France’s largest food manufacturer, Danone, caught the attention of investors and competitors alike when it stormed into the Kingdom of Saudi Arabia (KSA) last week. Saudi Arabia and its neighbours are standing on the brink of a wave of new investment. just-food.com takes a look at the Middle East markets and who’s moving into them, and explains the attraction.
Danone has announced that it is investing 500 million Saudi Riyals in buying 50.1% of the second largest Saudi fresh dairy, Al-Faisaliah (Al Safi) in Riyadh. While Danone and a number of other Western food groups have already established a presence in the markets of the Middle East, few have gone as far as devoting this level of cash or buying majority stakes in local players. In fact, until recently Saudi investment laws prohibited foreign investors taking controlling stakes in joint ventures with Saudi partners, but these laws were relaxed in April.
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Al Safi claims to have the largest integrated dairy herd in the world with more than 12,500 milking cows on one farm. Besides allowing for the expansion of Al Safi’s product range into new cheese and childrens’ products, it is planned to introduce local production of Danone’s mineral water and biscuit products. This will be a tough challenge as both sectors are heavily oversubscribed and over capacity.
Al Safi was the pioneer in the KSA for fresh set plain yoghurts and for packaging flavoured fresh local milk in long life aseptic cartons. It has so far not had the success enjoyed by Almarai, the leading local fresh dairy, in regional export markets and in particular those of the other five Gulf Cooperation Council (GCC) markets.
Almarai has 18,000 milking cows on five farms and has recently built the largest, most sophisticated dairy processing plant in the country, giving them the lowest production costs. Their product range is currently much wider, embracing products such as butter, butter ghee, canned cheese and various fruit yoghurts. Some of these products are imported. Yoplait brand fruit yoghurts are currently made locally under licence from Sodiaal, the French competitor to Danone. However, the jury is still out on whether fruit flavoured cultured products will ever make serious inroads into the very large volumes of traditional plain cultured dairy products preferred by Arab consumers.
This is the first time Danone has invested in the Middle East dairy business and is the latest development in a trend, which has accelerated over the last five years. Prior to that, the major Western blue chip food companies were more attracted to the Pacific Rim economies. It is now clear that, with the economic meltdown on 1997 in Pacific Rim economies, analysts have increasingly identified the advantages of the Arab World.
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By GlobalDataDuring the last few years, Unilever, Bestfoods, Nabisco, Heinz, Frito-Lay and the New Zealand Dairy Board have all started production of food in the GCC countries) and mostly in Saudi Arabia, which accounts for around two thirds of the GCC population. Coca Cola has returned in a big way. McDonald’s and Burger King have also entered, and it is interesting to note that, of the top ten retail organisations in the World, none is yet represented in the Kingdom of Saudi Arabia (KSA) but, of the top ten food service companies, eight are already active (the only two absent being Aramark Catering of the US and Compass Catering of the UK). Mars Inc. now has flavoured milk made under contract in Saudi Arabia and Kraft, the food arm of US tobacco giant Philip Morris, has introduced locally produced jar cheese. Nestlé has made a heavy investment in ice cream by buying the Galadari operation in Dubai. Valio has begun producing processed cheese in a joint venture in Syria as has Fromageries Bel in Egypt. Moreover, just-food.com has just learned that Fromageries Bel has started having jar cheese produced locally in Saudi Arabia, by SNZMP, the New Zealand Milk Products subsidiary. Whereas formerly, the emphasis was simply on import substitution, there is now much greater interest in forging real alliances and joint ventures with local marketing and market development responsibility.
The international majors have been attracted by such factors as:
- A movement towards greater economic integration in the region (for example, liberalisation of economies and import regimes in Egypt, Syria and Yemen, as well as the settlement of border disputes between Yemen and Oman and KSA)
- Relatively low levels of consumption per capita for dairy products
- The rapid development of pan-regional advertising through satellite television
- Excluding Iraq there is now a contiguous population of around 125 million people, most sharing the same language and cultural beliefs. The GCC itself has a very high rate of population growth so that according to some estimates its population will reach 40 million by 2015. The religious and cultural environment still encourages high birth rates and relatively large families. High birth rates mean that 18-30 year olds account for roughly half of the adult population.
- One of the major achievements of the local dairy industry has been to completely change consumer perceptions of the quality of local food products. In a recent survey, three quarters of Saudi housewives preferred local products against foreign. This would have been unthinkable twenty years ago, when the ascendance of western brands seemed unstoppable.
The following table provides estimates of the top eighteen companies or brands accounting for 80% of the total supply volume to the Saudi dairy market in 1999 according to international marketing strategy consultancy IMES, which specialises in the Middle East and Asia Pacific markets. In that year the market was worth approximately US$2.85bn at retail price levels. The estimated volume of their local production is given in the second column. It should be noted that Lurpak butter is a brand owned by the Danish Dairy Federation and produced by a limited number of Danish manufacturers. If the share of Arla’s Lurpak sold in the KSA were to be added to the Arla Danya total, this would almost certainly make Arla the leading supplier in LME (liquid milk equivalent terms). Similarly the Jamjoom Foremost local recombining producer is a joint venture with Friesland of the Netherlands and the two volumes could be considered together.
The Relative Importance of the Major Suppliers to the Saudi Dairy Market, 1999
Total LME (‘000 tonnes) | Of which Local (‘000 tonnes) | |
| Nestlé | 271 | 0 |
| Almarai | 251 | 158 |
| Danya (Arla) | 227 | 25 |
| SADAFCO | 167 | 167 |
| Fromageries Bel | 153 | 0 |
| Al Safi | 140 | 140 |
| Kraft | 138 | 2 |
| LURPAK brand | 115 | 0 |
| Campina | 114 | 0 |
| NADEC | 113 | 113 |
| NZDB | 78 | 55 |
| National Foods (LUNA) | 55 | 55 |
| United Group (PRIDE) | 55 | 54 |
| WADI FATMA (brand) | 45 | 0 |
| Al Othman | 38 | 38 |
| Jamjoom Foremost | 27 | 27 |
| Halwani | 22 | 22 |
| Friesland | 19 | 0 |
| Total | 2,028 | 856 |
The report “Dairy Products Saudi Arabia 2000” by IMES can now be purchased quickly and easily through our Knowledge Store. For further information about this and related publications and details of how to order Click Here
