The dairy industry in Saudi Arabia, the most sophisticated in the entire Middle East, is at somewhat of a crossroads. Consumption is at an all-time high, milk yields have never been better, the economy is on the up, yet one cannot help but feel that a major upheaval is imminent.

Industrial dairy processing in Saudi Arabia began only in the 1970s, but since then has progressed at remarkable pace. Milk processors traditionally divided into two broad categories - recombining plants working with imported milk powder and fresh dairies using locally produced raw milk. Milk produced by the recombiners was invariably packaged in long-life cartons, which facilitated widespread distribution in this harsh climate, while the fresh dairies up to the early 1990s supplied their milk generally in short-life packs, with distribution consequently concentrated in larger retail outlets.

Milk Consumption

Total consumption of liquid milk amounted to 335 million litres in 1999, increasing to almost 600 million litres if laban is included (laban is a plain, almost exclusively short-life, cultured milk drink consumed mainly by adult Saudi males). Per capita consumption is therefore around 30 litres per annum based on the current official population figure of approximately 20 million. In value terms the market for milk and laban is worth an estimated US$ 675 million at retail level.

As shown in Chart 1, consumption of milk increased steadily throughout the 1990s, growing at an average rate of 6% per annum between 1993 and 1999 i.e., around double the population growth rate. However, the market is experiencing significant change in how it breaks down on many different levels.

Firstly, consumption in percentage terms is gradually moving away from recombined milk in favour of fresh, though the former still accounts for more than half of the market (see Chart 2). Fresh milk grew by 70% between 1995 and 1999, while recombined milk grew by just 9%.

One of the main reasons behind the strong growth in liquid milk consumption is an increased level of awareness among consumers. Canned milk powder (e.g., Nestlé's NIDO) is still a very important source of milk in most Saudi households. In 1999, this accounted for a further 350 million litres of liquid milk equivalent (almost 44,000 tonnes at a conversion factor of 8), suggesting a total underlying market for liquid dairy products of approximately 950 million litres (or equivalent). While powder sales are static, milk and laban continue to grow strongly, thanks in large part to increased promotional efforts of dairy producers as well as the changing purchasing habits of the Saudi consumer (e.g., milk powder is a relatively inconvenient product to use).

The level of competition in the supply of milk has also increased significantly in recent years as many small dairy farms expand into processing, in the absence of regular third party supply contracts. Larger fresh dairies such as Almarai, Al Safi, NADEC and Al Othman are now largely self sufficient in raw milk and do not need to source externally to the same extent as before. Indeed, the supply of raw milk is now greater than demand, which has been one of the main factors encouraging fresh producers to expand into UHT processing and compete directly with the recombining dairies. While the price of long-life fresh milk did not differ greatly from long-life recombined up to recently, by the end of 1999, significant discounting was taking place, with some fresh brands up to 25% cheaper than their recombined equivalent.

Chart 3 summarises how long-life milk in Saudi Arabia breaks down by fresh/recombined during the period 1995-1999.

Flavoured milk continues its strong advance, averaging growth of more than 11% per annum since 1993, most of which can be attributed to the fresh dairies. Flavoured milk now accounts for 14.5% of the total milk market in volume terms, compared with 11% in 1997 and 10% in1993.

Sales received a boost following the Saudi authorities' decision to ban the sale of carbonates in schools in late 1996/early 1997. Growth since then has been more supply than demand-driven as the level of competition increased sharply. Distribution of flavoured milk has also improved, with companies such as Al Safi, Almarai, Mars etc, investing in vending machines to encourage impulse purchases. Also, given that the target market for flavoured milk are children, the continued bad press the soft drinks industry has been subjected to has clearly made an impression on Saudi mothers. There is growing perception/realisation that flavoured milk is nutritionally better for their children and a more "natural" product than carbonates.

While suppliers continue to aspire to establishing higher value-added niches in the flavoured sector (and in milk generally) in an effort to break through the one riyal price point, they have met with limited success as yet. Products such as SADAFCO's SAUDIA SHAKE (milk shake), Al Safi's SHAKY (milk shake) and the Mars range of drinks (now all under the GALAXY umbrella) still constitute a very small part of the flavoured milk market. Suppliers have so far failed to attract consumers in large numbers and, given the abundance of good quality one-riyal milks now in the market, this is not likely to change in the near future.

The future

In late 1999 and early 2000, there were signs that the standard price-points of short-life milk (and laban) were coming under considerable pressure. Although new entrants or second-tier dairies have occasionally under-cut established supplier prices, until now the bigger companies have held firm. The number one supplier of short-life milk and also the largest dairy farmer in the country, Almarai, looks set to up the stakes considerably in 2000 by doing the unthinkable (in the words of a competitor) i.e., reducing the retail price of its milk. Already, the Dairy Producers' Committee has met in extraordinary sessions to discuss the implications for the industry.

The implications may indeed be far-reaching. Not only would consumption levels receive a further boost but rationalisation of supply would also be encouraged. Also, many of the less profitable small and indeed large suppliers would be forced to streamline their operations in order to compete and survive. Mergers might become more attractive as has happened in North America, Europe, and Oceania etc. Indeed in the longer term, consolidation is in IMES view inevitable and should be embraced by the industry.