dairy industry
...ars have seen a number of fundamental changes occur in the regulatory backdrop of the Australian Dairy Product Manufacturing Industry n.e.c at both the state and the federal level. · Of key importance has been the deregulation of the upstream dairy industry which has historically been subjected to high levels of regulation. One of the primary characteristics of the old regulatory backdrop was the existence of State Government Marketing Arrangements which served to segregate raw milk depending on end use. This in turn over its twenty year industry created two very distinctive product segments; manufacturing milk (i.e. milk that was ultimately used in the production of dairy products such as cheese, butter, milk powders etc) and 'market' milk (i.e. milk for drinking). The former received assistance via the Commonwealth Government's Domestic Market Support Scheme (and was not subject to any government production controls), whilst the latter was subject to formal quantitative State Government price and quantity controls. Milk production quotas and/or premium pooling system were used to control the supply of market milk with farmers being paid a fixed and administratively determined price per litre of market milk supplied. However over the 1990s the milk industry was gradually liberalised as State Governments phased out post-farmgate controls. Then in 1999 in line with the National Competition Policy, and growing pressures from Victorian dairy farmers and manufacturers for reform and an open market for fluid milk, it was announced that the industry was to be deregulated as from 1 July 2000. State legislation governing the sourcing and pricing of milk was repealed, whilst former State Milk Authorities were wound up. At the same time, the Domestic Market Support scheme ended. With milk being a key raw material, this move to a freer and more open market environment has had a number of implications for industry participants. · Also of importance to the industry are the present attempts to streamline the general food regulation system and clearly separate food regulatory policy development from foods standards development. In November 2000, the Council of Australian Governments (COAG) signed an inter-governmental agreement to implement a model for a new national food regulatory system based on recommendations contained in the 1998 Food Regulation Review Report (the Blair report). The new system encompasses a new Australia & New Zealand Food Regulation Ministerial Council comprising ministers with a variety of portfolio responsibilities including primary food production, processed food and health, and responsible for the development for all domestic food regulation policy, as well as domestic food standards. The new regulatory system will also see the creation of another new agency, Food Standards Australia New Zealand (FSANZ) which is to replace ANZFA. Other issues which have some influence on the regulatory backdrop of the industry include increased consumer expectations with regard to food safety, nutritional content, environmental concerns with respect to packaging etc. The issue of genetically modified organisms; new labelling requirements set by the Australian New Zealand Food Standards Council with regards to genetically modified foods came into effect on 7 December 2001. These are thought to be among the strictest genetically-modified food labelling requirements in the world. Cost Structure Year: 2002 Item Cost Depreciation 2.2* Other 10.0* Purchases 76.0* Returns 3.0* Wages 8.8* Analysis As with many of the other food processing industries, purchases are the single largest cost item estimated to represent 76 per cent of sales. Within this cost item, raw materials represent the largest component with milk & milk product expenses accounting for roughly 76 of all raw material costs. Sugar is another key input. Also included within the purchases cost category is the cost of packaging, including cartons, containers and other packaging items. Wages and salaries are the next largest individual cost item, representing approximately 8.8 percent of sales revenues, followed by depreciation at 2.2 percent. All other expenses are included within the "other" cost category. Capital and Labour Intensity The level of capital intensity is high. · This reflects the level of resources tied up in purpose specific equipment, machinery and manufacturing facilities. · The major players have invested significant amounts in manufacturing plants, thus producing high volume production lines. · Depreciation accounts for 2.2 per cent of turnover, wages accounts for 8.8 per cent. Analysis · This high level of capital intensity reflects the level of capital expenditure tied up in purpose specific equipment and machinery, storage facilities etc. Recent years have seen industry participants invest considerable resources into new technologies and automated processes thereby not only increasing the level of capital invested in the industry, but also reducing labour requirements. · In 1999-2000, the average industry establishment employed 63 people, each of which generated turnover of $557,224. This is typically higher than the average for all food, beverage and tobacco manufacturers. · It is important to note however that capital intensity levels will vary between different sized operators; the degree of capital intensity is generally higher for larger producers than for smaller producers. They will also vary between product segments. · As players continue to move toward more advanced operation, this industry's capital intensity ratio will continue to increase. Technology and Systems The rate of technology change in technology systems is medium. · The extent of technological change varies greatly between sectors. The basic technology employed by butter producers (the churning of milk) has changed very little over the years. Similarly, there have been few changes in the 'other' product segment. Innovations in these two segments have been limited to the introduction of new minor products such as condensed milk in tubes and a limited attempt to provide convenience products such as coffee-milk powder blends. In addition, a number of energy saving techniques have been introduced. · On the other hand, changes in the cheese making have been more significant. These include membrane technology, especially ultra-filtration, and reverse osmosis. The development and introduction of APV Siro Curd technology resulted in increased cheese yields from milk; facilitated continuous automation with improved control over process variables and thus higher quality products; and reduced manufacturing time. Another recent development is the production of genetically engineered chymosin (used as a coagulant in cheese making). This reduces production costs and is suitable for the production of special purpose cheeses such as hal-al, kosher and vegan cheeses. The CSIRO has recently developed another food ingredient for the cheese industry by the name of "Cheese Base". · In the case of butter, the introduction of blended products (butter and vegetable oil) has required some modification of production and packaging technology. Of greater significance is a new procedure developed in the United States which offers the possibility of improving the competitive position of butter relative to margarine. The process, known as supercritical extraction, is able to remove cholesterol from milk fat (and beef tallow). It allows the collection of fractions with the desired low cholesterol level and low melting fat fractions which allows the development of low cholesterol, soft spread butter. · There have also been a number of changes in the use of whey and the whey manufacturing process. Traditionally produced in a liquid format, recent years have seen an increased focused on the production of whey powders and protein concentrates. United Milk Tasmania recently trialled the production of new food ingredients derived from whey. New products developed in this way could become a substitute for egg, may provide a protein fortifier for fruit juices, could be used as an ingredient in smallgoods and could be used as a fat replacement; another ingredient is being tested for use in infant milk formula. · Automation and computerisation in all segments of the industry has served to reduce labour requirements whilst also resulting in better quality control. · It is important to note that the adoption of new technology and manufacturing processes tends to vary with the size of the participant. For example, large companies and companies with overseas associates tend to adopt new technology rapidly. However the same is not necessarily true of other companies, particularly some of the co-operatives. Industry Volatility The level of Volatility is medium. · This high level of volatility reflects variations in market conditions and the residual nature of manufacturing milk supplies. · The average of the absolute year on year changes in real turnover growth for the five years ending 2001-02 was 8.8 per cent. · Changing production volumes and prices. · Fluctuations in the availability and price of raw material inputs may have an impact on Industry performance. Globalisation The level of Globalisation is medium. The trend of Globalisation is increasing. The moderate level of globalisation that characterises the Australian dairy product manufacturing n.e.c industry is a reflection of the dominant position commanded by foreign owned participants who have established onshore operations or acquired existing businesses. These include the likes of multinational conglomerates such as Nestle and Kraft (part of the Philip Morris group), as well as smaller trans-tasman players such as Bonlac which recently formed an alliance with the New Zealand Dairy Board (now part of Fonterra Co-operative Group, the ninth largest dairy company in the world). Other Australian players are themselves international players such as Murray Goulburn which is in fact Australia's largest exporter of processed foods. This level of globalisation also reflects the importance of international trade to the overall performance of the industry. It is also interesting to note that on a worldwide basis there were over 450 mergers in the dairy industry in the three years to March 2001. (Over the past five years, there have been 15 mergers and acquisitions in the Australian dairy industry alone). One of the main forces underlying this phenomenon was globalisation as companies sought to remain competitive on a global scale. Thus globalisation levels are set to gradually increase in line with the consolidation of the global dairy and food industries, the rationalisation of the Australian dairy industry and with the continued upward trend in export levels. Industry Performance Historical Performance The turnover of the dairy products n.e.c industry, after allowing for inflation, decreased by 0.3 percent per annum on average between 1980-81 and 1989-90. Whilst turnover had increased in the first half of the 1980s, it then declined as a result of an industry contraction due to difficult export market conditions. This contraction was particularly pronounced in the butter and milk powder segments. In comparison, the cheese segment expanded. Consequently, although the number of establishments in the industry varied during the 1980s, there was a definite tendency towards rationalisation in the later half of the 1980s. The industry then staged a gradual recovery in the early 1990s with turnover levels increasing strongly in 1992-93 and 1993-94 in line with favourable world market conditions. Growth in industry turnover averaged 7.9 percent per annum over the period 1990-91 to 1995-96. While there were some year to year fluctuations, cheese production increased fairly steadily over this period. Of considerable importance for the industry was the shift from cheddar to specialty cheeses. The latter, as differentiated products, enabled some producers (such as Lactos) to command a price premium for their products in Japan. In comparison, butter production tended to decline until the late 1980s when more favourable market conditions resulted in increased production. The production of milk powders also tended to decline initially, especially as UHT milk was increasingly used as a substitute, though again production increased in the late 1980s due to improved market conditions. Initially industry value added fluctuated with no real trend apparent. However after increasing quite sharply in 1987-88, value added then tended to decline into the early 1990s. Value added levels would have declined further had a process of industry rationalisation not occurred. Improved efficiency levels and the move to higher margin, lower volume products (for example specialist cheese varieties) also helped to boost industry value added. Value added grew sharply in 1992-93 and in 1993-94. As the number of establishments in the industry has fluctuated from year to year, a clearer indication of industry performance is given by value added per establishment. On the whole, there appears a general tendency for this figure to increase suggesting that industry profitability tended to improve. The profit ratio (the ratio of the difference between value added and labour costs to turnover) supports this conclusion. It rose from 9.0 percent in 1980-81 to 9.8 percent in 1989-90, though this was still below the average level for all food, beverages and tobacco manufacturers. Between 1992-93 and 1995-96, industry profit ratios continued to improve, reaching 15.9 percent by the final year. Current Performance Output Turnover Industry turnover grew at an average rate of 5 per cent per annum over the five year period to 2001-02 to reach an estimated $5,008.7 million. Growth was not continuous however and was in fact quite volatile. Growth rates of 11.8 percent and 18 percent were recorded in 1996-97 and 1998-99, whilst the growth rates in the between years were much more moderate. In one instance (1997-98) was -0.4 percent. Changes in turnover growth generally reflected changes in production and prices. Output Volume Production volumes increased over the performance period with each product segment recording growth, though growth rates did tend to vary between the various segments. The wholemilk powder segment recorded the strongest growth with annual growth rates averaging 13.3 percent per annum over the period 1995-96 to 2000-01. This compares to average growth rates of 3.6 percent per annum for the combined volume of skim milk and buttermilk powders. Cheese was another strong growth segment with cheese producers continuing to gradually replace cheese imports, particularly in the specialty cheese segment. Growth rates averaged 8.4 percent per annum over the five years to 1999-2000 with volume levels rising from 240,600 tonnes in 1994-95 to 360,700 tonnes in 1999-2000. Strong consumer consumption and increased export sales drove this growth. Production volumes then experienced a marginal decline in 2000-01 (down 4 percent) with levels of 355,822 tonnes being recorded for the year. Poor seasonal conditions and subsequently lower milk production levels can help explain this fall (see below). Over the performance period the level of exports increased by an average of 5.6 per cent per annum. Production of Dairy Products n.e.c 1995-96 to 2001-02 Year Kilotonne Kilotonne Kilotonne Kilotonne Butter/ Cheese Whole Butter Milk Milk & Anhydrous Milkfat Powder Skim Milk powder 1995-96 143 272 113 222 1996-97 147 290 134 233 1997-98 154 310 128 224 1998-99 176 328 145 262 1999-00 180 361 190 255 2000-01 164 356 211 265 2001-02 170 411 220 276 In 2001-02, production levels recovered from the previous year constraints. This was predominantly attributed to the recovery in total milk production, which increased to 11,268 million litres. Most of the increased milk production was utilised for cheese production. Favourable market conditions, and higher export demand saw cheese production rise from 356,000 tonnes in 2000-01 to 411,000 tonnes in 2001-02. During 2000-01, production was constrained in part by a fall in total Australian milk production which was 2.7 percent lower than the previous year at 10,556.3 million litres. Less favourable seasonal conditions and farm exits associated with deregulation are thought to underlie this contraction. Thus the fall in milk production levels available for users of manufactured milk saw processors reallocate resources at the expense of some product segments. For example, a number of industry participants increased their production of various milk powders in order to meet export commitments, whilst the production of cheeses declined. The production of butter and Anhydrous milkfat (butter with water removed) increased over the performance period by an average 3.3 per cent per annum. Approximately 9.2 billion litres of milk were processed into dairy products in 2001-02, primarily focusing on butter, cheese and milk powders. Prices Given Australia's position as a major dairy exporter in the global arena, prices received by industry participants are strongly influenced by developments on the world stage and by movements in relative exchange rates. In turn global dairy prices tend to be cyclical in nature, varying with world economic growth and international trade policies. Global dairy prices peaked in 1995-96, then eased in the following year before staging a partial recovery. However by 1997-98 prices had not regained their 1995-96 peak. They then fell quite sharply in 1998-99 and in many cases reached historical lows. For example by mid 1999, international prices for cheese and skim milk powders had fallen to reach their lowest levels in eight years whilst whole milk powder prices were at a five year low. These low prices then fed through to low domestic prices to the detriment of industry participants. Since then prices have gradually recovered aided by a return to growth in South East Asia and Latin America as well as various trade arrangements to the benefit of world trade, these include WTO imposed limitations on US exports of subsidised milk powder exports as well as progressive reductions by the European Union on the rate of subsidies granted to European milk powder producers. The progressive implementation of reduced ceilings on subsidised EU export volumes as set out by the Uruguay Round of trade reductions, has in fact meant that EU dairy export volumes have not increased since 1995 to the benefit of other dairy exporters and global dairy prices in general. However, in July 2001, these subsidies were reduced, and in some cases abolished. Butter prices have remained relatively weak in the face of sluggish economic growth in Russia, a major importer of butter. In 2000-01, butter prices were worth just $2,411 per tonne, compared to $2,993 in 1995-96. Cheese prices for 2000-01 were estimated to be $3,816, representing a 2 per cent increase from the previous year ($3739 in 1999-00). In 2001-02, butter prices remained relatively steady, reflecting tighter EU supplies, although weakness in demand from Asia was restrictive. Skim milk powder prices were prone to weakness. It is also interesting to note the effects of technological innovations and the move to higher value added products on the prices of various products within the Industry. For example, refinements in the techniques for producing ultra heat treated (UHT) milk saw a fall in the demand for condensed and evaporated milks and milk powders. Combined with concerns with regards to the high sugar content of condensed milk, these developments saw a fall in the average price of these products. At the same time, the shift from cheddar to specialty cheeses meant that industry producers were in a stronger position to command a price premium, both in the domestic and the international marketplace. Exports/Imports Exports remained a key market for the Australian dairy product manufacturing n.e.c industry. Its strong performance continued in 2001-02 with cheese and milk powder products remaining key export earners. In 2001-02 exports generated an estimated 64.9 per cent of industry turnover, up from 46.6 percent in 1996-97. During 2000-01, the industry was successful in its round of bidding for tenders offered by Japan's Agriculture and Livestock Corporation with Australian processors winning 35 per cent of the total tender for Super A Grade skim milk powder. On the import front, cheese still remained the primary import; virtually no butter or milk powders are imported. Imports have grown from $200.5 million in 1996-97 to $307.3 million in 2001-02, this represents an annual increase of 8.9 per cent over the outlook period. Currently the European Union (EU) is the largest dairy exporter, with 45 to 50 per cent of the market. The U.S. has only a 10 per cent share of the world trade of dairy products; New Zealand holds 22 per cent and Australia holds 9 per cent. Additional market access openings in the Republic of Korea have been achieved for a range of products, including butter, natural cheese, processed cheese and infant food and formula, through pressure to reduce Korean shelf-life restrictions. Organisations in the Philippines are currently pressing to support a boycott on Australian dairy products if Australia continues to block imports of bananas and pineapples from the Philippines. The Philippines is one of Australia's largest markets for milk, butter and cheese, and in 2000-01 was worth a total of A$370 million. Employment and Establishment Numbers Industry employment levels tended to increase over the five year period, reaching an estimated 8,921 in 2001-02, up from 7,981 in 1996-97. Underlying this increase was the expansion of the industry. However definitional changes may also explain part of the increase. Establishment numbers tended to fluctuate with two competing forces at work simultaneously; on the one hand, favourable prospects attracted new entrants, particularly smaller niche players such as those involved in the production of specialty cheeses. On the other hand, significant industry restructuring was occurring, prompted in part by the deregulation of the milk industry. Value Added As with turnover, growth in industry value added tended to be volatile over the performance period with year on year growth rates ranging between -21.1 per cent and 21.4 per cent. Overall value added levels rose from $671.4 million in 1996-97 to an estimated $1,202.3 million in 2001-02, representing an average growth rate of 12.6 per cent per annum. Underlying the growth in value added was the move to products with a higher value added content such as specialty cheeses as well as "convenience" dairy products for which higher margins could be charged. Higher productivity and a concerted move to control costs and improve operating efficiencies can also help explain this increase. Gourmet cheese such as goat cheese has increased significantly in recent years, the demand for this product as allowed this segment of the Industry to more than double in size. Currently, global demand exceeds supply in Australia. Profitability The following table represents the industry's profit ratio since 1995-96. This is calculated as the difference between value added and wages, divided by turnover. Between 1996-97 and 2001-02, profitability levels increased by an average of 12.8 per cent per annum. This high growth rate was attributed to the significant increases generated in 1997-98 and 1999-00 (28.7 per cent and 27.2 per cent respectively). Aside from this, the smaller increase in profits experienced such as in 1998-99 was due to producers offering higher prices to ensure continuity of supply, which had an adverse impact upon bottom line profitability. Industry Profit Ratio 1995-96 to 2001-02 Year Percentage Industry Profit Ratio 1995-96 15.88 1996-97 8.54 1997-98 10.99 1998-99 11.23 1999-00 14.28 2000-01 14.90 2001-02 15.15 Turnover Growth Year Turnover AUDmil Growth % 1993 2,712.9 N/A 1994 3,334.6 22.9 1995 3,330.0 -0.1 1996 3,542.3 6.4 1997 3,959.1 11.8 1998 3,941.9 -0.4 1999 4,650.9 18.0 2000 4,800.1 3.2 2001 4,886.5 1.8 2002 5,008.7 2.5 2003 5,287.7 5.6 2004 5,509.9 4.2 2005 5,730.2 4.0 2006 5,934.6 3.6 2007 6,132.1 3.3 Gross Product Growth Year Gross Product AUDmil Growth % 1993 475.3 N/A 1994 630.7 32.7 1995 657.2 4.2 1996 850.4 29.4 1997 671.4 -21.0 1998 762.5 13.6 1999 914.2 19.9 2000 1,107.3 21.1 2001 1,157.1 4.5 2002 1,202.3 3.9 Key Competitors Major Players Major Player Market Share Range % Murray Goulburn Co-operative Co Limited 12.00% - 16.00% (2002) Bonlac Foods Limited 10.00% - 15.00% (2002) National Foods Limited 5.00% - 7.00% (2002) Kraft Foods (Australia) Limited 1.00% - 4.00% (2002) Australian Co-operative Foods Limited 1.00% - 4.00% (2002) Murray Goulburn Co-operative Co Limited Market Share: 16.00 % Murray Goulburn Co-operative Company Ltd is one of Australia's largest co-operative dairy companies, generating revenues of $1,365 million in 2000-01. Obtaining milk from over 3,500 dairy farmer suppliers, Murray Goulburn is responsible for roughly 30 percent of Australia's milk production. It operates 6 factories within Victoria, as well as 26 trading stores. It is also Australia's largest exporter of processed foods, accounting for roughly 6 percent of the world trade in dairy products. In 2000-01, exports amounted to $1.1 billion. Employee numbers currently total 1,700. Of interest to this Industry is its cheese and butter manufacturing activities. In 2000, Murray Goulburn produced almost 100,000 tonnes of cheese. The company produces a range of cheeses which include reduced fat cheese ("Seven" and "Trim N' Tasty"), cheddar cheese (Tasty, Mild, Colby and Vintage), "moo" cheese for children, cheese slices and cream cheese. These are all produced under the Devondale brand name as is its range of butter and butter spreads (Dairy Soft and Extra Soft). Other cheese products include gouda, mozzarella and pizza cheese, as well as cream cheese, granular cheese and cheese powder. In the year ended September 2000, Murray Goulburn had a 2.9 percent stake in the overall Australian cheese market with its Devondale cheese accounting for 4.5 percent of the natural cheddar cheese market segment (Source: Retail World December 2000). Recent years have seen the company's revenue base gradually increase, rising from $1,114 million in 1996-97 to $2,000 million in 2001-02. Its asset base has also tended to increase as the company continued to expand. In 1998-99, net profit after tax rose 123 percent to $26 million, boosted by economies of scale. Sales revenues amounted to $1,365 million on 2000-01, representing a marginal fall of 4 per cent. The company's performance was adversely affected by higher milk prices paid to suppliers. Despite this, operating profits reached a record $50.4 million (compared with $29.7 million in the previous year). The recent financial performance of the company is given in the table below. In 2001-02, sales revenue increased to $2,000 million, representing an increase of 24 per cent from the previous year. This was attributed to strong milk production levels. Financial Performance for Murray Goulburn Co-operative Co Ltd Year Million Million Million Dollars Dollars Dollars Revenue NPAT Assets 1995-96 1045.0 24.9 629 1996-97 1114.0 13.9 665 1997-98 1115.0 10.4 770 1998-99 1319.8 26.0 828 1999-00 1420.2 27.3 888 2000-01 1613.8 45.0 1065 2001-02 2000.0 N/A N/A Financial data relates to all company activities On 23 March 2001, Murray Goulburn in conjunction with National Foods made a formal offer for Bonlac Foods Ltd, valuing Bonlac at roughly $880 million. Had the offer been accepted, Bonlac was to have been broken up with Murray Goulburn to acquire the milk processing assets and milk supply from farmers, whilst National Foods would have acquired Bonlac's consumer business which included the Bodalla and perfect cheese brands, and Western Star butter. However Murray Goulburn withdrew the offer on April 5, believing Bonlac to be committed to a rival deal with the New Zealand Dairy Board. In late May 2001, Murray Goulburn announced that it had signed a strategic alliance with Kraft Foods under which it would purchase Kraft's cheese plant at Leitchville. Under the agreement, Murray Goulburn is to supply a significant portion of Kraft's cheese requirements via a long-term supply arrangement. In early August 2001, Murray Goulburn announced that it was to build a $58 million high tech 80,000 square metre warehouse in Melbourne. The warehouse is to act as a major local and export distribution and storage point for milk processing. Bonlac Foods Limited Market Share: 15.00 % Established in 1986 via the amalgamation of three independent dairy co-operatives and one dairy marketing company, Bonlac Foods is a leading player in the Australian dairy foods industry. In 1998-99, the group purchased and processed roughly 23 percent of Australia's total milk production. The group obtains its milk supplies from 2,200 dairy farmer suppliers. Roughly half of the group's annual turnover is derived from export sales to international customers in 50 countries. Of particular interest to this ANZSIC class is the Consumer Products division which generated sales revenue of $379.6 million in the 1999-2000 financial year (roughly 31 percent of total sales revenue for the company). Primarily focused on the production of cheeses and spreads to be sold via retail and food service channels, the division also produces some cream, yoghurts, packaged milk products (Diploma milk powder) and whey powder/whey protein concentrate. In 1999-2000, cheese products accounted for 65 percent of the division's domestic sales, with spreads accounting for 24 percent, milk powders 7 percent and other products the remaining 4 percent. Domestic sales accounted for roughly 75 percent of the division's total sales with the remainder derived from export sales to Japan, South East Asia, and the Middle East. Bonlac is thought to be one of the largest suppliers of dairy products to Australia's food service industry. On a sales value basis, Bonlac was thought to hold a 34.0 percent share of the Australian butter market (with its Western Star and Allowrie brands) in 1999-2000 and a 14.3 percent stake in the cheese market (This has since increased following the formation of Bonland Dairies). Key cheese brands include Bodalla (Bonlac's cheddar cheese brand), Perfect Italiano (Italian type specialty cheeses) and Bega for which Bonlac holds a perpetual license granted by Bega Co-operative Society Limited. In addition, the division produces a number of lower-yield generic products however in recent months there has been a marked move away from low margin housebrand contracts in favour of higher margin lower volume lines. Bonlac also produces various milk powders (skim milk, buttermilk and full cream milk powder) within its Ingredients division which produces a range of dairy ingredients for both the domestic market and the international market (roughly 75 percent). Over 150,000 tonnes of ingredient products are exported per annum. In 1999-2000, the Ingredients Division generated sales revenues of $745.5 million (60 per cent of total sales). Recent times have seen the company restructure its business units with the intent of reducing its dependence on commodity products which are subject to the vagaries of cyclical global pricing patterns, whilst increasing its reliance on value added products which tend to possess a lower degree of price volatility. This will see the importance of its commodity products decline from its current 50 per cent of milk flow to 33 per cent by 2004-05. At the same time, Bonlac hopes to improve the returns earned from its commodity products through "cost reduction programs, the simplification of product specifications and increased geographic responsiveness". At the same time, Bonlac has undertaken a restructure of its supply chain. As part of this process, it has closed down three Victorian and Tasmanian plants (Camperdown, Drouin and Legerwood), whilst at a fourth plant (Toora), main operations have ceased. Over the past five years, Bonlac Foods has undertaken a number of acquisitions. Some of these are briefly outlined below; · Spring Valley fruit juices from Campbells Soup in August 1997. (This along with its Wave drink was later sold to Cadbury Schweppes in January 2001 for $30 million. Bonlac then entered into a supply agreement for the supply of dairy based beverages (produced at its Cobden manufacturing facility) to Cadbury Schweppes. At the same time, a number of other distribution assets were sold to Frucor Beverages Australia Pty Ltd). · The Gatorade sports drink license in May 1998 (as part of its plan to diversify its beverage production). · The merger with United Milk Tasmania Limited (UMT) on 1 January 1999. Of key significance however is its recent formation of the first major trans-Tasman dairy alliance with the New Zealand Dairy Board (now part of Global Dairy Company which in turn has recently been renamed Fonterra Co-operative Group). On 8 May 2001, Bonlac formed a strategic alliance with NZDB whereby NZDB acquired a 25 per cent equity stake in Bonlac Foods Limited whilst Bonlac acquired 100 percent of the share capital of NZMP (Australia) Pty Ltd. NZDB's Australian ingredients business was merged with that of Bonlac. Bonlac and NZDB also joined forces to create a new Australian-based consumer dairy products company (owned 50:50) now known as Bonland Dairies Pty Ltd. Initially known as ConsumerCo, Bonland Dairies was launched on 4 September 2001. Headquartered in Melbourne, Bonland Dairies is expected to have annual sales of roughly $600 million from the sale of key dairy brands such as Bodella, Mainland, Western Star, Allowrie and Bega. (In late April 2001, Bega had handed over the remaining marketing rights to Bonlac for New South Wales and the ACT in return for $35 million cash. Under the alliance, Bonlac is also to transfer its Melbourne cut, pack and process operations to Bega's two-year-old plant on the NSW south coast.) Bonland is thought to hold close to 35 percent of the Australian cheese market at the retail level. The recent financial performance of the company is outlined in the table below: Financial Performance for Bonlac Foods Ltd Million Million Million Dollars Dollars Dollars Revenue NPAT Assets 1995-96 1039 19.5 551 1996-97 1107 9.4 627 1997-98 1030 17.2 763 1998-99 1177 10.4 899 1999-00 1237 -39.0 860 2000-01 1068 41.1 840 2001-02 944 N/A N/A Financial data related to all company activities Increasing costs caused earnings to fluctuate from year to year. It recovered in 1997-98 after falling sharply in 1996-97. In 1998-99, Bonlac Foods experienced a 12.3 percent rise in sales revenue and a 25.5 percent rise in exports. Nonetheless, net profit after tax decreased from $17.2 million to $10.4 million. This reflected lower milk prices and subdued international commodity prices. In response to this, Bonlac announced its intention to focus on high value added products and on expanding export sales to Asia. Profits fell further in 1999-2000 to $3.7 million before abnormals and a loss of $39 million after abnormals associated with a significant corporate restructure and plant rationalisation. The company's performance was also adversely affected by its currency hedge program and a 4 per cent decline in its milk supply. This reflected the company's inability to match the milk prices paid by its rivals. Sales revenues for the year were however up 7.6 percent. The company is thought to be heavily debt ridden. In the most recent financial year, revenues amounted to $1,158.1 million, down 7.8 percent on the previous year. Underlying this fall was a reduction in export sales, reduced milk intakes (leading to lower sales volumes), as well as changes to the company structure (such as the divestment of its Spring Valley and Wave beverages). However operating profits before tax were up 208 percent to $56 million, reflecting the effects of asset sales, lower restructuring costs and the creation of Bonland Dairies. Net profit for the year amounted to $41.4 million, compared to a loss of $39 million in the previous year. Bonlac has recently reduced its debt levels by $69 million. The company reported a sound first half for 2001-02 as the impact of the company's restructuring continued to flow through to financial performance. According to interim results, operating profit after tax increased 75 per cent to $59.9 million from the $34.1 million reported in the first half of the previous financial year. Following the company's restructure, and the alliance with Fonterra combined with high international commodity prices, the company was able to pay suppliers an improved milk price this year compared with previous years. However, sales revenue decreased 19 per cent to $472.2 million following the sale of the Spring Valley beverages brands in January 2001. Another factors was the decreased international sales volumes as a result of lower milk flow. The financial results for the year ending 2001-02 saw Bonlac's sales revenue decrease by 11.5 per cent to $944.3 million, this was partially attributed to lower milk prices and the continued flow on affects from deregulation. There has also been intense speculation through the Industry that National Foods may takeover the company in the near future. In early July 2002, Bonlac announced an opening price of $1.84/kg butterfat and $4.42/kg protein for base spring payments for 2002-03. These prices represent a decrease of 27 per cent on the previous year's opening price commitment. National Foods Limited Market Share: 7.00 % Australia's largest fresh milk producer, National Foods Limited was formed in 1991 through the amalgamation of several dairy and food related businesses, including Allowrie Farmers Group (including Farmers Union), Cheetham Salt and Rural, Glad Consumer Products and Sunburst Regency Foods. As indicated in the following chart National Foods Limited generated sales revenue of $971 million in 2000-01 (compared to $1,097 million in the previous year). National Foods Limited currently employs 1,712 staff. Financial Performance for National Foods Limited Year Million Million Million Dollars Dollars Dollars Revenue NPAT Assets 1996-97 1169 74.1 561.2 1997-98 1083 43.8 593.8 1998-99 1124 46.6 613.3 1999-00 1097 48.2 593.1 2000-01 971 45.0 606.4 2001-02 1096 51.1 690.4 Of relevance to this Industry is its range of cheese produced under the Farmers Union brand. Produced at the group's Murray Bridge factory in South Australia, National Foods produces a range of ordinary cheddar and specialty cheddar cheeses which are sold in a wide range of varieties and formats (blocks, shredded, sliced etc) to both supermarkets/retail outlets and to the food service industry. The products are also exported to a number of countries throughout the world. In the year ended September 2000, it was thought to hold a market share of 0.8 percent (by value of retail sales) in the Australian cheese market. In September 2000, National Foods acquired the flavoured milk brand BigM. This acquisition has increased the company's profile in flavoured milks to approximately 50 per cent. BigM is one of the leading flavoured milk brands and has a 60 per cent share of the Victorian market alone. Construction commenced on a new $30 million soy beverage plant in Wodonga in Victoria supplying ESL and UHT soy drinks to the domestic market. This occurred after National Foods entered the soy beverage market though a joint venture with Vitasoy International Holdings in Hong Kong. Vitasoy has a 20 per cent share of the estimated $100 million Australian market. In late November 2001, National Foods made a cash offer for the specialty cheese maker King Island Co Ltd, valuing the company at $77 million. According to NatFoods, King Island is a perfect fit into the group's existing brand portfolio. The acquisition is to be funded via debt facilities, leaving room for further bolt-on acquisitions. Full acquisition of King Island Co took place in January 2002, along with its premium cheese brands; King Island, South Cape, Timboon and Tilba and other gourmet food brands such as Jean-Pierre pate. In December 2001, National Foods acquired the Yoplait franchise for China, along with the current Yoplait business from the East Asiatic Company (EAC) based in Shanghai. The business has sales of around $10 million and produces approximately 4,000 tonnes of yoghurt per annum. The acquisition isn't scheduled to take effect until April 2003. The acquisition will add to the existing Yoplait franchises held in Hong Kong, Singapore, New Zealand and Australia and will create an international growth path for the future. National Foods are also looking to involve a local joint venture to inject local knowledge and expertise to assist in the international growth. According to interim results, in 2002 the company's revenue increased 10 per cent and net profit increased by 13 per cent. These results were attributed the recent acquisition of King Island, volume and margin improvements, profitable cheese trading, and an increased emphasis in dairy desserts. National Foods said it expected to see earnings growth of 15 per cent in net profit in 2002-03. This was following company reports that net profit of $51,078 million was reported for the 12 months to June 2002, a 13 per cent increase on the previous period. In February 2002, the company announced its intention to purchase New Zealand Dairy Foods Limited. The New Zealand Commerce Commission is going to assess whether or not such a takeover meets competition guidelines in New Zealand. In June 2002, National Foods formed a joint venture with Hong Kong's Vitasoy and will build a $15.7 million manufacturing plant in Wodonga, Victoria. The plant will process fresh and long-life soy beverage under the brand name Vitasoy. In addition to supplying the Australian market, both companies are hoping to capture New Zealand, Asia and the U.S. as future export markets. The Wodonga plant project is the largest soy plant processing raw beans in Australia, and is expected to be operational by the end of 2002. Kraft Foods (Australia) Limited Market Share: 4.00 % Kraft Foods Australia is a subsidiary of the US based Philip Morris Companies Inc whose principal subsidiaries include Kraft Foods Inc., Philip Morris Incorporated and Miller Brewing Company. With interests in tobacco, food, beer and financial services, the Philip Morris group generated sales of over US$80 billion in calendar 2000 from its global operations located in nearly 200 countries. Revenues for Kraft Foods, the world's second largest food company with operations in over 140 countries, amounted to US$35 billion. With regards to its Australian operations, Kraft Foods is involved in a number of key activities include meat processing; dairy processing; fruit and vegetable processing; oil and fat manufacturing; cereal food and baking mix manufacturing and seafood processing. A number of these products are exported; over the last decade, Kraft Foods Australia has earned over $1 billion from its export sales from Australia. It has also invested over $350 million in new plants and technologies within Australia over the past ten years. In calendar 1999 Kraft Foods Australia generated sales revenues of $588.2 million and a net profit after tax of $34.4 million. Revenues for the following year are estimated to be worth $597.1 million, up just 1.5 percent on the previous year. The recent financial performance of Kraft Foods Australia is given in the table below. However, it is not possible to disaggregate the results to get those solely pertaining to this ANZSIC class. Financial Performance for Kraft (Australia) Ltd Y/E Million Million Million Dec Dollars Dollars Dollars Revenue NPAT Assets 1995 621 16.9 578 1996 611 6.9 616 1997 608 14.8 514 1998 545 22.8 567 1999 590 34.4 551 2000 597 N/A N/A Financial data relates to all company activities Having experienced a 6.5 per cent rise in sales revenue in 1995, sales revenues for Kraft Foods Australia then proceeded to fall over the next three years before experiencing an increase of 8 percent in 1999. The fall in net profits was particularly pronounced in 1996 (down 59 percent), exacerbated in part by food poisoning problems with its peanut butter. Financial data is unavailable for Australian operations for the previous two years. However, total operating revenue in 2000-01 for Kraft International (which includes Latin America and the Asia Pacific Region) increased to $2,430. In the year ended September 2000, the Company was thought to hold the largest share of the Australian cheese market by value of retail sales with a share of roughly 18.5 percent by value of retail sales (source: Retail world December 2000). It was also found to be within Australia's Top 20 brands (AC Nielsen) in calendar 2000 with sales of over $140 million from its cheese and dips products. However it is interesting to note that its natural cheese processing facilities were sold to Dairy Farmers in November 1997. It has also recently offloaded its cheese plant at Leitchville; in late May 2001 Kraft Foods entered into a long-term supply agreement with Murray Goulburn Co-operative under which the latter is to supply a significant portion of Kraft's cheese requirements from its newly acquired Leitchville plant. Australian Co-operative Foods Limited Market Share: 4.00 % Also known as Dairy Farmers group, Australian Co-operative Foods (ACF) is one of the few remaining dairy co-operatives with 4,500 dairy farmer members and 2,500 employees. Based in NSW, it is also Australia's second largest processor and distributor of milk and dairy products. Whilst it is predominantly involved in the processing of market milk, producing a range of full cream milks, various flavoured milks, yoghurts, creams etc, it also produces a range of cheeses (blue vein, cheddar, cream, feta, gouda, mozzarella, parmesan, pecorino, pepato, pizza and romano). In 2000-01 Dairy Farmers generated sales revenues of $1,194 million, down marginally on the previous year in the face of difficult conditions in the packaged milk sector. In the year ended September 2000, Dairy Farmers was in third place in the overall Australian cheese market with a market share of 14.2 percent, just behind Bonlac who had a market share of 14.3 percent. In the natural cheddar cheese brand segment, its Coon brand of cheese was in second place with a market share of 15.0 percent (Source: Retail World December 2000). Other brand names within the Dairy Farmers group include Australian Farmers, Bornhoffen, Caboolture, Classique, Dairy Vale, Farmers Best, Fred Walker, Jacaranda, Malanda, Mil Lel, Oak, Ski and Unity. In recent times, Dairy Farmers has itself been an acquisition target from a number of other dairy players. These have included Parmalat whose bid failed after the Dairy Farmers' board denounced the move as an attempt to destabilise the necessary restructuring of the company; and National Foods. In September 2000, National Foods proposed a $800 merger with Dairy Farmers that would have created a $1.4 billion dairy industry giant with the ability to create annual cost savings of $30 to $40 million. However Dairy Farmers rejected the offer in early December. Bonlac is also thought to have expressed an interest in acquiring Dairy Farmers. It appears highly likely that Dairy Farmers/ACF will either be taken over or will need to takeover another company to be viable in the newly deregulated market. The co-op has on a number of occasions considered the option of changing its ownership structure and floating on the ASX. However in August 2000, it again deferred float plans in the face of the fresh milk price war, which it itself had helped ignite by grabbing the Woolworth's house brand contracts from incumbents National Foods (in Victoria) and Pauls/Parmalat (in Queensland). It had defended its decision to spark the price war, suggesting that its current structure as a farmer owned co-operative meant its first obligation was to sell as much milk as possible for its farmer shareholders. In its latest restructuring proposal, ACF has achieved approval from the Australian Stock Exchange to impose a maximum limit of 15 percent for individual shareholdings in the restructured processing unit, excluding the proposed supply co-operative. In mid June 2001, Dairy Farmers failed to win the 75 percent support it required from its members to become a publicly listed company within three years. The group had hoped that this would provide a means of raising capital to take advantage of various joint venture arrangements. In the most recent financial year, sales revenue amounted to $1,194 million, the performance of the group having been adversely affected in part by difficult conditions in the packaged milk sector; revenue derived from this particular business fell 13 percent over the year to $629 million in the face of intense competition. The downturn in performance is even more marked when examining the group's profitability. Net profits amounted to just $77,300 for the year. One variable underlying this poor performance was the group's decision to maintain supplies despite having to purchase milk externally at export level premiums; the earnings before interest and tax loss for milk trading amounted to $9 million. However it is important to note that EBIT from the co-op's other business units was up 10 percent on the previous year, despite sales for these sectors rising just 1 percent. Underlying this growth were various cost reduction programs as well as a strong group focus on its Coon cheese brands (as well as its Ski yoghurt brand). The group has recently forecast a vast improvement in profitability for the current financial year, though it also warned that the volatility in the packaged milk market is set to continue. Despite this, sales in 2001-02 increased to $1,250 million, representing an increase of 4.7 per cent. Growth was driven by an increase in milk production, favourable market conditions and an increase in the demand for dairy products, particularly cheese. Financial Performance for Australian Co-operative Foods Ltd Million Million Million Dollars Dollars Dollars Revenue NPAT Assets 1995-96 739 24.2 392 1996-97 979 31.8 442 1997-98 1113 33.9 587 1998-99 1347 34.3 667 1999-00 1287 34.4 692 2000-01 1194 0.8 738 2001-02 1250 N/A N/A Financial data relate to all company activities Australian Co-operative Foods Ltd increased its holding in rival, National Foods with a 4 million share purchase increasing its stake to 9.2 per cent from 7.71 per cent. The company now holds 26.5 million shares in National Foods after the $12 million share purchase. The company has also been in discussions with Nestle in regards to a joint venture of their yoghurt sectors whereby the future of the Ski Brand, held by Australian Co-operative Foods but owned by Nestle. The combination would give the companies a leading share of the $500 million chilled dairy category in the Industry. In early 2002, Australian Co-operative Foods Ltd increased its holding in National Foods, with a 4 million share purchase, which increased its stake to 9.2 per cent (from 7.71 per cent). The company now holds 26.5 million shares after the $12 million purchase. In mid 2002, Dairy Farmers announced it was constructing a $20 million whey powder plant at its South Australian cheddar cheese factory. The plant is expected to produce 6,000 tonnes of powder, a byproduct of cheese making. The whey powder will be sold into domestic and international markets. In addition, the company announced its intention to discontinue packaged milk production at its facility, located near Newcastle, and reduce the size of the plants dairy products distribution centre. The company announced the rationalisation was in response to the changing demands of its clients and consumers. Other Players Traditionally, the ownership structure of many of establishments in this industry was based on farmer co-operatives owned and controlled by their dairy farmers. Primarily involved in the processing of milk and manufacture of milk products, these co-operatives generated a range of dairy products. However as market conditions became increasingly difficult, many of the co-operatives amalgamated and/or became companies. A number of acquisitions also occurred as the co-operatives once state based, sought to enlarge their geographic footprint. Another key type of participant in the industry today is the multinational dairy company which operates on a global scale, including the likes of Kraft Foods (owned by Phillip Morris Companies Inc), and Parmalat, as well as the likes of Nestle which is also involved in the production of non-dairy products. For example, Nestle is also involved in the manufacture of confectionery and coffee products. On a smaller scale, there are also a number of other players owned by overseas interests such as Lactos Tasmania, a member of the International Bongrain SA Specialty Cheese Group of France and Hoogwegt Australia Pty Ltd which is a subsidiary of the Hoogwegt Group based in The Netherlands. Many of these participants also produce non-dairy products. There also exists a number of smaller companies which cater to particular niche market segments. Many such companies are primarily involved in the production of specialty cheeses. For example, Lactos Pty Ltd (who claims to be Australia's Number One specialty cheesemaker) is a manufacturer and exporter of specialty cheeses which include among others blue vein, brie, camembert, emmental, gouda, gruyere, havarti, Neufchatel, raclette and swiss. These are marketed under the Aussie Gold, Cradle Mountain, Delice De France, Mersey Valley, St Claire and Tasmania Heritage brand names. Players of note include the following: Nestle Australia Ltd A wholly owned subsidiary of Nestle SA of Switzerland, the world's largest food company, Nestle Australia Ltd participates in the milk powder and malted milk powder segment of this industry through its Nesquik and Milo brands, and through its Sunshine milk powder products. It is also involved in the manufacture of infant food. For the year ended 31 December 2000, Nestle Australia earned sales revenues of $2.03 billion and a net profit after tax of $5.9 million (c.f $66.2 million in the previous year) from its various business units (Confectionery, Dairy Products, Food and Beverages, Friskies Pet Care, Nestle Food Service & Industrial and Nestle Pacific Islands). Unfortunately it is not possible to separate the results of its milk powder and infant food operations from total company activity. However a breakdown of Nestle Oceania (which includes Australia, New Zealand and the Pacific Islands) does give some indication of the relative importance of these operations. In 2000 milks accounted for 5.2 percent whilst infant nutrition accounted for 0.9 percent (compared with 24.7 percent for chocolate/confectionery, coffee (23.1 percent), culinary (10.0 percent) and pet food (9.1 percent) to list some of the larger product segments). Milk based products accounted for 63.0 percent of the regional group's exports, while infant nutrition accounted for 8.5 percent. Nestle Australia's market position rests on strong brand image, distribution and marketing support, as well as assistance with product support from its parent company. Generating sales in excess of CHF 81 billion in calendar 2000, the Nestle group employs some 224,540 people in 479 factories across the world. For the chilled dairy foods segment of this market in 2000-01, Nestle acquired the Ski Yoghurt brand, now held under license by Dairy Framers. This acquisition will enable Nestle to further expand its product throughout the market. Nestle now hold 10 to 16 per cent market share within the yoghurt segment. Parmalat A wholly owned subsidiary of Parmalat Finanziaria SpA, an Italian based global dairy company, Parmalat Australia Pty Ltd participates in this industry via its ownership of Pauls Limited which it had acquired in 1998. The Parmalat group operates 149 plants in 31 countries and employs approximately 38,300 people. In calendar 2000, the group reported consolidated sales of A$12.7 billion derived from its milk (61 percent of sales), fresh products (23.8 percent), vegetable (7.1 percent) and bakery (8.1 percent) divisions. Changing its name to Pauls Limited in 1998, the company is one of Australia's main manufacturers of milk (buttermilk, long life milk, extended life milk and flavoured milk), yoghurt and fresh dairy products (custard, cream, cheese and sour cream) and currently claims to hold approximately 22 percent of the Australian milk market. Brands under the Parmalat umbrella include Dairyfields, Haberfields, King Curl, Parmalat, Pauls, Rev, Skinny Milk, Swissfields, That's Y and Warwick. Of interest to this ANZSIC class is its "Warwick" brand of cheeses and the "Pauls" range of dips and cottage cheese. Types of cheese produced include cheddar, edam, mozzarella, brie, camembert and pizza. For the year ended 31 December 2000, Parmalat generated sales revenue of $688.5 million, down marginally from the record $723 million reported in the previous year. In the same year, the company recorded a considerable bottom line loss of $41.6 million in the face of a combination of heavy interest rate costs, lower wholesale milk prices, unrealised foreign exchange losses and abnormal losses. In 2002, Parmalat confirmed its Australian operations have accrued losses of almost $100 million over the past three years. According to dairy analysts, the loss has been attributed to inflated production costs and inefficient processing facilities. Throughout 2001-02, there had been heightened speculation that Parmalat would attempt to acquire National Foods, although this has been quashed since the announcement of the losses. Key Factors Key Sensitivities The key sensitivities affecting the performance of the Dairy Product Manufacturing n.e.c. in Australia industry include: · Domestic Goods Prices - Agricultural - Livestock Products - Milk Description: The price of milk. The domestic price of milk is of key importance given the importance of milk as an essential input. · Exchange Rates - Trade Weighted Index Description: Exchange rate movements. Given the importance of international trade to the industry, fluctuations in exchange rates can have a substantial impact upon industry performance. · Nutrition - Dairy Products Description: Health perceptions about dairy products. Consumer perceptions with regard to the "health" content of dairy foods are a key determinant of downstream demand for the various products produced by the industry. · World Prices - Agriculture - Livestock Products - Dairy Products Description: The world price of dairy products. This is a key determinant influencing both export returns plus returns generated on the domestic market. Key Success Factors · Guaranteed supply of key inputs Access to adequate milk supplies (especially in States other than Victoria and Tasmania) otherwise operating costs are raised by seasonality of production. · Marketing of differentiated products Product differentiation, including type of cheese and packaging. · Economies of Scope The ability of the firm to produce a range of dairy a...