As we carefully say that COVID is on its return, it is time to recalibrate and take notice of the current state of the dairy industry. In previous years (2016-2019) the dairy industry saw an annual growth of 5.9%. However, the industry was not able to maintain this growth rate during the COVID-filled years. Our analysis of the industry shows that also dynamics in the industry changed, and with these changing dynamics, growth and profitability drivers have shifted.
Players that focused on the retail sector were able to maintain growth in 2020
Pre-COVID, retail players in the dairy market, though being the largest segment by far, were lagging behind in terms of growth. The real winners were the players that traded in milk powder, or the foodservice focused cheese companies. Though milk powder remained a good product to have in the portfolios, the foodservice industry took a severe hit in 2020.
Companies that could hold on to their pre-COVID sales levels – or even grow, were the ones that successfully shifted their sales to the retail sector. Large integrated players already supplying retail benefited the most. For example, the combination of Galbani’s strong brand and its presence in retail resulted in more than 3% sales increase. On the other hand, DMK saw sales declining with 3.2% due to lost sales in the foodservice sector.
Strikingly, margins in the European Dairy industry went up in 2020 to 2.7% EBIT – but with tight margins other strategies have to be explored
Overall, margins went up from 2.3% in 2019 to 2.7% on average in 2020, turning around the trend of margin decline. This margin improvement is mostly driven by a higher gross margin, as producers managed to not fully pass on the cost benefit of the low milk prices in 2020 to their customers. With milk prices at record heights in 2022, the question is whether the realized margin improvement will hold or evaporate. It’s worth keeping in mind, that despite a slight increase in 2020, profit margins remain tight in the European dairy sector: 2-3% EBIT leaves limited room to finance investments.
Scale and a balanced portfolio greatly helped in protecting net sales and profitability in 2020, further advancing the position of large, integrated dairy players. Together with added value these are the primary winning strategies for (Western) European players, evident in above-average margins and higher resilience, in the current and future European dairy industry.
Want to explore the strategies of the 2020 fast growing companies? And know all the effects of too much milk production in several countries? Download our newest trend report on the dairy industry via the button below.