Fusion and consolidation of the dairy industry in Latin America has left the region with very large and very small companies, and few in between. Not only are companies fiercely competing on price, but they are releasing an ever widening array of products. Steve Lewis reports.
The recent merger of two of Argentina’s top three dairies led to the creation of Latin America’s largest dairy company. At the same time, European dairy industry giants Danone and Parmalat have expanded their presence throughout the region. Consolidation was an inevitable consequence of increased competition and a need to streamline the supply chain.
Parmalat and Danone represent a new breed of multi-faceted food and beverage companies that offer dairy products as only one segment of a diverse product offering. They are involved in multiple market sectors, including biscuits, bottled water, condiments and juices. Both have aggressively expanded in Latin America in recent years. Danone entered Latin America in the 1970’s and has seen its operations in the region grow to represent 10% of worldwide sales.
Recently Danone entered into a strategic alliance with StarMedia, a leading Internet portal for Hispanics. The two companies are combining their resources to create a “virtual channel” aimed at promoting good health. The target market is adolescents who are interested in a healthy diet. The site will not only promote Danone’s dairy products, but will highlight other product lines.
Parmalat has invested heavily in establishing production facilities for its dairy products and juices in Latin America. In June Parmalat completed its new dairy facility in Peru. The company pressed ahead with its ambitious construction plans in spite of the difficult economic climate that prevailed there over the past year. In justifying the investment, management stressed that it represents a permanent commitment to the Peruvian market which consumed roughly 164 million tons of dairy products last year valued at US$600m.
Parmalat proved its staying power in the region when it started operations in Mexico just prior to the economic collapse of 1995. After a two-year struggle during the economic crisis, it has achieved steady growth in sales of milk and fruit juices since 1997. Parmalat now has a strong presence in the UHT milk sector which has achieved wide acceptance in Mexico and other parts of Latin America due to its long life and ease of storage.
Regional players fight to stay in the game
With international dairy industry giants aggressively expanding in Latin America, dairy companies native to the region are forced to streamline their operations and maximize their cost competitiveness. Small dairy operations find that the economy-of-scale works against them and most have sold out or merged with larger companies. Therefore the dairy sector is rapidly headed toward a showdown between the European and Latin American giants.
Guiiliano Barnuevo, president of a leading Peruvian dairy called Estancias Ganaderas was quoted by Gestion newspaper as saying: “Four years ago each company had its market niche and almost none of them were competing head-on in the market; however that situation has turned around 180 degrees and now with the diversification of dairy products companies are launching as many new product lines and derivatives that they can, causing all of them to compete against one another.”
Increasing competition in the marketplace has put a serious squeeze on profit margins, forcing weaker dairy companies to merge or go out of business. According to Barnuevo, the main weapon that companies use to compete is price reduction, and another is to extend longer credit terms to customers. Both of these strategies give the advantage to large companies that have the capital necessary to absorb the cost.
In Argentina, market pressure led to the merger of market leader Sancor with third place Milkaut. The resulting company, Sancor Milkaut Cooperativa Limitada, is the largest single dairy company in Latin America. With combined annual earnings of US$1.27bn per annum, the company is well positioned to contend with multinational dairy companies both at home and abroad. Sancor exports its dairy products to 30 nations.
New products key to expansion
Most of Latin America’s leading dairy companies have greatly expanded their product lines in recent years. Among the most popular new product categories are frozen, fruit flavoured, and liquid yoghurts.
Since yoghurt was unknown in many Latin American markets until recent years, most local and regional companies did not offer them. Multinational companies, and Danone in particular, got a strong foothold in the yoghurt sector before local competitors caught on.
The strongest growth potential for the yoghurt sector is in lesser developed Latin American nations, like those of the Andes Community, where consumption is still quite low relative to other dairy products. For example in Ecuador per capita consumption of yoghurt is less than 1.2 litres per year, as compared with 9 litres of milk.
At this point it looks as though the world’s leading dairy companies will not totally displace leading Latin American contenders. Nevertheless their presence is profoundly reshaping the region’s dairy industry, leading to unprecedented consolidation and mergers. Mergers like that of Sancor and Milkaut in Argentina are likely to be replayed throughout the region as leading dairies combine forces to withstand strong international competition.
By Steve Lewis, just-food.com correspondent
To view related research reports, please follow the links below:-
The World Market for Dairy Products