Executive Briefings

There's Money in Dairy, But Growth Areas Are in Least Developed Markets

With $500bn in global sales, dairy was the biggest, fastest revenue-generating category in the food and beverage sector in 2015. But in value creation, the industry lags. Its inherent supply chain, market, and regulatory complexities, along with intense competitive pressures, mean there is no simple formula for profitable growth, according to a report from The Boston Consulting Group (BCG).

There's Money in Dairy, But Growth Areas Are in Least Developed Markets

Annual profit growth of dairy companies was almost half that of food and beverage companies overall (5 percent versus 9 percent) from 2009 through 2014, as the report, Four Strategies for Creating and Sustaining Value in Dairy, notes.

Although revenue projections are rosy -- analysts expect sales of $800bn by 2020 -- no company can expect to win on rising demand alone. The sector's many regional idiosyncrasies (such as fragmented supply and radically different retail channels) make competing on a broad scale a particular challenge.

"Dairy is still a two-speed world," said Marc Gilbert, a BCG partner and coauthor of the report. "In mature markets, overall growth is anemic (though certain subcategories are gaining ground). But in developing markets, consumption is growing faster than GDP." China, the Middle East, and Southeast Asia will account for 75 percent of the 10 percent annual volume growth projected over the next five years.

Yet as promising as emerging markets may be, many lack a so-called cold chain to ensure freshness and safety in the supply. Many also lack fully developed retail channels and have a hard-to-reach rural consumer base.

For any dairy company -- whether a global entity, regional cooperative, or niche upstart -- creating value today calls for a two-pronged approach. Companies must have in place the "table stakes" -- fine-tuned, optimized operations and efficiencies across the entire value chain. In addition, they need to choose the right value-creating strategy that will put them on a course to sustainable growth.

Master the Table Stakes
The report cites three table stakes essential to success. First, companies must nail upstream supply management. Whether it's ensuring quality feed for dairy cows, importing powder, or instituting rigorous quality controls, quality supply is critically important.

Lack of it can hurt consumers and brands, as the 2008 melamine contamination did in China.

Because margins in dairy are thin, cost controls and other efficiencies are also essential. Companies can streamline operations in any number of ways, such as by improving plant operations, reducing business complexity, and using digital technologies (robotics and warehouse automation systems, for example) to increase supply chain efficiencies.

Finally, companies must have an efficient go-to-market strategy. "In emerging markets, this means building a reliable distribution network to ensure freshness, based on the retail channel structure," said Jeff Gell, a senior partner at BCG and coauthor of the report. "But it can also mean choosing a product strategy that works around the absence of infrastructure." In mature markets, where the retail landscape is rapidly and widely diversifying, it means keeping close tabs on challenges and opportunities.

Then Choose the Right Value-Creating Strategy
The report identifies four core value-creating strategies that dairy companies can adopt to grow profitably.

• Seek opportunities in emerging markets. Doing so requires insulating the company from supply interruptions. For distribution, a company should either target the largest cities with premium products or invest in a go-to-market network with reach. Competing with incumbents calls for investing in branding.

Pursue M&A and strategic partnerships. Several of the industry's top performers grew through aggressive merger programs between 2009 and 2015 -- and two leading producers more than doubled revenue in this way. A company's M&A moves should align with its strengths and capabilities, and above all, with its growth strategy. "If you want to be a low-cost producer," said Gilbert, "divest the niche businesses, which can be a costlier distraction. But if innovation is your goal, consider losing the commodity lines that will only drag down your margin." Partnerships have helped some entities gain a foothold in emerging markets, trading off their manufacturing or supply chain know-how with the local provider's consumer knowledge and market access.

• Shift to higher-margin products. Companies might consider radically repositioning their entire portfolio to higher-margin products or actively pruning out low-performing products and categories. Whatever the approach, shifting to higher-margin products calls for constantly monitoring the portfolio, because the margin levels of any given product category vary from market to market -- and can shift over time.

• Innovate. Whether it involves creating a new product or format (such as ready-to-drink coffee) or seizing on a growing trend (dairy alternatives), many companies have achieved profitable growth through this strategy. But innovation can't be a sometime practice. "New products that seize market share usually only hold on to it for about a year before competitors threaten the leader," said Gell. "If you choose this route, be prepared to make innovation a priority – a practice you ingrain into the everyday culture."

Source: Boston Consulting Group

Annual profit growth of dairy companies was almost half that of food and beverage companies overall (5 percent versus 9 percent) from 2009 through 2014, as the report, Four Strategies for Creating and Sustaining Value in Dairy, notes.

Although revenue projections are rosy -- analysts expect sales of $800bn by 2020 -- no company can expect to win on rising demand alone. The sector's many regional idiosyncrasies (such as fragmented supply and radically different retail channels) make competing on a broad scale a particular challenge.

"Dairy is still a two-speed world," said Marc Gilbert, a BCG partner and coauthor of the report. "In mature markets, overall growth is anemic (though certain subcategories are gaining ground). But in developing markets, consumption is growing faster than GDP." China, the Middle East, and Southeast Asia will account for 75 percent of the 10 percent annual volume growth projected over the next five years.

Yet as promising as emerging markets may be, many lack a so-called cold chain to ensure freshness and safety in the supply. Many also lack fully developed retail channels and have a hard-to-reach rural consumer base.

For any dairy company -- whether a global entity, regional cooperative, or niche upstart -- creating value today calls for a two-pronged approach. Companies must have in place the "table stakes" -- fine-tuned, optimized operations and efficiencies across the entire value chain. In addition, they need to choose the right value-creating strategy that will put them on a course to sustainable growth.

Master the Table Stakes
The report cites three table stakes essential to success. First, companies must nail upstream supply management. Whether it's ensuring quality feed for dairy cows, importing powder, or instituting rigorous quality controls, quality supply is critically important.

Lack of it can hurt consumers and brands, as the 2008 melamine contamination did in China.

Because margins in dairy are thin, cost controls and other efficiencies are also essential. Companies can streamline operations in any number of ways, such as by improving plant operations, reducing business complexity, and using digital technologies (robotics and warehouse automation systems, for example) to increase supply chain efficiencies.

Finally, companies must have an efficient go-to-market strategy. "In emerging markets, this means building a reliable distribution network to ensure freshness, based on the retail channel structure," said Jeff Gell, a senior partner at BCG and coauthor of the report. "But it can also mean choosing a product strategy that works around the absence of infrastructure." In mature markets, where the retail landscape is rapidly and widely diversifying, it means keeping close tabs on challenges and opportunities.

Then Choose the Right Value-Creating Strategy
The report identifies four core value-creating strategies that dairy companies can adopt to grow profitably.

• Seek opportunities in emerging markets. Doing so requires insulating the company from supply interruptions. For distribution, a company should either target the largest cities with premium products or invest in a go-to-market network with reach. Competing with incumbents calls for investing in branding.

Pursue M&A and strategic partnerships. Several of the industry's top performers grew through aggressive merger programs between 2009 and 2015 -- and two leading producers more than doubled revenue in this way. A company's M&A moves should align with its strengths and capabilities, and above all, with its growth strategy. "If you want to be a low-cost producer," said Gilbert, "divest the niche businesses, which can be a costlier distraction. But if innovation is your goal, consider losing the commodity lines that will only drag down your margin." Partnerships have helped some entities gain a foothold in emerging markets, trading off their manufacturing or supply chain know-how with the local provider's consumer knowledge and market access.

• Shift to higher-margin products. Companies might consider radically repositioning their entire portfolio to higher-margin products or actively pruning out low-performing products and categories. Whatever the approach, shifting to higher-margin products calls for constantly monitoring the portfolio, because the margin levels of any given product category vary from market to market -- and can shift over time.

• Innovate. Whether it involves creating a new product or format (such as ready-to-drink coffee) or seizing on a growing trend (dairy alternatives), many companies have achieved profitable growth through this strategy. But innovation can't be a sometime practice. "New products that seize market share usually only hold on to it for about a year before competitors threaten the leader," said Gell. "If you choose this route, be prepared to make innovation a priority – a practice you ingrain into the everyday culture."

Source: Boston Consulting Group

There's Money in Dairy, But Growth Areas Are in Least Developed Markets