Arla Foods, the European dairy giant, saw sales and profits slide in 2015, a year that proved challenging for a number of the companies in the sector. However, the Lurpak and Castello owner described its performance as “robust”. In part one of a two-part interview, Dean Best speaks to Arla CFO Natalie Knight about the co-operative’s results.
There is little doubt 2015 was a difficult year to be operating in the dairy sector. In April, EU quotas on dairy production were lifted, adding to global milk output at a time when China and Russia were demanding less. The economic slowdown in China depressed demand for a range of commodities, which, combined with Moscow’s continued embargo on a range of food products including dairy, meant a larger pool of milk was looking for customers at a time when two of the sector’s largest were less present in the market.
Amid such challenging conditions, Arla Foods – the seventh-biggest dairy company worldwide by sales, according to Rabobank – saw its revenues and earnings fall.
Sales fell 3.3% to EUR10.3bn (US$11.3bn), which Arla said was “fully” in line with expectations. Net profit dropped to EUR295m, compared to EUR300m last year. The co-operative performance price, which measures the value Arla has generated per kilo of milk, fell to 33.7 cents per kilo, versus 41.7 cents per kilo last year.
The co-operative increased its milk volumes during 2015 by approximately 622m kilos to 14.19bn kilos and, in a sector where overall production rose, sought to divert more of its output into branded dairy products and into the foodservice channel.
The retail and foodservice channels already account for over 78% of Arla’s sales but the company’s focus last year of targeting its increased pool of milk at those sectors, rather than selling its milk in the lower-margin commodity markets, was critical in bolster the group’s performance in challenging conditions, CFO Natalie Knight tells just-food.
“We brought in 622 million additional kilos of milk and I think at most companies you would have seen all of that go to trading. For us being able to hold that same percentage – it’ll be very close to the same percentage as the prior year – is important for us,” Knight says. “We do have a good 11 [euro] cent differential in terms of what we’re being able to get in that channel versus trading. We know by just taking that incremental milk and putting it in retail and foodservice, versus letting it go into the trading channel, we generated over 55 million euros of incremental profits within the group.”
Knight, who joined Arla at the start of the year from sportswear giant Adidas, said the dairy group had “for the first time in many years” been able to increase the proportion of its sales generated through branded products in 2015, from 41.2% in 2014 to 42.1% last year. The strategy, she says, is a means of helping the co-operative’s margins. “We’re really trying get everything we can into the retail and foodservice piece as opposed to trading – then looking at making that as branded as we can get it,” she says.
When Arla announced its results for 2015, the company emphasised how it had sought to at least maintain its market share in its European markets. Knight says the co-operative “gained share” in each of its European markets, “with the biggest gains” coming in the UK, its largest.
However, Arla – perhaps unsurprisingly – had another tough year in Russia. When Moscow slapped an embargo on EU dairy products in August 2014, Arla was one of the first companies to outline the impact on its business, with 79 jobs in Denmark cut as a result of the lost sales. The Kremlin’s restrictions on imports are still in place and, despite Arla having some local production in Russia, last year was another in which the company came under pressure. “We certainly lost share in Russia, but every European brand did as well,” Knight says. She says Arla’s revenues in Russia stood at around EUR40m last year, compared to the pre-embargo level of almost EUR150m.
Could Arla look to increase its local production base in Russia? Arla flagged how important it still believes Russia is to its long-term prospects in December, when the company included the country in a list of six “market regions” on which it will focus its “growth ambitions”. Knight says: “We don’t make any comments on acquisitions or opportunities until they’re very concrete [but] what I would say about that is I don’t think that’s being actively pursued at the moment,” Knight says. “Our expectation is that that embargo is not going to be in place forever and we’re certainly very well positioned to support the market when it does open back up.”
Arla enjoyed double-digit growth from consumer products in three of its six key market regions in 2015. In the US, where the bulk of Arla’s business is in cheese, sales were up 14%. Last month, Arla added cream cheese to the range of products it sells in the US. Knight says the company believes the new cream cheese will be “our big growth engine” in the market.
In the Middle East and North Africa, sales of consumer products were up 20%. Arla saw growth from global butter brand Lurpak, as well as local dairy products brand Puck, while the company also felt the benefit of the start of its venture in Egypt with local dairy business Juhayna Food Industries.
In China, Arla grew its consumer-facing sales by 50%. The company has a local partnership with Chinese dairy Mengniu, through which the businesses sell dairy products from Europe. Arla is also a shareholder in Mengniu. Knight says Arla is working with Yashili International, the Chinese infant formula business majority-owned by Mengniu.
Another of Arla’s six priority geographic areas is Nigeria, which the group sees as central to its ambitions for the wider sub-Saharan region in Africa. Knight concedes the company had “some practical issues” with the start of its new venture with local distributor Tolaram but said it had “a very strong Q4” once the transition to the partnership was made. “We’re pleased with that growth,” she adds.
Check back in the coming days for part two of our interview with Knight, in which she sets out how Arla believes it will perform in 2016 and discusses the company’s Strategy 2020 programme, the initiative launched in December to drive its longer-term growth.