Thanks to Engro, Milk won't Dry up in Pakistan
The Inclusive Business Model of Engro Foods
Following our posts about what inclusive business (IB) is, how inclusive business models (IBM) work and their effectiveness in reaching the Base of the Pyramid (BoP), it is time for a real-world case study. It has not been easy to find them. Many are about the partnership programmes with development aid organisations rather than about their business models. Since the International Finance Corporation, a subsidiary of the Worldbank (IFC) is actively supporting IB, it has a number of case studies on its database. I selected Engro Foods and was quite surprised to find the following headline from December 2016 as a result of further research:
“KARACHI: Dutch company FrieslandCampina Pakistan BV (FC Pakistan) has completed its acquisition of a majority stake in Engro Foods at an estimated price of $446.81 million...”
Given the company's high valuation, it should be profitable and operate a business model promising future profits and competitive advantages. Engro Foods (EFL) launched in 2005 operates an inclusive business model to secure domestic milk supply. It is the second largest dairy producer in Pakistan. Their IBM has brought many informal farmers into their supply chain while also creating employment in rural areas.
At the outset in 2010, the challenges must have seemed gigantic: “Over 92% of milk is produced by small farmers in Pakistan (approx. 7mio). These farmers rear two to five cows that produce between 3-5 litres per day as against the world benchmark of 25-30 litres per day.” Pakistan's rural areas are vast and the 72 million dairy animals are widely dispersed. Farmer's access to markets is limited due to underdeveloped physical and communication infrastructure. Up to 15% of milk is spoiled during transportation. Farmers are paid unfair prices by middlemen many rely on for selling the milk. They are also charged high interest rates for credit. At the other end of the supply chain, dairies pay transaction fees to the agents. Milk quality is inconsistent due to “to weak feeding patterns, lack of modern farming techniques, and poor access to veterinary services.”
Apart from strengthening and securing milk-supply for the future, Engro realised that improving the quality of milk supplied through middleman would be difficult. Long-term strategic thinking has resulted in the establishment of a vast network infrastructure to collect milk, educate farmers, provide agri-services and ensure complete process transparency.
EFL's supply infrastructure rests on 3 pillars
Over 1,800 milk Collection Centers (mCCs): they reach 85% or 300,000 farmers supplying EFL in around 15,000 villages. Typically, on less than 30 sqm and located within 2km of farmers, a mCC is equipped with a chilling tank, basic laboratory, and geyser run on electricity or a generator. On average, a mCC collects 400 litres per day. EFL's more than 360 trucks transport the milk from the mCCs to regional hubs from where it is distributed to the milk-processing plants.
Over 1700 village milk Collectors (vmCs), trained in milk testing, handling, and hygiene practices and equipped with basic equipment such as collection utensils, a
testing kit, and record keeping register; vmCs collecting large quantities are also provided with coolers and generators.
Contractors and “dodhis” (village-level door-to-door milk collectors) transporting purchased milk from farmers to an mCC for testing.
For transparency between EFL and its suppliers, a management information system collects, transmits and monitors real-time data from its mCCs, provides reports for collected quantities, optimising logistics and quality and to facilitate payment to farmers. “Payment schedules can be customized based on farmers’ needs.”
Training, Services and Agri-Inputs
EFL's 40 “agri-service units” staffed with 87 veterinarians and agrarians provide training and guidance in areas such as vaccination, hygiene, and feeding practices. In 2013, the year the report was published, EFL was launching shops for dairy and agri-inputs at its 22 field offices.
In partnership with USAID and Care, women are trained in livestock and dairy management to generate livelihood opportunities. The Asian Development was expected to come on board these programmes to provide working capital finance.
In conclusion, this case-study describes an IBM successfully implemented through a public/ private partnership. IFC's USD 80 mio long-term loan facility approved in 2010 enabled Engo Foods to strengthen its supply chain through the inclusion of BoP farmers despite formidable challenges. Already profitable at the time of the loan injection, it was able to quadruple its profits within 3 years thereafter.
Since the publishing of this case-study, Engro has attracted additional finance and development support from various international organisations for training employees and farmers, offering working capital finance, promoting mechanisation in farming, lobbying the government on milk-price regulation, engaging farmers in networking, and much more. There is abundant information about Engro's engagement in improving livelihoods from which it is assumed that lives at the BoP must have have benefited. Unfortunately, the lack of studies on the impact on Pakistan's BoP does make this difficult to ascertain. More research and/ or publishing of such studies is desirable particularly for learning, replicating and scaling of similar initiatives.