Study looks at factors impacting global dairy processor margins in volatile times
By Case Dorresteyn
Dairy and Relocation Consultant
Wisconsin Dairy Business Innovation Center
An interesting study on margins in the global dairy sector was recently completed by the Netherlands Rabobank. Covering the time period of 2006-2010, the study was set up to determine which processors managed to maintain or increase margins in times of extreme price volatility.
The study looked at five different groups of dairy processors:
1.) The processors that produce “fast moving consumer goods” – Nestlé, Danone and Emmi
2.) A group of cheese producers – Saputo, Glanbia, Bongrain, Bel, Warrnambool and Milk Link
3.) Processors that run large milk bottling operations – Dean Foods, Parmalat, Dairy Crest, Granarolo and Morinage
4.) Cooperatives that have a presence in more than one of the above market segments – Arla Foods, Nordmilch, Murray Goulburn and Agropur
5.) An Asian category with Mengniu, Yili and Bright Dairy (China) and other Asian processors as Alaska Milk, Vinamilk, Dutch Lady and Ultrajaya
Looking back at this volatile period, it turned out that companies were the least affected if price increases could be quickly implemented, if they sold value-added products, or if operational costs could be reduced. Rabobank concludes that the companies with the strongest brands easily weathered the storm. Their 2010 operational margins were close to 15%, while 12% in 2006 and the business was hardly affected because of the strong A-brands.
Cheese producers in 2008 really struggled as they could hardly increase cheese prices despite of increased cost of milk. On top of that they battled strongly reduced sales and large inventories. Today they are in better shape as a result of more efficient production techniques and improved logistics. Furthermore, they developed better market strategies for their whey. Rabobank estimates the gross margin for the cheese producers to be at 8%.
Processors who bottle milk were most affected by the difficult years. After some years with stable margins, 2010 turned into a tough year because of high costs and a stronger market position of A-brands. Average margins for this group decreased from 6% to 4%.
The exact position of the co-ops is difficult to explain, according to Rabobank, as co-ops are not geared toward maximum profit, but are instead geared toward maximum benefit for the milk-supplying co-op members. Over the reported period the co-op margins were at the 3% level.
Similar margins (3%) were realized by the Chinese companies. The competition from foreign companies is getting stronger all the time and even today the Melamine crises is still a factor in the mind of the Chinese consumer.
The most successful players are located in southeastern Asia. Large markets shares and increasing product demand from 2006 to 2010 allowed them to double their margins to about 20%. Further improvements are predicted for the coming five years as well.
The bank predicts that the processors with the fast moving consumer goods will continue to be the ones to realize better margins. Furthermore they claim that the gap with cheese producers, milk bottlers and cooperatives will widen unless these companies regroup and make smart business decisions.
For more information, visit www.dbicusa.org.