Description
Deregulation of the Australian dairy industry, and ensuing supermarket strategies are transforming the fresh milk supply chains. Factors such as increasing consumer awareness, concerns about food safety and environment, innovation, supply chain integration and rationalisation of supply base are adding momentum to this transformation.
SUCCESS STRATEGIES BEING IMPLEMENTED IN FRESH MILK SUPPLY CHAINS
Issar, G., Cowan, R.T. & Wegener, M.
University of Queensland, Gatton, Australia
[email protected]
Abstract
Deregulation of the Australian dairy industry, and ensuing supermarket strategies are transforming the fresh milk supply
chains. Factors such as increasing consumer awareness, concerns about food safety and environment, innovation, supply
chain integration and rationalisation of supply base are adding momentum to this transformation. Milk processors in
response to changing market expectations are getting proactive in their relationship with retailers across all aspects of
business, innovating to generate sufficient returns from proprietary brands and strategically orienting themselves to
develop a mixed customer portfolio and appropriate management structures to service that portfolio. Milk producers are
expanding businesses to achieve production and cost efficiencies and strengthening contractual relationships on input
and output side for a greater security.
Introduction
The completion of the dairy industry deregulation process in June 2000 is transforming the fresh milk and fresh milk
products supply chains in Australia. This transformation is set in an environment where markets are getting more complex
and competitive, consumers more discerning and conscious about food safety and public policy is more focused on
environment related issues. Supply chains are becoming more integrated, and innovation in product, process and supply
chains is revolutionising the way products are being produced, distributed and marketed.
This paper examines the factors that have driven the Australian fresh milk industry in recent years and identifies key
strategies that actors across the supply chain are adopting for success. The paper is based on research, following supply
chain management literature, which identifies the risk management strategies in the dairy industry supply chains in
Australia. The enquiry seeks to understand the nature and shape of supply chains and the exchange relationship between
supply and value chains.
The fieldwork for the research involved semi-structured interviews at middle to senior management level in the retail,
processing, production and input market of the dairy industry supply chains. The data was managed and analysed using
software NVivo ver. 2.0, which assists in identifying major themes and relationships between concepts in data.
Key drivers in the Australian fresh milk supply chains
The volume of milk going into the liquid milk market now accounts for around 17% of Australia’s milk production. It is
the largest segment of the domestic market, accounting for around 40% of total value of the domestic dairy market
(Australian Dairy Corporation 2002).
There are six key factors that have driven the transformation of the dairy industry in recent years:
1. Deregulation
2. Supermarket strategies
3. Food safety and supply chain integration
4. Innovation
5. Environmental sustainability
6. Rationalization of supply base
Deregulation
Deregulation of the dairy industry can be understood in the wider context of progression of changes that are occurring
throughout industries at international and national levels. Globalisation and trade liberalisation have changed the
marketplace of all agri-food industries. International markets are now opening to trade, and domestic markets are
exposed to increasing level of competition, facilitated by advances in transport and communication technologies.
Post farmgate deregulation opened up significant areas of opportunity for retailers in terms of increasing their margins in
the fresh dairy produce category. Previously government not only set farm gate prices for market milk, but also had
control over pricing throughout the supply chain, determining margins for processors, distributors and retailers. They also
controlled where each processor could sell milk though franchised regions, which meant processors were not competing
in any way for sales of market milk. Deregulation gave supermarkets the ability to treat the retailing of the product
differently, to establish their own brands and to develop a different set of relationship with their suppliers.
Supermarket strategies
Understanding the factors driving supermarket strategies and the way actors in the upstream supply chain are
responding and adjusting to these strategies provides us with the key to understanding the transforming dairy industry
supply chains.
In August 2000 Woolworths announced standard national milk prices for its own label milk that effectively created a new
floor in the Australian price of fresh whole milk. It was the first time that a retail chain had set national prices for milk.
These new prices followed the announcement of two-year supply contracts which were offered to tender and attracted
aggressive bidding from the major milk processors. Other retailers, Coles, Franklins and IGA announced they would
match Woolworths’ lower milk prices for their respective labels (Australia Competition and Consumer Commission
2001).
While the overall milk consumption is slowly declining since the mid nineties to an estimated level of 96 litres per head in
2001/02, milk sales through supermarket channels have increased from 49% of drinking milk sales in 1999/00 to nearly
55% in 2001/02, of which nearly 50% is own label compared with 26% in 1999/00 (Australia Dairy Corporation 2002).
As a result supermarkets chains have increased the shelf space allocated to bottled milk to accommodate additional
processor brands and their own labels, and raised the profile of milk products in their stores. Supermarkets also tend to
use milk as a traffic builder and will sacrifice margin in order to attract customers into the store. Own label milk on an
average is 30% cheaper than the proprietary brand milk.
With increased own label presence on the shelves and increased shelf space for fresh milk dairy produce, supermarkets
are now looking ways to better manage the category in-store in terms of how the product is handled, placed in stores,
quality, presentation and pack size. Own label products, including milk, are thus no longer competing only on price but
on all aspects with major manufacturers’ brands. Own label products are a priority for supermarkets and their aggressive
promotion and marketing will be a predominant feature of the Australian market over the next decade (Retail World
2003a). In the dairy segment, supermarkets are expanding own labels to include reduced fat milk, low fat milk, flavoured
milk, UHT milk and other fresh dairy produce.
Supermarkets are now more aware of the cost structures of the processors and thus have leverage in bargaining.
However, they are also realising that a sustainable and profitable supplier is critical for their survival and they need to be
accommodating in sharing the profits in the supply chains.
Supply chain integration
A more discerning and food safety aware customer is a major factor behind increasing supply chain integration.
Consumers want to know more about the products they purchase, the composition of the products, where ingredients
come from and the way in which the products are produced throughout the chain.
In response supermarkets have drawn their ‘Food Standards’ which detail ‘Good Manufacturing Process’ with provision
for quality audits. All of the major supermarkets now require fresh produce to come from suppliers who comply with the
food standards code and good manufacturing practices.
To ensure traceability throughout the supply chain, from raw material to product on the shelves, an integrated,
transparent supply chain is necessary, which in turn requires standardisation of data and supporting technologies such as
tracking and tracing systems (Retail World 2003b).
Supermarkets’ increasing market share, focus on consumer demand, knowledge of processors’ cost structure and
emphasis on trace back capability has enabled them to implement the supply chain integration agenda in a more
aggressive way.
Innovation
In a highly competitive market such as fresh milk and fresh milk products, characterised by oversupply and a commodity
orientation, innovation in product, process and/or supply chain is the only long-term source of competitive advantage.
Retailers place much emphasis on selecting suppliers who demonstrate desire and an ability to be innovative – not just in
developing new products, but also in all aspects of business.
Processors innovate not only to get a preferential status from supermarkets but also to find new consumption and retail
opportunities to decrease their dependence on supermarkets.
Environmental sustainability
Changing public perception and government policy on environment sustainability has resulted in consideration of
environment in all stages of the supply chain. There is increasing implementation of environmental reporting standards
by dairy-food businesses through the supply chain. Supermarkets are concentrating on minimisation of waste, recycling
efforts, reduction of energy consumption. Processors are designing environmentally friendly, recyclable packaging. Milk
producers are under increasing scrutiny on water and land use efficiency and animal welfare.
Rationalization of supply base
The above developments in the business environment are seeing a continuation of the consolidation wave in the milk
production and processing sectors. The need to gain market power, to profit from economies of scale, to gain a hold in
new markets, to develop strong brands and to access new technology drives the consolidation process.
Key success strategies being implemented by processors in supply relationships with retailers
At the national level three processors dominate the liquid milk market, National Foods (34%), Dairy Farmers (31%) and
Parmalat (21%). National Foods is currently the only national processor dominant in the drinking milk sector in
Tasmania, SA, WA, with a smaller market share in NSW and Queensland. Dairy Farmers is a dominant processor in
NSW and the second largest processor in Queensland. Parmalat is the dominant player in the Queensland market. All
three processors have strong market positions in Victoria. Although liquid milk is not their core product line, Murray
Goulburn has established an 18% market share of the long life milk category under the Devondale brand (Rabobank
2003).
Proactive relationship with retailer across all aspects of business
The relationship between retailer and processor is moving from a buyer-supplier relationship to a partnership approach.
Processors now have multi-functional linkages with supermarkets and are gearing business structure to meet with
supermarket demands (Fearne & David 1999). They are restructuring their distribution and marketing networks to be
more proactive and responsive to the customer requirement. Business unit managers are being put at respective
supermarkets to assist/shape customer’s view of the category and its future development. Supply chains are being
streamlined to facilitate integrity and squeeze out any inefficiency in the system.
Processors are investing in information tracking systems to be up-to-date with the market developments and competitor
moves. Electronic information sharing is being enhanced to create a more responsive, efficient and paperless
transactional environment. However, there are costs associated with bringing about these changes and how supermarket
specific these changes should be is an issue that will need to be addressed by the processors.
Innovation
Increased competition amongst processors for supermarket tender and also to compete with supermarkets ‘own brand’
has resulted in increased product innovation and introduction of branded speciality milk. For example, in 2001/02 sales
were fresh regular milk (56%), speciality milk (28%), flavoured milk (9%) and UHT milk (7%) (Australia Dairy Corporation
2002).
Processors also expanded into UHT, organic and soy beverage market. The soy beverage market, a traditional
competitor to the dairy industry, is an emerging market in Australia and has benefited from heavy promotion of its health
benefits. The soy beverage market has been growing at 15% per annum and now accounts for approximately 45 million
litres per annum through supermarket sales. The market includes a number of non-traditional dairy companies, however
National Foods has a joint venture with Vitasoy, and holds 11% share of the soy beverage segment (Rabobank 2003).
Parmalat have recently launched their range of soy beverages products, and has entered into organic milk segment to
enhamce its presence in the ‘dairy case’ on the supermarket shelves.
Consumers have signalled that they are interested in product refinements as they are prepared to pay premium for
modified milk products. Processing companies must generate sufficient returns from proprietary brand products to be
able to invest in new product and packaging initiatives, as supermarkets own label milk had a negative impact on both
the revenues and profits of all the processors operating in the drinking milk market. There is therefore increasing
emphasis on developing modified milk products.
Strategic orientation
The milk processing companies, small in relation to their more powerful Fast Moving Consumer Goods (FMCG)
counterparts, are striving to achieve the level of service and professionalism which the customer have come to expect
from FMCGs. Processors are trying to develop a mixed customer portfolio and appropriate management structures to
service that portfolio. The moves include expanding in the domestic market, expanding the product mix, putting more
resources into brands and expanding into offshore businesses of appropriate products in face of static domestic demand.
Yoghurt is the fastest growing segment of the Australian dairy industry, benefiting from a favourable image as a healthy,
convenient snack and experiencing growth of around 8% per annum. Unlike drinking milk, yoghurt has more brand
loyalty. The market is dominated by four main players, Dairy Farmers (32%), National Foods (31%), Nestle (12%) and
Parmalat (11.5%) (Rabobank 2003).
Sales through route channel, such as convenience stores and service stations, are still an important distribution route for
dairy products and a channel over which processors have comparatively more control. Processors have been putting
more resources in developing these channels.
As is the case in most countries, liquid milk production is predominantly for the domestic market. Less than 5% of
Australia’s liquid milk is sold on the export market with 83% of the exports going to Asia and 75% of the total being in
the form of UHT milk. Historically, Australia’s dairy companies have tended to focus on either the domestic or
international market, however, in recent times they have diversified their product offerings and begun focussing on both
domestic and export markets. Dairy Farmers and National Foods now have 9% and 10% revenues generated through
export route respectively (Rabobank 2003).
In Australia fresh milk still accounts for 86% of liquid milk sales, however UHT is a growing segment of the market. The
preference for fresh milk is similar to market situation in the US, which consumes predominantly fresh milk, however in
European countries such as Spain and France, virtually all milk is sold in long life format.
Rationalisation of supply base
The fall in profitability of the major liquid milk processors following deregulation has added strength to the arguments for
further rationalisation within the drinking milk sector. Although supermarkets could still be a predominant actor in the
supply chain, further rationalisation of processing supply base would tend to balance the power relationships. This is
likely to see returns to the processing companies improve which could then flow on to farmers in the form of higher milk
price.
Over the last few years there have been a number of attempts to achieve this rationalisation with discussion taking place
between all three players and, despite significant industry and media speculation as to how the rationalisation may
unfold, a successful negotiation is yet to be achieved.
Key success strategies being implemented by processor in buying relationships with milk
producers
Securing a reliable supply base
Following deregulation, previously secure markets were open to competition from all processors. Processors trying to
gain access to a new market had to establish a supply base. At the same time milk producers were leaving the industry,
and this trend was accelerated by the recent drought, resulting in increase competition for farmgate milk. To secure year
round, consistent and reliable supply, milk processors are now entering into binding contractual arrangements with milk
producers. It not only provides them with security of supply but also better control in terms of logistics, quality, and
traceability.
Milk pricing strategy, which was earlier quota or pool based, was changed to reflect the complex market situation,
including factors such as matching supply-demand patterns, composition and quality requirements, competition, product
mix, attracting more milk producers and keeping a viable supply base.
The determinants of farmgate price of milk in most of the contractual arrangements are scale of milk production,
composition, supply pattern, quality, distance from the factory or market and commitment of the milk producer. Quality
audit protocols are also being strengthened to streamline quality of milk input.
To secure a reliable supply base, processors also had to invest in human resources for better communication with milk
producers, to provide better farm services and improve production efficiencies and cost competitiveness of milk
producers.
Key success strategies being implemented by milk producers in a supplier relationship
with milk processors
The effect of deregulation was felt more in states such as Queensland, NSW and WA, where a higher proportion of milk
was utilised in drinking milk. In Queensland farm numbers were reduced from 1999/00 to 2001/02 by more than 25%
and in NSW more than 23% (Australian Dairy Corporation 2002). Drought and growing concern on environmental
issues put further pressure on milk producers. With decreased profit margins, increased uncertainty in the market place,
increased input costs, stricter water and land use regulations, a number of less efficient producers have left the industry
and the remaining are becoming larger and more efficient.
With larger farm businesses, human resource management issues also came to the fore, as milk producers were
inexperienced in dealing with employed labour. Farmers’ organisations, such as Queensland Dairyfarmers’ Organisation
(QDO), which earlier strongly influenced farmgate milk price, were also trying to restructure their roles to suit the new
environment.
Economic efficiency
Milk producers are increasing efficiency with expanding herd size to achieve economies of scale and paying more
attention to the detail of farm management. They have upgraded dairy equipment, irrigation systems, and are
monitoring their costs more closely with benchmarks. They are improving their feed conservation systems and in many
cases growing their own feed to override cost fluctuations.
Contractual relationship
Milk producers are entering into contracts to have greater security. On the input side forward contracting on feed is a
growing trend. For the milk sales the majority of milk producers now have supply contracts with their processors. To gain
best value from these contracts milk producers will need to upgrade evaluation and negotiation skills.
Producer activism
Milk producers are also trying to redress the perceived power imbalances in the supply chain through attempts to
collective bargain for a sustainable base price, have some say in retailer-processor milk price negotiations and lobbying
with environmental agencies.
Innovation
In keeping with the overall trend in the supply chain, milk producers are also innovating in farming systems as well as
trying to find new consumption opportunities. Producing milk to processor specifications, finding a niche in organic milk
production, processing own milk, which finds acceptance in the local community due to embeddedness and perceived
freshness, are some of the examples milk producers are innovating.
Better communication with processors
With relationships becoming critical to long-term sustainability of all actors along the supply chain, there have been
attempts on both sides, milk producers and processors, to improve communication in terms of market trends forecasting
and signalling. In the new environment, rather than simply delivering a bulk commodity to the processor, milk producers
need to understand the quality specifications, the contractual obligations of both parties, where the risks lie and who
bears those risks (Hobbs & Young 2000).
Environmental sustainability
Farmers also need to become more efficient in terms of water and land use efficiency. With increasing herd sizes and
moves towards intensive farming, animal welfare is becoming an important issue. Even though farmers recognise the
importance of these issues, they are currently in a changeover phase and there is certainly a scope for better
communication and exchange of information between environment protection agencies and the milk producers.
Conclusion
The Australian fresh milk and milk product industry is in a transformation phase since deregulation and may take many
more years to stabilise. This decade will see a continuation of the process which has led thus far to a substantial increase
in scale, scope, sophistication and strategic importance of the fresh milk supply chains in Australia. It is clear that the
dominance of food retailers in food supply chains in Australia is growing, however, it is to be seen whether retailers in
Australia recognise the opportunities to drive value and not only volume in the fresh milk category. Milk processors and
producers are realigning themselves along the supply chain to meet the market expectations. Further analysis of data is
expected to look deeper into the strength of drivers of change and the implications of supply chain integrity on the actors
in the supply chain.
References
Australian Competition and Consumer Commission 2001, ‘Impact of farmgate deregulation on the Australian milk
industry: study of prices, costs and profits’ ACCC, Canberra.
Australian Dairy Corporation 2002, ‘Australian Dairy Industry In Focus 2002’ Australian Dairy Corporation, Melbourne.
Fearne, A & David, H 1999, ‘Success factors in the fresh produce supply chain: insights from the UK’ Supply Chain
Management, vol. 4, no. 3, pp. 120-128.
Hobbs, JE & Young LM 2000, ‘Closer vertical co-ordination in agri-food supply chains: a conceptual framework and
some preliminary evidence’ Supply Chain Management, vol. 5, no. 2, pp. 131-142.
Rabobank 2003, ‘Global Dairy Focus’, Rabobank, Sydney
Retail World 2003a, ‘Private label growth depends on retailers’ Retail World vol. 56, no. 1, pp. 7.
Retail World 2003b, ‘National strategy focuses on food safety’ Retail World vol. 56, no. 1, pp. 18.
doc_761757717.pdf
Deregulation of the Australian dairy industry, and ensuing supermarket strategies are transforming the fresh milk supply chains. Factors such as increasing consumer awareness, concerns about food safety and environment, innovation, supply chain integration and rationalisation of supply base are adding momentum to this transformation.
SUCCESS STRATEGIES BEING IMPLEMENTED IN FRESH MILK SUPPLY CHAINS
Issar, G., Cowan, R.T. & Wegener, M.
University of Queensland, Gatton, Australia
[email protected]
Abstract
Deregulation of the Australian dairy industry, and ensuing supermarket strategies are transforming the fresh milk supply
chains. Factors such as increasing consumer awareness, concerns about food safety and environment, innovation, supply
chain integration and rationalisation of supply base are adding momentum to this transformation. Milk processors in
response to changing market expectations are getting proactive in their relationship with retailers across all aspects of
business, innovating to generate sufficient returns from proprietary brands and strategically orienting themselves to
develop a mixed customer portfolio and appropriate management structures to service that portfolio. Milk producers are
expanding businesses to achieve production and cost efficiencies and strengthening contractual relationships on input
and output side for a greater security.
Introduction
The completion of the dairy industry deregulation process in June 2000 is transforming the fresh milk and fresh milk
products supply chains in Australia. This transformation is set in an environment where markets are getting more complex
and competitive, consumers more discerning and conscious about food safety and public policy is more focused on
environment related issues. Supply chains are becoming more integrated, and innovation in product, process and supply
chains is revolutionising the way products are being produced, distributed and marketed.
This paper examines the factors that have driven the Australian fresh milk industry in recent years and identifies key
strategies that actors across the supply chain are adopting for success. The paper is based on research, following supply
chain management literature, which identifies the risk management strategies in the dairy industry supply chains in
Australia. The enquiry seeks to understand the nature and shape of supply chains and the exchange relationship between
supply and value chains.
The fieldwork for the research involved semi-structured interviews at middle to senior management level in the retail,
processing, production and input market of the dairy industry supply chains. The data was managed and analysed using
software NVivo ver. 2.0, which assists in identifying major themes and relationships between concepts in data.
Key drivers in the Australian fresh milk supply chains
The volume of milk going into the liquid milk market now accounts for around 17% of Australia’s milk production. It is
the largest segment of the domestic market, accounting for around 40% of total value of the domestic dairy market
(Australian Dairy Corporation 2002).
There are six key factors that have driven the transformation of the dairy industry in recent years:
1. Deregulation
2. Supermarket strategies
3. Food safety and supply chain integration
4. Innovation
5. Environmental sustainability
6. Rationalization of supply base
Deregulation
Deregulation of the dairy industry can be understood in the wider context of progression of changes that are occurring
throughout industries at international and national levels. Globalisation and trade liberalisation have changed the
marketplace of all agri-food industries. International markets are now opening to trade, and domestic markets are
exposed to increasing level of competition, facilitated by advances in transport and communication technologies.
Post farmgate deregulation opened up significant areas of opportunity for retailers in terms of increasing their margins in
the fresh dairy produce category. Previously government not only set farm gate prices for market milk, but also had
control over pricing throughout the supply chain, determining margins for processors, distributors and retailers. They also
controlled where each processor could sell milk though franchised regions, which meant processors were not competing
in any way for sales of market milk. Deregulation gave supermarkets the ability to treat the retailing of the product
differently, to establish their own brands and to develop a different set of relationship with their suppliers.
Supermarket strategies
Understanding the factors driving supermarket strategies and the way actors in the upstream supply chain are
responding and adjusting to these strategies provides us with the key to understanding the transforming dairy industry
supply chains.
In August 2000 Woolworths announced standard national milk prices for its own label milk that effectively created a new
floor in the Australian price of fresh whole milk. It was the first time that a retail chain had set national prices for milk.
These new prices followed the announcement of two-year supply contracts which were offered to tender and attracted
aggressive bidding from the major milk processors. Other retailers, Coles, Franklins and IGA announced they would
match Woolworths’ lower milk prices for their respective labels (Australia Competition and Consumer Commission
2001).
While the overall milk consumption is slowly declining since the mid nineties to an estimated level of 96 litres per head in
2001/02, milk sales through supermarket channels have increased from 49% of drinking milk sales in 1999/00 to nearly
55% in 2001/02, of which nearly 50% is own label compared with 26% in 1999/00 (Australia Dairy Corporation 2002).
As a result supermarkets chains have increased the shelf space allocated to bottled milk to accommodate additional
processor brands and their own labels, and raised the profile of milk products in their stores. Supermarkets also tend to
use milk as a traffic builder and will sacrifice margin in order to attract customers into the store. Own label milk on an
average is 30% cheaper than the proprietary brand milk.
With increased own label presence on the shelves and increased shelf space for fresh milk dairy produce, supermarkets
are now looking ways to better manage the category in-store in terms of how the product is handled, placed in stores,
quality, presentation and pack size. Own label products, including milk, are thus no longer competing only on price but
on all aspects with major manufacturers’ brands. Own label products are a priority for supermarkets and their aggressive
promotion and marketing will be a predominant feature of the Australian market over the next decade (Retail World
2003a). In the dairy segment, supermarkets are expanding own labels to include reduced fat milk, low fat milk, flavoured
milk, UHT milk and other fresh dairy produce.
Supermarkets are now more aware of the cost structures of the processors and thus have leverage in bargaining.
However, they are also realising that a sustainable and profitable supplier is critical for their survival and they need to be
accommodating in sharing the profits in the supply chains.
Supply chain integration
A more discerning and food safety aware customer is a major factor behind increasing supply chain integration.
Consumers want to know more about the products they purchase, the composition of the products, where ingredients
come from and the way in which the products are produced throughout the chain.
In response supermarkets have drawn their ‘Food Standards’ which detail ‘Good Manufacturing Process’ with provision
for quality audits. All of the major supermarkets now require fresh produce to come from suppliers who comply with the
food standards code and good manufacturing practices.
To ensure traceability throughout the supply chain, from raw material to product on the shelves, an integrated,
transparent supply chain is necessary, which in turn requires standardisation of data and supporting technologies such as
tracking and tracing systems (Retail World 2003b).
Supermarkets’ increasing market share, focus on consumer demand, knowledge of processors’ cost structure and
emphasis on trace back capability has enabled them to implement the supply chain integration agenda in a more
aggressive way.
Innovation
In a highly competitive market such as fresh milk and fresh milk products, characterised by oversupply and a commodity
orientation, innovation in product, process and/or supply chain is the only long-term source of competitive advantage.
Retailers place much emphasis on selecting suppliers who demonstrate desire and an ability to be innovative – not just in
developing new products, but also in all aspects of business.
Processors innovate not only to get a preferential status from supermarkets but also to find new consumption and retail
opportunities to decrease their dependence on supermarkets.
Environmental sustainability
Changing public perception and government policy on environment sustainability has resulted in consideration of
environment in all stages of the supply chain. There is increasing implementation of environmental reporting standards
by dairy-food businesses through the supply chain. Supermarkets are concentrating on minimisation of waste, recycling
efforts, reduction of energy consumption. Processors are designing environmentally friendly, recyclable packaging. Milk
producers are under increasing scrutiny on water and land use efficiency and animal welfare.
Rationalization of supply base
The above developments in the business environment are seeing a continuation of the consolidation wave in the milk
production and processing sectors. The need to gain market power, to profit from economies of scale, to gain a hold in
new markets, to develop strong brands and to access new technology drives the consolidation process.
Key success strategies being implemented by processors in supply relationships with retailers
At the national level three processors dominate the liquid milk market, National Foods (34%), Dairy Farmers (31%) and
Parmalat (21%). National Foods is currently the only national processor dominant in the drinking milk sector in
Tasmania, SA, WA, with a smaller market share in NSW and Queensland. Dairy Farmers is a dominant processor in
NSW and the second largest processor in Queensland. Parmalat is the dominant player in the Queensland market. All
three processors have strong market positions in Victoria. Although liquid milk is not their core product line, Murray
Goulburn has established an 18% market share of the long life milk category under the Devondale brand (Rabobank
2003).
Proactive relationship with retailer across all aspects of business
The relationship between retailer and processor is moving from a buyer-supplier relationship to a partnership approach.
Processors now have multi-functional linkages with supermarkets and are gearing business structure to meet with
supermarket demands (Fearne & David 1999). They are restructuring their distribution and marketing networks to be
more proactive and responsive to the customer requirement. Business unit managers are being put at respective
supermarkets to assist/shape customer’s view of the category and its future development. Supply chains are being
streamlined to facilitate integrity and squeeze out any inefficiency in the system.
Processors are investing in information tracking systems to be up-to-date with the market developments and competitor
moves. Electronic information sharing is being enhanced to create a more responsive, efficient and paperless
transactional environment. However, there are costs associated with bringing about these changes and how supermarket
specific these changes should be is an issue that will need to be addressed by the processors.
Innovation
Increased competition amongst processors for supermarket tender and also to compete with supermarkets ‘own brand’
has resulted in increased product innovation and introduction of branded speciality milk. For example, in 2001/02 sales
were fresh regular milk (56%), speciality milk (28%), flavoured milk (9%) and UHT milk (7%) (Australia Dairy Corporation
2002).
Processors also expanded into UHT, organic and soy beverage market. The soy beverage market, a traditional
competitor to the dairy industry, is an emerging market in Australia and has benefited from heavy promotion of its health
benefits. The soy beverage market has been growing at 15% per annum and now accounts for approximately 45 million
litres per annum through supermarket sales. The market includes a number of non-traditional dairy companies, however
National Foods has a joint venture with Vitasoy, and holds 11% share of the soy beverage segment (Rabobank 2003).
Parmalat have recently launched their range of soy beverages products, and has entered into organic milk segment to
enhamce its presence in the ‘dairy case’ on the supermarket shelves.
Consumers have signalled that they are interested in product refinements as they are prepared to pay premium for
modified milk products. Processing companies must generate sufficient returns from proprietary brand products to be
able to invest in new product and packaging initiatives, as supermarkets own label milk had a negative impact on both
the revenues and profits of all the processors operating in the drinking milk market. There is therefore increasing
emphasis on developing modified milk products.
Strategic orientation
The milk processing companies, small in relation to their more powerful Fast Moving Consumer Goods (FMCG)
counterparts, are striving to achieve the level of service and professionalism which the customer have come to expect
from FMCGs. Processors are trying to develop a mixed customer portfolio and appropriate management structures to
service that portfolio. The moves include expanding in the domestic market, expanding the product mix, putting more
resources into brands and expanding into offshore businesses of appropriate products in face of static domestic demand.
Yoghurt is the fastest growing segment of the Australian dairy industry, benefiting from a favourable image as a healthy,
convenient snack and experiencing growth of around 8% per annum. Unlike drinking milk, yoghurt has more brand
loyalty. The market is dominated by four main players, Dairy Farmers (32%), National Foods (31%), Nestle (12%) and
Parmalat (11.5%) (Rabobank 2003).
Sales through route channel, such as convenience stores and service stations, are still an important distribution route for
dairy products and a channel over which processors have comparatively more control. Processors have been putting
more resources in developing these channels.
As is the case in most countries, liquid milk production is predominantly for the domestic market. Less than 5% of
Australia’s liquid milk is sold on the export market with 83% of the exports going to Asia and 75% of the total being in
the form of UHT milk. Historically, Australia’s dairy companies have tended to focus on either the domestic or
international market, however, in recent times they have diversified their product offerings and begun focussing on both
domestic and export markets. Dairy Farmers and National Foods now have 9% and 10% revenues generated through
export route respectively (Rabobank 2003).
In Australia fresh milk still accounts for 86% of liquid milk sales, however UHT is a growing segment of the market. The
preference for fresh milk is similar to market situation in the US, which consumes predominantly fresh milk, however in
European countries such as Spain and France, virtually all milk is sold in long life format.
Rationalisation of supply base
The fall in profitability of the major liquid milk processors following deregulation has added strength to the arguments for
further rationalisation within the drinking milk sector. Although supermarkets could still be a predominant actor in the
supply chain, further rationalisation of processing supply base would tend to balance the power relationships. This is
likely to see returns to the processing companies improve which could then flow on to farmers in the form of higher milk
price.
Over the last few years there have been a number of attempts to achieve this rationalisation with discussion taking place
between all three players and, despite significant industry and media speculation as to how the rationalisation may
unfold, a successful negotiation is yet to be achieved.
Key success strategies being implemented by processor in buying relationships with milk
producers
Securing a reliable supply base
Following deregulation, previously secure markets were open to competition from all processors. Processors trying to
gain access to a new market had to establish a supply base. At the same time milk producers were leaving the industry,
and this trend was accelerated by the recent drought, resulting in increase competition for farmgate milk. To secure year
round, consistent and reliable supply, milk processors are now entering into binding contractual arrangements with milk
producers. It not only provides them with security of supply but also better control in terms of logistics, quality, and
traceability.
Milk pricing strategy, which was earlier quota or pool based, was changed to reflect the complex market situation,
including factors such as matching supply-demand patterns, composition and quality requirements, competition, product
mix, attracting more milk producers and keeping a viable supply base.
The determinants of farmgate price of milk in most of the contractual arrangements are scale of milk production,
composition, supply pattern, quality, distance from the factory or market and commitment of the milk producer. Quality
audit protocols are also being strengthened to streamline quality of milk input.
To secure a reliable supply base, processors also had to invest in human resources for better communication with milk
producers, to provide better farm services and improve production efficiencies and cost competitiveness of milk
producers.
Key success strategies being implemented by milk producers in a supplier relationship
with milk processors
The effect of deregulation was felt more in states such as Queensland, NSW and WA, where a higher proportion of milk
was utilised in drinking milk. In Queensland farm numbers were reduced from 1999/00 to 2001/02 by more than 25%
and in NSW more than 23% (Australian Dairy Corporation 2002). Drought and growing concern on environmental
issues put further pressure on milk producers. With decreased profit margins, increased uncertainty in the market place,
increased input costs, stricter water and land use regulations, a number of less efficient producers have left the industry
and the remaining are becoming larger and more efficient.
With larger farm businesses, human resource management issues also came to the fore, as milk producers were
inexperienced in dealing with employed labour. Farmers’ organisations, such as Queensland Dairyfarmers’ Organisation
(QDO), which earlier strongly influenced farmgate milk price, were also trying to restructure their roles to suit the new
environment.
Economic efficiency
Milk producers are increasing efficiency with expanding herd size to achieve economies of scale and paying more
attention to the detail of farm management. They have upgraded dairy equipment, irrigation systems, and are
monitoring their costs more closely with benchmarks. They are improving their feed conservation systems and in many
cases growing their own feed to override cost fluctuations.
Contractual relationship
Milk producers are entering into contracts to have greater security. On the input side forward contracting on feed is a
growing trend. For the milk sales the majority of milk producers now have supply contracts with their processors. To gain
best value from these contracts milk producers will need to upgrade evaluation and negotiation skills.
Producer activism
Milk producers are also trying to redress the perceived power imbalances in the supply chain through attempts to
collective bargain for a sustainable base price, have some say in retailer-processor milk price negotiations and lobbying
with environmental agencies.
Innovation
In keeping with the overall trend in the supply chain, milk producers are also innovating in farming systems as well as
trying to find new consumption opportunities. Producing milk to processor specifications, finding a niche in organic milk
production, processing own milk, which finds acceptance in the local community due to embeddedness and perceived
freshness, are some of the examples milk producers are innovating.
Better communication with processors
With relationships becoming critical to long-term sustainability of all actors along the supply chain, there have been
attempts on both sides, milk producers and processors, to improve communication in terms of market trends forecasting
and signalling. In the new environment, rather than simply delivering a bulk commodity to the processor, milk producers
need to understand the quality specifications, the contractual obligations of both parties, where the risks lie and who
bears those risks (Hobbs & Young 2000).
Environmental sustainability
Farmers also need to become more efficient in terms of water and land use efficiency. With increasing herd sizes and
moves towards intensive farming, animal welfare is becoming an important issue. Even though farmers recognise the
importance of these issues, they are currently in a changeover phase and there is certainly a scope for better
communication and exchange of information between environment protection agencies and the milk producers.
Conclusion
The Australian fresh milk and milk product industry is in a transformation phase since deregulation and may take many
more years to stabilise. This decade will see a continuation of the process which has led thus far to a substantial increase
in scale, scope, sophistication and strategic importance of the fresh milk supply chains in Australia. It is clear that the
dominance of food retailers in food supply chains in Australia is growing, however, it is to be seen whether retailers in
Australia recognise the opportunities to drive value and not only volume in the fresh milk category. Milk processors and
producers are realigning themselves along the supply chain to meet the market expectations. Further analysis of data is
expected to look deeper into the strength of drivers of change and the implications of supply chain integrity on the actors
in the supply chain.
References
Australian Competition and Consumer Commission 2001, ‘Impact of farmgate deregulation on the Australian milk
industry: study of prices, costs and profits’ ACCC, Canberra.
Australian Dairy Corporation 2002, ‘Australian Dairy Industry In Focus 2002’ Australian Dairy Corporation, Melbourne.
Fearne, A & David, H 1999, ‘Success factors in the fresh produce supply chain: insights from the UK’ Supply Chain
Management, vol. 4, no. 3, pp. 120-128.
Hobbs, JE & Young LM 2000, ‘Closer vertical co-ordination in agri-food supply chains: a conceptual framework and
some preliminary evidence’ Supply Chain Management, vol. 5, no. 2, pp. 131-142.
Rabobank 2003, ‘Global Dairy Focus’, Rabobank, Sydney
Retail World 2003a, ‘Private label growth depends on retailers’ Retail World vol. 56, no. 1, pp. 7.
Retail World 2003b, ‘National strategy focuses on food safety’ Retail World vol. 56, no. 1, pp. 18.
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