This report titled “Enhancing the Export Competitiveness of Pakistan’s Biscuits and Bakers’ Confectionery Industry” is part of the PBC’s Make-in-Pakistan initiative. The Make-in-Pakistan initiative aims to develop a policy framework that would help revive the manufacturing sector in Pakistan, leading to the creation of jobs, an increase in value-added exports, sensible import substitution, and help raise government revenues.
The processed food sector, of which the biscuits and bakers’ confectionery industry is a sub-sector, is Pakistan’s second-largest industry after textiles; accounting for 27 percent of the value-added output and 16 percent of industrial employment.
This study relies on existing secondary research supplemented with field interviews of firms in the biscuits and bakers’ confectionery manufacturing sector.
The Global Biscuits and Bakers’ Confectionery Industry
In 2020, Germany ranked first in global exports of biscuits and bakers’ confectionery with a market share of 11.4 percent, followed by Canada at 8.4 percent, Italy 7.3 percent, and Belgium 6.3 percent. Pakistan was ranked 68th among global exporters of biscuits and bakery products, with a market share of 0.1 percent. Pakistan’s export growth, as indicated by a positive compound annual growth rate (CAGR) for the period 2016-20, has been in line with the world CAGR, indicating that Pakistan’s exports have grown in line with global exports.
Since 2009, global imports of biscuits and bakers’ confectionery products have increased by 72.7 percent at an average annual growth rate of 5.1 percent. The United States ranked as the largest importer with a share of 16.9 percent, followed by the United Kingdom at 7.7 percent, Germany 7.1 percent, France 6.2 percent, and Canada 4.3 percent.
Pakistan’s Biscuits and Bakers’ Confectionery Industry
Pakistan’s biscuits industry has grown at a 9.1 percent compound annual growth rate (CAGR) in the last 5 years, as per the Pakistan Credit Rating Agency (PACRA).[1] In the same period, the bakers’ confectionery industry expanded at a 9.4 percent compound annual growth rate.[2] Since 2016, exports of Pakistan’s biscuits and bakers’ wares have increased by 49.4 percent at an average annual growth rate of 10.6 percent, reaching $40.92 million in 2020. The North American and Middle Eastern markets have remained mostly untapped for baked product exports from Pakistan. Other top prospective markets include countries in Africa that have an export potential of US$ 77.9 million. Opportunities are also available for a few tariff lines under Pakistan’s current trade agreements. Biscuits and baked goods from Pakistan can be exported under preferential tariffs to China, Malaysia, and Indonesia.
India’s manufacturing facilities have a competitive edge over Pakistan’s in terms of domestic market size and the availability of sophisticated, locally manufactured plants and machinery. Pakistan’s corporate tax and policy rates are higher than those in India. Bangladesh and India increased their exports of biscuits and bakers’ confectionery products by 5.2 and 1.6 times, respectively, between 2011 and 2020; in the case of Pakistan, exports increased by a multiple of only 1.1.
Industry’s View on the Competitiveness of Pakistan’s Biscuits and Bakers’ Confectionery Industry
In-depth interviews with senior executives of companies belonging to Pakistan’s biscuits and bakers’ confectionery industry were conducted to gain insights into the competitiveness of the sector. The interviews were supplemented with secondary research to better understand global, regional, and domestic market trends. The major findings from these interviews supplemented by secondary research are:
- Cost Pressures: Increasing edible oil prices and the high dependence on its import have adversely impacted food manufacturers and consumers. In addition, high rates of inflation, an increase in the cost of utilities, and a general slow-down in the economy are putting some in the sector at a business risk.
- Large Domestic Market with High Levels of Penetration: The biscuit market is large in Pakistan, and each sub-sector is substantive on its own. The market is still in the growth stage as growth is higher than the growth of the overall economy. There is hardly any sub-sector that is not covered by one of the major manufacturers. Market penetration is nearly 100%.
- Industry Positioning: Biscuits in Pakistan are mostly positioned as snack or indulgence products instead of nutritional supplements – biscuits thus are not “staples” for consumers and purchases can be deferred. Globally biscuits and baked items are part of major festive seasons; in Pakistan, however, the industry has been unable to position itself as part of any festival.
- Price Elasticity of Demand: The price elasticity of demand is inelastic, resultantly manufacturers when faced with cost pressures are unable to transfer the full impact to the consumers.
- Absence of a National Food Standard: Each province has its own food standards which at times are in conflict with the standards being applied in another province. Additionally, local standards are not aligned with any international standards and this impacts competitiveness in global markets.
- Rampant IPR Violations: Counterfeit/mushroom brands produced by the unorganized sector are a major threat to the formal sector. Counterfeit/mushroom brands have also made their way into export markets.
- Exchange Volatility & Profit Repatriation Restrictions Discourage FDI: Environment is not conducive for FDI in the sector, not only is there exchange volatility, but also there are restrictions on profit repatriation.
- Potential Export Markets: Major markets which have not been tapped include countries in Africa, Europe, and the Middle East. Off-shore production facilities in regional countries could potentially help exports as Pakistan does not have a country-of-origin advantage when it comes to the manufacture and exports of biscuits & bakery products.
- Non-Tariff Barriers in Export Markets: Non-Tariff Barriers (NTBs) including testing requirements for banned ingredients, packaging, and labeling requirements are a major hindrance in entering smaller markets of Africa and Eastern Europe. In addition, there are frequent changes in regulations in developing economies which makes long-term planning and investment decisions difficult.
- For Global MNCs, Pakistan Mostly is Not a Low-Cost Option: The major ingredients which go into the manufacture of biscuits are palm oil, wheat & sugar. Though palm oil is available at international prices, wheat and sugar prices in Pakistan are higher than global prices. Local operations of global brands are generally at a price disadvantage vis-à-vis other affiliate of the same MNC.
- Domestic Manufacturers Have Always Had an Inward Focus: The local industry has grown on the basis of the domestic market and thus has an inward focus. Though most companies now appreciate the importance of exports as the next major growth opportunity, their focus is still on the Pakistani market and the Pakistani diaspora in regional and global markets.
- Tax Evasion is a Major Concern: Very high rates of Taxes, especially Sales Tax (17%) and Corporate Income Tax (29%), plus other levies like WPPF & WWF, provide a massive incentive for under-reporting production and sales. Unscrupulous manufacturers have used this
Recommendations
- Reduction in Sales Tax Rates: The formal compliant sector faces an existential threat from both the informal sector as well as unscrupulous registered manufacturers who mis-declare production and sales numbers. Either the rate of Sales Tax be reduced or else a Track & Trace system be implemented to monitor production and sales.
- Repositioning from Snack Category to Nutritional Category: By bringing in the nutrition supplement angle, albeit initially for some brands, and promoting this position aggressively, the industry can become part of government/donor nutrition programs as biscuits can cost-effectively deliver the supplements.
- Participation in International Trade Shows: Manufacturers, especially Pakistani firms, recommend greater participation in international exhibitions to showcase the industry since Pakistan is not a major sourcing country.
- Warehousing and Credit Guarantee Schemes for Sales in Africa / Central Asia: Most sales in Africa and Central Asia are done on a spot basis, for which local warehousing is a prerequisite. Indian, Chinese, and Turkish firms have managed to do well as their governments support them in setting up and funding warehouses in these target countries. In addition, in the absence of formal banking channels in most of these markets, exporters are reluctant to sell directly to importers in these countries. The EXIM Bank needs to come up with a credit guarantee scheme for Pakistani exporters.
- Brand Pakistan Needs to be Promoted: A concerted effort to promote Brand Pakistan is required. A PAKQUALITY initiative along the lines of the TURKQUALITY initiative is required to promote not just Pakistan but also Pakistani brands.
- Database & Market Intelligence: Information about market potential and changing consumer trends is required on an ongoing basis from both current and potential markets. In addition, information should also be available on both tariff and NTBs, such as packaging and labeling requirements. The TDAP needs to develop this database.
- Common National Standards Aligned with Globally Acceptable Standards: Pakistan Standards and Quality Control Authority (PSQCA) should set the standards for the industry, with the provincial authorities only acting as implementation bodies. PSQCA standards should be aligned with globally acceptable standards to allow easier compliance.
- Provision of Accredited Labs: Pakistan’s biscuit industry needs to lobby with the government to set up accredited laboratories for testing for compliance. Compliance with international standards could allow Pakistani products to enter more lucrative markets in the Far East and Europe.
- Incentives for R&D: Companies should be provided incentives for investing in R&D. Increasing research and development expenditures will result in introducing new, innovative items and expanding product lines.
- Zero Tolerance for IPR Infringement: Law enforcement agencies and the judiciary should stop treating counterfeiting as a soft crime so as to promote a level playing field. To counter the threats posed by the informal sector/mushroom industries, IP owners who have suffered damages should be able to pursue legal action, ideally in civil courts.
- Repatriation of Profits: The SBP must ensure the smooth repatriation of profits to the MNC’s home country to encourage foreign investment.
- Harmonization of Customs Nomenclature: While importing as well as exporting, it is essential to ensure harmonization of food product classifications and to reduce the NTBs. It would make customs clearance easier and less time-consuming, as well as improve the transparency of the valuation involved in the import of goods.
- Industry / Government Funded Joint Study: A detailed study jointly funded by the industry and the government needs to be undertaken to identify the opportunities and challenges in entering the African, European, and CAR markets as well as recommending a strategy to attain the potential.
- Export Oriented Joint Ventures Need to be Promoted: The formation of export-oriented international joint ventures will not only lead to an increase in exports but will also increase the capacity of local suppliers by updating manufacturing and safety standards for baked goods.
The PBC is a private sector not-for-profit advocacy platform set up in 2005 and is now composed of 96 of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures that improve the Pakistani industry’s regional and global competitiveness. More information about PBC, its members, objectives, and activities can be found on its website: https://www.pbc.org.pk
[1] A biscuit is a baked food product made from flour. It is defined as a small quick bread formed from rolled-out dough that has been cut or poured from a spoon. Biscuits are classified into several types based on their recipes and manufacturing processes.
[2] Bakers’ confectionery products have relatively higher sugar content. Bakers’ confections and sugar confections are the two large and overlapping categories. Bakers’ confectionary, often known as flour confections, consists primarily of sweet pastries, pies, cakes, and other similar baked products.
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