Emerald Emerging Markets Case Studies

Strategic buying at National Foods, Pakistan – a recipe for success

Mohammad Kamran Mumtaz Shahid Raza Mir
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Mohammad Kamran Mumtaz Shahid Raza Mir, (2011),"Strategic buying at National Foods, Pakistan – a recipe for success",
Emerald Emerging Markets Case Studies, Vol. 1 Iss 1 pp. 1 - 7
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 Strategic buying at National Foods,
Pakistan – a recipe for success
Mohammad Kamran Mumtaz and Shahid Raza Mir
Mohammad Kamran
Downloaded by UNIVERSITI TEKNOLOGI MALAYSIA At 13:37 25 October 2014 (PT)
Mumtaz and Shahid Raza
Mir are Assistant Professors
at the Institute of Business
Administration, Karachi,
Pakistan.
Disclaimer. This case is written
solely for educational purposes
and is not intended to represent
successful or unsuccessful
managerial decision making.
The author/s may have
disguised names; financial and
other recognizable information
to protect confidentiality.
DOI 10.1108/20450621111122174
t was July 2007. Muhammad Iqbal, Head of Supply Chain Management at National
I
Foods, Karachi reviewed his company’s budget for fiscal year 2007-2008 that had
recently been announced. The budget signalled start of planning for the next year.
Iqbal was worried. The task of planning for purchase of tomato paste, a key ingredient in
many products at National Foods, looked daunting. National Foods bought the paste from
China and it had not been easy to decide the exact quantity to buy.
Supply Chain Head at National Foods
Iqbal had MBA in Supply Chain Management and brought with him 24 years of experience.
Out of 17 years that he has been with National Foods, he spent ten years in sales and
marketing department before joining the newly formed Supply Chain Department in 2005. In
2006, he got promoted to Head of Supply Chain and this brought with it extended
responsibility for Iqbal. He had previously been sitting in meetings where issues concerning
the buying of tomato paste were discussed. Now that he was the Head of Supply Chain he
had to head such meetings himself and take a final decision.
National Foods and National Ketchup
National Foods was founded in 1970 and started out as a Spice company (National Foods,
2008). About three decades later it had diversified into a versatile food company with over
250 different products in 12 categories and over 100 different products for the international
markets. It was one of the local food companies in Pakistan that had both ISO 9001 and ISO
22000 certifications. National Foods developed innovative food products based on
convenience and fast preparation in line with existing modern lifestyles but also retained
traditional values through its collection of food products.
Ketchup target market
The food trend in Pakistan was changing and city dwellers were getting more inclined
towards ready made and fast foods. The changing tastes, traditions and patterns of food
consumption created a scenario where traditional home made sauce and chutney were
being replaced by ketchups of various types. Although ketchups found more appeal for
younger generation they were equally liked by adults. There was growing market for
ketchups and this left immense opportunity for food manufacturing companies to grab
market share.
Competitive positioning
National Foods’ ketchup faced severe competition from primarily Mitchell’s, Young’s,
Shangrila and Ahmed Foods’ ketchups. The market was cluttered with different varieties of
VOL. 1 NO. 1 2011, pp. 1-7, Q Emerald Group Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1
 ketchup from these companies which made it difficult for the consumer to distinguish
products of one company from another.
In the face of this fierce competition, it was very hard for ketchup producing companies to
stand out in the crowd. Therefore, it was critical to come up with new products and stay
ahead of the competition. National Foods practiced aggressive marketing strategies to
combat the competition. Special emphasis was placed on the distribution channel for
ketchup. The company had also been placing great importance on quality. According to
Mohammad Iqbal:
We want to give our customers the best quality and for that consumers are willing to pay more for
our products than those of our competitors.

Ketchup manufacturing at National Foods

The company launched its ketchup division in 1997. Ketchup was being produced on
KOSME plant (which had been imported from Italy) at the National Foods’ factory in Sind
Industrial and Trading Estate (SITE), Karachi.
The Ketchup product category at National Foods included Tomato Ketchup
which constituted 75 per cent of total sales in this category. Chilli Garlic Sauce constituted
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10 per cent, Hot & Spicy 10 per cent and Imli Chutney 5 per cent. These contributed nearly
15 per cent to the gross sales of National Foods and had an average annual growth of
10-15 per cent. Anyhow, this growth in demand was volatile because of competition in the
market and low barriers to entry.

Purchase of tomato paste at National Foods

History of buying tomato paste
National Foods started buying tomato paste from Turkey in 1997 when its requirement was
200 metric tons per year. As the requirements increased with the growth of ketchup sales the
company realized that it is more profitable to buy from China. Although Pakistan was an
option as suppliers for paste were available there but the brix value (brix value determined
the percentage of total solids in the paste and hence its quality, the higher the value the
better the quality) of the paste available in Pakistan ranged between 12 and 24 whereas
National Foods required 36 brix tomato paste for its ketchup. The price difference as
compared to China was not significant either.
China offered comparatively better prices for the desired quality of paste and a shorter lead
time of one month when compared with Turkey. Thereby the company made its first fresh
agreement with Uranqi, Xiangian China in 2003.
Landed cost of buying from China had shown an approximate average 10 per cent increase
from the previous years. Anyhow it was hard to predict the exact pattern of prices for the
next year.

The buying process

The yearly budget got announced in May to June. So requirements planning for tomato
paste started in July. Then in August the company got samples of tomato paste and
quotations from its qualified suppliers. Based on the quality of the sample and the quotation
it then negotiated price with the suppliers that met the minimum threshold of quality. Order
was then placed following the regulations for import.
The paste was imported in 20 feet containers via sea. Shipment started arriving in early
November but could get as late as last week of November depending on the timing of tomato
harvest.
The harvesting season for tomatoes started in August and continued till January in some
years. This translated into getting final deliveries, for the order placed in August, as late as
January. The suppliers of tomato paste had to buy the tomatoes for production during the
harvest season. They would charge an additional amount for holding the tomato paste after

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PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 production if these are not shipped immediately. The holding cost in China was 10 per cent
more as compared to that in Pakistan.
Usual practice had been to book the paste during the harvesting season and any buying
after that resulted in additional cost.

Supplies for manufacturing of ketchup

Ketchups were being made from 10 to 15 items. One of the key ingredients in the
manufacturing of ketchups was tomato paste. It was available in tin cans for consumer market
as well as wooden bins and steel drums with aseptic packing for the industrial market.
Wooden drums could hold 1.3 MT while steel drums carried 240 kg approximately.
These supplies had a shelf life of 18 months.
Other ingredients of ketchup were tomato paste, sweeteners, vinegar, salt, spices,
flavorings, onion and/or garlic. The types of sweetener used were usually granulated cane
sugar or beet sugar. Other sweeteners included dextrose or liquid sugar in the form of corn
or glucose syrup.
Tomato paste, sugar and preservatives were imported. The company imported paste in steel
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drums of 240 kg. Other raw materials were purchased locally from suppliers in Lahore and
Karachi. Flexible packaging materials were supplied by Packages Limited while glass
bottles by Ghani Glass and twist caps by Hills side. Master cartons came from suppliers
20-25 km from National Foods’ factory in Karachi.

Year 2007
Political conditions in Pakistan
There had been a rise in antigovernment terrorist activities and general hatred against
Pervez Musharraf Government for his pro-US stance (Hill & Associates, 2007). Several lethal
suicide attacks in the stance of a few months, mostly targeting law enforcement officials,
indicated extreme designs of the terrorists. The resolve to succeed at both ends was very
strong, which clearly spelled out that the security situation would continue to be extremely
volatile.
Musharraf was under pressure from all the political parties to hold the elections on time as
promised and to relinquish his post of Chief of Pakistan’s Armed Forces. If the election
schedule announced by Parliamentary Affairs Minister Sher Afghan Niazi was followed,
presidential elections would be held in the Autumn of 2007 and the general and provincial
elections would be held on January 30, 2008. Uncertainty over the course of these elections,
if they happened at all, was one of the most significant risks facing the country.
Islamic extremist groups, the mainstream political/Islamic parties and exiled national leaders
were more interested in a showdown with General Musharraf to curtail his powers or to
remove him from office, than they were in an election.
Anyhow, the rupee had not shown much downslide and was trading at Rs. 60 for US$1.

Buying scenario
Prices for paste had risen but China claimed that crops next year would be good and prices
would reduce.
Calculations based on budget and demand forecast (considering 10 per cent annual
growth) showed a requirement of 650 tons for the following year. Iqbal had got quotations for
the required quantity with given specifications from National Foods’ qualified suppliers.
Table I shows the minimum buying criteria.
The existing consumption rate showed that 150 tons of tomato paste would be available in
inventory at the time the order is placed.

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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3
 Table I Tomato paste quality standard
Brix % 36-38
Brix % average must not be less than 36
Brix % no individual test value may be less than 34
Lycopene mg/100 g e55
Mold count Not in excess of 50 per cent positive fields
Microbe In accord with commercial asepsis demand
Chromatism 12.5% a/b e2.1
Mucosity cm/30(12.5%) 712
PH 3.9-4.5
Lead(Pb) mg/kg d0.5
Tin(Sn) mg/kg d200
Total acidity d3

Keywords:
Purchase management,
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Iqbal had called quotation based on his approximate calculations for the quantity of tomato
paste. The quotations were now available and Iqbal had to negotiate a final price with the
suppliers.

Iqbal was able to make a deal for US$960/ton C&F Karachi Port in 2006 bringing the
Tomato paste,
suppliers down from US$1,000/ton.
Planning,
Inventory, There was an additional 25 per cent duty and 5 per cent custom and clearance cost. Holding
Perishable products costs for one ton of paste for one year in Pakistan could be approximated to Rs. 15,000.

References
Hill & Associates (2007), Security Assessment Pakistan 2007.
National Foods (2008), Annual Report, National Foods, Melbourne.

Exhibits

Exhibit 1 National Foods ketchups (Note: Different packaging and sizes)

Note: Different packaging and sizes

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PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 Exhibit 2
China’s tomato paste export prices soaring up
Tuesday, March 06, 2007 Posted: 08:10 BJT(0010 GMT) MOFCOM

A global shortage in tomato paste resulted in soaring export prices of China’s related products,
which brought more opportunities to its ‘red’ industry, but at the same time, it also raised
accusations from overseas tomato paste industry saying that China’s tomato paste enterprises
were cornering the market, which was justifiably denied by China’s tomato paste industry.
Presently in Northern Italy, tomato paste price soared up to 700 euro/ton while in Spain, the
price reached 680 euro/ton, and in the meantime, tomato paste was sold out in both Europe and
U.S. The global shortage in tomato paste spurred China’s exports significantly. According to the
statistics released by China Chamber of Commerce for I/E of Foodstuffs, Native Produce and
Animal By-Products (CCCFNA), in 2006, China’s tomato paste export volume reached 630 million
kilograms, a 4.71% increase over the previous year, which totaled $360 million, up by 18.8% year
on year while the unit price attained $566/ton, and realized a 13.46% growth.
Witnessing China’s tremendous success and increase in tomato paste exports, some people
from overseas tomato paste industry assumed that China was taking advantage of the global
shortage in tomato paste and cornering the market. These accusations were strongly opposed by
officials representing the CCCFNA, who indicated that China’s tomato paste producers used to
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sign an annual sales contract with overseas importers in early August each year; although price
fluctuation may still happen, the risk is shared by both exporter and importer.
In 2006, due to bad weather in Greece, its tomato output was only 710,000 tons, less than the
1 million tons expected, and at the same time, the U.S. also faced a decline in tomato output,
which totaled 10.10 million tons, a 13% decrease than reckoned. Meanwhile China maintained its
normal yearly output. The statistics indicated that in 2006, China’s tomato paste export volume to
the U.S. reached 9.44 million kilograms, a 735.3% increase over the previous year, which realized
$5.01 million of profit and went up by 933.2%.
Source: Chinese Ministry of Commerce

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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5
 Exhibit 3 Weighted average lending and deposit rates
Per cent per annum
Gross Outstanding Fresh Outstanding
Items disbursements loans deposits deposits

July 2007
Public 10.88 10.90 10.97 11.50 4.23 5.09 3.54 4.63
Private 10.35 10.37 11.24 11.69 5.63 7.06 4.06 5.40
Foreign 10.56 10.58 13.99 14.17 5.08 6.28 5.05 6.26
Specialised 10.19 10.19 8.98 9.57 7.27 8.32 5.79 7.40
All banks 10.42 10.44 11.26 11.72 5.47 6.83 4.03 5.32
June 2007
Public 10.22 10.26 10.95 11.61 4.39 7.60 3.55 4.75
Private 10.74 10.88 11.36 11.78 5.46 7.01 3.98 5.32
Foreign 8.85 8.92 13.83 14.04 5.09 6.47 5.42 6.56
Specialised 9.71 9.71 8.97 9.58 8.52 9.68 5.32 7.30
All banks 10.32 10.43 11.33 11.80 5.33 6.98 3.98 5.30
May 2007
Public 11.16 11.17 10.96 11.52 5.40 8.12 3.97 5.12
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Private 10.81 10.92 11.33 11.75 5.40 6.91 3.92 5.23

Foreign 9.53 9.63 13.80 14.01 5.22 6.67 5.45 6.61
Specialised 9.31 9.31 8.99 9.57 7.07 9.12 5.68 7.16
All banks 10.56 10.66 11.32 11.76 5.38 6.93 4.02 5.30
April 2007
Public 11.13 11.15 10.98 11.70 5.13 7.31 3.75 4.87
Private 10.94 10.99 11.29 11.74 4.89 6.45 3.83 5.14
Foreign 9.15 9.24 13.86 14.10 5.41 6.78 5.44 6.58
Specialised 9.24 9.25 8.97 9.60 5.33 6.49 5.63 7.11
All banks 10.60 10.66 11.30 11.79 4.99 6.54 3.92 5.19
March 2007
Public 11.21 11.34 11.06 11.74 5.14 6.53 3.65 4.76
Private 10.85 10.90 11.28 11.72 4.98 6.70 3.86 5.19
Foreign 9.04 9.42 13.84 14.05 5.64 7.01 5.42 6.58
Specialised 9.52 9.53 8.93 9.56 6.98 8.95 4.91 7.02
All banks 10.55 10.67 11.29 11.78 5.08 6.74 3.92 5.21
February 2007
Public 10.47 10.61 10.96 11.56 5.27 6.87 3.50 4.57
Private 11.01 11.05 11.29 11.73 4.94 6.73 3.78 5.10
Foreign 8.65 8.95 13.76 13.94 5.42 6.03 5.26 6.34
Specialised 9.69 9.70 8.95 9.59 3.21 4.34 5.34 6.91
All banks 10.52 10.62 11.29 11.75 5.03 6.59 3.82 5.09
January 2007
Public 11.79 11.87 10.98 11.57 7.28 9.05 3.44 4.53
Private 11.00 11.03 11.14 11.59 4.99 6.50 3.68 4.96
Foreign 8.67 9.00 13.88 14.15 4.71 5.56 5.07 6.33
Specialised 9.82 9.82 8.94 9.60 3.57 5.17 5.32 7.42
All banks 10.65 10.74 11.18 11.66 5.05 6.48 3.72 4.97

Source: www.sbp.org.pk/ecodata/Lendingdepositrates.pdf

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PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 Exhibit 4 Key financial ratios
2003 2004 2005 2006 2007 2008

Performance measures
Efficiency ratio, operating leverage (%) 97.32 94.59 97.22 94.18 92.91 92.27
Return on assets (%) 10.25 14.16 8.22 13.57 16.85 16.61
Return on net assets (%) 10.50 22.81 11.22 15.52 23.02 21.96
Return on capital employed (%) 25.64 39.42 21.33 28.97 35.66 40.70
Return on equity (%) 15.25 30.32 17.39 32.71 42.05 35.43
Profitability measures
Gross margin percentage 27.31 27.79 25.89 30.92 34.23 32.20
Net margin (%) 1.76 3.64 2.00 3.81 5.41 5.11
Operating margin (%) 4.30 6.28 3.80 7.11 8.38 9.48
Earnings per sham 4.71 10.89 7.21 16.55 23.40 28.33
Investment utilization
Collection period (period average) 14.81 14.49 15.47 17.56 16.37 22.15
Creditors payment days 13.53 16.79 19.85 25.64 31.18 30.80
Inventory turnover days 81.29 95.53 101.24 103.50 97.98 108.33
Inventory turnover ratio 4.49 3.82 3.61 3.53 3.73 3.37
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Asset turnover (times) 2.69 2.44 2.41 2.20 2.22 2.09

Financial condition
Current ratio 1.00 1.05 1.09 1.16 1.10 1.07
Quick ratio 0.17 0.16 0.19 0.43 0.33 0.33
Debt to equity ratio (%) 40.26 19.77 49.23 83.44 52.67 38.19
Interest coverage ratio 2.59 6.87 3.64 5.28 6.13 5.16
Booh value per share 31.97 39.87 43.08 58.13 86.55 93.37

Source: National Foods Annual Report

Exhibit 5
Year Forecast Demand Error Growth %

1999 200 190 10

2000 220 220 0 15.79
2001 250 260 210 18.18
2002 290 300 210 15.38
2003 340 330 10 10.00
2004 350 360 210 9.09
2005 370 400 230 11.11
2006 400 450 250 12.50

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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 7