Kaghaz

A business strategy case study

Contents
Background......................................................................................................................................3

Substitutes........................................................................................................................................3

Competitors......................................................................................................................................4

Buyers..............................................................................................................................................5

Suppliers..........................................................................................................................................5

Distribution......................................................................................................................................6

Delivery through Bilty.................................................................................................................6

Costs........................................................................................................................................6

Impact on final cost.................................................................................................................7

Develop distribution network......................................................................................................7

Costs........................................................................................................................................7

Outsource Distribution.................................................................................................................7

One or all three?...........................................................................................................................8

Annex A: Facebook insights............................................................................................................9

 Awais was waiting for Uzair, the founder of Kaghaz to arrive. He was Uzair’s partner at
“Kaghaz” in the city of Lahore. Both of them were going to have a meeting to discuss the future
of the company.

Whilst waiting for him, he was contemplating what his next step in life should be. He was
about to graduate from the Lahore University of Management Sciences (LUMS) in a month and
had to make a decision. He could either choose to do a job, he estimated that he could earn
around rupees 50000 from the job. His second option would be to continue to work for Kaghaz.
Currently, he was getting 50% of the share of profit from Lahore which amounted to around
rupees 30000. He felt that as he and Uzair were contemplating expansion in Gujranwala, his
profit could potentially increase to rupees 40000. Moreover, if the business continued to expand
in the future, his profits could rise by approximately rupees 10000 for every new place that
Kaghaz entered. Another option that he could pursue was to start his own distribution company
after graduation. With this company, he would not only manage work for Kaghaz but also other
similar companies. So, if Awais was able to get the accounts of two other companies like
Kaghaz, he could potentially earn rupees 90000 a month. He felt this was a realistic option as the
time required by him to manage Kaghaz operations was two hours maximum per day.

As he was contemplating his options, Uzair walked in. Uzair had been recently thinking
about how to make Kaghaz bigger and better. He wanted to discuss his ideas with his partner,
Awais. He felt that Kaghaz could expand into different cities with the help of Awais. It was
crucial for Uzair to have a partner as that ensured that there was a proper distribution system in
different places where Uzair was not present. Secondly, there was the option to expand into
different colleges and schools. Currently, Kaghaz was only serving UMT, LUMS, COMSATS,
UCP and FC. There was a huge part of the market that was underserved namely universities like
Kinnaird, Lahore College for Women University, FAST, King Edward, Shareef Medical
Complex and University of Lahore. There was another option of getting notebooks made from
China as a low cost alternative. Currently the whole distribution system was managed by both
the partners themselves but now as the company was expanding they had three options the way
they could manage their distribution system and build a more sustainable model. Managing the
distribution was major a decision for the Kaghaz management to take.
Background
Kaghaz was founded in February 2013 by Uzair. Recalling from his university days, he
remembered the hassle of writing on rough pages. He wanted to bring a change for the future
students. He strongly believed that there is a need for good quality paper. Wanting to cater to the
gap in the market which students unconsciously ignored was his primary motivation to start
Kaghaz. While discussing with his friends the new idea he stated

‘Jab acha kaghaz hoga nahi tou logon ko uski pehchan kaisay hogi’.

Despite the higher cost of Kaghaz notebooks as compared to the others existing in the
market, Uzair was sure that students will not be reluctant to pay an extra 20-30Rs for the ease
and cleanliness the new paper will provide them with.

Apart from this, his unique selling proposition was also to make notebooks appear much
flashier as compared to the existing ones in the market. The idea of interesting and unique covers
having memes popular among the youth was the basic idea. The improvement in quality was to
be brought by the use of 80 grams of paper which was more than the weight of the paper used in
other notebooks available in the market.

The production facility of Kaghaz is currently located only in Karachi; however they
have warehouses in Lahore & Islamabad as well. The distribution network of Kaghaz not only
extends to the three major cities, they are also distributing to other cities including Sialkot,
Faisalabad & Gujrat. The expansion rate has been very high and they are establishing a strong
network throughout Pakistan. Due to budget constraints, Kaghaz cannot invest heavily in
promotions. Networking is more important in this industry therefore Kaghaz has used cheaper
methods of promotion. Their primary promotion tools have been in store branding and social
media promotion. In store branding basically includes posters and rack stickers.

Substitutes
The substitutes for their products included tablets and laptops. The problem with tablets
was that they were very expensive in comparison with notebooks which were cheaper. Both
tablets and notebooks have limited capacity hence it’s difficult to store too much information on
both. Even though the tablets provide a certain additional user experience yet as the local
population is not yet accustomed to yet so their use is usually not acceptable even in the
classroom.

Another substitute for their product was mobile phones which could be used for writing
notes or points. However, the small screen of the phones made it difficult for people to read and
could cause eyestrain. With paper, the person could make sense of their writing and there
wouldn’t be any negative impact on the eyes.

Registers were also considered a substitute for spiral bound notebooks. They were
cheaper and easily available. However, their paper quality was not as good as that of a spiral
bound notebook. Moreover, they did not have unique covers with interesting memes or TV
sitcoms on the front which is something popular nowadays with the purchasing customer.

Competitors
“Wells Paper Products Company” was established in 1993 by a sole proprietor. They
manufacture more than 300 stationery notebooks of different sizes and designs. Their
manufacturing unit is located in Karachi. Their products are sold in Karachi, Islamabad, Lahore,
Rawalpindi, Faisalabad, Sukkur, Rahim Yar Khan, Multan, Peshawar and Quetta. Their main
brands include Biro, Dalmatian and Bingo. They have an edge over kaghaz because they have a
very huge and well-established distribution network alongside being a trusted supplier to
wholesalers and stationary shops.

Ease is another competitor for Kaghaz, but as they entered the market last year their
impact cannot be truly analyzed. In the Porter’s Five forces, their impact comes from new
entrants as well as competitors. Currently, they are only in Lahore and working on a small scale.
Their major disadvantage is that their prices are higher than Kaghaz’s without providing a major
jump in quality or the overall service experience to the customer. Moreover, they don’t have
good links with retailers as yet. Furthermore, Kaghaz has better quality covers of 350gms
whereas theirs are only of 215gms. In marketing terms they are charging through a strategy of
more for less. Ease is charging more and providing less.

Imported notebooks from China are also a huge source of competition for Kaghaz. This is
because they have low costs because of economies of scale and less duty on paper imported from
China. In the case of Kaghaz, costs are high due to the duty which is imposed on paper. On the
other hand, Kaghaz has superior and unique covers whereas imported books have generic plastic
covers.

9lines defines itself as an eccentric fashion brand. They have an online presence only and
compete with Kaghaz on notebooks. They also sell other things like sunglasses, briefcases and
bags. A major disadvantage for them is that because they don’t have an offline presence that’s
why many people are not aware of their brand. People are more aware of the Kaghaz brand than
they are of 9lines because Kaghaz is available both online and offline (Stationary Shops).

Other small competitors include Prime, Hamza and other generic brands.

Buyers
Kaghaz targets the young generation hence their sales are not only physical but virtual as
well. Due to the increasing trend in online sales, virtual presence has become extremely
important in an industry selling low to medium range products. Kaghaz therefore has both online
customers who order standard and customized notebooks from their Facebook page
(facebook.com/kaghaz.pk) and also place orders for products. Physical presence of books is also
there at various university related retail stores including Khokha at LUMS.

The age group which Kaghaz caters to is mainly from the bracket of 18-24 years of age.
The research carried out also shows that their market comprises of 65% females and 35% males.

Suppliers
The main supplier of paper is an importer of paper who imports paper from Indonesia.
This is because Pakistan has near to zero paper printing machines set up except for “Packages”.
The high quality paper used is imported through Karachi port and therefore the prime location
chosen to have lower costs for production is Karachi. The card on the cover of the copy is also
imported. The printing, binding, price tagging and packaging are done in an in-house facility.
Distribution
A strategic expansion option for Kaghaz would be to forward integrate in to distribution of
notebooks to many different cities of Pakistan which have a great demand. If Kaghaz decides to
start its own distribution it would require a high capital expenditure.

Kaghaz currently has a very informal distribution network. In Lahore, for example, Awais is
handling all operation including the deliveries. As his graduation approaches, he could be wanted
on other critical tasks in Kaghaz or he could be moving to newer pastures sooner or later. Either
way, Kaghaz has to formalize its distribution network such that the people running the network
(such as Awais) can be commissioned to another task or replaced easily without the loss of
operational effectiveness.

Kaghaz can model their distribution on the current setup, open their own distribution centers and
hire their own logistics team in major cities. Alternatively they can deliver through industrial
scale delivery systems.

Delivery through Bilty

Industrial shipments are handled through the bilty system. Kaghaz hands over goods to a
transporter in Karachi. The transporter aggregates large amounts of goods to be transferred to
specific cities and sends these consignments through either bus or by rail. Once the shipment
reaches the desired city, the intended recipient (shopkeeper in this case) of the shipment is
notified and they have to pick it up from the transport company’s office. These offices are
located near bus stations and railway cargo terminals.

Costs
The cargo company charges by the weight and the relevant costs are given below.

Origin Destination Cost per kg

Karachi Lahore 7
Karachi Islamabad 9

Online cash-on-delivery orders cost Rs. 100 to deliver (per package) within the city with the
warehouse. Around 3000 such packages are dispatched per year to customers who order online.
Impact on final cost
Choosing this course of action will mean that there is no intermediary to deal with. That will
result in a cost reduction of 300,000 Rs a year. But this decision has a flip side as well. From our
field research and Awais’ dealing with shopkeepers, we came to know that a shopkeeper does
not prefer leaving his shop to pick up a consignment. Uzair estimates that in case of such a
system, sales in Lahore could reduce as much as from 3,000,000 to 1,800,000 units. One of
Kaghaz’ major competitive edge is that the shopkeeper gets deliveries on a regular interval
without leaving his shop unattended. Changing to a bilty method would risk losing this strength.

Develop distribution network

One option in this respect is to develop complete distribution networks in major cities in
Pakistan. These warehouses are nothing more than small rooms that do not cost a lot to rent.
Currently, all demand in Lahore is fulfilled by contracting only 1 rider and it is improbable that
Kaghaz will need more than 2 riders in the near future.

Delivery of goods to the warehouses will be made using the bilty system described above. The
rider will receive the shipment and transfer inventory to the warehouse. Shipments to individual
shops can be carried out from there.

Costs
The relevant costs are given in the following table. Costs of bilty shipments are given above.

Fixed cost of warehouse (rent) 7000 Rs/month

Riders’ salary and fuel compensation 7500 Rs/month

Outsource Distribution
Another option is to outsource distribution entirely to other small distribution firms. These firms
will get the goods from the manufacturing plant in Karachi and will be responsible for selling
notebooks to shopkeepers in their respective areas. Profit margin for notebooks sold through 3rd
party distribution will be reduced from 25% to 10% and the volume of sales will increase
depending on the areas targeted.
One or all three?
Kaghaz does not need to commit exclusively to any one type of distribution. All three could
work in combination and different types of areas could be targeted through the three distribution
types. But it is not clear to Awais and Uzair how to make that decision. Having your own
network gives the most control but limits the potential of growth through 3rd party distributors
who already have a very strong network. Meanwhile, the bilty system requires the least
management oversight and frees them up for more critical matters such as expansion.
Annex A: Facebook insights