bulk to boutique: road to riches? · branding value add but so do many of our competitors! 4 has...
TRANSCRIPT
Australian Dairy Conference
Bulk to boutique: road to riches?
Michael HarveyRabobank Food & Agribusiness ResearchFebruary 2016
2
A dictionary definition of ‘value add’
“…an improvement or addition to
something that makes it worth more”
Extract value
• Country of origin branding
• Leveraging safety, quality and integrity of product
Add value
• Taking numerous forms
• Product, packaging and process innovation
3
Our industry has good credentials to ‘extract’ value
High quality/grass
fed
Sustainable production
TraceabilitySpeed and access to market
Country of origin
brandingValue add
But so do many of our competitors!
4
Has value-add been forced on us?
Source: Dairy Australia, Rabobank
Australian exportable surplus (million litres)
SMP/Butter27%
WMP8%
Cheese31%
Drinking milk25%
Other9%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Australian milk utilization, 2014/15
Source: Dairy Australia, Rabobank
5
Profit add is a common goal amongst dairy processors
2 key reasons:
Cost of doing business are higher here than global peers due to high labour and overhead costs
Competition for milk supply among these processors is intense
Source: Bloomberg, Rabobank
Financial performance of selected dairy processors
0
2
4
6
8
10
12
14
16
18
South EastAsia
NorthAmerica
Europe China Brazil Africa Oceania Japan
Ave
rag
e E
BIT
DA
ma
rgin
20
08
-14
f
2008-2014 average 2008-2014f average Top 30 listed companies
6
Value-add is only one of the levers being pulled to ‘profit add’
Find growth in local market
Reengineer export strategies Partnering with
offshore customers
Capital raising for investment
Improve milk pricing and farm profitability
Value- add strategies
Operational efficiencies
Parmalat buys
Harvey Fresh
/Longwarry Food
Park
Fonterra revamping
Australian business
Improving access to
market and distribution
Murray Goulburn
capital restructure
Lion, Parmalat and Norco to
building export
Capacity and product mix
optimisation
Drive defensible returns
Murray Goulburn and Lion both to strip
$100 million from cost base New entrants
7
Value add can be quite niche … or quite simple?
FrieslandCampina pay suppliers a premium
who graze herds outdoors for at least 6hrs a
day, 120 days per year
iNdream is made from melatonin-rich milk
collected at night when cows naturally
produce increased concentrations of
melatonin
8
Volume vs value – bulk comes before boutique
Source: Rabobank
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Mill
ion
s lit
res
LM
E
WMP Liquid milk
Chinese import volumes, milk powder and liquid milk
9
On the surface export margins look very lucrative
Source: Coles Online, Rabobank
Indicative retail price of 1 litre of UHT milk (AUD/litre)
0.00
1.00
2.00
3.00
4.00
5.00
Coles private label Devondale Local China brand Imported brand inChina
10
But value-add products attach a layer of cost to the business
Source: PC, Rabobank
Cost structure comparison, % of operating costs, bulk milk powder vs branded fresh milk
Raw milk71%
Other29%
Raw milk54%
Other46%
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There are risks and barriers to entry
Lack of scale / supply capacity
Regulatory/certification hurdles
Capital outlay
Product development churn
Protecting IP/counterfeit
12
-200
0
200
400
600
800
1000
Net
her
lan
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Irel
and
UK
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Ger
man
y
Fran
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Den
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Sp
ain
Bel
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Au
stri
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CZ
Po
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Ital
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Fin
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Hu
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Slo
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Slo
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Gre
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Bu
lgar
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Bal
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Sta
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Cro
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Sw
eden
Ro
man
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‘00
0 t
on
nes
EU growth accelerating in the post-quota era
Growth in milk production versus pervious year (April-December)
Source: Rabobank analysis
Ireland and the Netherlands account for 50%
13
We aren’t alone in our quest to value add
Powders79%
Cheese17% Fresh
4%
Planned investment in new EU processing capacity
China liquid milk imports, 2009-2015
0
100,000
200,000
300,000
400,000
500,000
2009 2010 2011 2012 2013 2014 2015
Germany Australia New Zealand Other
Source: Rabobank
Source: Rabobank
15
We are seeing a decoupling of farmgate milk returns from volatile commodities….
Source: Rabobank analysis
World WMP vs MG vs Fonterra FMP, (A$/kgMS and USD/t)
0
1,000
2,000
3,000
4,000
5,000
0.00
2.00
4.00
6.00
8.00
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16f
MGC AUD/kgMS Fonterra AUD/kgMS WMP
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Summary and conclusion
Australia has good credentials to play the ‘value add’ game
Playing the game requires investment, comes with risk and presents hurdles
The competitive environment in ‘value add’ is intensifying
A strong point of difference is critical to defensibility – quality and brand strength is key!
Profit gains for successful value adding will be shared along the supply chain
And there is no guarantees of success…
But early evidence suggests strategies are working to de-commoditize farmgate returns
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