United Distributors Pakistan Ltd: Business Report
United Distributors Pakistan Ltd: Business Report
“In 1980 the earth had 4.3 billion people to feed, and that figure will increae to 6.2 billion by the year 2000. The earth’s population will balloon to 11 billion by 2050. Additional food to feed 250% plus population will have to come from improved technology. New agricultural technology must play a key role” said by Mr. Jehanzeb Khan, Chief Executive, UDPL. He believes within 40-80 years, depending on projected population growth, world food production must be increased by at least as much as was ahieved during 12,000 years since the beginning of agriculture. Pest control is a major contirbution in increasing the productivity of the agricutural produce. UDPL is focussed on Agro Chemcials Agro Chemicals and its 85% revenues come from the sale of petcides and herbicides, 10-12% from the sale of seeds and 3% from Solar Energy business. In the pesticide industry UDPL stands no. 5 hierarchy of market share. The company started its business with an agency of Dow Ellanco in 1984 and in 1988 they asscoiated themselves with FMC Corporation offering a variety of pesticide products. Then there was an onging journey with growth and new products. Basically the task taken by the company was to bring MNC’s in Pakitan to sell their products through itself and earn commission on it. The MNCs did not have high commitment in Pakistan. In marketing the products from these MNCs UDPL was associating itself with world renown products and earning higher margins on these products. UDPL is a group company of United Distributors Ltd. having joint ventures with many multinational companies and is considered very successful in the distribution business. The company is a part of large UDL group including IBL Mudarba, Searle, P & G, Gillette, Pioneer Seeds, Fine Coporation, RJR, Nabisco, Unisys, Apple, Smith Newport & Smith International. Out of these companies IBL is a pure distribution company and rest are joint ventures with foreign business concerns of large repute. UDPL has a setup of over 100 employees with head office in Karachi. UDPL is marketing pesticides as its main product besides seeds & solar systems.
UDPL was incorporated at Karachi on July 01, 1981 as a Private Limited Company under the name of “ United distributors (Karachi). It was converted from Private to Public Ltd. Company on December 01, 1986. However the name of the Company was changed to United Distributors Pakistan Ltd. effective March 16, 1987.
United Distributors (Pvt.) Ltd. or UDL group, which was set up in 1886 started as distributors of Imperial Tobacco in India and soon diversified into other general merchanidize which at that time was being imported from all over the world.
The UDL Group started off as a distribution house had a strategic realingment of its course in the late 70’s took place, as a result today it is transfoming itself into a marketing company with a powerful ditribution network. In the late 80’s management felt a need to present itself as a marketing oriented company and then onwards shift started from pure distribution setup to marketing oriented distribution system. The group as it stands today, treats its pure distribution separately from the marketing accounts which are handled by separate divisions within the company. In 1984 the company was a distribution agency of Dow Ellanco products. Dow Ellanco left UDPL in 1988 and in the same year the company signed with FMC Coproation and started distributing its products. The relation of FMC grew in 1990 and by a joint venture between UDL & FMC Corporation by the name of FMC United. All the products formulated by FMC United were warehoused and distributed by the UDPL.
Pesticide Market in Pakistan
It is estimated that more than 90% of the pesticides are used on Cotton, Peticides used on other crops like rice, sugar-cane, maize orchards and vegetables are also steadily increasing. The largest share of the pesticides is consumed by the cotton crop. which is cultivated on 28,359,000 Hectares all over Pakistan. The largest consumer of the cotton pesticides is Punjab province which cultivates 24,378,000 Hectares of cotton (85% of the total Hectarage of Pakistan. The analysis done in the year 1994 by Rohone Paulenc reveals that the toal peticide market for Pakistan is divided in to three main segments. The insecticides 89.9% , Herbicides 9.4% and Fungicides 1.5% of the total market.. The main insecticides in use are Pyrethroid mixtures 29.5%, Organophosphates & Others 38.3%, Carbammates 2.7% and Straight Pyrethroids 18.7%. The composition reflects the total market of the pesticides.
Phases of Market Eveolution in Pesticide Industry of Pakistan
Following scenario has occured in the evolution of pesticide industry in Pakistan:
|Period||Pricing Structure||Distributed by|
|I||1947-1965||100% Subsidy by Govt.||Public Sector Agencies|
|II||1966-1974||Rs. 0.25 per litre/KG were charged, in other word 75% on granular insecticides|| |
Public Sector Agencies
|III||1975-1979||50% subsidy on Liquid|
pesticides and 75% on
|25% by Public Sector and 75% by Private Sector agencies|
|IV||1980||Subsidy withdrawn on all types of insectivides/pesticides||100% by private sector agencies|
From 1947 till 1965 Government was bearing the expense of perstification completely. From 1966-74 Government started charging Rs. .025 per litre/Kg which was again sharing the major expense with the farmer. From 1975 the subsidy ratio was 50% on liquid pesticides and 15% on granules insecticides. During this period for the first time the Private sector came into play. In the year 1980 subsidy was totally withdrawn on all types of insecticides/pesticides and distribution was taken over by private sector agencies by 100%..
In 1980, pesticide marketing in Pakistan was handed over to the private sector except for the province of Baluchistan, which was being supplied through public and private sector jointly. In the remaining three provinces the private sector is playing its full role by making pesticides available at the doorstep of the farmers through the dealer network spread out in the remotest areas of the country. There effective role can be judged from the market size in 1980 which was only Rs. 200 million and expanded to a figure of Rs. 2,655.28 million (Source: Pakistan Agricultural Pesticide Association report dated April 20, 1989).
Since Privatization of pesticides imports and distribution, local and Multinational companies have put-in a lot of money/time and made untiring efforts in developing and streamlining the marketing and distirbution system. Highly trained, specialised and experienced staff, at all levels, were/are employed to handle this very sensitive trade which needs knowledge, experience and skill.
PESTICIDE CONSUMPTION (1981-1990)
|Quantity a.I. (M.T.)||905||1320||1757||2517||3489||4112||4428||3759||4460||5296|
|Annual Growth %||45.85%||33.10%||43.25%||38.61%||17.85%||7.684%||15.1%||18.64%||18.74%|
|Growth from 81, %||45.85%||94.14%||178.1%||285.5%||354.3%||389.2%||305.36%||39.3%||4.85%|
Consumption of pesticides in Pakistan has been very low when it was with Government and as it came in the private sector there was tremendous growth in the consumption.
In the beginning, pesticides were supplied to dealers against Credits mostly secured and this system helped immensely in increasing sales turnovers. With the passage of time, companies started competition among each other for grabbing bigger market-share. For this pupose they had to supply pesticdies on dealers terms which were normally based on bigger discounts and less securities or even without any securities. The resultant was bad debts which companies had to bear as a reward. This annibiliated many companies who could not sustain losses. Since 1988 the trend has changed and the companies have stopped furnishing the credits. UDPL also suffered some set backs because of this trend but they recovered and announced strict credit terms. At present they are having a ratio of 40% advances, 55% cash sales & 5% credit sales in their sales practices.
During 1988 it was realised that various brands of popular pesticides sold in the country can also be imported from countries like China under Generic orChemical names. Author visited China and Taiwan during 1988 and studeid price differentials between pesticides manufactured in these countries andother conventional sources such as U.S.A. France, Japan, Germany and England. This gave birth to a new breed of pesticides the “Generic Products”. As these generic products are low priced they tend to give tough time to the branded products of MNCs. Branded products marketeers are complaining that marketing of generic products without educating farmers about their effective use has a hazardous effects on farming. Specially in the case of pyrethroids it has been observed to have following main flaws because of lack of understanding of the modeof action of pyrethroids:
- Knock down effects
- Excitation and fluhing effects
- Repillent effects
- Relative absence of vapour activity
- Absence of systematic effects.
…..an edge over others – Strong Distribution Network
The marketing and distribution of peticides in Pakistan is handled by 26 distributors including the Company, working in Punjab, NWFP and Sind. These ditributors have established their storage points (Sales depots) in different areas of the country in order to efficiently neet the dealers demand. Each distributor has its technical staff to give advice to the dealer and farmers for pest identification and correct useof peticides. Tehnical literature in Urdu and local language isprovided regarding pesticides and their dosage rates for different crops. The company’s philosophy is to stay close to the customer and for that it has developed a network which covers the entire agriculture sector of the country. UDPL has a very strong network of distribution with country wide 12 branches.
Functional Areas of Business
The company has a well defined finance department, distribution domain and sales setup but it has shallow marketing and personnel departments. The finance department is lead by Mr. Anjum Bashir who is a Chartered Accountant with 16 years experience and composed personality to monitor the financial activity of the UDLP. He prepares following budgets regularly as a part of his financial planning:
- Cash Flow Budget
- Fixed Assets Budget
- Sales Budget & Expenses
The major changes in the financial structure are taken at the group level in the meetings of the Board of directors and other decisions are taken at the departmental level with complete delegation.
The company acquires short term loans for 180 days to feed capital required to meet the seasonal demands. Major borrowings are done at the group level and are allocated accordingly to the group companies. The credit policy of the company is 40% advances, 55% cash and 5% credit sales.
As the major borrowings are done at the group level it is not a quick decision to arrange for any major requirement of financing. Many of the times there is an acute shortage of the funds to meet seasonal requirements.
The major marketing activity of the company is performed by the Marketing Services Manager of the company. The packaging and promotion are performed by the MSM. Recently the company has inserted a small marketing department by transfering Mr. Humayun Ansari from the Solar Systems department to the pesticides department. The marketing activity is not really visible in the operations of the company. Mr. Humayun is more invovled in the legal aspects of the product management and is interacting more with the plant protection department to launch new products. There aren’t any market plans developed from this department uptil now.
The personnel department of UDPL is comprised of one Admin Assistant he looks after all the affairs of the company. UDL has a well defined Human Resource Function run by expereinced personnel but their penetration in the affairs of the UDPL is superficial and they are not able to address the invidual problems of the company. High turnover of employees is visible in the company from 20-40% per year. Drop out rate is almost 1 sales person per month. the reasons observed for this are the growing demand of experienced high layers of pesticides. the UDPL is known for having above average talented people in the marketing of pesticides. There is high acceptability of such people in the market. The competitors are absorbing these people by giving them higher incentives and compensation planes to captivate them. The company believes on job rotation and it is performed at middle management and supervisory level.
Marketing Company or Distribution Company?
The UDPL is one of the most developed distribution insitutution of Pakistan. It is said about the UDPL that “ They can even sell junk at a high price because of their strong field force, distribution network and experience”. The company has background of decades of experience in the distribution. There is inclination of management to transform this company to a marketing oriented company from just a distribution setup. To implement this idea a new marketing department has been introduced. But still it is very difficult to say UDPL is a marketing oriented company. One of the critical factors for successful marketing in this industry is research and matching of the need of the crop with new products immediately. UDPL does not hold any such facility. The only way they cater to such situations is by the matching their existing product line with the disease of the crop. Another aspect of the research which has been neglected is the research of the consumer preferences which are very important for proper understanding the needs of the consumer.
Joint Venture with FMC
In 1984 UDPL’s main product line was from Dow Ellanco but Dow left in 1988 and luckily the the company got associated with FMC corporation. In 1991 FMC and UDPL decided that they should have a joint venture with FMC participating 60% & UDPL 40% in the equity of the venture. A formulation plant was set up near Lahore. The arrangement was as FMC will provide the product anhd FMC United will pack it and UDPL was responsible for selling the product. In 1991 both the comapnies FMC and UDL felt differently and FMC United started selling directly and out of the total products with UDPL four were taken by FMC United for direct sales and two were left with UDPL. At present out of the seven products of FMC Corporation 2 are sold by UDPL and 5 are sold by FMC United. Although it seem as if the UDPL is loosing in the hands of FMC United but as FMC United is a joint venture again it will be credited by 40% to UDL group which is the parent group of UDPL.
Dynamic Market Mechanism
The pesticide market is very dynamic and involves quick responses of products to the problems faced by the farmers with the pest. Petification is done at various stages of the growth of the crop. Many of the times one pesticide is not able to control the pest at the initial stage of the crop which builds pressure on the farmers as the infections spreads to the crop resulting in a change of application of pesticide in the second stage of the pestification. Quick reponse is required to respond to such activity.
The selling of pesticide is seasonal and sales cycle of the pesticide is usally from 1-3 months (excluding collections). All the activity is to be scheduled very catiously as during this period if something goes wrong the entire year performance is effected. The planning of inventory maintenanace and distribution requires experience and thorough knowledge of the market toproduce accurate forecasting.
Focus on Cotton crop, the backbone of exports
Pakistan is among the largest producers of cotton. Its textile industry consumes more than 8.0 million bases every year. Cotton and its products constitute 60% of the exports of around $ 7 billion. The country harvested a record 12.8 million bales of 170 Kg each in 1991-1992. The bumber crop was followed the very next year by the crises due to pest attack, leaf curl virus, and finally the heavy rains. The production dropped to 9.1 million bales in 1992-93 to 7.61 million bales in 1993-1994 and 7.682 million bales in 1994-95. The Agricultural University of Faisalabad and other institutes of agricultural research are continously endeavouring to control pests of cotton crop. Government is facilitating the pest control by all means to increase its cotton produce and other crops. The oppotunity for UDPL lies in caputing this market. A little research on the market will boost the performance of the UDPL in this sector.
Competition with a Giant
Ciba Geigy is said to be well ahead in the industry as compared to all the players and it has 27% share of the toal market. Ciba was the first company to market agro products on large scale and it maintains its lead uptil now. Ciba has a very strong marketing support structure, distribution network, reseach facility and experienced field staff. These factors contribute in placing it as the market leader. Hoechst Paksitan is no. 2 in the market and is trying to catch up but the distance is farther as their total sales of pesticides were only 42% of the Ciba Geigy. UDPL is a local company and is ranked as no. 5. in the sales after Pak Agro it is the largest Pakistani firm in terms of sales (1994). To beat the giant’s competition UDLP and other players are struggling to increase market share by offering new products, advertising & sales promotion and aggressive selling strategies. It is a long run for UDPL to cross Ciba-Geigy, but the first target would be Pak Agro which is at no. 3 in pesticide sales (1994). One important fact observed in the sales for last 3 years is consistency of performance by the top players. The ranking of the first 6 players has not changed in these years which refelcts there has not been a major shuffling in the market shares of the players.
The Product Crises
UDPL has suffered stagnation of sales in last two years. The competiiton of generics is getting fierce day by day. The product turnovers is increasing. The new products Spark and Larsban & Neural-D from Dow are filling the gap created by Talstar (FMC product). UDPL is looking for new partners for distributorship and it has been successful in singing some contracts. The company has already applied for new products with Plant Protection Department. The reasons claimed by the company for stagnant sales are floods & bad weather.
Generics an opporutnity or a threat
In the 1980s when the pesticide industy was shifted from public sector to private sector many multi national companies came into play in the pesticide market. The role of these companies was conspicous in promoting pesticides and educating the farmers of the vitality of pesticide. Later Govt. realized that the prices charged by these companies are higher and they introduced a system which has enabled peticide dealers, importers, and big growers particularly of cotton, to import any peticide from the country of its manufacture and have it registered. Efficient and tecchnically sound advisory service to the farming community and non-exeistence of day-to-day problem-oriented field research backed by an educational programme for the growers was incoporated by these large companies. Widening of the base and diversifying sources of peticide supply under generic system has increased the chances of sub standard and adulterated supply of peticide manifold for which a strong honest and active regulatory organisation is sadly lacking. UDPL has been facing this jeopardy in a puzzled stance. It has a choice to promote the branded products from their basket or it can float the generic products in the market by their own brand names. UDLP has already introduced “Grip”, a generic product locally branded which has been a sucess in the market. After loosing Talstar to FMC United it has tried to fill the gap from Dow’s products Neural-D & Larsban but still UDPL has an open area to market unbranded products in the market.
FINANCIAL PICTURE OF THE COMPANY
Mr. Anjum Bashir is the Finance Manager of the company he expresses his satisfaction over the financial operations of the company. He is a chartered accountant and is repsposible for the major financial decisions of the company. The company’s financial statement exhibit that the company was not much like a sailing boat rather there are uneven movements across the income statements and balance sheets of the last six years.
The sales figure of 1990 is Rs. 270,374,058 which was improved significantly in the year 1991 and reached a figure of Rs. 869,252875. This growth is four times the sales of 1991. After 1991 the company could not maintain the same revenues and they were reduced by 31% in 1992. In 1993 sales further went down by 25% at Rs. 493,633,949. In the year 1994 the trend in decline improved and sales improved by 11% at Rs. 507,786,719. This trend shows that the sales are stagnant in the year 1993 & 1994. In the year 1995 one of the star products of UDLP Talstar is not available ( taken back by FMC for sales directly) it will be difficult to predict growth in sales. The company has taken two products from Dow Ellanco Lorsban & Neural D to replace the Talstar and their success will also determine the sales growth trend. In the competitive profile we see that the sales of the UDL are placed as no. 5 continously for three years from 1992-1994. The market share of the UDLP is 8.87% of the total pesticide market
The financial charge of the company is continously increasing the burden on the expense side. In the year 1994 it is 4.52% of the sales as compared to 2.08% of 1991. This is also a factor contributing responsible to eat the profit by 2%..
The Company is maintaining its dividends. The proposed dividends in the year 1992 were 9 million, reduced by a fraction to 8.7 million and rose to 10 million in 1994. If we compare these figures with the market prices of the shares of UDLP as given in the graph of market price of shares and turnover enclosed in the appendix. The prices touched the figure of Rs. 80 in the April,93 which was the peak price for the last four years. The correlation of this price rise could be established with the dividends of 1992 which were doubled to that of 1991 of Rs. 4.5 million
General and Administrative expenses have increased more than proportionately in the last three years and rose to 2.58% of sales in the year 1993 from 1.68% in 1992 and in the year 1994 they show as 2.356% of sales. The result of this rise could be the fixed cost of G & A expense which has risen against the stagnant sales for the last three years.
In 1993 the company decided to increase its equity to 43,582,390 from 30,000,000. This has been reflected in the EPS ratio as falls from 2.25 to 2.8 to 1.3 from 1992 to 1993.
Gross Profits are are steady and are better then 1992 of 13.53% as 15.86% in the year 1994.
Average collection period has been tremendously improved in they year 1994 to 22 days as compared to 54 days of 1992.
The return on Assets have improved to 5% in 1994 against constant 3% return for the previous three years.
Inventory turnover is 13 times in 1994 as compared to 3 times of 1993 and 5 times of 1992. This is a significant improvement in the inventory management and reflects that the company is managing the inventory in a very efficient manner.
The long term debt of the company is constantly rising from 2.2 millions to 4.9 million in the year 1994. The long term debt to equity ratio represents this trend and it is .98 in the year 1994 as compared to .137 in 1991 and .07 and .08 in they year 1992 and 1993.
The current assets over current liabilities have increased to 1.18 reflects the better liquidity position of the company and also its ability to clear short term debt. The Quick ratio has been improved and is equal to 1 in the year 1994 which shows equilibriumd between the two arms of current ratio (current assets-inventory and current liablities). This shows that the company is able to meet its short term liablities without relying on the inventory.
Challenges of the Future
The direction of the company depicts that they have to fight back and boost their sales with a minim of 15% growth per year. The product shuffling has caused some gaps due to loosing star products like Talstar of FMC. It is required to fill the gap by new products and possibly develop own products to increase the market share. Sales Trunover of the staff has become a regular feature and if it will continue it will keep on bringing its hazardous effects on sales. Human Resource Department should be able to control this pest on the sales department. Performance of the company requires definite improvement to bring a desirable proportion of expenses and sales which could be achieved either by cutting dow the expense or boosting sales at large. The structure of the company seem to be an evolution of the old distribution set up and requires reorganization to cover all the functional needs. The financial needs of the marketing should be addressed with sufficient funds.