European dairy co-operative Arla Foods has set out an ambitious growth plan for its Russian business. The firm has indicated it intends to triple sales in the country. Katy Askew caught up with Arla senior vice president Hans Christensen, who has overall responsibility for Russia and other emerging markets, to find out how.
Arla Foods has signalled its intention to rapidly develop its presence in emerging markets. In order to deliver long-term value to its farmer shareholders, the dairy co-operative has acknowledged it must expand in high-growth areas of the global dairy sector.
These plans were laid bare at the start of the year, when Arla unveiled its Strategy 2017.
Arla aims to reduce its reliance on the stagnant, competitive and saturated European markets where its strength lies and seek out new growth spaces in emerging markets in order to swallow the anticipated jump in milk production in the wake of the abolition of EU milk quotas in 2015. In particular, the Denmark-based dairy giant has indicated it plans to take full advantage of dairy market potential in Russia, North Africa, the Middle East and China.
Arla is targeting a threefold increase in Russian revenue by 2017, up from the DKK600m (US$105.7m) the company generates in the country.
To achieve that goal, Arla will need to generate strong organic growth in the market, regional head Hans Christensen tells just-food. Arla’s organic growth rate – sales of products produced in Europe and imported to Russia – stands at about 25%. Arla is growing its key global brands – Lurpak butter, Castello cheese and Arla Natura – ahead of the market as a whole. According to research from MarketLine, the Russian dairy market had total revenues of US$14.2bn in 2011, representing a compound annual growth rate of 10.6% between 2007 and 2011.
“We are gaining significant market share right now, as we speak. With that organic growth rate we are outperforming the market several times,” Christensen says.
“We will gain share. We have done that for many years. We are now market leader in white cheese. It is a smaller category, it is not a big volume category, but we are are the market leader. We are also market leader in Russia in the mould cheese area.”
Arla is now looking to beef up its presence in Russia’s high-volume yellow cheese category, Christensen explains. “Our next target is yellow cheese: we need to be more focused on the real volume and scale drivers, which is the butter area and yellow cheese.”
Arla has entered into a contract manufacturing agreement with the country’s third-largest dairy concern, Molvest Group, to build a cheese manufacturing facility. The site will initially produce havarti cheeses, but will expand to make other yellow cheese products “over time”, Christensen suggests.
“We go into commercial production in November. [Local production] will definitely be a big part of our growth in the future, together with the imported part of our business. They are going to complement each other,” Christensen says.
“The whole idea of having local production is to be able to increase our product offering with different types of cheeses, while continuing what we have always done – exporting to Russia. We will have a bigger yellow cheese portfolio that will make us significantly more interesting to Russian retailers. That is the future.”
As Arla expands its product offering, Christensen expects to increase distribution in Russia. “A broader range will allow us to increase distribution because we will be forging stronger links with retailers,” he predicts.
Arla has taken a regional approach to expansion in Russia – first targeting larger cities of a million or more people, then expanding distribution into smaller cities.
“We plan to scale up and become more and more available for consumers in the bigger cities. We started three years ago with this regional strategy, aiming at having distribution and people on the ground in cities of one million people. We have achieved that and now we are going for those cities between 700,000 and one million inhabitants. We are expanding city by city, that is our regional strategy.”
However, Arla is not moving into virgin territory and competition at a local and federal level is intense, Christensen says.
“On a federal level, there are the local [manufacturers] like Wimm-Bill-Dann, which is owned by PepsiCo, as well as other importers, like Valio from Finland. It is a very competitive category and there are many local suppliers in the market. They are not federal, but you always meet strong competition from local players around the regions of Russia.”
While competition does result in some downward pressure on pricing, Christensen says Arla is able to compete on both price and brand building.
“Our price positioning is in what we call lower premium. We are not the most expensive brand – we are not in the high premium, low volume area,” he insists.
This stratum of the category is benefiting from the growth of Russia’s middle class, Christensen continues. “A lot of Russian consumers trade up to us because the middle class grows and grows and grows in Russia.
“More and more people demand products with a high degree of food safety. Scandinavia has really strong limits about that. Clean environment, clean products, natural, healthy, etc, etc. We of course benefit from that.”
Arla’s growth strategy in Russia also sees the dairy co-operative on the look out for local acquisitions, Christensen reveals. “We are still investigating the market for acquisitions. To treble Russian sales, some parts of that strategy will need a greater local presence and, yes, we are perusing targets. Targets are primarily within the core area of our strategy, which is yellow cheese.”
While Arla is investing in building scale and driving revenue growth in Russia, Christensen adds the Russian business must be self sustaining.
“We have to make money and fuel our own growth and pay for our own growth… There must be enough profit that we can continue to invest in our strategic roll out. When you start to open up the regions, you need people in the cities. That adds a huge cost. On the other hand, we also need to invest in our brands – the Arla Natura brand, the Costello brand, the Lurpak brand. If there is something left when the day is over, absolutely. But if you asked me to prioritise, we are there for volume, revenue and market share.”
This is the short-term target, Christensen says. However, in the long term he has his sites set firmly on generating long-term returns to Arla’s farmers.
“When the day is over it is important that we add value to our farmers and our owners. We are a co-op. We are owned by farmers. And everything I do is to deliver as much value as possible for our owners so that the milk price is at the right level that they are satisfied with. That is my task.”