V. MARKETING U.S. PRODUCTS AND SERVICES A. Distribution and Sales Channels There are approximately 100,000 retail outlets in Pakistan, of which nearly 20,000 are located in the major cities. About 40,000 of the total are classified as universal stores/outlets. These are further subdivided into the following categories: Category Size No. of Outlets A Large(Upscale) 300-500 B Medium 3,000-4,000 C Small 10,000-11,000 D Very Small 25,000+ 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. 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. 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 U.S. Department of Commerce (USDOC) can provide assistance in locating potential agents and representatives abroad through its "Agent/Distributor Service" (ADS) available through USDOC district offices in the United States. The USDOC "World Traders Data Report" 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, a U.S. pizza outlet, and a U.S. car rental company are currently represented in Pakistan through franchisees. 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 is not without drawbacks. Potential areas of tension between franchisor 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. franchisors 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", (killed 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 a World Traders Data Report (WTDR) 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 franchisor 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, Ramada Inc., Sheraton, Holiday Inn, Best Western, Pizza Hut, and Avis. 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. E. Joint Ventures 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. A company making any public offer of securities for sale or intending to issue capital beyond Rs. 100 million 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 (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. 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 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 air waybill). 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 pharmaceuticals). 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. Newspaper advertising is the most widely used method of advertising. Other advertising vehicles include radio, television, billboards, periodicals and trade journals, direct response advertising, and slides and commercial film shorts in movie theaters. 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), The News (Islamabad, Lahore, Karachi), The Pakistan Times (Islamabad, Lahore), The Nation (Lahore), The Muslim (Islamabad), The Frontier Post (Peshawar, Lahore), 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 immediate past editor of The News is the current Pakistani ambassador to the United States. 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. 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). A 30-second commercial in prime time currently costs $1,900 on PTV and $1,500 on STN. Radio broadcasting time lasts approximately 17 hours a day. The standard advertising rate on Pakistani radio for commercial firms and products is approximately $65 for a 30-second spot. Pakistan currently allows trade advertising material other than commercial catalogues to enter duty-free, but levies a 15 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 industry 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 shows and video catalogue exhibitions 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 in early 1994 had to build into their final sales price the following factors: loading charges (approximately 6.0 percent of initial price); customs duty; sales tax; iqra education tax; flood relief surcharge; income tax; octroi (a municipal tax); import license fees; bank charges; and insurance. 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 gradual but steady 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, but it is the policy of the Pakistan Ministry of Defense that no commission be paid. Parties to such transactions have adopted creative approaches to ensure compensation to the agent without payment of "commissions". Commercial procurement of small to medium amounts of military equipment is generally made through local agents of overseas manufacturers and suppliers. The supplier must certify that no agency commission is included in the quoted prices. The Ministry of Defense then pays the commission in rupees as follows: For a Single Order Rate of Commission (%) Up to Rs. 5,000 7.0 From Rs. 5,000 to 50,000 3.5 From Rs. 50,000 to 100,000 3.0 From Rs. 100,000 to 50,000 2.0 From Rs. 500,000 to 1,000,000 1.5 From Rs. 1,000,000 to 2,500,000 1.0 Over Rs. 2,500,000 0.5 L. Protecting Your Product from IPR Infringement 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. U.S. citizens receive national treatment on patent, copyright, and trademark matters, but enforcement of the law is weak. 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. Pakistan's patent law provides for process but not product patent protection for pharmaceuticals and agrichemicals. Proving infringement of a process patent is relatively more difficult and such patents are more easily circumvented than product patents. Copyright infringement is an area of great concern. Although Pakistan is a member of the Universal Copyright Convention, 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. In September 1992, a statutory amendment, which generally strengthens penalties against copyright infringement, became law. In the past, foreign investors had experienced difficulties in obtaining government approval for royalty and technical fee agreements, but revised laws and regulations have largely eliminated this problem. Limits on royalty and technical fee payments have also been abolished. The United States has proposed a bilateral agreement on protection of intellectual property rights; the GOP is now considering that proposal. 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.