Dairy Wars: How things can turn sour for unpreparednFierce competition will be in value chain efficiency

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Chris Chenga
The dairy industry is turning out to be an exciting sector in the economy. Excitement in this regard is in the context of competition. Competition  is intriguing for investors with an eye on market economies, and it is good for macro-economic growth.

Indeed there are other sectors with market participants galloping neck to neck in the contest for margins and market share.

Zimbabwe’s dairy sector, however, is exceptional in that competition appears along all stages of the supply chain; production, processing, retail and even advertising!

From where it all begins at the lactating heifers on green pastures, up to various end points which could be breakfast tables where kids gather, the office fridge in your accounts department, or straw mat grannies at early evening tea time, less overt multiple stages influence the ultimate consumer preference.

The narrative extends into other milk by-products such as cheese, yoghurt and ice cream. These new product lines have also seen a number of market participants venture for potential profits. Notwithstanding this positive rival atmosphere, the dairy sector has had structural issues to contend with.

Even though there are a number of challenges to have beset the sector, none are more expounding than those of supply chain viability. This is a structural matter.

According to the Zimbabwe Association of Dairy Farmers (ZADF),the production cost of milk had reached an average of $0,59 per litre locally, compared to a much lower global average of $0,42.

Supply chain competitiveness suffered greatly after the land reform process that took place three years after local volumes had actually reached their peak output of 260 million litres. But due to no decrease in consumer demand, and eating habits having become more inclusive of other milk by-products, local producers had since been surpassed by lower cost foreign competitors  to supply the market.

Encouragingly, there has been concerted action in unison by dairy stakeholders. The coherence displayed by dairy stakeholders can perhaps be likened those of the National Bakery Association of Zimbabwe. Public and private sector engagement has led to swift policy recommendations and subsequent action items.

These include import restrictions, production model standards and benchmarks, as well as identifying cost drivers that are adopted from business environment bottlenecks.

Being a sector with well-organised representation, many industry executives are optimistic that structural constraints are of a finite existence. Wide sentiment in the industry is that if market participants do not position themselves now, they’ll struggle for market share in a structurally open market where fierce competition will solely be based on the equilibrium of efficiencies!

Since the dairy sector is market driven, based on consumer demand, participants such as Dairibord, DenDairy, Alpha Omega, and more recently ProBrands,are the anchors of value chain efficiency.

As the leading dairy brands recognisable to consumers, it will be a battle for margins and market share between these participants.

Consumers have become used to pricing points rigidly fixed between $1,15 and $1,25 per litre carton, for instance. The elasticity of demand between alternative brands should force participants to focus their competition in downstream value chain activities. This presents the option of two competitive models.

First, participants can source their own suppliers on the open market. The competitive advantage in this case would be restricted to off take persuasion alone.

Simply, price will persuade farmers to supply to whichever preferred participant. At whatever price offered per litre, farmers either deliver at depots or collection trucks. This sourcing model will prove difficult to sustain for a number of reasons.

Initially, neither market participant can rely of outbidding on price alone. As alluded to earlier, production costs are already exorbitant, and all market participants would rather deal in a manner that pushes pressures acquisition prices downwards not upwards.

As prices cannot be pushed onto the consumer, participants would be hesitant to cut already thin margins just to purchase milk before overheads that accompany processing, packing, and marketing.

This sourcing model is also unsustainable in that there is not enough dairy herd to satisfy supply. Furthermore, of the small dairy herd that exists, there are not enough farmers with suffice expertise to regularly deliver market grade milk — at least not enough to bring volume certainty to participants.

Perhaps most overwhelming to the sourcing model is that dairy farming is highly capital intensive with new farmers taking as long as a year just to break even. There are not enough self-finance dairy farmers to supply adequate milk.

Thus, a second model will be more determinant on margins and market share.

Unlike a passive sourcing model, market participants may be forced into actively investing into developing their own milk suppliers.

This model has gained traction over the last two years. It is also a potential competitive advantage to market participants that are able to pass on value chain efficiencies onto their milk suppliers.

For instance, margins can be created in competencies such as reducing calf mortality, improving feed conversion ratios, and enhancing the milk yield from heifers during inter-calving period. This is highly technical and requires skilled expertise, but it is an essential strategy for improving margins.

Certain industry insiders have started to engage potential farmers for such programs also circumventing placing an over reliance on farmers who are not capacitated to supply reliably.

Granted there is a larger investment proposition to this model, it does mitigate many risks that the first model has recurrently apportioned to market participants. It puts a lot of risk mitigation within a company’s control and influence. Thus, whichever model a market participant chooses the trade offs are clear.

Many industrialists in Zimbabwe have become notorious for settling on conventional explanations for lost market share and value chain inefficiencies.

Indeed this past year has seen rhetoric of heavy rain depressing heifer lactation.

However, such has become the competitive nature of the dairy industry that some participants have already started investing in not only shelters, but mechanised habitats for cows.

These come with alternative energy sources that utilise cheaper and more readily available organic biogas.

Moreover, these innovations present opportunities for organic cow feeds that nourish heifers and improve milk output. A lot more competitive variables affect margins and market share beyond the cheap acquisition of milk. Regardless, it is very hard to differentiate upstream value chain activities for a commodity like milk and its by-products.

Organisational management such as administration and marketing activities are of undeniable consequence.

However, it is sound foresight to believe that whichever market participants to survive what will only become a more fierce sector, will do so only by enhancing downstream value chain efficiencies.

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