Dairy has proved one of the food industry’s more colourful sectors in recent years with volatile prices, rising production costs and the emergence of buoyant emerging markets keeping processors on their toes. Arla Foods, Europe’s second-largest dairy group, has set out its stall for international growth in this ever-evolving landscape. In this month’s just-food interview, Dean Best spoke with Arla CEO Peder Tuborgh to find out more about Arla’s ambitions.

While the global dairy sector remains in a state of flux, one of the industry’s heavyweights, Arla Foods, is looking to flex its muscles.

The only certainty in the dairy market at the moment is uncertainty. Following last year’s record dairy prices, a combination of increased supply and lower consumer demand has hit prices in 2008. According to food industry analysts Rabobank, prices are expect to bounce back some time in 2009 as global demand recovers and dairy consumption in the world’s emerging markets continues to grow.

However, the roller-coaster nature of dairy prices only serves to illustrate the volatility in the sector. Combine that with the spectre of increased production costs and the challenges for those that operate in the dairy sector are plain to see. Some dairy processors, like the Dutch giants Campina and Friesland Foods, have looked to join together to combat that volatility and industry watchers believes further consolidation in the sector is on the cards.

Arla, the Danish-Swedish co-operative, is not standing still. Last month, the company, Europe’s second-largest dairy group, unveiled a five-year global strategy for the business. A focus on fewer markets, including those where dairy consumption has been buoyant, including China, and greater investment in product innovation are among the initiatives Arla believes will strengthen the business and improve returns for its farmer-members.

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The company plans to double its investment in product innovation, while consolidating its brands into three “strong, global brands” – Castello, Lurpak and a new namesake brand. Arla is also looking to double its worldwide sales of whey protein.

For Arla CEO Peder Tuborgh the programme is vital. The 45-year-old joined Arla in 2000 in the wake of the company’s merger with fellow dairy group MD Foods, where he had worked since 1987.

In almost a decade at Arla, Tuborgh has seen a great deal of milestones, not least the 2003 merger of its UK business with Express Dairies. However, Tuborgh, who has been in charge of Arla since 2005, believes the five-year plan unveiled last month is a watershed moment in the company’s history.

“It is the most ambitious strategy, and also one of the most visionary strategies,” Tuborgh tells just-food. “We are now ready to look at all solutions that will strengthen the company for the benefit of our owners. We are ready to shift our current focus on brands and markets, open doors to new owners, and invest more in less brands and markets.”

The maker of brands including Castello cheese, Lurpak butter and Cravendale milk sells into around 100 markets worldwide but Tuborgh believes the time is right for Arla to take stock of its global presence and divert resources to key markets. “The main reason for our new and redefined focus on our international markets is a realisation that we get more out of our investments by focusing those investments on fewer markets,” Tuborgh says.

Arla CEO Peder Tuborgh

Arla has earmarked three so-called “seed” markets for particular attention. Russia, where Arla has a fledgling cheese and butter venture, the US, where the company has a growing cheese business and China, where the group runs a venture with local dairy group Mengniu, have been identified as key to the company’s international growth.

“Any future Arla investments internationally will be focused on these three markets – that way we can benefit more from the investments,” Tuborgh says. “We cannot be everything to everyone on all markets and this new strategy seeks to maximise our impact by prioritising and categorising our world map. Arla is present on approximately 100 markets worldwide, so the need to create a sharper overall focus has been evident.”

One of the company’s immediate areas of focus is likely to be China, where its venture was one of the dairy businesses caught up in the recent melamine-in-milk contamination scandal. Arla’s Chinese partner Mengniu was named as one of the dairies at the centre of the melamine outbreak, which saw at least four babies die and thousands become ill after consuming milk powder contaminated with the industrial chemical melamine. The scandal rocked China’s buoyant dairy sector, which has enjoyed rising milk consumption and attracted growing interest from multinational investors. The worry is just how China’s growing love for dairy will be affected by the scandal. Tuborgh, however, is cautiously optimistic about the future of one of the markets central to Arla’s international ambitions.

“Regaining consumer confidence is without doubt the absolute number one priority for us in China right now. And we believe it will happen – our expectations are to return to normal sales levels by the end of 2009,” Tuborgh insists. “Our advantage is that we offer products which have been through an extensive testing for melamine, which means we can offer the consumers products that are safe to consume. That being said, the development of the market in China has been set back by the unfortunate incidents this year. Over the long term, we do not doubt that dairy production has great prospects in China in the future.”

Tuborgh also sees opportunities closer to home. Under Arla’s review, Germany and Poland have joined the company’s “core” markets of Finland, Denmark, Sweden and the UK. Tuborgh keeps his cards close to his chest but the signs are that Arla will take an active role in the widely-expected consolidation in the European dairy sector.

“Although we cannot mention any specific names of potential partners at this point, we can say that Arla is currently searching the market for potential partners with whom we can either set up some sort of collaboration with regard to local production and distribution or possibly buy other companies,” Tuborgh reveals. “Arla expects to play an active role in the consolidation of the dairy sector in Northern Europe in the next five years. At this point, we cannot get more specific about the nature of possible alliances, but we have identified both Germany and Poland as two new core markets for our business.”

Milk production is set to rise “significantly”, Tuborgh says, and he sees it as vital that Arla is ready to pounce should opportunities for acquisitions or alliances arise.

“We foresee a significant increase in milk production across this Northern European region, and our response to this must be to take part in that actively through consolidation. Growth is essential to success on the international dairy market today, and Arla simply cannot sit back and watch passively as new opportunities present themselves,” Tuborgh insists.

With Tuborgh in charge, such a notion is very unlikely indeed.