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
million litres
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.

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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
million litres
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

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.