Major dairy players target expansion in emerging markets

Despite the growing trend for health and wellness and functional products in the global dairy market, gaining scale and access to emerging markets remain key growth strategies. Euromonitor International examines the activities being undertaken by some of the leading players to achieve these objectives.

Lactalis continues European expansion via intense acquisition policy

Lactalis has been expanding in the Eastern European dairy market via intense acquisition activities. The company became the fourth largest player in the region in 2008 with a 3.3% value share. Its 2007/2008 campaign targeted Croatia, Ukraine and the Czech Republic, with these three markets currently accounting for nearly 70% of the company’s retail value sales in Eastern Europe.

In 2010 Lactalis’ new Eastern European target markets appear to be Russia and the CIS countries. Lactalis is reported to be in negotiations to acquire the Yefremovsky milk processing plant in the Tula province of Russia.

This would be Lactalis’ first acquisition in Russia, at an estimated cost of US$20 million, including the purchasing price and modernisation costs. Currently, the Yefremovsky plant produces some 2,500 tonnes of hard cheese a year and its 2008 revenue was US$8.7 million. Lactalis has also reportedly invested US$23 million in expanding its operations in Moldova.

The company has two dairy plants in the country where it produces products under the President and Alba brands. Enhanced capacity of the plants is set to increase cheese and feta cheese exports to former Soviet Union countries and Europe.

Up till now, Lactalis’ expansion in the Russian dairy market has been organic, and the company achieved a 43% CAGR over 2001-2008. However, it still counts as a small player in Russia, ranking 18th in 2008 with a 0.6% dairy value share.

The country’s dairy market is expected to outperform the Eastern European region as a whole with a 3.1% CAGR over 2009-2014, and in absolute retail value terms the country will account for some 45% of regional market growth over the period. However, volume growth is expected to remain well below value growth, at a 2% CAGR, indicating an increase in unit price and stiff competition in the dairy market’s health and wellness categories.

Lactalis has also been strengthening its Western European position with acquisitions, with much heavier investment in comparison to its Eastern European spending. In March 2010, it bought the dairy operations of Spanish food company Ebro Puleva for around US$860 million.

With this acquisition, Lactalis has become the second largest dairy company in Spain, increasing its value share to nearly 10%, although still some way behind current leader Danone (17%). Although Spain is the fifth largest dairy market in Western Europe, it is forecast to post a 1% CAGR decline over the 2009-2014 period, resulting in a market contraction of around US$675 million in constant value terms.

It can be concluded that Lactalis’ expansion strategy is acquisition driven and focused on the long term, building on a range of opportunities, such as the dynamism of markets which are expanding as consumer demand grows for more industrially processed food products and the strengthening positions of not yet mature but more affluent developed markets.

Although its latest acquisition of Ebro Puleva’s dairy assets does not target rapidly growing geographic markets, and almost the entire Ebro Puleva dairy portfolio consists of drinking milk products, thus not benefiting hugely from the wellness trend driving growth in functional dairy categories, it does enhance Lactalis’ scale of operations, strengthening its competitive edge in the market.

Nestlé and FrieslandCampina increase production capacity in Asia

In the first half of 2010, both Nestlé and FrieslandCampina announced plans to invest in expanding their dairy capacity in identified Asian growth markets, namely Indonesia and Vietnam, respectively.

In March, Nestlé started to invest US$100 million in improving the production capacity of its milk processing facility in the Indonesian region of East Java. biggest investments the firm has made in Indonesia and will make the facility one of Nestlé’s 10 largest milk processing plants in the world.

The development will increase the plant’s fresh milk intake from local dairy farmers from around 620,000 litres per day to more than one million litres a day in the next few years.

FrieslandCampina also announced that it plans to invest in expanding its production capacity in Binh Duong, in southeast Vietnam. In its 2009 financial results, the company claimed improving revenue performance in the country is the result of rising Vietnamese incomes as well as greater interest in health-boosting dairy products.

Currently, Indonesia is the sixth largest dairy market in Asia-Pacific and is expected to grow at a healthy CAGR of nearly 5% over 2009-2014. Nestlé is the leading player in the Indonesian drinking milk products market and the rising health awareness of Indonesian consumers will provide opportunities for drinking milk products over the forecast period.

At the same time, there are factors that face with the weakening consumer purchasing power in the current economic climate and the still strong consumer preference for unpackaged and unbranded liquid milk. In Indonesia, Nestlé also faces increasing competition from growing local players such as Ultrajaya Milk Industry & Trading Co Tbk PT and Nutrifood Indonesia PT.

There is likely to be growing demand for products which offer convenience and practicality, given the increasingly busy lifestyles, particularly of urban consumers. As a result, more powder milk and flavoured powder milk drinks companies are expected to introduce liquid variants of their existing brands over the forecast period. Nestlé will have to be quick in responding to such trends in order to consolidate its leading position in the Indonesian drinking milk products market.

In terms of Asia-Pacific’s prospective markets for the expansion of international companies in most FMCG categories, including dairy products, China must be mentioned. Over the 2009-2014 forecast period, the Chinese dairy products market is expected to post a 5% CAGR; in absolute retail value terms this single market will account for over 50% of the region’s market gain.

The competitive landscape in the Chinese dairy market is challenging; the top two positions are held by Chinese dairy conglomerates Inner Mongolia Mengniu Milk Industry (Group) Co Ltd and Inner Mongolia Yili Industrial Group Co Ltd, their combined market value share approaching 35% in 2008. In such a market environment, even Nestlé, the world’s largest food and beverage company, commands a mere 2% value share.

Danone, on the other hand, ranks third with over an 8% value share, although historically its Chinese operation had been strongly enhanced by its long-standing but now defunct joint venture with local partner Wahaha.

The Chinese dairy products market is also infamous for its frequent food safety scandals, the most recent being the melamine contamination scandal in 2008. Such a crisis of confidence in milk safety could have a significant effect on the performance of the market, which continues to be largely dominated by local companies. However, these circumstances could offer an opportunity for international manufacturers to enter.

Strategic objective to increase scale of dairy operations in emerging regions

Recent moves from leading dairy product manufacturers show that their strategies are focused on strengthening their positions and enhancing their production capacity in emerging markets, predominantly via acquisitions, in order to satisfy rising demand for more industrially processed dairy products in these regions. Players failing to establish relevant scale in these dynamic markets will see a fall in their competitive strength in the category.

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