Posted on 03 February 2010.
Having been forced by the severe economic environment in 2009 to make cuts across its business, Arla Foods has substantially increased its investment budget for 2010 to DKr1.84 billion (Eur250 million) as the Scandinavian dairy giant again focuses on expansion.
In addition to marketing expenditure to drive sales growth, the investment budget has earmarked funds for significantly expanding capacity and ongoing efficiency improvement measures. Arla Foods will spend almost DKr920 million – nearly half of the total budget – on increasing capacity and making structural adjustments in 2010. This is double last year’s investment level and equivalent to about 4% of projected turnover. The dairy group is seeking to increase 2010 turnover by 2-3% to DKr47 billion.
The decision to invest in expansion this year makes a change from the retrenchment of 2009, when the focus was on cost reduction.
PederTuborgh, chief executive of Arla Foods.
“The objective is to achieve the highest possible milk price for our farmers in a very price conscious market with substantial and rapid fluctuations. During the past year, we have put considerable effort into the savings programme and have been dealing with the implications of the global economic situation. During 2010, we will again show our customers, and consumers, across the world what Arla stands for and what we can and want to achieve,” explains Peder Tuborgh, chief executive of Arla Foods.
Driving Sales and Profits
A 30% hike in marketing expenditure is designed to fuel sales and profits. Investment behind Arla Foods’ global brands, Lurpak butter and Castello cheese, will be intensified as will support for the Arla brand and the Closer to Nature concept, as the dairy giant continues to concentrate on shifting processing from industrial to value added products, so reducing its reliance on commodity markets.
Of course, the anticipated growth in sales and profits will require a corresponding increase in production of value added products and consequently an expansion of capacity.
New investments commencing during 2010 include the construction of a new drying tower at Denmark Protein Nr Vium and the expansion of yellow cheese capacity to 44 million kg per annum. The largest single amount, however, is the allocation of DKr182 million for the completion of the expansion to Arla Food’s Stourton dairy in the UK.
In conjunction with investing heavily in expanding production capacity and making associated structural adjustments, Arla Foods will also continue to implement the group-wide DKr1b cost savings programme, including 250 redundancies, launched in the spring of 2009 as it maintains its focus on efficiency. Indeed, it is imperative that costs are kept at 2009 levels.
Focus on Adding Value
As a co-operative, Arla Foods’ priority remains the price paid to milk producers, whose earnings are under pressure. In 2009, 31% of Arla’s raw milk went to industrial products but the aim is to cut this proportion to 27% as sales of processed products are crucial in order to achieve the highest possible milk price for dairy farmers. “Our focus is to continue to add more value to our milk and to continue to work towards achieving our growth target for 2015 of DKr75 billion, and we will not achieve this without significantly expanding our capacity,” says Peder Tuborgh.
Reflecting its strategy of adding value to its milk, Arla Foods has just formed a partnership with Starbucks, one of the world’s largest coffee brands, to enter the ready-to-drink coffee market in Europe.
Arla Foods was formed in 2000 through the merger of two dairy farmer co-operatives – Arla of Sweden and MD Foods of Denmark. Arla Foods has production facilities in 12 countries – Denmark, Sweden, the UK, Finland, the US, Canada, Argentina, Brazil, Poland, Germany, Saudi Arabia and China – and its products are sold globally, although its two main markets are Scandinavia and the UK. Arla Foods is one of Europe’s leading dairy processors and also ranks within the top ten globally.
Arla Foods has a broad product range and is active in all the main sectors of the dairy market. Fresh products, including liquid milk, cream and yoghurt, generate about 45% of turnover, followed by cheese at just over 25% and milk powder on 13%. Butter and spreads, including Arla Foods’ flagship Lurpak brand, account for 13% of turnover.
Development Strategy For 2013
Peter Turborgh recently unveiled Arla Foods’ five year development strategy, setting out clear global ambitions for the group by building on its strength in Scandinavia and the UK and by harnessing the potential of its strong brands. The strategy incorporates five key elements with the central aim of delivering the best milk price to Arla Foods’ co-operative farmer owners.
Arla Foods will continue to concentrate on developing its traditional core markets and aims to become the market leader in Denmark, Sweden and the UK, and number two in Finland. However, Arla Foods has added Germany and Poland to its core markets and will increase activity there as it aspires to be among the top three dairy companies in both countries.
The Netherlands is also now a new core market following Arla Foods’ recent acquisition of Friesland Foods Fresh in Nijkerk from Dutch dairy co-operative Royal FrieslandCampina. The Nijkerk business has sales of over Eur200 million. The acquisition is “in perfect alignment with our strategy to become the preferred dairy for consumers in Northern Europe,” says Peter Tuborgh.
Furthermore, Arla Foods, which is currently present in 80 markets worldwide, will prioritise its global activities to achieve the best return from resources. As part of this strategic shift, the US, Russia and China have been identified as special growth markets, and will be assigned a larger share of the group investment budget. Other markets have been defined as ‘tactical’ and business activity will be maintained at current levels.
“We cannot do everything in all markets. We must be extremely strong in some international markets – but not everywhere and not in all categories,” he points out.
Arla Foods will concentrate on developing three global brands – Lurpak butter, Castello cheese and Arla, which is both the corporate brand and the brand for the majority of the group’s other products.
The product development budget will be doubled with the focus on natural ingredients, health, taste and organic products. Indeed, Arla Foods has just joined forces with Danish neighbour Danisco to establish a new research partnership, which aims to develop infant formula more closely resembling mothers’ milk.
Another goal is to double sales of powdered whey proteins to become the global leader. Arla Foods purchases whey from other major cheese producers and has processing facilities in several locations across the world.
The fifth element of the development strategy has entailed setting a target of a 25% reduction across the group in greenhouse gas emissions from transport, production and packaging by 2020. This means working with its co-operative members, research institutions and industry associations to reduce carbon dioxide emissions at farm level.
“The strategy focuses on what we excel at and on markets where we are, or can, be leaders,” comments the Arla Foods chief executive. “It is focused, ambitious and demanding. The next five years will be an enormous challenge for us all, but it’s not impossible for us to achieve our objectives and it is important for us to give our all and gain ground.”
The increase in the 2010 investment budget to DKr1.84 billion signals Arla Foods’ commitment to aggressively pursuing its five year development goals after a period of consolidation in 2009.
Like other international dairy groups, Arla Foods had to contend with the effects of global recession and price pressures coupled with a major imbalance between supply and demand for milk throughout 2009. Consequently, 2009 was characterised by cost cuts across the business and a reduction in the milk price paid to co-operative members as Arla Foods adjusted to the changed market scenario.
Net profit in the first half of 2009 for the January to June 2009 period was DKr263m and turnover declined by almost DKr2b to DKr22.3b, of which DKr1.7b was due to the fall in the exchange rate between Swedish krona, sterling and Danish kroner.
Although the half-year results were in line with budget, Peder Tuborgh admits that the economic downturn was “more extensive and prolonged than expected and has impacted all Arla’s markets.”
Outlook For Prices
However, there were positive market signs as 2009 drew to a close. Peder Tuborgh expects that prices in the retail market will rise just as those for industrial products have, as Arla Foods continues to ensure that its farmer members are given the best price for their milk. “In recent months we have seen a rise in commodity prices, which have been mainly driven by increases in the price of industrial products, in particular bulk cream. As a result of these developments we raised the milk price paid to the members of the cooperative in October and again in December,” he remarks. “However, the overall price for raw milk is insufficient to ensure that dairy production is sustainable globally which is why there needs to be an improvement in dairy product prices in the retail sector.”
UK Growth Strategy
Accounting for over a quarter of group sales, the UK is central to Arla Foods’ future development. Indeed, the UK is the dairy group’s single largest national market. Arla Foods has invested heavily in its UK business and will continue to do so as part of its growth strategy for this important region.
Processing over two billion litres of milk annually, Arla Foods UK is on the Britain’s largest dairy companies. In addition to being a major supplier of liquid milk and cream to the top retailers, Arla Foods UK leads the butter, spreads and margarine sector, as well as supplying other added value products such as flavoured milk, cheese and yoghurt.
Although UK consumers have been trading down to less expensive dairy products, Arla Foods UK’s three major brands have continued to perform well. Two of these brands – Cravendale and Anchor – are each valued at more than £100 million, while Lurpak is worth over £200 million. Launched in 2001, Cravendale is now the number one milk brand in the UK and is worth £142 million, growing at 20% year on year. The Anchor butter and spreads brand is produced under licence from Fonterra, the New Zealand co-operative.
Peter Lauritzen, chief executive of Arla Foods UK.
Until recently, Arla Foods and Fonterra operated a joint venture in the UK but Arla has now bought out Fonterra’s 25% stake. “Anchor is a very strong, successful, brand in the UK and it is a good business in which to invest,” points out Peter Lauritzen, chief executive of Arla Foods UK. “The butter, spreads and margarine market is a key category for Arla and this is a logical step for us to take this brand forward and develop it further in the UK.”
In line with its co-operative principles, Arla Foods has built a close working relationship with British dairy farmers. Indeed, the Arla Foods Milk Partnership, a group of over 1,400 members, supplies 80% of Arla Foods UK’s total raw milk requirements and also owns a stake in the British dairy processing company.
To support its ongoing development in the UK market, Arla Foods is investing £70 million (Eur80m) to expand its flagship dairy at Stourton in Leeds, having already spent £100 million at the site, which processes milk for the major supermarkets as well as leading milk brand Cravendale. The additional investment at Stourton allows the site to process a range of fresh dairy products, including fresh cream and Creme Fraiche. It also permits Arla Foods to manufacture cottage cheese for the first time in the UK.
In line with its strategy of improving efficiency, Arla Foods has embarked on a LEAN programme in the UK. A pilot is taking place at the Stourton complex where a robust LEAN model is being developed which will then be rolled out to other UK sites.
World’s Most Advanced Dairy
Arla Foods also plans to build a new one billion litre liquid milk processing facility on the outskirts of London as part of its UK growth strategy. The new facility will be the largest and most technologically advanced of its kind in the world.
Intended to create a platform for Arla Foods UK to grow its fresh milk business, the new dairy will be operational in 2012. According to Arla Foods, the new London dairy will set new world-class environmental and efficiency standards.
“Arla is totally committed to a long-term sustainable future in the UK and the construction of the new dairy demonstrates that commitment. Incorporating the most sustainable building techniques the dairy will be the largest, most efficient and environmentally advanced in the world,” says Peter Lauritzen. “We already have an industry leading site at Stourton, in Leeds, but our new, cutting edge, facility in London will be world leading and take dairy processing into the next generation.”