Bulk to boutique: road to riches?

Transcription

1 Bulk to boutique: road to riches? Australian Dairy Conference Michael Harvey Rabobank Food & Agribusiness Research February 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 2

3 Our industry has good credentials to extract value High quality/grass fed Sustainable production Traceability Speed and access to market Country of origin branding Value add But so do many of our competitors! 3

4 Has value-add been forced on us? Australian exportable surplus (million litres) 7,000 6,000 Australian milk utilization, 2014/15 5,000 4,000 3,000 2,000 Drinking milk 25% Other 9% SMP/Butter 27% 1,000 0 WMP 8% Source: Dairy Australia, Rabobank Cheese 31% Source: Dairy Australia, Rabobank 4

5 Average EBITDA margin f 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 Financial performance of selected dairy processors South East Asia North America Europe China Brazil Africa Oceania Japan average f average Top 30 listed companies Source: Bloomberg, Rabobank 5

6 Value-add is only one of the levers being pulled to profit add Lion, Parmalat and Norco to building export Parmalat buys Harvey Fresh /Longwarry Food Park Find growth in local market Reengineer export strategies Partnering with offshore customers Improving access to market and distribution Fonterra revamping Australian business Improve milk pricing and farm profitability Murray Goulburn capital restructure Capital raising for investment Value- add strategies Capacity and product mix optimisation Drive defensible returns Operational efficiencies Murray Goulburn and Lion both to strip $100 million from cost base New entrants 6

7 Value add can be quite niche or quite simple? indream is made from melatonin-rich milk collected at night when cows naturally produce increased concentrations of melatonin FrieslandCampina pay suppliers a premium who graze herds outdoors for at least 6hrs a day, 120 days per year 7

8 Millions litres LME Volume vs value bulk comes before boutique Chinese import volumes, milk powder and liquid milk 9,000 8,000 7,000 6,000 5,000 4,000 WMP Liquid milk 3,000 2,000 1, Source: Rabobank 8

9 On the surface export margins look very lucrative Indicative retail price of 1 litre of UHT milk (AUD/litre) Coles private label Devondale Local China brand Imported brand in China Source: Coles Online, Rabobank 9

10 But value-add products attach a layer of cost to the business Cost structure comparison, % of operating costs, bulk milk powder vs branded fresh milk Other 29% Other 46% Raw milk 71% Raw milk 54% 10 Source: PC, Rabobank

11 There are risks and barriers to entry Lack of scale / supply capacity Regulatory/certification hurdles Capital outlay Product development churn Protecting IP/counterfeit 11

12 Netherlands Ireland UK Poland Germany France Denmark Spain Belgium Austria CZ Portugal Italy Finland Hungary Slovenia Slovakia Greece Bulgaria Baltic States Croatia Sweden Romania 000 tonnes EU growth accelerating in the post-quota era Growth in milk production versus pervious year (April-December) Ireland and the Netherlands account for 50% Source: Rabobank analysis 12

13 We aren t alone in our quest to value add Planned investment in new EU processing capacity Cheese 17% Fresh 4% Powders 79% Source: Rabobank China liquid milk imports, , , , , , Germany Australia New Zealand Other 13 Source: Rabobank

14 So how do you measure success?

15 We are seeing a decoupling of farmgate milk returns from volatile commodities. World WMP vs MG vs Fonterra FMP, (A$/kgMS and USD/t) , ,000 3, , , Source: Rabobank analysis 2009/ / / / / / /16f MGC AUD/kgMS Fonterra AUD/kgMS WMP 0 15

16 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 16

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18 Volume Value add can take many forms High Commodity powders ACE Farms Commodity cheese Regional brand owner Superannuation funds Liquid milk Tailored ingredients Nutritional powders Yogurt Specialty cheese Micronutrients Low Low Margin/defensibility High 18