FMCG in the Middle East: Profile - Almarai
In last decade, Almarai has expanded outside original business of dairy
For packaged food manufacturers with ambitions for international growth, the Middle East presents an opportunity, with growing populations enjoying rising incomes.
However, in recent decades, a number of local industry giants have developed, building robust positions in a number of food sectors, armed with solid supply chains and intimate knowledge of the consumers of the region.
One such company is Almarai, the bakery, dairy and poultry processor based in Saudi Arabia.
Almarai was set up in the late 1970s as a partnership between Irish agri-foods businessmen Alastair and Paddy McGuckian and HH Prince Sultan bin Mohammed bin Saud Al Kabeer.
According to the Almarai website, the Sultan "recognised an opportunity to transform Saudi Arabia's traditional dairy farming industry" to meet the needs of a "rapidly expanding domestic market".
The 1990s was a period of significant change for the business. Almarai became a Saudi Arabian limited liability company in 1991 and revamped its production network, centralising farming and processing.
It was almost a decade ago when Almarai really started to take off. In 2005, the company floated 30% of its shares; two years later, the group made its first move outside dairy with the acquisition of Saudi firm Western Bakeries.
In 2009, Almarai swooped into poultry with the purchase of Hail Agricultural Development Company, or HADCO. That year also saw Almarai set up a dairy and juice venture with PepsiCo. IDJ was formed to target countries in the Middle East, Africa and south-east Asia, excluding the Gulf Cooperation Council states. Its main markets are Egypt and Jordan, from where it exports to other countries.
Almarai joined forces with another US food group in 2010. The company signed an agreement with infant formula manufacturer Mead Johnson to set a venture serving GCC states.
The flotation, as well as the acquisitions and ventures, boosted Almarai's growth. According to a company presentation published in 2010, Almarai had a compound annual growth rate of 7.5% between 1995 and 2004. From then on, its growth kicked on. With acquisitions, its CAGR between 2004 and 2010 was 24.2% but, without those deals, its CAGR was still at a robust 20.9%.
And looking at Almarai's recent financial results, the company has enjoyed rising sales and profits for each of the last five years.
In 2013, Almarai booked net income of SAR1.5bn, up 4.3% on 2012. Net sales were up 13.5% at SAR11.22bn.
Dairy continued to account for over half Almarai's sales - some 51% - with 41% of the group's revenue coming from fresh dairy products.
The most buoyant growth came from poultry. The division is the sixth-largest of the seven business units Almarai outlined in its results: alongside poultry, Almarai broke results down into fresh dairy; long-life dairy; cheese and butter; bakery; fruit juice; and arable and horticulture.
Poultry sales jumped 57% in 2013, accounting for a fifth of Almarai's growth. On that metric poultry was behind only fresh dairy last year.
At a little over 13%, the rate of growth of Almarai's sales in 2013 may have been behind its record in recent years. Profit growth was hampered by factors including a surge in dairy costs, the company said.
In its report for 2013, Almarai said a key "challenge" for its dairy business would be the rising prices of commodity prices, including dairy and feed inputs.
Nevertheless, demand for dairy products in Saudi Arabia and the wider Middle East continues to grow. The trend is, of course, bringing in more investment from the likes of Arla Foods but Almarai has a solid position in the region. According to Euromonitor, Almarai is the "leading producer of fresh dairy products in the GCC".
That said, two-thirds of Almarai's total revenue is still made in Saudi Arabia. The company does supply dairy products to all six GCC states - Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman and exports to Jordan, Lebanon and Yemen, Jordan and Lebanon. For the medium term, Almarai has to try to push on in its bid to grow its dairy arm in the wider Middle East.
Industry watchers have pointed two other sectors in which they believe Almarai can achieve robust growth - poulty and infant formula.
At Business Monitor International, analysts have said Saudi Arabia's poultry output is expected to grow for the second consecutive year after disease wiped out production in 2011/12. Government is supporting processors like Al Watania Poultry, Fakieh Farms and Almarai to boost production, who are, BMI says, "heavily investing in the sector".
In a report on the Saudi Arabia food and drink sector, BMI notes Almarai's poultry division is still losing money despite the recent growth it has enjoyed due to initial investment costs, feed prices and high mortality rates of birds. However, BMI forecasts: "Almarai is likely to break even over the course of 2014, as production capacity is set to expand with the opening of a new line of production. Almarai recently indicated that it would push investment in its poultry segment, as it views the segment as the fastest growth opportunity over the medium term."
And it is in infant formula that Almarai has made its most significant move so far in 2014. In January, Almarai paid US$4m to buy out Mead Johnson from their local infant formula venture, International Pediatric Nutrition Company.
Under the terms of their agreement, the companies said they would review the venture three years later, which has led to a restructuring of their partnership.
Almarai has paid US$4m to buy out Mead Johnson and become the sole shareholder of the venture. The two sides have struck deals on the continued use of trademarks and technical support. IPNC markets formula under Mead Johnson's Enfagrow and Enfamil brands.
For Mintel, infant formula presents an opportunity for Almarai. "Demand for baby food and drink products in the Middle East and North Africa is set to grow as the population increases and income levels rise," Mintel says in a report on the sector.
"The Middle East and North Africa is a broad and diverse region which includes over 20 countries and states, comprising an overall population of over 370m people – more than the population of either the eurozone or the US. By the year 2025, it is estimated that the region's population will grow to around 450m."
Almarai is a fledgling player in a regional sector that houses the likes of Nestle, Danone and DMK. It will be tough for Almarai to continue to build its nascent presence in the category but Mintel believes it can gain a foothold.
"Almarai is well-placed to drive brands in the area of dairy nutrition," Mintel says. "In 2012, it opened the Gulf region's first infant nutrition plant at Al Kharj. Beyond Saudi Arabia it is an important brand in Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates – all identified as high-income countries."
As Almarai approaches the 40th anniversary of its establishment, it is a business with a strong presence in the Middle East's food industry and has become a significant player in sectors from dairy to bakery. It faces challenges - from battling fierce competition in dairy to pressure on prices of commodity imports - but opportunities do lie ahead.
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