The COVID-19 pandemic has impacted every industry on the planet over the last two years - and the dairy sector is certainly no exception. The maturity and longevity of the sector have enabled many organizations to weather the disruption. With newly updated data for 2020, our recent report into the dairy industry trends presents a clearer picture of this performance.
The distinction between the three types of entities within dairy - Producers, Processors, and Traders - is crucial to any analysis of the sector. In particular, this distinction is vital to understanding the factor that seems to be the single greatest determinant of profitability and growth - scale.
With producers needing large quantities of raw milk to turn a profit and traders shifting sizable volumes of products, both are generally larger than processors, which mostly require limited machinery to cut up cheese or similar dairy products. The importance of these differences in scale is seen frequently throughout the report.
Remarkable companies
Despite the turmoil of the last two years, several companies within the dairy sector performed remarkably well throughout 2020. These include many of Europe’s largest dairy companies. That being said, DMK paid the price for focusing on cheaper bulk products and struggled in 2020.
Impressive performance was identified by some of the industry’s major players, including Royal Friesland Campina, Arla, Glanbia, and Galbani. This impressive performance was largely due to economies of scale, which provided a greater opportunity to shift sales across channels during the pandemic. Interestingly, Galbani’s performance was noteworthy due to the way its strong branded retail position was leveraged during a time when people had more money to spend on high-quality retail products. This helped the company to achieve record performance.
During the pandemic, focusing on added value was a better way of maintaining profitability rather than selling bulk products. In line with the strong performance of Galbani, one of the largest producers of mozzarella and other Italian cheeses, other producers of Italian fresh cheese like Latteria Montello and Deliziosa were also able to record strong levels of profitability by producing high-quality products with protected origins. Danone, meanwhile, benefitted from the diversity of its product range - an advantage of being the largest dairy producer in the world.
Return on assets
If we look at the value chain links individually, it is clear that producers have been able to generate consistently higher ROA levels. This is predominantly because producers own the far majority of assets in the industry - hence why they generally take home a larger piece of the pie.
The lower levels of returns seen among processors and traders was compounded somewhat during the pandemic, as lockdowns severely reduced sales across certain channels. While retail fared well, for example, the effect of COVID restrictions on the restaurant trade greatly dented sales for many processors and traders.
Key Insights
As mentioned previously, larger players generally enjoy higher margins than their smaller peers in the European dairy sector. This grants them higher levels of resilience. This has been much-needed during the pandemic, which has driven growth stagnation across the value chain, with processors affected most. When looking across different sales channels, foodservice companies have been affected most by the pandemic, breaking the strong growth trend visible in earlier years.
One dairy industry trend that has not been invalidated by the pandemic is the tightness of the margins involved. These continue to be pressurized. The longevity of the dairy sector does give some cause for optimism, however.
Trade data suggests growth will recover in 2021 and, looking further ahead, it is likely that dairy sales will stabilize or even increase, with a post-pandemic recovery probable. This should translate to greater returns, even if companies decide that margins are too tight to increase their investment.
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