Royal FrieslandCampina and Arla recently published their annual figures for fiscal year 2022. The annual report of another giant, French company Danone, is just around the corner as well. This is the time to take stock of the global dairy market. Let’s take a look at 6 companies from the Rabobank Global Dairy Top 10, whose 2022 results are already in: Nestlé, Danone, Fonterra, Royal FrieslandCampina, Arla, and Saputo. In this article we dive into their operational performance, trends, and challenges in the industry.
Revenue and growth within the dairy industry
Across the industry, 2022 was characterised by high cost inflation. By passing on input costs to customers, it’s not shocking that all companies realized significant sales growth in the most recent year. Predominantly driven by higher sales prices, which in some cases increased by more than 25%.
- In terms of volume growth, the top performer is Saputo, who managed to increase their total sold volumes of products in 2022. Particularly in the industry and foodservice segments, which was more than sufficient to make up for lower retail volumes. Comparatively, its competitors performed worse in terms of volume.
- Arla sold lower volumes of its main global brands (Arla -4.3%, Lurpak -7.6%, Castello -6.9%), leading to an overall volume decline for the first time in years.
- Similarly, FrieslandCampina also struggled to maintain its volumes, in part due to 6.0% of its member farmers leaving the company, resulting in 2.5% lower milk intake.
- Fonterra saw its production volume (of ingredients especially) decline by 160 thousand tonnes, but still net sales increased by 11.6% this year.
- Nestlé Dairy reports single-digit growth led by strong demand for premium and fortified milks. Its reported sales of milk products and ice cream (excluding infant nutrition and also not including sales of its joint-venture Froneri) grew by 5.5%. Its infant nutrition business reported a strong 10.1% organic growth, especially in China.
- Danone shows a similar development. Like-for-like sales of EDP (Essential Dairy and plant-based products) increase by 5.8%, despite 4.3% lower sold volumes.
Operational performance
Taking a look at the operational performance in 2022. There’s a balance in the rate at which the price increases are going to the milk suppliers. The gross margin is under increasing pressure across the industry. Royal FrieslandCampina continues to pay a competitive milk price, at €57.4 cent/kg (an increase of 46.2%). Yet their gross margin declined by -1.7%. Similarly, Arla’s performance price increased to €55.1 cent/kg and Fonterra’s Farmgate milk price increased to $9.3 / kg, while their gross margins declined by 3.8% and 0.5% (relative to net sales) respectively.
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At an operational level, the dairy companies see fluctuations across the board. Most notable, Royal FrieslandCampina’s EBIT (excluding exceptional income and costs, among which €153 million in reorganisation costs which pressure the profit before taxes) increases by 1.5%, driven by staff efficiencies and lower deprecations.
Growth markets and strategy
As the above-mentioned operational performance shows, the ability to produce and sell at high volumes is under pressure. This raises challenges in the short- and long-term. How will these companies deal with these challenges, to remain competitive and profitable?
A recurring theme in the 2022 financials is infant nutrition, which is generating solid growth in terms of both volume and price. FrieslandCampina, Fonterra and Nestlé report substantially higher demand. Major growth markets this year were China and the US, the latter being fueled by infant formula shortages due to supply chain issues and a shutdown of production by Abbott Labs. Selling infant nutrition in emerging markets seems like a way to mitigate the volume decline in dairy. However, this comes with its own set of challenges, like increased competition and declining birth rates in China, which these companies will have to overcome.
Another recurring theme between these dairy firms, is their focus on strategic brands. Arla, FrieslandCampina, Nestlé, and Danone all focus on higher-value brands in their strategies. For Nestlé, this might lead to a higher share of dairy in its product mix, in favor of low-value segments like frozen-food and water. The profitability of these dairy firms has come under pressure in 2022, and this looks like a good way to maintain their profitability in the coming years. However, the question will be how that pans out in the next year, since consumers are increasingly shifting away from A-brands as the inflation persists. It suggests the brand-focused strategy is not aligned with consumers’ demands. Furthermore, plant-based alternatives are gaining marketshare; although keeping it profitable could be challenging.
On one hand, branded products are necessary for these firms to remain profitable and pay out solid prices for their milk supply. However, it needs to be done efficiently, to deal with the imbalance between supply and demand. Not only in the coming year, but also after the current cost inflation has subsided.
Investments
How are these dairy companies set to overcome global challenges, like the shrinking livestock numbers? Across the industry, companies are actively investing in their own efficiency in order to maintain profitable growth accessible in the future.
Like the abovementioned focus on extra added-value in the product portfolio, similarities exist in the restructuring processes of these dairy firms. Bringing down the number of production locations. FrieslandCampina reduced its number of factories from 65 to 48 (2022), and Saputo is ‘streamlining’ production in the US in a similar way (2023). Similarly, Saputo and Nestlé both seem to go back to their core in certain markets, by outsourcing production (Nestlé in Africa, 2022) or distribution (Saputo in the UK, 2023) to external partners.
Corporate Social Responsibility continues to be big on the agenda as well. This year, Arla and FrieslandCampina both saw a reduction in the amount of member farmers. With further impact of climate-related restrictions in the industry expected, how do these cooperatives differentiate themselves in order to bind suppliers to them? Via FrieslandCampina’s (‘Foqus planet’) and Arla’s (€500 million per year) sustainability incentives, the monetary incentive is there.
More generally, emerging markets like China and India remain interesting growth markets for dairy companies. Among others, Nestlé is planning to invest US$613m in India by 2025 to accelerate its business here. Meanwhile, Danone has invested in a new R&D facility in China in 2023.
Final thoughts
This article shows that competition among dairy companies will increase among multiple fronts. Both volume and value growth could be under pressure towards the future. The companies are taking action by increasing focusing on brands and investing in efficiency. And yes, brands are a way to increase valorisation of milk: but are they really what a consumer wants in times of inflation?
The larger companies are also challenged by smaller companies like Royal A-Ware, which are gaining a bigger piece of the pie. These smaller companies are more flexible and have proven to respond quicker to changing market conditions. Smaller companies can also position themselves in niches: that can be a difference maker for them, more than for larger companies. Larger companies possess an advantage over their smaller counterparts in terms of scale. With scale comes the potential for greater long-term operational efficiency. However, in the current climate, the benefit of scale looks more like an obstacle. Hence, the question becomes more: how and where can I take advantage of the benefits of my scale?
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