Spilt milk

Australia’s dairy wholesale sector is coming off a good year, thanks to surging global food prices. But as prices fall, increased competition will lead to consolidation and force some companies out of the sector. IBISWorld general manager ROBERT BRYANT explains.

By Robert Bryant

Australia’s dairy wholesale sector is coming off a good year, thanks to surging global food prices. But as prices fall, increased competition will lead to consolidation and force some companies out of the sector.

Companies within Australia’s dairy sector are used to taking the good with the bad, and in the last 12 months they have seen plenty of both. While drought continues to provide enormous challenges for the sector, strong global demand during the first half of 2008 (remember the threat of the global food crisis?) helped push up prices.

The dairy wholesale products sector has its own set of challenges. Deregulation has increased the exposure of the dairy industry to both domestic and international market forces, which has stimulated industry consolidation and a national approach to dairy manufacture and wholesaling.

In recent years, retailers have been increasingly bypassing separate wholesalers and buying directly from the manufacturer. This has increased competition, particularly for smaller, less efficient specialist dairy product wholesalers. Effective wholesaler bypass has been aided by the increased consolidation and vertical integration of dairy product manufacturers.

Industry profitability has also been negatively affected by the large and increasing presence of house branded products. The passing on of increases in costs for house brand products has been challenging due to contract lengths and supermarket power.

However, there are some bright spots. The industry has benefited from an increase in imports and revenue has been boosted by increases in dairy product prices as a result of strong international demand. Overall revenue growth is expected to grow by 1.3% in the five year period to 2008-09.

Industry revenue is expected to increase at a marginal rate of just 0.7% over the five year period to 2013-14, based on forecast increases in dairy product production, partially offset by decreases in dairy product prices. Furthermore, the push for more house-brand products will benefit supermarkets and squeeze wholesalers’ margins.

This will put pressure on operators to fight for survival and industry rationalisation is expected to occur with less profitable businesses exiting the industry.

Consolidation within the industry is also predicted with the drive for economies of scale and some excess manufacturing capacity. There is likely to be increased ownership by multinationals with continued globalisation of the food manufacturing sector.

Potential exists for the industry to further increase its market share in global traded dairy products through increases in demand from the deregulation of certain markets such as the EU.

Key success factors for operators in the industry

• Guaranteed supply of key inputs. Access to, or contracts with, reliable manufacturers helps maintain a consistent level of supply of dairy produce for wholesaling. In this industry, the major players are actually also the manufacturers.
• Having an extensive distribution/collection network. An effective distribution network can increase the competitiveness of wholesalers by capitalising on economies of scale and reducing the costs of produce.
• Ability to control stock on hand. Effective stock control management can help minimise stock spoilage and waste through the timely delivery of products.
• Having an integrated operation. Efficient warehouse and distribution systems increase competitiveness by reducing the costs of wholesale produce.
• Having contacts within key markets. Established links with a number of retail outlets give wholesalers a reliable and consistent level of demand for their products.
• Market research and understanding. Marketing of differentiated products, such as different type of cheese or new forms of packaging can stimulate demand for dairy produce at a retail level, which will flow through to increased demand at a wholesale level.
• Provision of superior after sales service. The provision of excellent customer service can help wholesaler build and maintain reliable supply and demand relationships.

Products and service segmentation

Major market segments

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au