International Journal of Retail & Distribution ManagementThe changing structure of distribution channels in PakistanAsad Aman Gillian Hopkinson

Article information:To cite this document:Asad Aman Gillian Hopkinson, (2010),"The changing structure of distribution channels in Pakistan",International Journal of Retail & Distribution Management, Vol. 38 Iss 5 pp. 341 - 359Permanent link to this document:http://dx.doi.org/10.1108/09590551011037572

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The changing structure ofdistribution channels in Pakistan

Asad Aman and Gillian HopkinsonDepartment of Marketing, Lancaster University Management School,

Lancaster, UK

Abstract

Purpose – The purpose of this paper is to consider the impact of the entry of internationalwholesalers upon existing fast moving consumer goods (FMCG) channel structures and therelationships between channel members in Pakistan.

Design/methodology/approach – The paper draws on primary and secondary data. Industrial andpublished sources are used to describe the retail industry and traditional channel structures inPakistan. Semi-structured interviews with industry experts and channel participants (manufacturers,distributors, local and organised wholesalers and retailers) over the period illustrate the perspectivesof different channel members.

Findings – Although currently holding small market share, the entry and growth of international,consolidated wholesale has opened alternative channel structures. This poses a threat to some channelmembers and creates relationships that alter the distribution of power in the channel. In this fluidsituation, there is the possibility of substantial change in Pakistan’s FMCG retail.

Research limitations/implications – The nature of the Pakistan retail market creates difficultiesin compiling statistics or generalising from observations. The paper uses published statistics, industryreports and interviews to nevertheless be able to comment on this important market.

Originality/value – The paper looks at an under-researched market and comments upon the firststeps in that market towards consolidation and internationalisation. In looking at the reactions ofextant market players to this recent development, the paper provides useful insight and guidance tothose (manufacturers, retailers and analysts) interested in retail in Pakistan.

Keywords Fast moving consumer goods, Emerging markets, Wholesaling, Pakistan

Paper type General review

1. IntroductionThe nature of retailing and the structure of retail channels have changed considerablyover recent years in many developing countries, in part through inward retailinvestment. Where there has been sizeable inward investment this has attractedacademic interest and led to country-specific analyses of retail, most especially in China(Goldman, 2001; Hingley et al., 2009) and India (Sengupta, 2008; Srivastava, 2008). Incontrast, there has been very little published about retail in Pakistan wheremultinational investment in distribution and retail is more recent despite a longstandingpresence of multinational fast moving consumer goods (FMCG) brands. The firstsubstantial inward investments in FMCG and grocery retail sectors occurred at thewholesale level with the entry of Makro and Metro in late 2006 and mid-2007,respectively. Accordingly, this paper uses secondary and primary data to look atFMCG retail structures in Pakistan with a particular focus upon the entry of these

The current issue and full text archive of this journal is available at

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The authors would like to thank two anonymous reviewers and the Editor for their insightfulcomments and assistance in this paper.

Distributionchannels

in Pakistan

341

Received December 2008Revised September 2009

Accepted January 2010

International Journal of Retail &Distribution Management

Vol. 38 No. 5, 2010pp. 341-359

q Emerald Group Publishing Limited0959-0552

DOI 10.1108/09590551011037572

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international wholesalers. There are two related aims of this paper. First, to consider theimpact of the entry of international wholesalers upon existing channel structures andwhether it is leading to changes in this structure. Second, to consider how the entry of theinternational wholesalers has influenced relationships between channel membersreflected in issues including margins at different levels, bargaining power and trustbetween members. Additionally, the paper provides a description of FMCG and groceryretail in Pakistan as the context of the study since this is not available elsewhere.

The paper is organised as follows. Section 2 introduces the sources and methods weused in our research and writing the paper. In Section 3, we outline contemporary FMCGretailing in Pakistan and discuss recent trends. Section 4 describes the market entry ofMakro and Metro. Section 5 considers the perspectives of FMCG channel members totheir market entry both at the time of entry and subsequently. In conclusion, wecomment upon the changing perceptions noting the implications of these for the futurestructures and relationships of FMCG channels in Pakistan.

2. Methods and data sourcesThe data used in this paper are drawn from both secondary and primary sources.

Secondary sources were used in order to assemble a picture of retailing in Pakistan.These include sources relied upon by policy makers and practitioners and published byorganisations such as the World Bank and market research companies such as PlanetRetail, AT Kearney and EuroMonitor. We also drew on relevant press comments inPakistan. We used these sources for statistical evidence and comment. It is worth noting,however, that considerable and problematic variation exists between estimates of themarket. There are several reasons for this which we expand upon in Section 3. However,briefly stated, the traditional retail and wholesale sectors in Pakistan are extremelyfragmented and comprise very small firms that enter and exit the market rapidly andoften do not register for tax purposes. Within the trade it is common to talk of“disorganised retail” and the extent to which this is appropriate is reflected in thedifficulty of providing definitive statistics.

The published statistics provided a context within which we could assess the likelyaccuracy of statistics upon which the multinational FMCG companies base theirdistribution strategies. The FMCG companies provide more comprehensive statistics thatcover all levels of the channel and break these down geographically. They also were able toprovide data concerning levels of recommended margin available to different channelmembers. These sources therefore provide data regarding channels more broadly ratherthan being limited to retail. We were able to access data from four such manufacturers and,since these did vary by about 25 per cent, we chose to use the data provided by onemanufacturer that represented a middle ground estimate of market size. We stress that weregard these necessarily as an estimate but one that is broadly consistent with the picturedepicted by sources such as the World Bank. Therefore, we work with this data in order tobe able to comment at all upon channel structures in this commercially important country.

The primary data are drawn from two tranches of interviews conducted at multiplelevels in Pakistan retail channels with the aim of understanding the perspectives ofvarious participants upon the entry of Makro and Metro to the Pakistan market. Hence,semi-structured qualitative interviews (Kvale, 1996) were conducted both at the time of(2007) and subsequent to (2008) the entry of Makro and Metro. The interviews used asimilar format in order to uncover how participants believed the entry of Makro and

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Metro would and subsequently had affected their ways of operating and their activity.The interviews took place at the work premises of participants, lasted approximatelyhalf an hour and extensive notes were taken – the interviews are shown in Table I. The2007 interviews were conducted by a group of MBA students from Lahore University ofManagement Sciences under the supervision of the first author (Sajid et al., 2007). Thoseof 2008 were conducted by the first author. An endeavour was made to select the samerespondents for interviewing in 2008, however, due largely to changes in the industry, alittle less than half of the respondents had to be replaced with the equivalent role holders.

In 2007, the first author worked for a multinational FMCG company, he had leftindustry by 2008 but the interviewees were aware of his previous involvement. It is notpossible to know what effect this involvement had upon the interview content.

3. A background to retail in PakistanOur primary concern is with FMCG channels in Pakistan so we commence at theconsumer end of the channel by providing a brief introduction to Pakistan and depictingretailing in Pakistan including developments within retailing over the past decade.

Pakistan is the sixth most populous country in the world with 175 million inhabitants(US Census Bureau, 2009). The population of Pakistan is predominantly rural (66 per cent)but with major urban centres such as Karachi and Lahore which are the 13th and 37thmost populous cities in the world, respectively, (Worldatlas, 2009). Owing to economicgrowth and rising consumer spending the retail industry has surged; retail sales haverisen 68 per cent by value between 2004 and 2008. As would be expected in a developingeconomy, grocery sales have risen at a somewhat slower rate of 60 per cent by value in thesame period but remain the most important component in retail sales (Planet Retail, 2009).

This substantial and growing market is reached through an extremely fragmentedretail market with formats that would scarcely be recognisable in some Westerncountries. According to data reported by the World Bank there were 2.4 million retailoutlets in 2003 of which 99 per cent were small, one-two person operations (ForeignInvestment Advisory Service (FIAS), 2005). The prevalence of these micro-enterpriseswithin retail is in keeping with size of the informal economy and high levels ofinvoluntary self-employment in developing countries (Henriques and Herr, 2007) and theheavy representation of retail within Pakistan micro-business (Khawaja, 2006). Thiscomposition of retail business owners leads to volatility with rapid entry and exit so thatover half micro-enterprises have been in business for less than five years (World BankReport, 2007). The prevalence of micro-businesses also influences the dominant formatswhich comprise general stores (63 per cent), “mobiles” (22 per cent) and kiosks(15 per cent)[1] (FIAS, 2005). In line with the growth of retail turnover, the number ofretail outlets has grown by about 15 per cent in the last decade (Shah et al., 2007). Thishas occurred in part through the use of funds remitted by emigrants to family membersand largely within the traditional formats as outlined above (FIAS, 2005).

There is concentration at the retail level in some sectors in Pakistan. The FIAS (2005)reported two clothing and footwear chains, Bata and Service, as having over 200 outletseach. Concentration in FMCG and grocery is, however, at a very low level as indicated inthe same report where Agha’s is cited as the largest FMCG retailer by turnover yethaving only one retail outlet. Whilst the growth of chains is not a major trend, theintroduction of a supermarket style format is an important recent feature (Guitard et al.,2005) albeit that these continue to be operated largely as independent stores.

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Table I.Number of semistructured interviewsconducted in 2007 and2008

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The supermarkets are referred to locally within the trade as “modern” or “organised”retail and thus differentiated from “traditional” and, by implication, disorganised stores.These terms are widely used in other developing countries – see, for example, Sengupta(2008) and Srivastava (2008). The modern, supermarket format is in its infancy but hasbeen introduced in the major cities of Karachi, Lahore and increasingly in the capital,Islamabad (Farrukh and Dever, 2000). These are self-service stores with multiplecheck-out counters and over 1,000 square feet in size. Typically, they provide branded orpackaged grocery items including foods, personal care and household goods (Ghani,2005). The modern format has enjoyed considerable success (Ashraf, 2007) with salesthrough the format rising by 360 per cent between 1999 and 2003 (EuroMonitor, 2004).Nevertheless, in 2003 the modern sector accounted for less than one half of one per cent ofFMCG retail sales (FIAS, 2005). The modern format is associated with increasedefficiency having, for example, higher sales per employee (FIAS, 2005) but similaritywith retail organisations in more concentrated markets should not be overestimated.There has been no development of own brands (FIAS, 2005) or of direct purchasing andlogistic systems. Many factors have been cited that are expected to limit the growth anddevelopment of modern retail including consumer preferences for daily shopping ofperishable items due to low refrigerator and car ownership and dietary preferences(Planet Retail, 2009), high import taxes on key retail equipment and the favourablepricing available in the traditional and in many cases untaxed sector (FIAS, 2005).Additionally, the advantage that the modern sector could generate, particularly in theevent of the growth of multiples, is reduced by the lack of organised, efficient supplychains for many items (Shah et al., 2007).

The factors that may inhibit the growth of the modern format provide some explanationfor the absence of international investment in FMCG retail. The Pakistan Government hasadopted a liberal policy on foreign direct investment, allowing 100 per cent foreignownership in retail. Despite this encouragement and the size of the market (measured bypopulation) Pakistan is seen as a less favourable area for retail development having beenranked in AT Kearney’s Global Retail Development Index only in 2005 (AT Kearney,2005). Therefore, despite favourable investment policies, investment has been far slowerthat in some developing countries that are more restrictive (Mukherjee and Patel, 2005).The first entry of a multi-national in Pakistan in FMCG and grocery retail is scheduled for2009 when Carrefour, run by Majid Al Futtaim Group of Middle East is due to enter thePakistan market (Haider, 2009). Therefore, the first multi-national investment in the sectortook place at the wholesale level with the entry of Makro and Metro as we shall discuss.

In overview, Pakistan’s retailing is characterised by extreme fragmentation,dominated by traditional formats and micro-businesses. A modern sector had emergedat the retail level prior to the entry of Makro and Metro and this is operated largely byindependents and by Pakistan nationals. This sector had seen impressive growthalthough factors limiting its eventual growth have been identified. These factors includethe absence of efficient supply organisations and infrastructures further up thechannels – the relevance of this will be considered further as we discuss the upstreammembers of FMCG channels.

4. The entry of Makro and MetroIn late 2006 and in mid-2007, respectively, Makro and Metro[2] entered the Pakistan marketoperating a cash and carry format. Their investment models differed. Makro entered

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through a joint venture between the House of Habib and SHV of The Netherlandsas Makro Habib Pakistan Ltd Metro entered without local collaboration. Both have salesareas of 8-11,000 square meters per outlet and have released growth intentions of 30 storesthroughout Pakistan in the case of Makro (Associated Press of Pakistan, 2008) and20 outlets in the long-term located predominantly in the more populous Punjab province forMetro (Planet Retail, 2009)[3]. To date, both wholesalers have focused upon the major citiesthat have attracted most attention from multi-national businesses including manufacturersand brand owners and, more recently, Carrefour. Whilst the planning laws were supportiveof market entry and in some cases government land was made available to lease, thecompanies faced challenges in obtaining appropriate land. Lower cost land in city outskirtssuffers from poor security, making retailers and potential customers wary of doingbusiness there (FIAS, 2005). Where government land was provided in residential areasthey faced opposition from local residents of Karachi and Lahore (The Nation, 2008;Cowasjee, 2009).

Both, Makro and Metro operate in three broad categories which are fresh produce, dryfood (FMCG) and durables (non food). FMCG represents approximately 30-40 per cent ofrevenue – both sell these in bulk packs. Both target diverse markets comprisingtraditional retailers, industrial buyers and hotels, restaurants and cafes (HoReCa). Thetwo businesses differ slightly, however, in terms of customers served and marketingcommunications.

Makros’s core target market is professional customers (that is, mostly retailers), yet,according to their management in interview, in practice they also sell goods for personalconsumption to customers registered under a business name. Metro strives to provide“lowest possible price” to its customers and takes more steps to discourage all B2Cactivity.

In the two years since the entry of these international formats at the wholesale level,data from one of the FMCG manufacturers show that these “organised” wholesalershave gained a share of the FMCG market equivalent to 1-2 per cent in urban Pakistan,rising to around 4 per cent in those cities where they have focused greater investment(Tables II and III). In this time they have expanded and they continue to expand thenumber of stores. Whilst the presence of these wholesalers remains small in terms of thenumber of stores and current market share, their success to date is noteworthy. Theirlong-term success depends upon the extent to which they are assimilated and possiblyalter the structures of FMCG channels in Pakistan. We therefore turn now to dataprovided by an FMCG company in order to consider the channel structure that Makroand Metro entered and their subsequent impact upon this. As previously outlined, we

Cities

Distribution companiesemployed by FMCG

manufacturerLocal

wholesalersTraditional

retailersModernretailers

Makrocash and

carry

Metrocash and

carry

Karachi 6 6,876 44,342 3,521 3 0Lahore 3 3,128 25,467 1,487 1 1Islamabad 1 387 3,789 97 0 1Urban Pakistan 10 10,400 73,500 5,200 4 2

Source: 2008 industry data supplied by an FMCG manufacturers dealing in household and personalcare brands

Table II.Number of channelmembers in the three bigcities

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draw on interview data taken at the time of market entry and subsequent to market entryto demonstrate perspectives upon Makro and Metro and the changing relationshipsbetween channel members enabled by their entry.

5. FMCG distribution structures in PakistanThe distribution structure in Pakistan has long been constituted by different playersnamely, FMCG manufacturers, distributors, wholesalers and diverse types of retailersThese relatively long distribution channels which are, as discussed, fragmented at theretail level are also fragmented at the wholesale level (Ghani, 2005) as shown in Table II.The simple flow of goods through the channel (prior to the entry of Makro and Metro) isshown in Figure 1 and a brief account of the role of these channel members is now given.All statistics quoted are based upon figures provided by one FMCG company, asdiscussed in our methods section.

5.1 FMCG manufacturesBoth multinational and local or national brand owners operate through a similar channelstructure and employ multiple distributors. The few exceptions include P&G and Dabur(of India) where brand owners use a sole distributor. The extent to which the brandowner takes channel leadership and therefore determines the flow of product and fundsthrough the length of the channel differs between local and multinational brands. Thelatter generally are able to act as channel leaders to a far greater extent than can localbrand owners. Our primary focus is upon the multinational FMCG manufacturers. Inthese cases, Pakistan is a manufacturer dominated market where brand owners can actas channel steward (Rangan, 2006) heavily influencing the overall channel strategy.

5.2 DistributorsDistributors are organised according to geographic territory and typically the country ispartitioned into around 300 “exclusive” territories serviced by local distributors. Theseterritories may centre upon one town and include some outlying districts or may relate toone defined area within the largest cities. Each distributor is an independent, appointedintermediary who purchases goods from the manufacturers and sells and delivers thesegoods to wholesalers and also to some retailers, most notably urban retailers. Manydistributors work with multiple FMCG manufacturers.

Cities

Distributioncompanies

(%)

Localwholesalers

(%)

Traditionalretailers

(%)

Modernretailers

(%)

Makro cashand carry

(%)

Metro cashand carry

(%)

Karachi 96 35 51 10 4 0Lahore 98 28 58 12 1 1Islamabad 96 20 55 21 0 4Urban Pakistan 97 32 54 11 2 1

Notes: This table depicts the flow of value of goods to the extent these are known by the FMCGmanufacturer. Hence, circa 3 per cent of value sales are made to Makro and Metro, 97 per cent are madevia distributors. Columns dedicated to local wholesalers, traditional retailers and modern retailersshow the flow of goods from the distributors and thus round to 97 per centSource: 2008 industry data supplied by an FMCG manufacturers dealing in household and personalcare brands

Table III.Percentage of FMCG

value share of channelmembers

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Distributor/manufacturer relationships are governed by contract which stipulates thedistributor margin and requires the distributor to implement various trade andconsumer promotional activities for the manufacturer. Moreover, the distributor isresponsible for the sale and delivery of goods to all economically feasible outlets in theagreed territory. In return, the distributor receives the manufacturer goods exclusivelyin a particular area[4]. This exclusivity renders the manufacturer highly dependent uponthe efforts of distributors to maximise sales. This dependence is mitigated, however, bycontractual terms and the manufacturer’s brand power. In turn distributors acceptcontrol which is mitigated by exclusive access to a geographic market with respect topopular and well supported brands.

The manufacturer communicates with some wholesalers and retailers, most notablythe modern retailers with whom they, for example, organise promotions. However, (priorto the entry of Makro and Metro, as we discuss) the distributors acted as intermediarieswho facilitated the flow of goods in all cases to the next level of the channel. Additionally,they add value in the channel through their local knowledge and relationships withdown-stream members (wholesalers and urban retailers). This enables them to develop themarket locally and to develop the confidence to extend credit to down-stream partners.

5.3 WholesalersWholesalers are important in developing economies, bridging the market gaps of sucheconomies and providing support to their fragmented customer base (Samli andEl-Ansary, 2007). This is reflected in the fragmented character of the wholesale level inPakistan with over 10,000 such businesses in the three metro cities (Table II).

Wholesalers are not contractually bound to any other channel member. They buy thegoods from the distributor and sell to retailers and sometimes to end customers.

Figure 1.The distribution structureprior to the entry ofmodern wholesale

FMCGmanufacturer

(National)

Distributioncompany

FMCGmanufacturer

(MNC)

LocalWholesaler

Traditionalretailer

Consumer/customer

Modernretailer

Arrows reflect simple flow of goods

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Thez primary customers of these wholesalers are rural retailers who are not serviced bydistributors and hence must visit wholesalers to obtain supplies. Additionally, urbanretailers may choose to visit the wholesalers despite being “on the calling lists” of thedistributors. This may occur where wholesalers undercut the manufacturer’srecommended price. A third source of trade at the wholesale level comes from salesmade between wholesalers. Strong networks of relationships can develop betweenwholesalers which enable a level of cross territorial sales – sometimes in order to takeadvantage of quantity-based trade promotions. Thus, the wholesale level gives rise toparallel distribution systems that operate alongside the official, territorially basedchannel structure of the official distribution system.

5.4 RetailersIn the first tier cities Karachi, Lahore and Islamabad alone there are approximately80,000 (Table II) independent retailers. We have noted the variety of traditional formatsand the distinction between traditional and modern or organised formats. As previouslynoted, the modern format has outperformed the growth of the market although itsabsolute level remains small.

Both modern and urban traditional retailers are serviced directly and at the retailer’spremises by the distributors’ sales forces. Some retailers of either category chose,however, to buy from the wholesalers often in order to obtain a more favourable price aspreviously noted. A majority of retailers in urban areas source from both distributorsand wholesalers.

In summary, then, the distribution structure at the time of entry of Makro and Metrowas fragmented and operated through multiple levels. Strong international brands wereable to provide channel leadership and sought to promote orderly marketing through asystem of exclusivity with their immediate partners, the distributors. However, the vastnumbers of wholesalers and retailers also gave rise to out-of-system sales creatingunofficial alternative channels along which products and payments flow.

The entry of Makro and Metro at the wholesale level brought alternative channelsto the Pakistan FMCG market (Figure 2). They sought to buy directly from themanufacturers and thus compete directly with distributors who formerly had sole resellerrights within defined territories. Their stance, vis-a-vis wholesalers was more ambiguous.On the one hand, they offered an alternative source of supply for wholesalers and thus maybe seen as partners to the wholesalers. On the other hand, Makro and Metro offered a moredirect channel to retailers and thus could be seen as competitors of the local wholesalers.

The entry of these multinational, organised wholesalers thus may substantiallyre-shape Pakistan’s retail channels and, indeed, their success depends upon the extent towhich they are assimilated in extant or new channel forms. Whilst the changes that theywill bring cannot yet be predicted, we are interested in the perspectives of the varioussets of channel participants at and since the time of entry to see how they are reacting tothe entry of Makro and Metro as an indicator of the changing shape of retail structures.

6. Perspectives on the entry of Makro and MetroWe divide our discussion into two sections. The first is based on interviews from 2007and illustrates perspectives of channel members at the time of Makro and Metro entry.The second part describes perspectives of the same channel members in 2008, i.e. afterMakro and Metro started their operations.

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6.1 Pre Makro-Metro entry perspectives6.1.1 FMCG manufacturers. In 2007, multinational FMCG companies were keen toexpand their business with these organised wholesalers, keeping in view the success ofMakro and Metro in other countries. The multinationals developed local key accountsdepartments that received training from global teams and which would negotiate termsof trade with Makro and Metro. The key accounts departments operated independentlyin that they did not report to the global key accounts structure. FMCG manufacturerswere, however, acutely aware of the pressure that organised cash and carry may place onexisting distribution channels. These existing channels were and would remain over theshort and medium term the main source of business for them. Whilst the manufacturerstherefore did not want to disrupt the traditional structure, the organised wholesaleformats also provided an opportunity to overcome the informal distribution systemsthat the local wholesalers operated.

In view of these mixed concerns, the FMCG manufacturers placed importance on thenegotiation of trade margin with the new entrants, especially since this would determinethe extent of impact these wholesalers could create on the traditional distributionchannel. An overview of the intended margins for one FMCG is shown in Figure 3 –these approximate the margin levels operating with respect to popular FMCG products.The margins are structured at each level taking into account the effort of each channelmember. Thus, the distributor margin is greater when a distributor performs thebroader functions involved in selling to individual retailers (7 per cent) than when someof these functions are performed by wholesalers (4 per cent). As we have seen indiscussing the trade between wholesalers, these intended margin levels do vary to alimited degree, for example, where trade promotions may be introduced.

The alternative channel via Makro and Metro brought changed cost structuresand re-apportioned tasks and also presented a challenge in terms of pricing through

Figure 2.The new distributionstructure

FMCGmanufacturer

(National)

Distributioncompany

FMCGmanufacturer

(MNC)

Localwholesaler

Traditionalretailer

Organisedwholesale

(Makro/Metro)

Consumer/customer

Modernretailer

Arrows reflect simple flow of goods

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the channel. Makro and Metro, as consolidated wholesalers could bring efficiencies andhigher bulk purchases and thus requested a purchase price lower than that operating atthe wholesale level (at Pakistan rupees 104, as given in the example in Figure 3). Ifgranted, however, this would pose a large threat to existing members of the channel.Makro and Metro could more rapidly erode market share of both distributors andtraditional wholesalers by offering lower prices to the retailers. This ultimately mightadjust the retail structure by increasing opportunities for efficiency amongst thosedeveloping growth plans. Given the prevailing competition laws, the manufacturer’s keymeans to gain some control of these dynamics rested upon their operative pricing withMakro and Metro at or near the wholesale price level and their ability to influence Makroand Metro’s prices according to their power. As we have discussed, these multi-nationalbrand owners had previously been able to operate as channel captains but the newphenomenon of consolidation could, over time, place their position in question.

Overall, FMCG manufacturers felt very positive about Makro and Metro and lookedforward to entering into a collaborative relationship with them but were highly attunedto the issue of pricing with respect to these companies.

6.1.2 Distributors. Distributors, prior to entry of Makro and Metro, did not considerthese cash and carry chains as a threat to their business and supported this view throughseveral arguments. First, they argued that retailers would not purchase from theorganised wholesalers who did not extend credit which was seen as an important facilityfor cash poor retailers. Second, the distributors argued that customers will not take the

Figure 3.An example of trade

margin structure of anFMCG product

Channel member PKR* % margin

FMCGmanufacturer SP* 100

Channel member PKR % margin

PP* 100SP 107

Distribution company

7%

Channel member PKR % margin

PP 104SP 107

Localwholesaler

3%

Channel member PKR % margin

PP 107SP 120

Retailer 12%

PP = Purchase priceSP = Sales pricePKR = Pakistan rupee

Notes: 125 millimetres shampoo bottle; margins were calculated from the price list of a manufacturer.Similar proportions of trade margin distribution are present for all other FMCG products

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risk of carrying cash to these wholesalers given the law and order situation in Karachi.According to the distributors, their ability to maintain strong customer relationshipseven during the most adverse law and order situations had engendered a level of trustamongst those customers that Makro would be unable to replicate. Moreover, they weresceptical that consumers would shop from Makro in view of the bulk sales policy. Thus,in part the immediate perceptions of distributors were based upon their estimation oftheir own local and cultural knowledge and cultural-based practices which they believedprovided a high level of protection.

Distributors also mentioned the criticality of their business for the manufacturers andthe dependence therefore the FMCG manufacturers had on them. Thus, they werehopeful that manufacturers would not facilitate operations of Makro and Metro at theexpense of distributors’ business. They also cited their importance in the extantstructure as a factor that would lead to protection by the FMCG manufacturers.

Finally, and possibly less optimistically since it does suggest their ownmarginalisation, distributors said that Makro would be unable to serve the entirefragmented market so that distributors will retain penetration of less accessible markets.

6.1.3 Wholesalers. Local wholesalers considered Makro and Metro to be a threat totheir business but were doubtful about the future of these organised wholesalers. Localwholesalers considered their relationship with the customers and extension of credit asvery important factors. They were of the view that Makro and Metro would not be able toextend credit to their customers since they lacked local knowledge and depth ofrelationship with retailers. Additionally, the wholesalers readily referred to Metro’slimited gain of share from local wholesalers in India.

6.1.4 Retailers. Mixed opinions were expressed by retailers. Modern retailers didperceive some threat from Makro and Metro. With their growing market share they hadtraded directly with distributors and communicated directly with FMCG manufacturersin a way that the traditional retailers would not. At times, therefore they had negotiatedfavourable conditions through the extant system. Their concern thus focused on thepossibility that the organised wholesalers would also make sales to end consumers andthat the affluent class of the cities might turn to Makro and Metro for an internationalshopping experience.

Conversely, traditional retailers did not view Makro or Metro as a threat but rather asan opportunity. They saw that the operations of Makro and Metro in their cities hasgiving them more choice. Moreover, they also thought that they could buy importedassortments from Makro and Metro which were otherwise unavailable. Traditionalretailers said that lower prices, transparency in billing, ambience and availability ofchoice could compensate for the lack of credit facility at organised wholesalers. Hence,according to comments collected at the time of Makro and Metro entry, these traditionalretailers, through whom the vast majority of retail sales are made (Table III) perceivedless value in their relationships with wholesalers/distributors than the latter perceived.

6.2 Post Makro-Metro entry performance and perspectives6.2.1 Makro andMetro. Makro cash and carry personnel were obviously very optimisticabout future of the business in Pakistan. Makro, in its earlier phase had the objective ofabolishing the existing distribution setup and the ambitious goal of becoming thedistributors for FMCG products in the three large cities of Pakistan. Both objectiveswould have been supported by achieving favourable trade margins (Figure 3).

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Makro cash and carry in its initial phase tried to stick to its original target customers,retailers. However, in a few weeks time of its first store opening, Makro removed therestrictions on purchases and allowed anyone, including end consumers to shop fromtheir stores. This, according to them was essential to support high infrastructuremaintenance costs and led to the introduction of smaller bulk quantities. This businessalso provided massive in store advertising opportunities for FMCG manufacturersforming another source of revenue for Makro. This re-defined their relationships withother channel members in several ways. They became competitors to the retailers,especially to modern retail. Additionally, they could add more value in relationships tobrand owners through the promotional opportunities they supplied. Additionally,Makro have adapted their original model to include the provision of delivery to localwholesalers and larger retailers and, in some cases, credit arrangements.

Like Makro, Metro also wanted to sell at lower prices and sought a greaterdistribution margin. However, upon entry they developed the market in several respectsthat differed from Makro. Metro wanted to ensure that only genuine retailers orbusinesses could purchase from Metro. Strict criteria were implemented for customerregistration and minimum purchase values along with the exclusion of children from thestore were enforced. Metro was critical of Makro’s moves towards consumer retailingsince they felt that if they started selling to the end consumer it would harm their originalcustomers, that is, the retailers. Moreover, Metro did not provide any advertising spacefor the manufacturers, as they wanted to provide genuine cash and carry ambience totheir customers. We thus see Metro as more concerned to preserve their initial (entry)position in the channel structure.

Possibly, Metro’s greater fidelity to its entry model is associated with a commitmentto slow market growth. According to Metro the business will not have a significantimpact on the traditional distribution structure of manufacturers since the market isextremely fragmented.

6.2.2 FMCG manufacturers. According to manufacturers, Makro has shown greatflexibility in adapting to local market dynamics. Their joint venture with Habib group hashelped them in comprehending local customer needs. This is evident from the fact thatMakro has relaxed its customer entry requirements based on the heavy end-user trafficand has changed the layout of its stores according to the location and customer base.Metro, comparatively, is committed to strong wholesale concept and multinationalcompany (MNC) manufacturers usually have a very professional relationship with Metro.

In terms of the effects of Makro and Metro, generally, manufacturers believe thatthere has not been any significant impact on the traditional trade structure as such. Oneof the reasons is that many multinational manufacturers have ensured in the terms oftrade agreed with Makro and Metro that a minimum floor price is maintained in thesestores.

Thus, we can see Makro, Metro and the FMCG manufacturers tending to downplaythe impact that the new entrants will have on the total structure of retail in Pakistan. Thenew entrants themselves emphasise the competitive situation between the two of themrather than their ability or ambition to change the extant structure. By comparison, othersets of channel participants are rather more likely to emphasise current changes.

6.2.3 Distributors. Various FMCG distributors representing the multi-nationalbrands were interviewed in the three major cities to gain insights into the impact ofMakro and Metro and also to understand how their relationship with manufacturers has

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been affected in the process. Needless to mention, in the traditional retail setup, thedistributors play a pivotal role in the distribution strategy of manufacturers. They feelthat due to Makro and Metro, their market share has been affected adversely and noteshifts of power across the channels towards these global wholesalers.

Whilst the distributors consider the terms of trade to be dictated by the manufacturersto them, they consider the balance of power to be tilted towards Makro and Metro in theirrelationships with the manufacturers. Accordingly, they see themselves as the FMCGmanufacturers’ second priority with respect to stock allocation during stock outs.

Distributors in Karachi consider their advantage of door step delivery to have beeneroded through Makro’s introduction of delivery and credit for high volume customers.With aggressive telemarketing services, order taking and delivery of goods, Makro isoperating on lines close to the distributor business model and distributors do see theirposition as therefore being directly challenged. On top of this, according to distributors,manufacturers in some product lines are selling imported products to Makro and Metro,which are not made available to distributors. According to the distributors such changesin manufacturers’ policy have come about because manufacturers benefit from thesingle channel of Makro and Metro by reducing their large sales forces.

Thus, at the current time the distributors feel that the aspects they previously saw asinsulating them, to some extent, from the new entrants have been undermined especiallythrough credit and delivery services but also they feel less secure in the value of theirposition to FMCG manufacturers.

6.2.4 Wholesalers. The entry of Makro and Metro has had an interesting influenceupon the wholesale business. Traditionally, wholesalers tended to consider theirrelationship to FMCG manufacturers as problematic in that they received little supportand were placed under considerable pressure in a system that afforded them few options.

Wholesalers believe that Makro and Metro are able to pass better margins becauseterms of trade agreed by manufacturers favour the organised wholesalers. Theperception of quality of goods supplied to distributors has also deteriorated, as the localwholesalers think that Makro and Metro are provided with better quality products.

Wholesalers in Karachi cite reasons for sourcing from Makro that include door stepdelivery, superior availability of fast moving and more scarce stock keeping units,availability of regular trade promotions and better margins at Makro since price increasesare minimised. However, many wholesalers still do not buy from Makro and Metro.Reasons mentioned by these wholesalers include the old relationship with the distributors,cash only policy of Makro and Metro and difficulty in leaving the shop unattended to visitthese stores.

Wholesalers therefore currently perceive the possible impact of Makro and Metroas being higher than they had initially thought. In particular, they are beginning to seeMakro and Metro as offering a superior source of product and as, in some cases, havingmade adaptations that enable trade in the local conditions. It is possible that they perceivethese new entrants as opening channels that address some of their previous concerns.

6.2.5 Retailers. There has not been any significant change in the perspective oftraditional retailers. Modern retailers, however, have felt that their business is beingaffected since the ambience and assortments appeal to the affluent class who wouldotherwise shop at the modern formats. These retailers, like distributors also felt thatmanufacturers are providing huge favours to Makro and Metro by giving them bettermargins and by giving them first priority in stock allocation. The retailers also feel that

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the advertising budget spent by manufacturers on in store promotions in modernformats has also declined. They attribute over-spending by manufacturers in Makro instore as the primary reason for this decline.

7. ConclusionDespite the small market share possessed by the organised wholesalers in the Pakistanmarket the changing perceptions of market participants is suggestive of thefundamental changes that they could bring to channel structures in Pakistan.Specifically, the potential of the format is now more broadly recognised with lessscepticism about their ability to operate in the local conditions. Additionally, the extentto which they are considered to pose a threat or opportunity has changed amongstmarket participants. Most specifically the distributors feel more threatened than initiallywhilst local wholesalers are moving towards recognition of opportunities. We thusconsider the entry to have led to a dynamic situation in which market participants cometo re-interpret their position and to envisage new methods of relating to other partieswithin a channel system (Table IV).

The fluidity of the current situation may be seen as disrupting power patterns in theextant channels. How power will be distributed in the future is not yet clear but we cansee that some channel participants will be eager to preserve or enhance their position inthe midst of change. In particular, we note threats to the distributors’ position.Indifference to Makro and Metro and confidence in the strength of their relationship withthe manufacturer has given way to greater concern. In a similar vein, we note theperception amongst wholesalers and retailers of the benefits of greater options whichshows the distributors’ position to be under threat. We also note that the manufacturershave, in the past, had considerable power vis-a-vis their immediate channel partners, thedistributors. Their power with respect to consolidated, organised wholesalers is lessclear and we have seen the manufacturers’ more cautious approach to these partners –especially with respect to pricing. Despite this caution, the growth of major wholesalepartners may allow manufacturers more indirect influence upon trading further downthe channel. In particular, it may open up a structure that removes some of the confusingpatterns of unofficial trading between wholesalers and between wholesale and retaillevels. Hence, it is impossible to predict how relationships will be re-shaped over thecoming years but the introduction of new wholesale channels has brought in thepossibility of considerable realignment of power within the total structure.

For the moment and as a result of the fluidity of the situation it is possible to see therelationships between FMCG manufacturers and other channel participants as underconsiderable strain. Distributors are less confident in the value of their relationships andthere is a widespread perception that the new entrants are receiving favourabletreatment from brand owners. These traditional partners still represent the bulk of tradeand are likely to retain that status in more rural areas for some considerable time.Managing transition and across a plethora of channel types is therefore a challenge tothe FMCG brand-owners – and one in which they may draw upon knowledge generatedin other markets.

Finally, we expect the complexity of channel management in Pakistan to increase intothe future. Although factors have been suggested that gravitate against consolidation ofthe retail sector in Pakistan, as we have previously noted, there is also reason to projectincreased consolidation (if modest in comparison to Western markets) not only at the

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2007

2008

Ch

ann

elm

emb

er

Per

cep

tion

ofM

ako/

Met

roas

thre

at/

opp

ortu

nit

y

Per

cep

tion

reg

ard

ing

futu

reof

Mak

roan

dM

etro

Per

cep

tion

ofre

lati

onsh

ipw

ith

man

ufa

ctu

rers

Per

cep

tion

ofM

ako/

Met

roas

thre

at/

opp

ortu

nit

y

Per

cep

tion

reg

ard

ing

futu

reof

Mak

roan

dM

etro

Per

cep

tion

ofre

lati

onsh

ipw

ith

MN

Cm

anu

fact

ure

rs

FM

CG

man

ufa

ctu

rers

Op

por

tun

ity

Neu

tral

N/A

Op

por

tun

ity

Pos

itiv

eN

/A

Mak

roN

/AP

osit

ive

Med

ium

N/A

Pos

itiv

eS

tron

gM

etro

N/A

Pos

itiv

eM

ediu

mN

/AP

osit

ive

Str

ong

Dis

trib

uto

rsIn

dif

fere

nce

Neg

ativ

eS

tron

gT

hre

atP

osit

ive

Wea

kW

hol

esal

ers

Th

reat

Neg

ativ

eM

ediu

mN

eutr

alP

osit

ive

Wea

kM

oder

nre

tail

ers

Th

reat

Neu

tral

Str

ong

Th

reat

Pos

itiv

eM

ediu

m

Tra

dit

ion

alre

tail

ers

Op

por

tun

ity

Pos

itiv

eM

ediu

mO

pp

ortu

nit

yP

osit

ive

Med

ium

Table IV.Summary of channelmember perceptions 2007and 2008

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wholesale level but also at the retail level. This consolidation may occur to some extentthrough the growth of indigenous modern chains since we have seen the popularity ofthe modern format. Consolidation is, however, to be expected also as internationalplayers enter the retail market. Carrefour is the first such market entrant and this mayprecipitate further international interest. Further consolidation cannot be considered inisolation from the progress of Makro and Metro but is likely to be influenced both byperceptions of the success of these actors and by extant players’ understandings of thechanges and reactions to these. These changes include threats they present to somelevels of the channel and opportunities for greater choice, efficiency and pricecompetitiveness that they present to other channel members.

Notes

1. “Mobiles are a traditional form of retailing where outlets are not only confined to open airstalls, but also include operators who knock on car windows to sell their products. Kiosks arelocated in streets or parks, mainly selling confectionary, newspapers and tobacco” (FIAS,2005, p. 31).

2. The official web sites of Makro and Metro (as seen on 23 December 2008) are www.makropakistan.com/index.htm; www.metro.pk/servlet/PB/menu/-1_l2/index.html

3. Owing to a long established strategic relationship between Makro and Metro thesewholesalers do not generally operate in the same country and Pakistan is the only countrywhere they have entered almost simultaneously. The ownership structure of the twobusinesses in Pakistan may prevent them from coming into direct competition – and reflectMetro’s longer term plans in Pakistan. Planet Retail (2009) points to Makro’s divestmentstrategy in Asia where most of their investments in Taiwan, Malaysia, Philippines, Chinaand Indonesia have been sold mostly to Asian conglomerates, and links this with some saleof ownership of their Pakistan operations to their local partners, House of Habib.

4. Competition laws in Pakistan were revised in 2007, previously the competition authorities“limped along” and “failed to do anything substantive or worthy of mention” (Mirza andDaudpota, 2007). The current law is modelled on European competition law and, inter alia,prohibits agreements that fix purchase or selling prices or divide and share markets(Competition Commission of Pakistan, 2007). Of the few cases so far pursued, none are ofimmediate relevance to this sector.

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Associated Press of Pakistan (2008), “Makro cash & carry to invest $ 300 million in Pakistan; toopen 30 stores”, 24 June, available at: www.app.com.pk/en_/index.php?option¼com_content&task¼view&id¼42877&Itemid¼38 (accessed 5 August 2009).

AT Kearney (2005), Emerging Market Priorities for Global Retailers, AT Kearney 2005 GlobalRetail Development Index, AT Kearney, Chicago, IL, p. 4.

Competition Commission of Pakistan (2007), Competition Ordinance, 2007, CompetitionCommission of Pakistan, Government of Pakistan, Islamabad.

Cowasjee, A. (2009), “The deprived have been heard”, The Dawn, 5 July, available at: www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/the-newspaper/columnists/16-ardeshir-cowasjee-the-deprived-have-been-heard-579-hs-04 (accessed 5 August 2009).

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Khawaja, S. (2006), “Unleashing potential of the SME sector with a focus on productivityimprovement”, paper presented at the Pakistan Development Forum, 10-11 May,Islamabad, available at: http://siteresources.worldbank.org/PAKISTANEXTN/Resources/293051-1147261112833/Session-3-2.pdf (accessed 6 August, 2009).

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Shah, S.Q.A., Zaidi, M., Ahmed, M.I. and Syal, H.N. (2007), “Pakistan”, in Vorley, B., Fearne, A.and Ray, D. (Eds), Regoverning Markets, Ashgate, London, pp. 145-54.

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About the authorsAsad Aman’s research interests lie in evolving FMCG distribution channels in Asian markets.He has worked for several multinational FMCG manufacturers in senior management positions,where he managed business relationships with local as well as international/organisedwholesalers and retailers. He has also supervised various academic researches. He currently ispursuing his PhD in the Marketing Department of Lancaster University Management School.Asad Aman is the corresponding author and can be contacted at: a.aman@lancaster.ac.uk

Gillian Hopkinson’s interests are in channel management and in inter-organisationalrelationships within distribution, interests which arise from her previous career in purchasingand selling in the travel industry. She has researched channels in contexts that includehospitality, FMCG and car distribution and published in journals including The Journal ofManagement Studies, Psychology & Marketing, Industrial Marketing Management and TheEuropean Journal of Marketing. She is a Senior Lecturer in Lancaster University ManagementSchool.

To purchase reprints of this article please e-mail: reprints@emeraldinsight.comOr visit our web site for further details: www.emeraldinsight.com/reprints

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