Opinion from global food and drink experts, Zenith Global
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Introduction

Consumption of food and drinks is an enduring human need. In the modern age, lack of time is fast becoming a norm. Satisfying the need to consume food and drinks by cooking at home is becoming increasingly challenging. Cooking is now often a weekend activity, particularly associated with social gatherings rather than a part of daily routine. This has fuelled the growth in demand for packaged food and drinks around the globe. Many front running companies have achieved remarkable success by introducing the “right product” in the “right market” through the “right channel”, that offers quality, nutrition, convenience and value for the “target consumer”.

Opportunities remain aplenty for entrepreneurs and established (non food and drink) businesses to enter the packaged food and drinks industry and reap success. Consumers are increasingly knowledgeable and their needs for nutrition and well-being are constantly evolving. As a result, there is always space for genuine innovation.

But belief in opportunity is not enough to invest your hard earned reserves in a new food and drinks business. Without a deeper understanding of what lies ahead, the result could easily be frustration and financial loss or even bankruptcy. Even world leading companies are familiar with the bitter taste of failure when a new product launch, packaging redesign or product reformulation backfires and results in a massive drop in sales.

So, what is the way forward? As a budding entrepreneur, or as an established business looking to foray into food and drinks, there are a few important questions to answer first:

• What is the “right product” for the “target consumer” in the “right market”?
• How to transfer the recipe from the home kitchen to the industrial kitchen?
• How much of this product can be sold realistically? How much market share is achievable?
• How much would it cost to set up the business of producing and selling this product?
• How much would it cost to run the business successfully and profitability over its lifetime?

A great feasibility study can answer these questions.

 

What is a feasibility study?

In simple terms, a feasibility study objectively evaluates a project’s potential for success and delivery of value. It helps answer the fundamental question – “Should we invest in this business?” Arriving at an answer to this question will save time, effort, money and heartache.

A thorough feasibility study helps to define specific business scenarios and explore them in great depth. It is a journey of exploration that investigates a variety of ways to set up your business and get your products to the market.

As a result of such in-depth analysis and assessment, flaws are identified and alternatives are eliminated before arriving at a decision.

Despite the merits of conducting a feasibility study, many business tend to skip this important step in taking business decisions.

Reasons are many:

• Internal pressure: “Other businesses are successful, we would be too”, “We conducted a study many years ago and found it to be a viable business idea”.
• Consultant vs in-house study: “Why pay a consultant when we can conduct the study internally?”
• Supplier pressure: “A leading equipment supplier has conducted a market study, and it can provide the technology required to meet the sales forecast.”

This is potentially a dangerous path to follow. For example, consider making the decision based on the opinion of a leading equipment supplier. Yes, there could be high demand in the market. Yes, other companies are successfully selling similar products. And yes, the supplier’s equipment could potentially help you produce the forecasted volume. But how about sourcing the right raw materials; cost of raw materials and packaging material; sourcing the right processing equipment; manpower requirements; quality standards and regulatory requirements; getting the product to market; cost of warehousing and distribution; getting listed with retailers; achieving the required shelf-life, and so on.

The list of unknowns is long. Once a business decision has been made, it is often very difficult and costly to change course.

What constitutes a great feasibility study?

Entrepreneur’s vision

The root of a feasibility study is the vision of the business or entrepreneur. The vision usually takes shape from a simple idea. For example, “packaged ready meals for the urban population”. The idea grows into a vision based on the entrepreneur’s aim (build a multi-million dollar business in 10 years’ time), interest (cooking, healthy eating), values (quality products, affordable pricing, high availability) and knowledge (recipes).

The next and most important step in the feasibility study is to take this vision to the next level by evaluating how viable it is. This requires answering a few fundamental questions:

• What are the opportunities?
• Are there any reasons not to proceed?
• Will it be financial viable?
• Does it make sense from an operational standpoint?

 

Research and insights

 Answering these questions starts with collecting relevant data and converting this into actionable insights.

Comprehensive data collection will encompass the following:

• Market quantification – Market volume, market value and growth of the target product category.
• Competition – Is the market dominated by a few companies or is the market highly fragmented with many small companies? Are there already brands with a similar approach?
• Consumer – What is the target consumer demographic (infants, children, young adults, young professionals, senior citizens, men, women, sports, expatriates, and so on)? And what are their taste preferences (traditional taste vs acquired taste)?
• Packaging preferences – Plastic vs non-plastic, clear packaging vs opaque packaging, small containers vs large containers, screw caps vs sports caps vs straw vs flip closures.
• Pricing – Pricing by pack type and pack size, pricing by regions within target market, pricing by channels.
• Sales channels – Modern retail, traditional stores, wholesale, kiosks, hotels, restaurants, catering.
• Distribution – Own distribution vs third party distribution, distribution infrastructure, cold chain, ambient chain.
• Regulations – Quality standards, packaging and labelling standards.
• Future outlook – Potential for the product category to see sustained future growth.
• Macroeconomic trends – Political and economic situation in the country, major events in the horizon (elections, sporting events, Brexit!).

Collecting such detailed information is not a straight forward process. A series of primary interviews with retailers, manufacturers, importers, distributors, associations and major stakeholders may be needed to collect penetrating insights. Such primary data needs to be supplemented by secondary data, such as published reports, news reports, journals, data from statistical agencies, import/export data, etc. Analysing such detailed data will lead to the development of a fuller market picture with more actionable insights.

In addition to market insights, a thorough analysis of the value chain is also essential. This analysis will reveal the various costs along the value chain, such as:

• Raw materials and packaging materials
• Warehousing and distribution – own or third party
• Retailer and wholesaler margins.

These costs will be essential when developing the financial model for the business.

 

Route-to-market recommendations

Once the market and value chain potential is established, the next step is to develop the route-to-market recommendations.

Detailed assessment of the market will lead to the identification of gaps and opportunities within the chosen product category. This will in turn help develop route-to-market recommendations.

Such recommendations should include:

• Product range(s): Product variants and portfolio evolution for the first 5-10 years of the business.
Volume analysis: Identifying the forecast market share and volume and value projections.
Segmentation, targeting and positioning: Recommendations on brand positioning in order to identify packaging types and pricing
5-10 year sales profile: Volume sales by pack type and by pack size for the first 5-10 years.

By this point in the feasibility study, the following outputs would be ready for further exploration:

• Sales volume projections
• Revenue projections (based on value chain analysis and product pricing)
• Cost of goods sold (COGS) – this is the cost of raw materials and packaging material
• Gross margin – calculated as ‘revenue minus COGS’

 

Technical feasibility

The next and equally vital part in the process is the assessment of technical feasibility. Now that we know what the projected sales volume is, the next step is to define the process of converting this idea into reality.

It starts with the development of a production process, beginning with “raw materials in” through processing and packaging to storage and “finished goods out”.

Once the production process is defined, the next step is to identify the most suitable technology for various stages in the process flow. These include equipment for raw material storage (cold storage or ambient, based on requirements), raw material processing (cooking, pasteurisation, UHT treatment, mixing etc.), filling, packaging and finished-goods warehousing. As part of this, shift and manpower requirements will also be defined along with conceptual details of the factory set up required.

Considerable research is required in stage. This should include conversations with original equipment manufacturers (OEMs) to understand whether an off-the-shelf solution is available that can meet the requirements of the business, or whether a bespoke solution needs to be created. Further local research must be conducted to identify operations costs such as staff salaries, costs of fuel, electricity, local taxes, cost of construction, other costs such as project management, insurance etc. All these need to be collected in order to develop a fully comprehensive financial model

The technical feasibility assessment should generate the following outputs:

• Production capacity required
• Number of machines required to meet the production capacity
• Shift and production patterns
• Manpower requirements
• Factory area and layout requirements
• Capital expenditure (CAPEX) requirements of the factory
• Operational Expenditure (OPEX) requirements of the factory
• Factory concept design

 

Financial feasibility

To complete the feasibility study, a financial model needs to be developed based on all the outputs so far in the study.

Ideally, a financial model should include the following:

• Sales and production volumes
• Direct production costs (ingredients and packaging)
• Gross margin
• Other production costs (including production staff, maintenance, power, water)
• Logistics and distribution costs
• Management/administration staff costs
• Capex (split out by equipment CAPEX, civils CAPEX and other CAPEX, e.g. personnel vehicles etc.)
• Sales promotions and discounts
• Overheads (management personnel, marketing, insurance etc.)
• Profit & Loss sheet
• Balance sheet
• Cash flow
• Return on investment

Such a detailed feasibility study combined with the financial model will enable the entrepreneur to approach potential investors or banks seeking investment.

 

What it takes to conduct such a feasibility study

A thorough and comprehensive feasibility study is not for anyone and everyone to undertake. It requires a toolbox containing deep knowledge and expertise in the subject matter, many years of industry experience, the ability to convert the vision into a launch roadmap for the entrepreneur through modelling and analysing scenarios, and a wide network of industry contacts who can provide key actionable insights.

Consultants with many years of food and drink manufacturing experience are ideal partners for entrepreneurs looking to venture into this industry. They possess the required knowledge and expertise to guide you through each stage of your entrepreneurial journey towards the setting up of a profitable business.

 

Ideal outputs of a great feasibility study

A great feasibility study will explore several scenarios in great depth, detailing the strengths, weaknesses and implications of each, thereby enabling the entrepreneur to eliminate some options and assess the handful of options that remain. A great feasibility study will present the entrepreneur will all information needed to make a “go or no-go” decision.

If a decision is made to go ahead with the idea based on a selected scenario, then the feasibility study will be a great foundation for a business plan. The financial model from the feasibility study will be a great appendix to the business plan, which can be presented to potential investors.

 

Summary

A great feasibility study requires a great deal of research and analysis followed by developing scenarios. Such a study will provide the entrepreneur with more focus and narrows down the number of alternatives to consider. It will take someone with substantial knowledge and expertise to conduct such a study.

A great feasibility study will identify a reason to go ahead with the idea, or not to go ahead with it, and help the entrepreneur to make a decision.

Zenith consultants have been conducting feasibility studies for over 20 years helping small and large clients to begin their journey and supporting them into their further growth years. Pulling on many years’ industrial experience in international markets and utilising its own global market databases, Zenith can provide prospective clients with a turnkey solution for a truly great feasibility study and then assisting the implementation through to delivery.

If you are interested to learn more about feasibility studies or any other food and drink consultancy service we can provide, then please contact me using the following details:

Neil Wallburton
Operations Consulting Director

Zenith Global Ltd.
e nwallburton@zenithglobal.com
t +44 (0) 1225 327956 (direct line)

It’s a surprise move from US giant Kraft splitting the cash cow of the American Grocery brands from the high growth ‘snack’ brands targeted the later at developing markets, (including Europe).  Clearly the split makes sense from an investment view point, and its easy to see that there are investors who want “steady dividends” generated from US grocery cash cows, and those who want rapid capital growth, which might be raised from emerging market ‘snack’ sales. And, shouldn’t the investor make the decision of what type of return he, or she, wants, rather than management deciding on the level of ‘risk’ to shareholder funds once the money has been invested?

However, what about all of the advantages of size? Does this split mean, (just as consolidation is rife elsewhere in the food and drink sector) that Kraft have discovered that there are no ‘economies of scale’ in the food sector after all, and are we about to see lots of demergers unravelling all of the mergers to date?

And where will cheese fit in? Kraft cheeses have been a staple in the market both inside and outside the USA, and Cheese could be ‘snack’ or a ‘grocery’……

By all accounts, Kraft have “taken their eye off the cheese ball” recently, with sales of Kraft processed cheeses suffering some heavy declines in the North American market  over the past few years. Price increases needed to cover raw material costs will not have helped that, and there may be more to come.

The exception in terms of performance is ‘Philadelphia’ which is a rising star and doing well both inside and outside the states and has recently launched in the big cheese market of France. The plan is for ‘Philadelphia’ to be part of the American grocery business and it is not clear if
this will mean that it will reduce its presence elsewhere in the world. If so it will certainly create space in the Fresh Cheese market for others……

First published in Dairy Innovation Magazine

The growth of the Indian economy is impressive by any measure. The
9% GDP growth achieved in 2010
(currently forcast at above 8.5% for 2011), is predicted by Finance Minister Dr. Pranab Mukherjee, to
rise to 10% shortly this will place it ahead of China as the worlds fastest
growing economy with a retail market growing at 25% annually.

Of the BRIC countries, in the world of Food and Beverage, India is
likely to offer the greatest potential for
growth over the next 20 years.
According to UN projections the adult population in India will increase
by a 240 millions over the next two decades, compared with 20 m in Brazil. The
adult population of Russia, by contrast, will decline sharply by almost 20 m
and China’s will peak in 2015 and then gradually decline. By 2030, India is
forecast to overtaken China as the world’s most populous country. In addition
the rate of urbanisation in India is predicted by the UN to be maintained at
above 2.4% until 2030 with China’s rate of urbanisation falling to 1.2% in the
same period. At the same time, the OECD estimate that, over the next 30 years
that, using the World Banks definition, the ‘middle classes’ in India will
expand, from below 10% of the population currently, to over 90%. As a result
The food and beverage sector is already seeing dramatic impacts Coke cola, for
example, reported a 22% increase in sales across India in the second quarter
2010. The Asian Bottled Water Association report that he Indian bottled water
market is currently growing at 60% per year.

 

India is worlds biggest producer of milk with annual production of
111.11 m tonnes which in 2009/10 contributed around 8% of the country’s GDP.
The current growth in dairy production of 3.19%, surprisingly continued through
the drought of 2009, but is according to the India Dairy Association, still around
3% lower than the growth in demand forcing up prices and sucking in imports. In
the past two years, milk prices have risen from Rs 17 a litre to Rs 27 a litre.
While the percentage growth of products is not as high as in such
countries as Brazil and China the size of the market makes the total volume
growth bigger.  However, despite the
growth in demand India in the past a big importer of milk and dairy products.

 

The aim, and the need, in the coming decades is clearly to expand
production to meet the increased need of the urbanised middle classes.  Growing and intensification of the dairy
sector may be problematic. Much of the current production, around 55%, is
buffalo milk (India produces over 90% of the worlds supply from Buffalos), and
the majority of milk is produced in the informal sector by small holders and
landless labourers who are grouped into village co-operatives at village level
(in 2007 the NSSO in India reported that 69% of milk was produced on farmers of
less than 2Ha). The market itself is also complex. To provide
them a steady market and a reasonable price for the milk produced, about 13.90 million farmers are brought under
the ambit of 133349 village level cooperative societies.

 

Operation Flood,  a programme
initiated by National Dairy Development Board in 1970, was the previous major
initiative to develop India’s Dairy Industry from stagnation to success and
operated until 1998. Indeed, Operation Flood led to the growth of dairy
industry in India, and helped India become the world’s largest milk producer.

To build on
the success of Operation Flood, and to take the dairy cooperative movement
further, the Government of India, through the National Dairy Development
Board(NDDB) has now approved a new National Dairy plan, “Perspective 2010”.

Perspective 2010 is a plan, to be funded by a soft lone from the
World Bank,  which will have an outlay of
more than Rs. 17,300 crore ($3,650 million) to achieve a target of 180 million
tonnes of milk production annually by 2021-22 across the 14 key dairying states.
Milk production is expected to grow at 4% giving an annual incremental output
of 5 million tonnes in the next 15 years. The NDDP plan
envisages that the project will do everything from increasing cattle and
buffalo productivity, to expanding coverage of milk producers, procurement and
processing through four ‘thrust’ areas, ‘Quality Assurance’, ‘Productivity
Enhancement’, ‘Institution Building’ and providing a ‘National Information
Network’. By the end of the operation 65% of the milk should pass
through the formal sector compared to 30% now. To cope with the additional processing in the
formal sector the plan will expand milk processing capacity by an
additional 60 million kg per day, expand drying capacity by an additional 1200
metric tonnes per day, and refurbish existing processing capacity with an
outlay estimated at about US $ 2300 million.

In the first phase ‘Perspective 2010’ will focus on the six key
dairying states; Gujarat, Punjab, Karnataka, Uttar Pradesh, Bihar, and
Maharashtra.  Currently these states are
amending their co-operative law to meet the demands of the project. The NDDB
has set up a new organisation, “NDDB Dairy Services” with its headquarters in
New Delhi to implement the plan. The new body is headed by the impressive figure
of Ms Sangeeta Talwar as Managing Director, previously of Tata Tea and Nestle,
and famed for spearheading the celebrated
‘Jaago Re’ campaign which was aimed  at
developing young peoples views on issues like voting and corruption, she
will be responsible for all aspects of Perspective 2010’s role out and the
formation of implementation bodies within the states.

Although India is striving to maintain its self sufficiency the
continued population growth, urbanisation and growth of the middle classes
leads to the conclusion that India will become a major target for exporters in
future years and that it must become an attractive target for inward investment
developing the formal milk sector and serving the newly well off population.

First published in Dairy Innovation Magazine.

Since the mid 1970’s production of milk in the US has been
steadily rising. In the early 2000’s with world demand and prices creeping
upwards to match the higher prices achievable on domestic markets, the
Americans started to awaken to the idea of exports. Not exports supported by
subsidised market dumping programmes such as the Dairy Export Incentive
Programme, but exports on commercial terms. Groups such as the US Dairy Export
Council worked tirelessly to awaken US processors to the possibility of the
world market. Buoyed by the scarcity of government stocks and the strong demand
from developing markets returns were good and producers invested in expanded
production. Then in 2009, hit by the global economic downturn and food safety
scares in China the market stalled. At the same time input prices to farms
increased to record levels. Americas producers were hit hard and the most
progressive who had borrowed to expand to meet the ever increasing demand were
hit hardest.

Now demand has returned to the market. US dairy exports are
again increasing and topped 12% of production in 2010. There is, however, an
emerging recognition that America both in capacity and cost terms has become
the balancing supply in the world market. While the American industry is well
placed to take up the slack between world supply and rising demands, with the
role comes the reality that ‘marginal’ litres sold on the world market are now
the major influence in setting US milk prices. Exposure to world markets brings
with it ‘volatility’ and the threat of a repeat of the 2009 experience,
something which the famously complex federal support mechanisms (a combination
of end use pricing, intervention buying, and market hedging) originally created
to support recovery from the great depression, were woefully inadequate to
prevent.

All sides of the US industry acknowledge that reform is
necessary and that a different approach is needed. The dairy farmers lobby body
the National Milk Producers Federation (NMPF) is supporting a package of
reforms under the banner of ‘Foundation for the Future’. The basis of the
proposal is to replace ‘Price Support’ with ‘Margin Support’.

Under the plans they are asking the government to reform the
market support mechanisms to provide a guaranteed level of margin on 90% of a
base level of production (the highest milk sales in any of the past 3 years
from a farm) irrespective of farm size and production level. Producers will be
offered the chance through the same scheme to top up the margin protection to
higher levels on a voluntary basis by payment of additional premiums.

In addition, the plans would substantially reform the
Federal Milk Marketing Orders scheme which currently sets regional prices for
raw milk based on end use of the product.  Insisting still that milk for the liquid
market is inherently different from milk for the manufacturing market, the
proposals suggests a liquid premium is collected on milk bound for the liquid
supplies and distributed by the government, as now, to all producers, something
that processors group, the International Dairy Foods Association (IDFA) argue should
be abolished over 5 years.

Finally, clearly worried by the spectre of ‘2009’,  the proposals support the introduction of the
a Dairy Market Stabilisation Programme designed to kick in if farm margins fall
below an agreed trigger point, limiting payment to the farm to as little as 96%
of the average milk sales over the previous three months (or the equivalent
month in the previous year). This would have the immediate effect of depressing
production, with the diverted milk sales monies being passed to a farmer board
who would use it to incentivise removal of the surplus from the market.

This final measure is the most controversial part of the
plan with IDFA claiming that this would limit supplies and damage export
potential. Arguing that policies attempting to manage production such as those
in Canada and Europe have lead to higher consumer prices with little benefit to
producers, instead IDFA argue for greater education about the use of existing
risk management tools and for the  introduction
of tax deferral schemes encouraging producers to save money from the  good years rather than invest in increasing
production.

It seems the debate will rumble on exploring Americas new
role in world supply and it is unlikely that any legislative changes will be
introduced ahead of the 2012 Farm Bill.
Whatever the outcome, both sides agree that any changes will need to be
within the scope of WTO agreements and should not seek to impose a more
protectionist approach or adoption of the market/growth management approach
advocated by the USDA Dairy Industry Advisory Group (the equivalent to the
European High Level Dairy Group). This surely signals an acceptance of the opportunities
offered by globalisation by the industry. At the same time the rest of the
world will maybe need to view American supplies in a different way
also…..

Tata’s Activate in the United States is one of the best known examples of a drink that uses new self-dispense caps to give consumers the theatre of pressing or twisting the top to diffuse colour, flavour and function throughout the bottle.  In time, it’s not impossible that such caps could by themselves become as popular as bags for tea or pods for coffee.

At this month’s Vitafoods exhibition in Geneva, I saw several products that have adopted a somewhat different approach.  Here are four:

  • Novel Creation’s Maximum was launched in Israel two months ago.  It’s a range of liquid supplements in 30 day supply bottles.  The reasoning is that liquid is absorbed three times more effectively than tablets or capsules.

 

  • Second was Re-code, a slimming and shaping syrup from Zuccari in Italy.  For 45 euros, women over 30 can buy a 20 day bottle of 200ml, converting 10ml servings into a 1 litre a day regime.

 

  • A third new example was DrenaFast from Biocol in Portugal, designed to detoxify and provide you with a perfect flat stomach.

 

  • Capping them all was an ingenious but complex product called Pyour from the Netherlands.  Inside the otherwise empty bottle is a tube of 20 tablets.  You put a tablet in the cap and it dissolves when you fill the bottle.  For 12.95 euros, you can have a five day routine of four flavoured probiotic drinks a day to “support healthy bowels”.

 

Is this the future ?  It certainly could be part of it.

The power of new technology and a great team … I’ve never tweeted myself.  But Zenith’s IT team does make sure my blog goes out on FoodBev.com, LinkedIn, Facebook and Twitter.

In just three months on Twitter, the blog has attracted over 200 followers.  I’m delighted and look forward to keeping you all in touch with continuing observations about important as well as curious new developments in the food and drink sector.

Do let me know if you think my focus needs adjusting in some way or if I’m missing anything of substance.

Global Dairy Top 10

February 27th, 2011 | Posted by Kevin Bellamy in Uncategorized - (0 Comments)

First published in Dairy Innovation Magazine

The dairy world continues to cautiously get back to normal after the price shocks of 2008/9, it is interesting to note that the collective turnover of the Top 10 dairy companies in the world shrank by $13.5Bn between 2008 and 2009 an average of 10.5%, and that many of them have taken great care to strengthen their balance sheets as they recover from recession.

In the near future, it seems highly likely that the process of globalisation will continue and again start to gain momentum. Dairy remains one of the fastest growing food sectors around the globe and there is a big gap to fill between the average consumption of dairy products in developing markets of 51Kg per year and the average of 268kg per year consumed in developed markets. As the trend in these markets for consumers to be more urban, wealthy and middle class, continues there is a growing acceptance of the nutrition and health benefits of dairy which coupled with a developing palate for western diets continues to drive increases in demand.

As indicated by this years Top 20 list published in July by Rabobank,  with notable exceptions it is multi national companies from developed markets who, through joint ventures and acquisitions, are benefiting from the growth in developing markets bringing their technical ability to quickly adapt to the changing desires and providing food safety reassurance to new these consumers.

The Top 10 ranking has changed little from 2009 but there are some notable changes in those challenging to be in the list with Asian companies creeping up the list as the Asian markets continue to dominate world growth.

The increase in international trade which increasingly  fills the gap as demand outstrips supply in developing countries together with the ebbs and flows of supply and demand for products and inputs continues to lead to increased market volatility which in turn continues to encourage further consolidation another trend which is set to continue.

Nestle (Dairy Turnover 2009 – 25.9BN USD)
Expanding based on Health and Nutrition in developing markets

Nestle  continues to be the biggest dairy company in the world. During 2010 the reins of the dairy SBU (Strategic Business Unit) passed from the assured hands of Tom Coley, who had run the business since 2002,  to Thierry Philardeau previously a senior player in Nestles water business . As the worlds biggest food company Nestle sets major trends in the way that the market is seen, Paul Bulcke (CEO) this year reaffirmed the companies commitment to nutrition and health as their key marketing thread. This has been particularly impactful in developing markets where the companies ‘Creating Shared Value’ initiative is seeking to provide improved nutrition to people in developing markets at affordable prices. Nestles focus on developing new markets is reflected in the recent announcement  of an investment of $100m in co-operating with Fonterra in the building of a dairy plant in Chile.

Danone (Dairy Turnover 2009 – 14.8BN USD)
Biggest Fresh Milk milk supplier expanding though acquisition in Russia and CIS

At number two in the overall dairy ranking Danone continues to be the biggest supplier of fresh dairy products around the world. Danone has also had a change in management during the year with Jordi Constans being named as Head of fresh dairy products. As an organisation in 2010 Danone have increased their focused on Health and Nutrition in which dairy plays a major part despite continued difficulties in getting claims regarding its probiotic products recognised by the European authorities. In addition, after a previous association with Wimm Bill Dann, owning an 18% stake which they quickly divested this year Danone have now acquired Unimilk, making Russia and the CIS their biggest market.

Lactalis (Dairy Turnover 2009 – 12.7BN USD)
French Dairy company aiming to be worlds leading cheese company through acquisition

Although French, Lactalis now does most of its business (56%) outside France. This year the company has continued a steady international growth. The purchase of Spanish company Puleva Foods buy out is the latest in a string of acquisitions for Lactalis, including the Italian cheese company Galbani, U.S. company Rondele, Lubborn creamery and Spanish company Forlasa Alimentación. Lactalis has had a long term acquisition strategy aimed at making it the worlds leading cheese company, however more recently they have shown an interest in the French Yoghurt maker Yoplait.

Friesland Campina (Dairy Turnover 2009 – 11.2BN USD)
Dutch giant co-operative continues to consolidate assets after merger

Friesland Campina have continued with the significant reorganisation of the business since the merger of the two major Dutch co-operatives continuing with the planned closure of 6 sites and the merger of R&D facilities at Wageningen. Despite the focus on re-organisation the company posted strong growth for the first half of the year mainly due to strong performance in its Asian and African markets which grew by 15.9% rather than Europe where growth was disappointing. Cee’s t’Hart the CEO in setting out the companies strategy until 2020 envisages growth in dairy-based beverages, branded cheeses and infant and toddler nutrition ingredients as it plans to target previously unexplored markets in the Middle East, North Africa and South East Europe.

Fonterra (Dairy Turnover 2009 – 10.2BN USD)
Revised capital structure and reduction of debt put co-op in strong position

Fonterra have had a successful year making the second biggest payout to farmers in its existence. The Board have also been able to persuade members to adopt a new capital structure allowing share trading between farmers requiring the co-op to have less capital on hand to manage this, and during the year have significantly reduced their gearing through further farmer investment. This will allow Fonterra to invest further in infrastructure to support its global business for example the $100m joint investment with Nestle in Chile. However, while becoming one of the most competitive global players, Fonterra complain that they still have to supply domestic competitors some of whom are foreign owned, with milk from their producers under the Dairy Industry Restructuring Act

Dean (Dairy Turnover 2009 – 9.7BN USD)
Increasingly difficult trading conditions impact biggest US player

While maintaining its position as the biggest US dairy company Dean, which owns Horizon, Alta Dena, Garelick, McArthur and other dairy brands nationwide, is struggling with a shift toward private-label milk consumption, excess capacity in the industry and price cuts it made to appease consumers and retailers. Both Fitch and S&P the two big credit rating agencies have downgraded Dean’s credit rating recently and the company has seen third quarter profits drop by three quarters. The companies Fresh Dairy Direct-Morningstar businesses have been particularly hit as supermarkets have sought to reduce prices throughout the current recession. Interestingly the company’s soya beverage subsidiary Whitewave which successfully acquired Belgian company Alpro last year bucked this trend continues to generate respectable profits.

Arla Foods (Dairy Turnover 2009 – 8.7BN USD)
Danish co-op saves its money to strengthens investment in developing markets

Arla’s key approach to recovering from the recession and market turmoil has been to save money and build its balance sheet strength. By it’s own admission the company has paid a lower milk price than many of its members would have liked. However the company is now well positioned and starting to make investments in key markets such as the Netherlands, Sweden, South America and the UK, announcing a £150m dairy in Aylesbury and investment at the UK Westbury powder plant. Such investments are designed to maintain their position as a world player.  The prudent approach to finance together with the companies strong branding linking them ‘Closer to Nature’ has been very positive throughout the year. The company has also changed the basis by which Swedish milk prices are paid to try to overcome their lack of competitiveness caused by currency changes to maintain one of its key home markets. However to remain in the global league, at some point Arla may have to address its capital structure in a similar way to Fonterra to provide the level of investment required.

DFA (Dairy Turnover 2009 – 8.1BN USD)
US co-op morns loss of leader while looking at the future market

Dairy Farmers of America, Inc. overcame the sad news in December 2010 that its Chairman, and industry titan Tom Camerlo had lost his fight with cancer with Randy Mooney, previously Vice Chair elected as Chair.  The company retains about 30 processing sites after the sale of its National Dairy Holdings business to Mexican company Lala during 2009. In 2010 DFA have expanded into the growing Hispanic cheese market with the purchase of Houston based Castro Cheese. DFA which is responsible for the purchase of about one third of all milk in the US and is a major supplier to Dean Foods has spent much of the year in 2010 recovering from the very difficult year experienced by members in 2009 when market volatility led to poor prices. As a result of this DFA have a major interest and involvement in the ’Foundation for the Future’ proposals from National Milk Producers Federation to change the basis for the market of raw milk in the US.

Kraft (Dairy Turnover 2009 – 6.8BN USD)
US food giant recovers from difficult time with cheese

Kraft is the biggest U.S. manufacturer and marketer of food products, second to Nestle around the globe. It grew out of a wholesale cheese delivery business established in Chicago in 1903 and growing rapidly by supplying American forces in both World Wars. Kraft have focused on the controversial takeover of UK chocolate maker Cadburys recently moving the holding company of the business to Switzerland to avoid paying UK tax. US Cheese revenues, representing 6% of Kraft’s total turnover were down by 10,1% in 2010 leading to more than an 18.1 drop in operating margin from US cheese indicating the difficulties which the market has been through over the last couple of years. However, the US cheese market is showing signs of recovery, and the re-packaging of its Philadelphia brand may lead to an improvement in Kraft’s performance in this area next year.

Unilever(Dairy Turnover 2009 – 6.4BN USD)
Anglo-Dutch conglomerate continues to indulge itself with ice cream

The Anglo-Dutch giant Unilever while being one of the biggest dairy companies in the world by merit of its Ice Cream businesses sometimes has an uncomfortable relationship with the rest of the sector with its approach to such issues as trans fatty acid labelling and claims made about its yellow fat products. Unilever compete aggressively with Nestle in the $59Bn global ice cream markets with brands such as Ben and Jerry and Magnum, investing in R&D to provide healthier options for indulgence. Together Unilever and Nestle control over one third of the global market for Ice cream. With the ice cream market in countries such as India expanding at around 20% per year Unilever are well placed to take advantage of this key indulgence market.

(Article written for Dairy Innovation Magazine – Issue 35 February 2011).

In what was to many a surprise move, PepsiCo announced in December that they had agreed to pay $3.8Bn to buy a controlling stake in Wimm Bill Dann, Russia’s biggest dairy company. Insiders report that they plan to complete the purchase of the whole company for a huge $5.4Bn by mid year 2011. It makes Russia Pepsico’s biggest international market, and makes them the biggest food and drink company in Russia. The deal, which is notable as it is the biggest deal ever in the Russian market outside the energy sector, was made possible by the sale of its 18% share in Wimm Bill Dann, earlier in 2010, by French dairy giant DANONE. Interestingly, the price which DANONE sold its stake for valued the company at slightly over $2.5Bn (under half the value which PepsiCo have now put on it). All this leads you to believe that Pepsico really wanted this big step to happen! Wimm Bill Dann, who’s turnover in 2009/10 was $2.4Bn has been expanding rapidly in recent years and is undoubtedly a success story, and the Russian economy has expanded at over 7% per year in the last decade, but why would PepsiCo want to buy a Russian dairy company so much?
Many commentators have focused on the juice market. Certainly, using Wimm Bill Dann’s juice business allows PepsiCo to continue its age old duel with Coca-Cola by becoming the leader in Russian juice. Combining its previous Lebedyanski juice sales with Wimm Bill Dann’s will give Pepsico a 42% market share compared to Coke, with its Multon and Nidan subsidiaries, having about 35% of the market. But this is clearly not the whole story.
The change in dynamics in Pepsico’s Russian business seems to reflect a change across its thinking globally. Prior to the move Pepsico’s turnover in Russia relied on its beverage and soda products (41% of turnover) and juice (27%) with a small footprint in snacks. Now 47% will come from dairy. PepsiCo CEO, Indra Nooyi, says “dairy has huge untapped potential to bridge snacks and beverages. We see the emerging opportunities to ‘snackify’ beverages and ‘drinkify’ snacks as the next frontiers in food and beverage convenience”. She also talks about health and nutrition as a key priority with sustainable growth including the need for “healthy consumers” reflecting their mission statement “Performance with purpose”. Pepsico, the second biggest food and drinks company in the world, appear to take their responsibility to human sustainability very seriously, Jaya Kuman who heads up their recently formed Global Nutrition Platform has set out an impressive plan to expand their “Good for you” nutrition business, including fruit and veg, whole grains, functional nutrition and low fat dairy, from $10Bn to $30Bn by 2020. He also has plans to reduce the amount of salt, added sugars and certain fats by 25% by the end of the plan. Nor is it only in developed markets that Nutrition features, Mehmood Khan, the companies R&D chief, talks about the opportunities for hygienically and nutritionally enhanced dairy as an opportunity of improving nutrition in developing markets.
Of course, this is not Pepsico’s first foray into dairy. In 2009 the company entered into a joint venture with Almarai, the Saudi Arabian dairy concern, forming “International Dairy and Juice Ltd.” in which Pepsico have a 52% share to Almarai’s 48%. Part of the agreement is that the company will not trade in the countries of the Gulf Co-operation Council which form Almarai’s home markets, but has already acquired subsidiaries in Jordan (Teeba) and Egypt (Begti). Together with Wimm-Bill-Dann the company now has an excellent chance to expand its dairy and juice operations across the Middle East and Asian regions.
PepsiCo may find the dairy sector in Russia altogether more challenging. Competition is increasing across both traditional dairy categories and new value added ones. DANONE’s purchase of Unimilk means that Russia is now its biggest market and they too are looking to establish their health adn nutrition credentials. Regional companies are continuously improving the quality of their products and packaging and seeking to expand their coverage of the market. Innovation is proving vital in this rapidly developing market of 142m consumers with increasing disposable incomes. Wimm-Bill-Dann themselves have a programme to increase turnover by $650m by 2015 and launched 70 new sku’s in 2010 alone including a new cheese ‘Granfor’ and shortly a new product aimed at reducing blood pressure.
The Russian market itself has been turbulent over the past year with the Chief Executive of the Federal Anti-Monopoly service (FAS) Teymuraz Kharitonashvili, accusing dairy companies of “price gouging” due to the claimed gap between the price received by producers, of 11.5 roubles, compared to the price paid by retailers of 32 roubles (about $1). (A 70:30 split in favour of the processor). Head of Russian Dairy Union, Vladimir Labinov, argues that the case has been overstated and that the value along the supply chain goes 40% to farmers, 28% to processors, and 32% retailers. But there have been reports last year of retailers such as Seventh Continent a retail chain tearing up their contract with Danone/Unimilk due to unacceptable price hikes. There have even been threats of government intervention using their ability to fine companies 1.5% of revenue for unacceptable price increases. Competition for raw material is also likely to be an issue with the cost and availability of fodder being affected by last years drought in Russia reducing production in Russia by 1.5% from 2009.
PepsiCo’s move into Russia signals a highly strategic move for the company which will undoubtedly change the way we think about the dairy sector in future. The fact that they have moved in the way they have demonstrates the important contribution of dairy to world nutrition in coming years. It also demonstrates that dairy remains one of the most exciting industries around the world not just for traditional dairy companies but the food and drink sector as a whole.