In comparison with neighbouring India, Pakistan has attracted much less interest as a development market and investment opportunity for international food conglomerates. However, writes Saeed Akhtar Baloch, in spite of political instability, the nation's food industry is developing, and represents untapped potential for foreign investors.

Much is made of the inward investment opportunities offered by India, one of the famed BRIC markets and as such a prime development area for multinational companies, but comparatively little is made of the opportunities on offer in neighbouring Pakistan.

However, in spite of the political instability that has stricken Pakistan in recent years and which continues to be a problem, the Pakistan food industry has grown at an average rate of 10% over the last three years. The country has a long established food manufacturing industry and strong commodity production, and the food sector is one of the largest industries in the country.

Moreover, in comparison with India which has been attracting significant investment for some time, there is a feeling that Pakistan's potential has so far remained largely untapped. Indeed, Affan Haider, public affairs manager at Nestlé, believes the untapped potential in Pakistan's food sector - particularly in dairy - make it more attractive than India. In a bid to capitalise, multinationals from countries such as the Netherlands, Germany, France and the United Arab Emirates (UAE) are now beginning to enter the market.

The potential for increasing inward investment has not been overlooked by the Pakistan government. Shamoon Sadiq, chief executive of the Pakistan Horticulture & Development Board, said that in addition to focusing the nation's food companies on exploiting export potential his agency is offering incentives for foreign investment. The Government has launched a US$30m project to promote the agro-based food sector.

"We have seen consistency in economic policy under the Musharraf regime and last year the government zero-rated import of food sector machinery," says Haider. However, he believes a further boost to investment would be provided by raising the ceiling of foreign ownership of Pakistani companies from 40% to 100%. The Government is considering such a move for foreign food manufacturers and retailers.

Nevertheless, instability clearly remains a disincentive for foreign companies. Business leaders have been calling for the hard pressed Musharraf regime to frame a workable and effective mechanism to regulate the volatile prices of raw materials, to allow sustainable growth in food sector.

While the size of the informal sector makes measuring trends in Pakistan problematic, conservative estimates suggest the organised food sector has more than 8,000 manufacturing units with 13 food companies listed on Pakistan's three stock markets, representing some US$32m in paid-up capital.

Pakistan also boasts a diverse range of food exports including processed fruits and vegetables, meat preparations, spices, nuts, biscuits, sweets, confectionery, sugar preparations, jams, marmalades, pickles, red chilies. The food sector accounts for 27% of the country's manufactured goods production and 16% of the total manufacturing employment, according to official statistics.

Contributing some 23% to GDP, according to data from Pakistan's Trade Development Authority, the country's food sector is capable of producing a vast variety of fresh and processed products. And increasingly local manufacturers are capitalising on the availability and use of modern technology to meet the growing domestic and international demand.

Official statistics show exports of various processed items are on the increase. For example, manufactured sweet baked goods, including biscuits, waffles and wafers, crispbread, buns, ginger bread, rusk/toasted bread etc, saw 6% growth in the 2007/07 financial year. But there is certainly much room for growth. Pakistan's share of the US$3.2 trillion global processed food business is low.

In Pakistan, retail sales of food products rose to US$1.69bn from US$1.54bn in 2005, according to a Lahore Chamber of Commerce report.

Increasingly sophisticated marketing techniques are being adopted as international fastfood and retail operators expand in Pakistan. McDonald's and KFC are already present and now companies such as Metro cash-and-carry and Subway are also opening outlets in Pakistan's major cities to tap into rising personal income and increasing demand for consumer goods, both of which continue to grow in spite of the country's political turmoil.

"To meet the growing demand of our products, we have installed a new milk plant in the southern province [Punjab] worth US$100m, the single largest plant of its kind in Pakistan," says Haider. "Another US$400m investment plan is in the pipeline which shows our long-term investment policy in Pakistan." Nestlé reported 28.5% growth in its Pakistan sales for 2006 to US$367m.

Haider is confident of riding out the existing political problems facing the Musharraf government. "Political turbulence does affect sales… but it hardly harms our long-term commitments," Haider says. "Our long-term plans are disturbed only when something unusual happens…as in 1999 when Pakistan went nuclear."

Besides the presence of food multinationals, such as Nestlé and Unilever, the country also boasts significant locally-owned manufacturers such as Shezan International, which produces juices, pickles, jams, marmalades, and other processed foods. Shezan posted 31% growth in sales to US$29.96m in 2006 and a 21% rise in profit, and in the first nine months of 2007 has registered 20% and 25% increases in sales and profit respectively.

Shezan International CEO Saifi Chaudhry believes a food industry where certain processed categories, such as beverages, juices, pickles, jams and jellies, have shown 30% to 40% over the past five years has huge potential for expansion in spite of the political problems

Although Pakistan's food sector is changing fast as lifestyles and consumption habits evolve and increasingly affluent consumers demand more packaged products, the informal food sector remains the biggest challenge for the organised food industry. There are over 10,000 small bakeries alone in Lahore catering to 60% of the population, notes Haroon Chaudhry, CEO of Lahore-based Bunny's. "Since the unorganised sector is not in the sales tax net, its input costs are much lower than ours."