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October 28, 2014

SIAL 2014: Interview: Danish Crown eyes growth in international, organics

Danish Crown is grappling with a world meat market marked by the Russian import ban and weaker European demand. In response, the Danish co-operative plans to use its global footprint, on the one hand, while capitalising on growth areas such as increasing consumer interest in organics, on the other. Katy Askew spoke to Henrik Biilmann, MD of Danish Crown's organic arm Friland, to find out more.

Danish Crown is grappling with a world meat market marked by the Russian import ban and weaker European demand. In response, the Danish co-operative plans to use its global footprint, on the one hand, while capitalising on growth areas such as increasing consumer interest in organics, on the other. Katy Askew spoke to Henrik Biilmann, MD of Danish Crown’s organic arm Friland, to find out more.

Danish Crown, the farmer-owned meat co-operative, is facing challenging conditions in its core European markets, where selling prices are depressed on lacklustre demand in the region.

The situation has been compounded by the Russian trade ban. Import restrictions were first introduced in February due to outbreaks of swine fever in wild boar in Poland and Lithuania. The import ban took on a political aspect this summer, as tensions between Russia and the bloc escalated over Russia’s involvement in the Ukraine.

According to Henrik Biilmann, the managing director of Friland – Danish Crown’s organic arm – the impact of the Russia ban has been “substantial” in terms of group turnover.

“It is a large [volume] of pork that we need to find a home for elsewhere in the world,” Biilmann tells just-food.

“Pork prices in Europe have gone down quite significantly. As you know, Danish Crown is a co-operative. Our owners are the farmers and how we pay them is our kilo price to them. That has gone down by around 15% in the past two months.”

In the long-term, Biilmann says Danish Crown’s farmer shareholders “will not be able to absorb” this pricing pressure. “This is very critical to a lot of farmers… If there are no solutions to this – either finding new markets or that Russia opens again – farmers could [go out of business].”

However, Biilmann suggests Danish Crown will be able to benefit from a number of competitive advantages, not least its broad geographical base, to shore up pig prices for its members.

“We operate all around the world. You could look to the Asian markets, you could look to South American markets. It is about finding new markets and about finding new customers in the markets that we operate in. That is an advantage that the Danish Crown group has – we have a global network and we sell and manage to ship products to anywhere in the world basically.”

The company already has a “good foothold” in China, where it has four offices. The co-operative will look to step up growth in such markets, Biilmann suggests.

“That is a thing you can hope for – that the growth you see in China will help to absorb what used to go to Russia. But that is for the long term,” he stresses.

The need to develop frozen capacity and grow distribution mean far-flung export markets in Asia and the Americas are a long-term burn, Biilmann continues. The company must also look to grow its core business in northern Europe.

An area of “substantial” growth for Danish Crown in Europe can be found in the organic sector, for which Biilmann is responsible.

“We have seen very strong growth – we are talking double digit [over the last two years] and in the area of 15% of our turnover in the last year.

“Our largest [markets for organic meat are] first of all our home market – in Denmark – then in France, where we are seeing very large sales growth, Germany and Holland, where we are seeing not so much on pork but more in beef. It is basically across our main markets. And then we have smaller markets. Sweden could be a bigger market for us than it is today. We do see good potential there and high interest in organic and free range. It is Europe – tending to be northern Europe – where we see the most growth.”

According to Biilmann, through much of northern Europe, demand for organic products has not been dampened by the weak macroeconomic environment and down consumer sentiment that has characterised recent years.

“Maybe we saw a slowing of the growth. But we didn’t see a recession of sales, which continued to grow during the financial crisis. The exception [to this was] the UK. The UK market – and the organic market in the UK – has really turned down. It seems now that it is coming up again, but it is from a low base.”

Elsewhere in Europe, the picture is brighter. “In the European market there is a growing interest in organic in general. That is of course falling back to us. There is more interest in total in products and concepts that are offering some kind of differentiation. In our case it is animal welfare, whether it is free range or organic. It is offering something extra and more and more consumers are choosing to buy into it.”

A business generating double-digit sales growth in markets that are as stable as northern Europe represents a promising prize for any FMCG firm. And Danish Crown is believes it can step up growth in the organic sphere by expanding its market share, Biilmann says.

“It absolutely is a very promising area for Danish Crown. When looking at market share, for example, in the Danish market share in pork – we have 2% of the market share at the moment. Why not 4%? Why not 6%? Which would be really really good for us. And it is possible.”

Demand growth for organic meat in northern Europe is outstripping the rate at which supply increases – a factor that could ultimately put a cap on organic meat sales for the Danish co-op. “We do have trouble with supply keeping pace with demand,” Biilmann concedes.

It takes two years for a conventional farm to convert to certified organic production. During this time, farmers are not paid a higher price for meat that costs more to produce and they must also absorb all the costs associated with switching to organic. This can be a significant barrier to increasing levels of organic production, Biilmann says.

“The farmers are having trouble financing either growing their current organic production or stepping into production. Banks and other financial institutes in times like these are a bit more conservative than usual. That is maybe where we are feeling the most the financial constraints.”

In order for farmers to convert to organic production, Danish Crown has to show it is worth their while.

“There needs to be quite substantial price differentiation,” Biilmann observes. “What we can do or show over a long period is that there is good economical sense in this. It not only makes sense for the animals or the environment but it is a business. I see that as my task. Organic is not just for a few hippies now – it is actually a business and a living.”

While Danish Crown hopes to demonstrate the benefits of switching to organic production over the long term, the co-operative is hesitant to provide short-term financial help to farmers.

“There is a very clear line in the sand. Because we are a co-operative we have to be careful not to support some farmers and not others. It is actually quite difficult for us to help finance or offer loans. What we sometimes to to help farmers getting started is to help finance the first round of pigs, getting started in production.”

Nevertheless, with demand for organic meat growing apace, it would seem all members of the co-op could feel the shared benefits of higher organic production.

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