BRICS and beyond: Arla Foods plans emerging markets leap

By Chris Mercer | 11 January 2013

Growing competition for space in key emerging markets appears to have convinced Arla Foods that it needs to act now if it is to secure a market for its milk supplies beyond 2015.

Arla said today that it is launching an emerging markets-focused strategy running through to 2017. The new plan renders its current 2015 plan as obselete, although the co-operative says that it has already hit most of the targets within it.

Chief among Arla's concerns is ensuring that it takes full advantage of dairy market potential in Russia, North Africa and Middle East, and China.

In short, the Danish group expects to have more milk on its hands following the abolition of EU milk quotas in 2015 and it needs a market for the extra supply. Sluggish Europe, although still an important region for liquid milk and added value dairy, just isn't going to cope with the extra supply on its own.

The global dairy market is expected to show annual growth of 2.4% in volume terms up to 2016, and the growth will be driven by emerging regions.

Of the three potential markets identified by Arla in its 2017 plan - Africa and Middle East, Russia and China - it is the last of these where the firm has most work to do.

According to Arla's own projections in its 2011 annual report, China is set to suck up 45bn kg of milk between 2010 and 2020. In contrast, Middle East and North Africa (MENA) will need 11kg, the rest of Africa will need 10kg and the 27-member EU just 5kg.

These figures underline the opportunity in China in particular, and Arla is keen to see returns from a country where competition is already hotting up. This competition includes a strong domestic scene, which most recently has focused on developing supply lines between New Zealand, one of the world's dairy powerhouses, and the Chinese mainland.

Canada's government has projected that China's dairy sector will expand in value by 80% between 2011 and the end of 2016, reaching a value of US$74.7bn. This compares to a growth rate of 58% in the preceding five years. Cheese and skimmed milk powder represent sizeable opportunities for growth, albeit at different scales.

More generally, the European Commission's recently-published outlook document for the global milk sector also highlights growing competition on world markets. "Due to more dynamic developments in the world market the EU will gradually lose world market share, though it still account for around 31% of global exports in 2022," it said late last year.

Arla is determined to grab a significant share of those exports. A spokesperson for the group told just-food today that it wants to recoup a fifth of sales from emerging markets by 2017, versus around a tenth currently.

In MENA and Russia, Arla is already growing strongly, with sales up 27% and 33% in those markets respectively in 2011

The firm's overall export strategy is two-pronged. One prong focuses on key brands, particularly Arla, Castello and Lurpak. The other prong focuses on the high-margin ingredient business, which is set to see sales double to DKK5bn over the strategy period.

Closer to home, Arla says it needs to shave DKK2.5bn of cost savings from its current operations by the end of 2015.

It remains unclear how this will be done. A group spokesperson said he could not rule out job losses related to capacity cuts, but added that the majority of savings will be day-to-day operational efficiencies.

There will need to be further analysis of Arla's plan, but today's announcement certainly marks a firm statement of intent.

Sectors: Commodities & ingredients, Dairy, Emerging markets, Financials

Companies: Arla Foods, European Commission

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