Tony Pititto, national head of food and beverages at Grant Thornton discusses what mid-sized dairy suppliers can do to help their business.
In November 2013, Grant Thornton released ‘Hunger for Growth: Food and Beverage looks to the Future’ which predicted that a key driver of growth for Australian companies in coming years would be exports to South-East Asia and China.
And the growth has begun, with dairy processor Murray Goulburn announcing they will invest $127 million in cheese and infant formula factories in Victoria and Tasmania. The investment is part of the processor’s plans to boost exports, especially value-added cheese and infant nutrition targeting Asia markets.
Murray Goulburn isn’t alone; dairy co-operative Norco has its sights set on exporting 20 million litres of fresh milk to China in the next 12 months and Pactum Dairy Group (PDG) has signed a strategic supply agreement between Shepparton-based PDG and China’s Bright Dairy.
Export
Pititto says the size of the market in Asia and its close proximity to Australia means that it should produce the greatest reward, but before suppliers jump head-first into export, they need to know the market.
Suppliers have to spend time and resources understanding that market before success can come.
They could form joint ventures with overseas partners, where the joint venture partner is already in the market but of course there are risks involved so companies would need to do the proper level of due diligence before joining those joint ventures. Or they may have to relocate some of their better people into those markets. They could also look at industry bodies, such as Austrade, to help them better understand those markets.
Room for more?
Pititto says while there’s room for more suppliers in the export market, suppliers have to be innovative in trying to open up new markets.
One area that’s really grown is powdered milk. That’s an area that’s being exported to Asia where there is a big demand for our product and that has grown over the last five years.
Suppliers also have to have a different product. They have to be able to differentiate their product versus the existing competitor. Secondly, they can develop joint ventures; they need to have their staff on the ground. Finally, if you’re going to offer the same product, then what’s your advantage? The advantage has to either be price – which you’d need to be able to sustain, or speed. You have to offer some point of difference with established competitors.
"One area [in the Asia export market] that’s really grown is powdered milk." Image: alibaba.com
The duopoly
The supermarket price wars have been difficult for dairy producers and suppliers, sometimes forcing suppliers out of the market and into export.
Before suppliers can even try and position themselves to better negotiate with supermarkets, there are a couple of things they need to do first.
Suppliers need to look at their production facilities and make sure they’re state of the art and they’re as low cost of a producer as possible. In a lot of cases that means that they will need to invest in more efficient manufacturing facilities. That might include, for instance, robotic milking machines, but they do need to become more efficient and reduce the costs.
Secondly, they need to look at product innovation and investment in research and development (R&D). It’s about trying to be relevant to consumers. Consumer tastes are changing, whether it is here or abroad and it’s about developing new products and new opportunities.
"It’s a trade-off between higher volumes but at a lower margin from supermarkets, versus lower volumes but at a higher margin." Image: martybou.wordpress.com
It’s not always about supermarkets
Although supermarkets require large volumes from a supplier, it’s not always the most beneficial deal. Pititto says suppliers have got to try to avoid completely relying on supermarkets and should look at alternative avenues such as online.
It’s a trade-off between higher volumes but at a lower margin from supermarkets, versus lower volumes but at a higher margin. The trade-off will be for companies to see whether they’ve got the right mix. Rather than just having one avenue, have a look at alternatives and try to get a better mix so that you may have some product going through the supermarket at a lower margin and some product going at a higher margin through different channels.
Another opportunity is developing joint ventures with downstream manufacturers of dairy products so that they are not just tied to the supermarkets. Dairy farmers can look at forming a joint venture with a food manufacturing company that uses their product to develop another, so that product can then go to offshore markets, it can have different channels such as the foodservice, restaurant chains so they’re not reliant just on supermarkets.
But it’s not all smooth sailing; Pititto says that setting up new distribution channels can be challenging, and initially takes a lot more time and cost to set up.
What’s next?
Pititto says that although times may be tough for dairy farmers, thanks to external factors like the influence of supermarkets and, as we’ve seen in recent years, the high Australian dollar, sometimes the absence of an effective succession plan can be a contributing factor in the close of a farm.
Succession planning is really important. [Suppliers have to ask] when the current owner retires, where’s the succession plan? Have they got proper planning in place so that there are people that are going to come through and continue the business? There’s a number of aspects of succession planning, there’s the physical training, making sure you’ve got the right corporate structure so you can pass the business on, state planning and wealth planning.
With an intensified competition, some businesses aren’t making the cut.
Over the last 12 months there have been a number of dairy companies that have gone out of business so there has been a shrinking of the number of companies operating in the dairy industry, especially in Victoria and New South Wales. A lot of the smaller dairy participants have left the industry.
While there’s no specific formula to success, it’s essential for suppliers to continually innovate, and do their best to stand on their own two feet.