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  1. Analysis
June 29, 2015

BRICs and beyond: Dairies meet Mexican challenge through diversification

Dairy producers in Mexico have turned to product diversification to boost sales in the face of rising costs, weak purchasing power within lower income consumer groups and growing competition for the favour of more affluent consumers. Elizabeth Machuca reports.

Dairy producers in Mexico have turned to product diversification to boost sales in the face of rising costs, weak purchasing power within lower income consumer groups and growing competition for the favour of more affluent consumers. Elizabeth Machuca reports.

Dairy processors in Mexico have seen production costs driven up by the price of raw milk in the country. According to Beatriz de Llano, an analyst for market researchers Euromonitor International, average unit prices in the sector rose by 7% annually in 2014 because of a rise in farm gate prices caused by cattle feed cost inflation. Average prices increased from MXN5.90 (US$0.38) per litre in 2013 to MXN6.50 (US$0.41) per litre in 2014.

This situation is not expected to abate. De Llano predicts that price rises will continue until 2019. "Every year, stockbreeders negotiate to be paid a better price per litre of milk, as they face continuous increases in cattle feed prices as a result of droughts leading to fodder shortages," the analyst observes. Price volatility in sugar will also continue to impact prices, she adds.

President of the Mexican National Chamber of Dairy Producers (CANILEC), Juan Pardo, tells just-food that this situation means large and small dairy companies in Mexico have seen their profits fall by an average of 2% a year over the last 24 months.

Another ongoing problem for Mexico’s dairy sector is the low purchasing power of a large proportion of the Mexican population. World Bank statistics say that Mexico’s GDP per head in 2013 was US$10,307. But wealth in Mexico is distributed unevenly – the World Bank says its GINI inequality index rating (of between 1 and 100 – the most unequal) is 48.1. That compares to 26.8 in Norway and 38 in the UK.

The Mexican Senate, through its research arm – the Instituto Belisario Domínguez – released a report in May suggesting that 52% of Mexicans – more than 50m people – cannot afford to purchase basic shopping basket items with their monthly salary. Many Mexican consumers struggle to afford condensed, powdered, whole and evaporated milk, the report found.

According to analysts, this issue has been sharpened by a tax of 8% on high caloric foods, introduced last year. "This is impacting the budget of Mexican consumers, combined with the country’s economic slowdown lowering consumption rates, not only for the taxed categories, but for groceries in general," Euromonitor's de Llano observes.

In response to this pressure on consumer spending, a low cost segment has emerged within the Mexican dairy sector. Wal-Mart, for example, has grown sales of its lower price formats as well as selling dairy in smaller – and therefore more affordable – pack sizes. "We have Leche Aurrera, which is our low cost milk brand. I cannot reveal any sales figures but it’s a profitable market that has experienced a double digit growth in the last few years," a spokesman for Wal-Mart de Mexico tells just-food.

Leche Aurrera is sold at around US$0.74 cents per litre, 14 cents less than similar products offered by rival brands such Alpura or Lala.

To turn a profit in the low cost segment, companies need to leverage high volumes and low costs. According to the Mexican Milk Producers and Consumers Association, to reduce expenses low cost manufacturers use dairy formulas and whey instead of whole milk.

This alleged practise has drawn criticism from dairy bodies and CANILEC's Pardo argues products that contain combined dairy substances as opposed to whole milk should be required to state this information on the labels. "If it is to be considered as milk it should contain the percentage stated by national and international regulation," he insists.

As poorer consumers are squeezed and competition at the value end of the sector intensified, many Mexican dairy companies have sought to appeal to wealthier Mexicans by releasing value-added products. "The glass of whole milk is not the focus of our business any more. We are now expanding and one of the priority areas that has proved to be profitable is the yoghurt market and the skimmed milk products," Pardo explains.

According to figures from CANILEC, which represents around 100 dairy producers, profits in Mexico from yoghurt-related products are rising 6% annually and, in the last 24 months, the diversification of yoghurt products has increased significantly.

"One of the best-selling products is Greek [style] yoghurt and yoghurts with fruity bottoms. The sales of those two are going so well that we now have more than 30 different varieties," said a sales executive of one mid-sized Mexican dairy producer, who did not want to be named.

Value-added cheese products are also witnessing rising demand and production has increased as a result, up from 315,555 tonnes in 2013 to 342,870 the following year.

But Mexican dairies also face competition to win over the more affluent Mexican consumer. As well as a step up in activity in the value-added dairy space, Pardo says dairy companies are having to grapple with "the negative campaign against cow milk" that, he suggests, has benefited companies producing soy, rice and almond-based non-dairy drinks. "They are not milk but those products are sold like it," the dairy chamber chief tells just-food.

In Mexican branches of US-owned Wal-Mart visited by just-food, a litre of whole milk is sold for Mexican Pesos MXN13.40, whereas a litre of soy drinks can reach MXN22.50.

Increased consumption of value-added products such as yoghurt drinks and dairy alternatives could depress whole milk demand, suggests De Llano. Whole milk "does not seem to be moving towards higher per capita consumption due to the competition that it faces from yoghurts, flavoured milk drinks and non-dairy milk alternatives," she observes.

"Cow’s milk, which is the biggest sub category in drinking milk products in terms of volume, showed a 5% value growth in 2014 versus previous year, which is coming from price increases more than volume growth that will actually show a 2% contraction," she adds.

Despite these challenges Pardo thinks there are opportunities for innovative dairy companies in Mexico. "There is actually a production deficit in the national market because we can only produce 70% of the total demand and the rest is imported. Mexico is still a place of opportunity for innovative producers. We are optimistic because the consumption numbers have been steady during the first quarter of the year, and we are expecting a modest growth of 1.5-2% in profits at the end of 2015."

Larger Mexican dairies are also developing their export businesses or investing in dairy companies overseas. Grupo Lala, for instance, is investing in ramping up production in Latin American. The Mexican dairy major opened a production plant in Nicaragua and plans to expand its operations to central, south and even north America. At the same time the company has been cutting production costs at home. Meanwhile, rival Sigma Alimentos, which makes dairy, meat and agricultural products, has announced investments in several central American dairy companies.

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