The Roar of the Celtic Tiger
While the Irish are obviously pleased with how things have been progressing, they have too high a regard for history to become complacent. The term Emerald Fox is starting to replace Celtic Tiger more and more and perhaps better reflects the importance attached to identifying and developing niches where they have competitive advantage. This is particularly relevant in the dairy sector.
The infamous Cream Separator
Believe it or not, Ireland was a major player in the international dairy industry as far back as the 1800s when Irish butter was considered the best in the world and commanded the highest prices. Indeed, Cork (Ireland's second largest city located in the main dairy producing region) was for many years the site of the world's busiest butter exchange during the 1800s, with buyers coming from all over Europe to source product. Not surprisingly, most of this butter ended up in Britain, though it took another 100 years before we thought of wrapping it in attractive gold foil and branding it KERRYGOLD.
The development of the cream-separator changed all of that and Ireland steadily lost butter market share to the French, Danes and other Europeans. This new technology produced a more uniform product in greater quantities and at a lower price, and indirectly helped influence how the Irish dairy industry subsequently developed - It was clear that the numerous small farmers had to pool their resources if they were ever to compete with their foreign counterparts.
After studying how dairy farming was organised throughout Europe, the first dairy co-operative (based on the Danish system) was eventually established in 1889. By 1900 their number had grown to fifty-six and by the early 1960s to one hundred and sixty. The words merger and rationalisation were then invented and the number of individual co-operatives went into decline.
Common Agricultural Policy
Ireland's image as an essentially agricultural economy is in reality far from accurate (software accounts for the country's greatest share of exports) but dairying is indeed more important to the economy in relative terms than its European neighbours. Agriculture contributes around 4% to GDP, which is more than double the EU average and second only to Greece.
Consumption of dairy products in Ireland itself is of course limited and around 80% of milk production is ultimately destined for export in finished product form.
The Irish dairy industry's present portfolio of products has been influenced by twenty-five years operating within the heavily regulated Common Agricultural Policy (CAP) regime. In the 1970s and early 1980s European CAP market support structures (intervention support, levies on imports, subsidies for exports etc.) indirectly encouraged growth in production of dairy products that could be stored i.e., the focus was on commodities rather than higher value-added products.
Ironically, some commentators feel that the introduction of quotas (national limits on milk production) in 1984 and their subsequent renegotiations at EU level indirectly gave Irish exporters an edge on their European competitors. In the ten years to 1995, Irish quotas were reduced by 6-6½% compared with 8½-10% for other European countries. Ireland's share of EU exports consequently increased.
Milk Production and Utilisation
Total milk production in Ireland has been relatively stable at around 5.0-5.1 billion litres during the last five years and it can be seen from the accompanying chart that an exceptionally high share of this milk is converted into butter.
Chart: Ireland: Utilisation of Raw Milk Supply (whole milk only), 1998
Source: Central Statistics Office
With Ireland exporting around 120,000 tonnes of butter in 1998 and 130,000 tonnes of milk powder (70% of which is skim milk powder), it is recognised that production emphasis will have to shift away from such commodities in future years in favour of products offering better growth prospects/higher margins e.g., cheese and dairy based ingredients. This is recognised at both government and industry level.
When is a Co-op not a Co-op?
Four organisations control around 60% of the 5 million tonnes Irish milk pool. These are Glanbia (formerly Avonmore Waterford), Kerry Group, Dairygold and Golden Vale. In fact just one of these, Dairygold, is a "true" co-operative, the others having taken on PLC status during the 1980s. Rather cleverly, their owner-farmers agreed to exchange their assets for significant stakes and board representation in the new quoted PLCs, decisions which have paid off very handsomely in subsequent years. The new "PLC coops" also did well, using the new funding at their disposal to develop in directions which would otherwise not have been possible.
One of the main difficulties faced by these organisations is of course ensuring that the interests of all stakeholders are satisfied. Owner-farmers are clearly interested in getting as high a price as possible for their milk, at a time when processors are looking to minimise costs in order to remain competitive. Reconciling these different interests has led to considerable tensions from time to time.
Glanbia is by far the largest dairy processor in Ireland with 1998 sales of around $3 billion. Formed by the merger of two of the countries largest co-operatives in 1997, Avonmore and Waterford, a new streamlined and marketing orientated organisation is beginning to emerge under the leadership of Mr Ned Sullivan who joined the group following a career with Grand Metropolitan (subsequently Diageo). Glanbia processes approximately 30% of the Irish milk pool.
Already, a strategic review has led to the company divesting a number of non-core or weak businesses such as cheese manufacturing in Wisconsin (USA), Irish meat interests, and most recently its UK liquid milk operation. The UK business processed around 650 million litres in 1998, the fifth largest supplier in the market, and was sold to Express Dairies for around Stg£120 million. Glanbia felt that rationalisation of supply in the UK was inevitable and eventually decided to sell rather than actively grow the business. Glanbia's main focus in the future is expected to be in selected consumer foods and global dairy ingredients.
Kerry Group is of course already a major player in dairy ingredients worldwide, having transformed itself from a small County Kerry farmers' co-operative in 1972 to an aggressive international food organisation with manufacturing interests from the US to Malaysia. Turnover in 1998 was around $2.5 billion, 25% of which came from Ireland.
Kerry is now essentially an ingredients company - ingredients accounted for 63% of turnover in 1998 - and most industry observers feel that this figure will increase in future years.
Dairygold sales were a little under $1 billion in 1998, slightly more than half of which was dairy related (meat a further 26% and agri-trading 22%). Dairygold is a true co-operative and therefore has a different set of priorities to the quoted companies. It is however much more innovative than some of its smaller competitors and has been quite proactive in developing export markets for its products (speciality cheese, meat products and dairy ingredients).
Dairygold's neighbour Golden Vale is slightly smaller in turnover terms and has undergone a fundamental restructuring following the collapse of its share price in 1996. It managing director Mr Jim Murphy (formerly in charge at the Cheese Company in the UK) has been instrumental in developing the company's non-dairy interests, in particular a venture into the ready meals sector through its acquisition of Rye Valley in 1998. Recently it has had considerable success in Ireland and the UK with its CHEESESTRINGS cheese snack aimed at children. Meanwhile, loss-making cheese production facilities in the Netherlands have been liquidated. Golden Vale remains a leading supplier of sliced cheese to the food service sector internationally and the company's present portfolio of products is now more balanced than at any time in the past.
Most Irish milk powder and butter exports are channelled through the Irish Dairy Board, a State-owned company until 1973 when Ireland joined the EC, and now owned by the dairy co-operatives. Its most enduring success was launching the KERRYGOLD brand in the early 1960s, the brainchild of the Board's first General Manager Tony O' Reilly (of Heinz fame). The IDB operates through an integrated network of subsidiary companies, overseas sales offices, agents and distributors.
As dairy processors increased in size and expanded operations outside of Ireland, many are now bypassing the Board, particularly with non-commodity products, and selling through their own marketing infrastructure.
One of the more positive developments in recent years was the establishment of Bord Bia, the Irish Food Board, to provide the Irish food industry with strategic leadership and practical advice in the pursuit of increased sales, market penetration and improved positioning in international markets. It also actively promotes Ireland as a source of quality food products throughout the world and has been instrumental particularly in assisting many smaller specialist producers of gourmet cheeses, yoghurts etc. develop sales outside Ireland.
Playing catch up
One of the urgent and immediate challenges facing the Irish dairy industry generally is how to organise itself to best prepare for a rapidly changing marketplace. Under the Agenda 2000 CAP reform cuts, the sector is facing a 15% fall in prices in five years time. Already the smaller coops are working with operating margins of less than 2%, significantly less than their counterparts in Europe and Australia/New Zealand. Clearly something must give and it is only a matter of time before further mergers/rationalisation take place as is happening in Denmark, Germany, New Zealand, the US, Netherlands and elsewhere.
Indeed in New Zealand, which is similar in size to Ireland (population less than 4 million), the two largest coops in the North Island and South Island hope to merge to create a company controlling 60% of the available milk pool. Recent reports suggest that the 10 remaining dairy groups, led by Kiwi Dairies, may also join to create one single giant dairy company. Like Ireland, the New Zealanders must export to survive and have established aggressive marketing teams dotted around the world.
The history of the Irish dairy industry is one of constant adaptation in response to changing market circumstances and it is only a matter of time before change is forced on some of the less progressive processors. Rationalisation of milk supply and processing are essential if exports are to remain competitive. Ireland must pursue a strategy for minimising commodity production costs while at the same time actively developing supply of higher value added products.
Companies are also aware of the importance of more aggressively marketing their products outside Ireland and indeed in identifying opportunities in non-traditional markets. Adopting a "fox mentality" should ensure that Irish dairy producers not only survive in a less regulated market but thrive.
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