Most of the end value of New Zealand’s dairy ingredients is being captured by foreign-owned firms beyond the border, a new report shows.
The government-commissioned Coriolis research report on growing consumer demand for dairy products in Southeast Asia is the latest in a series on New Zealand’s food and beverage industry aimed at achieving the government’s goal of doubling exports to 40 percent of gross domestic product by 2025.
The report uses a carton of UHT milk to show how value goes offshore. Of the $1.73 price in a Southeast Asian store, the retailer gets 28 cents and consumer tax takes 21 cents. The Southeast Asian manufacturer gets 92 cents, while freight and insurance account for 2 cents. The New Zealand dairy processor and dairy farmer get just 13 cents and 18 cents respectively. Coriolis has previously used the example of infant formula. Of the $47.50 retail price for a can in Asia, just $4.60 goes to the dairy farmer and dairy processor in New Zealand.
The report assesses opportunities for New Zealand dairy retail products across seven categories – butter, cheese, condensed and evaporated milk, drinking milk, ice-cream, and infant formula – in six Southeast Asian countries. All categories and markets are forecast to grow demand for dairy products over the next five years, although at varying rates.
While Southeast Asia is the next logical step for New Zealand exporters with branded retail products, the report said many of the overseas-owned companies dominant in selling dairy products in the region have directly invested into New Zealand dairy production, such as Danone’s investment in Gardians and Sutton Group.
Coriolis director Tim Morris said it has taken a while for New Zealand companies to build the necessary skills to sell their own brands: “I think it’s hard but we’re getting there.”
Morris said he’s reluctant to say the dairy industry is not doing enough value-add because he’s “sick of that story”, but the world is extremely competitive and local companies have to find a niche.
A good example is Hamilton-based Dairy Goat Cooperative, the world’s leading manufacturer of goat milk nutritional powder products, which developed the first commercial infant formula from goat’s milk, he said. Formed in 1984 from an amalgamation of goat milk cooperatives, DGC had revenues of $150 million last year and now exports to 20 countries.
John Penno, managing director of Rakaia-based dairy processor Synlait Milk, said value-add doesn’t have to mean selling your own branded products.
Synlait’s value-add strategy is to partner with companies that have established brands and routes to market, and to add value into the manufacturing and ingredients behind those brands. Its partnership with A2 Milk to make A2 Platinum infant formula is one example, while another is its recent partnership with US baby products manufacturer Munchkin, which is launching a new branded infant formula, Grass Fed, into the US and China.
Penno says while there may be better margins in branded products, the best option for Synlait was to get higher margins than on standard products at large volumes through well-established or well-resourced new brands. The processor’s near-term goal is to be paying above market prices to suppliers for half of the milk it processes.
The Coriolis report says some Southeast Asian consumers see New Zealand as a quality supplier and there are significant trade agreements in place or in development. New Zealand is the largest supplier of milk powder to Southeast Asia with a 67 percent market share and has a 27 percent market share of the region’s total dairy imports.
The report said only two categories – butter and infant formula – were a good fit for New Zealand producers, with unoccupied positions in the market available for new entrants and niche players to create a point of difference.
While infant formula is a large category and growing by 8 percent a year in Southeast Asia, New Zealand will struggle to improve its current weak retail performance without doing something new, the report said.
There’s strong endorsement of New Zealand as a production location for wider Asia as evidenced by the overseas investments in local producers. The region is a major user of lactose, milk powder and whey. Despite local hype, there is no clearly revealed demand for a New Zealand branded infant formula in the region, unlike in China, the report said.
However there are a number of opportunities in the less profitable ‘growing up milk’ (GUMP) and sheep milk segments of the market, and in infant formula that promotes health benefits such as being free of hormones and antibiotics.
New Zealand could also build on its strong position in butter as the only major producer with growing volume. Its semi-stable shelf life allows it to be packed in final form in New Zealand. There’s a big range of opportunities for new entrants and niche players including in sliced and portioned products, new flavours, and packaging innovations such as resealable or ‘squeezy’, the report said.