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Country Commercial Guides for FY 2000: Pakistan Report prepared by U.S. Embassy Islamabad, released July 1999 Note*

CHAPTER IV. MARKETING U.S. PRODUCTS AND SERVICES

A. Distribution and Sales Channels

There are approximately 125,000 retail outlets in Pakistan, of which nearly 30,000 are located in the major cities. About 50,000 of the total are classified as universal stores/outlets. These are further subdivided into the following categories:

Category 		Size				No.of Outlets

A			Very Large			      300-500
B			Upscale				  5,000-7,000       
C			Medium				10,000-15,000
D			Very Small			       50,000+

Stores in the latter three categories are usually owned by a sole proprietor. Large supermarkets or chain stores for general consumer items still do not exist in Pakistan, though the trend may catch on soon, as one large supermarket has been established in Lahore in collaboration with a British chain of supermarket and has become a major point of attraction there. However, the concept of chain stores for fashion apparel has lately begun to emerge in the larger cities, where several such chains carrying predominantly locally manufactured merchandise are currently operating. In addition, hundreds of government-owned Utility Stores sell food and household items and serve as a mechanism for restraining inflationary price increases by following the government line on pricing.

Many consumer retail stores stock general merchandise for everyday use. There are also large numbers of stores which sell a single commodity, for example, tires, cooking utensils, textiles, or jewelry. Such stores are generally located in bazaar areas and tend to be situated near many other shops carrying similar goods. There are as yet no shopping malls or large department stores in Pakistan; however, the government has built multi-storied shopping plazas in Islamabad, Karachi and Lahore with several stores rented out to retailers. The one located in Islamabad is partially closed, and Karachi and Lahore plazas are struggling to stay in business.

Foreign companies considering marketing their products in Pakistan may choose to use the services of local distributors or may develop their own distribution chain. Distributors in the urban areas generally deal on an exclusive basis. Some market consultants estimate that the services of 100-300 distributors would be required for nationwide coverage. One very large multinational company selling consumer products employs 500 distributors to reach a significant portion of Pakistan's small towns and villages.

As a matter of policy, most companies do not provide credit to distributors, and distributors in turn generally sell on a strictly cash basis to retailers. Smaller distributors often do provide credit to retailers, but the volume of such transactions is relatively insignificant.

Pakistan's wholesale market is fairly well-developed, with about 1,000 - 1,500 wholesalers constituting this segment of the distribution network. Karachi is the major distribution center and wholesale terms there are representative. Approximately one-fifth of the wholesalers in Karachi sell on a consignment basis. Fewer than one-third of the wholesalers allow discounts to their customers, but the granting of 30 to 90-day credit is common. Because of limited financial resources, retailers generally sell on a cash-only basis. Consumer credit in Pakistan remains an insignificant portion of the total commercial credit. Foreign companies selling industrial or capital goods often sell directly to the end-user or, if the market is fairly large, they appoint one major distributor, who then sells either to sub-distributors or directly to end-users.

B. Use of Agents/Distributors: Finding a Partner

Many foreign firms in Pakistan appoint local agents to provide market intelligence and to facilitate distribution. These agents typically work on a fixed commission, which can range from two to 10 percent for plant and equipment purchases and from 15 to 20 percent for spare parts. Commissions may be computed on f.o.b., ex-factory, or c.i.f. basis, as mutually agreed. Some agents prefer to have suppliers quote net prices to them and they, in turn, add the commission to arrive at their selling price. Other agents operate as consultants on a fixed-fee basis, receiving their fee regardless of the volume of total sales.

Probably the most common arrangement is the exclusive agency agreement, under which the supplier agrees to neither appoint another dealer/distributor, nor to negotiate sales through any other party. In return, the agent is barred from handling similar items produced by other companies. Under this arrangement, the agent receives commissions on all sales of the product regardless of the channels through which the order is placed. He often imports and stocks the spares most frequently required by the end-users. Agency agreements typically extend for a term of one to three years and generally require 30 to 90 days notice by either party for termination.

Overseas suppliers may look after the interests of their local agents in various ways. For example, the principal may arrange separate payments to the local agent for provision of after-sales service during and beyond the warranty period. The principal often compensates the local agent for providing technical and administrative support services not directly related to any specific sales transaction.

The Commercial Service of the U.S. Department of Commerce (USDOC) can provide assistance in locating potential agents and representatives abroad through its Agent/Distributor (ADS) and Gold Key services available through USDOC district offices in the United States. The "International Company Profile" (ICP) can provide information on individual agents.

C. Franchising

The concept of franchising is gradually gaining acceptance in Pakistan, especially in the hospitality sector. Several major U.S. hotel chains, three major U.S. restaurants, and a U.S. car rental company are currently represented in Pakistan through franchisees. Other leading U.S. fast-food companies are looking into the prospects of entering this market, and have done some major groundwork.

Franchising provides U.S. companies with a fairly swift way to enter the market without a major capital commitment. By operating through local franchisees, U.S. firms can gain access to local expertise and significantly reduce the problems of adjusting to an unfamiliar business environment.

However, franchising in Pakistan is not without drawbacks. Potential areas of tension between franchiser and franchisee include quality control, intensity of marketing efforts by the local franchisee, and possible conflict of interest on part of the franchisee. The local affiliate may end up as a competitor once the franchise agreement expires or is terminated.

A key consideration in establishing a franchise operation in Pakistan is quality control, particularly if the enterprise proposes to use locally produced items. The quality of local items is often inconsistent and must be closely monitored. Some U.S. franchisers in Pakistan have run into quality-control problems and have either terminated operations or allowed the operation to blend into the local economy and let the image of an international franchise lapse. Importing inputs, especially food ingredients, also poses problems for franchises. Import regulations are often vague and interpretations can change with little or no prior notice. In Pakistan, all imported food items, particularly meat items must be certifiably "Halal", (slaughtered in the proper ritual Islamic manner).

Selection of a franchisee is critical because usually it involves a long-term relationship. Prior to entering an agreement with a local company, U.S. firms may commission an ICP on the local company, by paying the appropriate fee to their local district office of the U.S. Department of Commerce. U.S. firms are, of course, advised to identify a number of candidates and evaluate each carefully.

The franchise agreement must be carefully drafted to protect the interests of the parties. The franchiser must be able to retain some direct control over operations, even after transfer of business and technical know-how. Crucial elements of the franchise agreement include territorial coverage, duration, franchise rate, protection of trade secrets, quality control, and minimum performance clauses. The U.S. firm should assure that its patents and trademarks will be registered in its own name rather than that of the franchisee.

Major U.S. companies with franchise operations in Pakistan include Marriott, Sheraton, Best Western, Pizza Hut, Kentucky Fried Chicken, TGI Friday, Subway, McDonald's and Avis. A couple of other fast-food franchise outlets are expected to come up in Karachi, Lahore and Islamabad shortly.

D. Direct Marketing

Direct marketing in Pakistan until recently was limited to direct mail advertising, with leading pharmaceutical firms and large publishing groups as major users. The pharmaceutical companies were reaching out to doctors, hospitals, and other medical professionals, and the publishers were using direct mail to reach out to their existing subscribers of magazines and publications for repeat business. However, the inception of telemarketing and greater use of courier services have recently broadened the scope of direct marketing.

The concept of direct marketing is gradually gaining acceptance in the Pakistani marketplace, driven by the efforts of several multinational companies. Low costs for domestic mail and local telephone calls make this a potentially cost-effective sales medium. The major drawbacks to direct marketing in Pakistan are the lack of readily available mailing lists and the paucity of reports on consumer preferences, making it difficult to target and reach the intended audience. Efficient mail, courier, and telephone services are generally limited to major urban areas, confining the current reach of direct marketing to the cities of Karachi, Lahore, Rawalpindi/Islamabad and Peshawar.

U.S. companies considering direct marketing in Pakistan should take local customs and cultural values into consideration before launching a campaign. The use of a local advertising agency is advisable in implementing the direct marketing option. A few advertising agencies have separate direct marketing departments. Now, a major U.S. bank has also begun to offer this service.

E. Joint Ventures/Licensing

The three principal routes to entering the Pakistan market are: (1) formation of a wholly-owned private company; (2) formation of a public limited company (foreign firm retains majority control, but seeks public participation through stock flotation); and (3) establishment of a company in cooperation with joint venture partners, who supply local expertise, management, and capital.

The joint venture may be either a private or a public company. Joint ventures can be an attractive option in Pakistan today because there are many local entrepreneurs who have built a substantial base in their industrial enterprises and are seeking to combine their knowledge of local markets with foreign capital and technological know-how. The foreign joint venture partner limits its initial country exposure while enjoying the support of a local partner in a new market and prominent joint ventures have been established in the automobile, fertilizer, electronic, financial services, food, and consumer product sectors.

Firms wanting to delay direct entry into the Pakistan market should consider licensing arrangements with Pakistani firms, an option that permits them to enter the market in stages if the initial response is promising.

F. Steps to Establishing an Office

A business in Pakistan may be organized as a sole proprietorship, a partnership, or as a public or private limited company. Foreign investors generally establish limited companies as required under the Companies Ordinance, 1984. They must register with the Registrar of Companies. Company registration offices are located in each of the provincial capitals and also in Islamabad and Multan. The promoters of any proposed company have to also obtain confirmation from the Registrar of Companies that the proposed name of the company intended to be set up is not identical to the name of any existing company, or the proposed name is not deceptive or inappropriate.

A company making any public offer of securities for sale or intending to issue capital is required to obtain approval from the Controller of Capital Issues (CCI). After completion of the required formalities, firms should apply for necessary utilities to the authorities below:

Electric Power: Karachi Electric Supply Corporation (KESC), for the Karachi area, and Water and Power Development Authority (WAPDA) for the rest of the country.

Natural Gas: Sui Northern Gas Pipelines (for Punjab and NWFP) and Sui Southern Gas Company (for Sindh and Baluchistan).

Telephone, Fax: Pakistan Telecommunications Corporation (and private cellular phone companies).

Water: Local governmental authorities.

All manufacturing concerns employing more than 10 persons are required to register with the appropriate provincial Chief Inspector of Industries under the Factories Ordinance, 1984. Companies are also required to register with the concerned income tax department and obtain a National Tax Number (NTN).

Within 30 days of establishment, foreign companies must file the following documents with the Registrar of Joint Stock Companies, Ministry of Finance:

- a certified copy of the charter, statutes, or memorandum, and articles of association of the company;
- the full address of the registered or principal overseas office of the company;
- the names of the chief executive and directors of the company;
- the names and addresses of persons resident in Pakistan who are authorized to accept any legal notice served on the company.

U.S. firms may find it advantageous to use the services of a local attorney in complying with these formalities.

G. Selling Factors/Techniques

Imports - Imports of goods into Pakistan generally require a Compulsory Letter of Credit (L/C), unless a special exemption is obtained in advance. Revolving, transferable, and packing letters of credit are not permissible. Letters of credit should provide for negotiation of documents within a period not exceeding 30 days from the date of shipment.

Payment to the beneficiary (stipulated in the L/C) may be made either in the country of origin or in the country of shipment of goods. Other payment terms are subject to approval by the State Bank of Pakistan (SBP). Remittances may be made soon after goods have been cleared by Customs.

Pakistan Customs authorities require a commercial invoice and a bill of lading (or airway bill). Exporters should forward documents separately if shipment is by sea, but should include them with air shipments. Certificates of origin are not legally required but may be requested by the consignee or consignee's bank. When a certificate of origin is not requested, a statement of country of origin should appear on the invoice. Consular invoices are not required.

The exporter should also be sure to ascertain from the importer the precise number of copies of each document which will be required. Other documents, such as insurance certificates and packing lists, also may be requested by importers, depending on the specific circumstances. Customs authorities require special certificates for imports of plants and plant products and used clothing (e.g. a U.S. Food and Drug Administration certificate for foods and pharmaceutical). In order to expedite the process and to avoid potential delays and penalties, exporters should request detailed instructions from the Pakistani importer prior to shipping.

H. Advertising and Trade Promotion

Pakistan has over a dozen major advertising agencies, some with foreign affiliation. Advertising agency commissions are usually 15 percent of the cost of the advertisement. Information concerning advertising agencies may be obtained from the Pakistan Advertising Association, 232 Hotel Metropole, Abdullah Haroon Road, Karachi.

Television and newspapers are the most widely used method of advertising. Other advertising vehicles include radio, billboards, periodicals and trade journals, direct response advertising, and slides and commercial film shorts in movie theaters. Some companies have now begun to advertise on the Internet as there are presently more than 50,000 Pakistanis with Internet access.

Pakistan has over 115 daily newspapers. The Daily Jang, published in Urdu, is the single largest newspaper, with an estimated national circulation of almost 750,000. Combined circulation for the roughly 13 English-language newspapers is approximately 200,000. The principal English-language daily newspapers are Dawn (published in Karachi, Lahore), The News (Islamabad, Lahore, Karachi), The Nation (Lahore), The Frontier Post (Peshawar), Financial Post (Karachi) and The Business Recorder (Karachi). Although the English-language press reaches only a small fraction of the population, it is influential in political, business, academic, and professional circles. The two major English-language general magazines are the monthlies, The Herald and Newsline. The principal English-language weekly economic magazine is the Pakistan & Gulf Economist, published in Karachi, and there is also a widely read English weekly Friday Times published from Lahore. The Dawn, The News, The Nation, and the Business Recorder are now also available on the Internet.

Almost all broadcasting outlets in Pakistan are government-owned and operated, but accept private advertising. Television is broadcast in color on three channels, using the PAL system. English language programs are broadcast for about two hours a day on the larger Pakistan Television Corporation (PTV) and for eight to ten hours a day on the Shalimar Television Network (STN). In addition, more than 15 channels, mostly of Indian origin, are received through satellite. These channels provide stiff competition to the PTV and STN in terms of advertising revenue. The current spot rate of a 30-second commercial on the PTV network is $680 and $460 on the STN.

Satellite television broadcasts have made rapid inroads in Pakistan and it is estimated that more than 200,000 dish antennas are presently installed in the country. More than 15 channels are received through satellites reaching about 3 million viewers. Unauthorized Cable TV operators have started to provide service in densely populated neighborhoods of Karachi, Lahore and Rawalpindi.

Radio broadcasting time lasts approximately 17 hours a day. The standard advertising rate on the Radio Pakistan network for commercial firms and products is approximately $75 for a 30-second spot. The government has recently allowed a private company to operate an FM broadcast service. The FM-100 is Pakistan's first FM stereo music channel, available round the clock, in Karachi, Islamabad and Lahore. The license granted by the government does not permit them to do news and current affairs programs.

Pakistan currently allows trade advertising material other than commercial catalogues to enter duty-free, but levies a 12.5 percent sales tax on those items. Samples may be admitted duty free only if they are representative parts of a complete shipment or are unsuitable for sale. The duties applicable to commercial shipments apply to samples having a commercial value.

Trade Shows - The textile and leather industries and the Computer Society of Pakistan hold annual events for export promotion purposes and for the local industry, respectively. U.S. Department of Commerce-sponsored catalogue/product shows and seminars can be useful vehicles for generating sales leads and for locating suitable agents and distributors. Trade and seminar missions can also provide valuable first-hand insights into the Pakistani market, as well as serving to introduce U.S. equipment and technology. Trade missions can educate government and other end-users about product availability, technical characteristics, quality, and price, and can establish contacts with key organizations to promote product awareness.

U.S. firms should also consider participation in regional events (focusing on either South Asia or the Middle East) in order to reach potential Pakistani purchasers, agents, and distributors.

I. Pricing Products

Product pricing is often difficult for new entrants to the Pakistan market, principally due to the country's complex tax structure. Foreign companies represented by a local agent, distributor, licensee, or other intermediary generally work closely with their local affiliates in determining prices.

Relatively high shelf prices frequently include a substantial tax component, which can add nearly 50 percent to the retailer's purchase price. High prices for imported consumer items have created a large market for goods coming into Pakistan through the "informal channel." Large quantities of goods are brought in by expatriate Pakistanis and professional couriers from the Gulf region in their personal baggage. In some segments of the market, goods brought through this channel have market shares ranging from 50 to 95 percent.

As an illustration of the scale and complexity of various taxes and duties imposed on imported consumer items, marketers of products build into their final sales price the following factors: landing charges (approximately 1.0 percent of initial price); customs duty; sales tax; bank charges; insurance, and the recently introduced general sales tax. The Government has recently done away with the "Octroi" tax (a municipal toll tax).

Pricing of non-consumer items is based on different parameters. Most foreign companies in this market segment are also represented by agent/distributors and give their local affiliates significant latitude in pricing decisions. Agents often opt for higher sales turnover by reducing their margins, allowing them to generate more revenue through a higher volume of sales. In other cases, local agent/distributors may add up to 30 percent to the list price as their commission, depending on the nature of the product. For duty and tariff purposes, they quote the principal's list prices only. On average, retailers mark up imported machinery and equipment 10 to 15 percent and imported general merchandise 20 to 30 percent.

Many local agent/distributors now quote their prices in U.S. dollars because of the frequent depreciation of the Pakistani rupee.

J. Sales Service/Customer Support

In Pakistan, the end-user generally requires comprehensive and reliable after-sales support on all durable and non-consumer items, accompanied by good documentation and instructions for product installation, operation, and repair. Many purchasers choose a complete turnkey package, which often includes employee training.

Foreign sellers generally require local agent/distributors to maintain a certain minimum inventory of spare parts. Most agents provide a warranty and "free maintenance" for one year, building the cost of maintenance into their overall price.

It is a common practice for end-users to demand a guarantee that the supplier will respond to questions or rectify faults in the equipment within a specified period of time. The time period may vary from a few hours to several days, depending on the nature of the product and the fault in the equipment.

K. Selling to the Government

Pakistani government agencies and public sector companies allow only exclusive agents to submit bids for tenders as an assurance that they receive only one quotation from each supplier. Many firms (especially Japanese) add a clause on direct negotiation which allows them to deal directly with the end-user, should the firm believe that the agent may have difficulty in concluding a sale. On such sales, the commission payable to the agent, if any, is determined by the principals and is based on the proportion of services rendered by the agent.

Pakistani law does not prohibit payment of commissions on commercial procurement of large amounts of military equipment. However, the Directorate General Defense Purchase (DGDP) requires that the foreign principal provide the following: ex-factory value of items supplied; FOB value of these items; and percentage or amount of commission/or any other fee for services provided by the local agent. Commercial procurement of small to medium amounts of military equipment is generally made through local agents of overseas manufacturers and suppliers.

L. Protecting Your Product from IPR Infringement

The laws in Pakistan generally provide for protection of intellectual property rights (IPR). Nevertheless, intellectual property piracy in Pakistan remains widespread. Recently, the government has undertaken the task of rewriting legislation in the areas of copyrights, patents, and trademarks. Recently, several U.S. companies (e.g. book publishers, video film producers, and computer software companies) have complained that Pakistan's copyright law enforcement is ineffective and that penalties for violation are extremely weak. The U.S. Pakistan Treaty of Friendship, Commerce and Navigation guarantees national treatment for patent, trademark and industrial property rights.

Pakistan is a member of the World Intellectual Property Organization (WIPO), the Universal Copyright Convention, and the Bern Copyright Union, but not of the Paris Convention for the Protection of Industrial Property. The United States and Pakistan have held a series of official discussions on intellectual property protection aimed at strengthening the rights of U.S. companies and individuals, and to ensure that Pakistan complies with its TRIPS commitment.

M. Need for a Local Attorney

For multinational corporations considering capital or industrial investments in Pakistan, local legal counsel may provide useful insights into the local laws and business environment, identification of the appropriate business structure (such as a liaison office, a branch office or a wholly-owned subsidiary), and advice and assistance in drafting appropriate agreements and complying with local regulatory requirements.

After the decision to invest has been made, local legal assistance may be required to obtain operating licenses, incorporate legal entities, comply with appropriate corporate formalities, obtain work permits for expatriate personnel, and negotiate employment contracts for local staff. For ongoing operations, local counsel can update investing firms on statutory and regulatory developments and provide day-to-day advice on matters such as tax compliance and protection of intellectual property rights.

All consular posts in Pakistan maintain a list of attorneys in their Consular District. U.S. firms needing a referral may contact the Consular Section at the U.S. Embassy or the relevant U.S. Consulate for assistance.

N. Performing Due Diligence/Checking Bona fides of Banks, Agents, Customers

The U.S. Department of Commerce offers various services such as the Agent Distributor Search (ADS), and the International Company Profile (ICP). Both the services help locate potential business partners, as well as provide limited available background information on Pakistani firms, including their financial standing, business reputation, areas of interest, and current business activities.