the Pakistani market space.
Perks of FMCG Boom
One notable advantage of the high consumerism forces in the region is that the increase in consumer activity has acted as a driving force for other sectors in the economy. Pakistan is estimated to have the fastest growing retail sales growth at 8.2%/year through years 2016 till 2021. Ecommerce is another area positively impacted by the rise in consumerism, as new online payment options along with faster internet speeds have enabled the population to carry out transactions from the comfort of their homes. In the midst of all this financial activity, the FMCG business has still managed to remain flexible enough to respond to local trends and dynamics as well as manage their operations in a cost-efficient manner.
Moreover, the advertising industry is also benefiting from recent trends of growing buying powers, as the country’s media market is amongst the world largest fastest growing in the entire industry. Increasing advertising revenues have converted and driven incredible growth in the mass media industry especially in the privately-owned commercial media. Furthermore, there is also a spillover effect of the high consumerism amongst the urban middle classes into the sports and entertainments sectors of the economy.
The rise in consumerism also means a better standard of life and greater job opportunities for the local populace in the future. The competition that results from increased buying activity would eventually make it possible to acquire a better-quality goods and services and lower costs.
Downsides
Such highs of the FMCG industry are countered by some of the repercussions of high consumerism it introduces in any struggling economy of the world. With an Environment Performance Index Ranking of 169 out of the total 180 countries (2018), Pakistan is facing an environmental crisis that is only aggravated by the solid waste produce of the FMCG industry. The culture of recycling is yet to take off fully, as plastic bags continue to litter both rural and urban neighborhoods. Read about Covid and its impact.
Furthermore, the high consumptions trends in the burgeoning middle class could hurt the economic growth in the long run. This is because the more the urban classes spend on FMCG products, the less income they have, to save for later. This could lead to an even more depressed private savings rate due to lowered national savings.
Other dangers such as the use of low-quality raw materials to create larger quantities of goods seem very likely to happen. Apart from the dissatisfaction that could result from such an experience, the act of buying excessive products and goods in itself causes a shift in thinking of consumers as well. If consumerism persists at a high rate, consumers might become excessively materialistic and measure their happiness and contentment by their material possessions.
Way Forward
Euromonitor research group predicts Pakistan’s retail market to expand at an increasingly alarming rate in the next 5 years, becoming the world’s fastest growing retail market. A huge chunk of this growth is said to be driven by its 66%, under 30-year-old youth population.
In light of successful transformations of many small businesses into major brands, experts venture to even suggest that Pakistan is decades ahead of its neighboring giant India in terms of infrastructural development. This does not come as major surprise since the recent improvement in the security environment, better infrastructure, transport and auxiliary facilities in major cities of the country, relatively cheap consumer prices and economic expansion at nearly five per cent have proven to be significant contributory factors in the growth of the retail market.
The current government appreciating MNCs role in the domestic economy, particularly those working in the area of FMCG industries, is introducing structural reforms with leading focus on increasing exports and controlling imports to ease the burden on foreign currency reserves and achieve sustainable economic growth.
To achieve this, the government is offering incentives and welcoming new investment in export-focused and import-substituting industries. Prior to this MNCs made heavy unchecked use of raw material to produce goods for domestic markets. These MNCs enjoyed demographic dividends, well within the framework set for them and helped improve quality standards and practices.
But now, an encouragement of joint ventures and stock exchange listings to maximise local participation by the government can hope to ensure some level of commitment to sustainable and responsible growth. Currently Pakistan’s foreign direct investment (FDI) policy offers 100% foreign ownership and profit repatriation with hardly any sector differentiation. On the other hand, there is also an interest the local business community in pooling of expertise and financial resources to introduce Pakistan owned MNCs in the international market that will help further boost the economy.
The FMCG business in Pakistan still has a long way to go. Our country ranks amongst the lowest with regards to ease of doing business. A much more favorable ranking can be attained by adopting policies that are investment friendly. Policy makers need to put political and personal interests aside when devising business and economic strategy. Lastly, a thorough analysis of the negatives of high consumerism and an active approach towards tackling these cons is needed.
