Global Market Decline of Milk Pushes Down Arla’s Revenue for H1

26 Aug 2016 --- Despite a European crisis in the dairy industry, Arla Foods has delivered strong half year results with its branded sales growing 6.1 percent, although decreasing market prices in Europe has negatively impacted overall Group revenue.

Arla’s revenue for the first half of 2016 was €4.9 billion (US$5.5 billion) which is 5.3 percent lowered compared to the same period in 2015. 

Increasing milk volumes and oversupply across Europe has generated downward pressure on market prices in the first half of 2016. Global milk prices reached the lowest level for many years. 

Despite the drop in revenue, Arla says the outlook for the second half of the year is positive and maintains its expectations in terms of profits and expects improvements in its milk prices to farmers. 

Earlier this week, the National Farmers’ Union also said it was a relief that Arla is to raise its milk prices by one pence per liter from September 1, which means the farmer-owned cooperative will increase the price it pays its farmers. It’s part of a move to raise prices due to weakened sterling value since the Brexit announcement in June, increasing international commodity prices and oversupply in Europe.

Overall milk volumes in the first half of 2016 went up 1.9 percent to 7.2 billion kg, but despite taking in more milk, Arla claims to have moved the surplus into profitable channels like the retail and foodservice space which has been a vital move this year. Arla says it has delivered on its promise to not only process all of the milk that it’s farmers supply but to “innovate” to get the best prices for farmers. 

“In a very difficult market environment, we have continued to improve the quality of our business by relentlessly pursuing our strategic direction. Our dairies have effectively processed 119 million kg extra milk from our owners and our commercial teams in all markets have proactively ensured that this extra volume has been sold into retail and foodservice channels, avoiding it being used for the production of less profitable commodity products,” says CEO in Arla Foods, Peder Tuborgh.

“This is crucial at a time when Arla and our farmer-owners continue to be challenged by the global market decline.”

Where Arla has performed best so far this year is in its brands. Arla’s strategic branded volume-driven growth was 6.1 percent compared to 3.1 percent during the first half of 2015. This was also double the pace of growth of private-label products. The revenue growth was generated by the Arla brand (up 5 percent), Lurpak (up 7 percent) and supported brands such as Puck (up 10.2 percent). In contract, Castello showed a reduction in the first half of the year, decreasing by 0.7 percent. 

“Our brands are growing according to plan despite tough market conditions. Our international business has contributed significantly to this development, primarily due to increased sales in Sub-Saharan Africa, China and Southeast Asia. In Europe, where some markets are dominated by private-label products, our branded business has continued to grow despite tough market conditions,” says Arla Foods CFO Natalie Knight.

“The performance of our strategic brands is crucial, even at a time when global prices have driven down our overall revenue, because it strengthens the quality of our revenue through improved market positions and increased profitability in line with our strategy, Good Growth 2020.”

Arla’s profit for the first half year was €124 million (US$140 million), corresponding to a profit share of 2.5 percent of revenue (excluding gain from sale of entities), compared to 2.3 per cent in the same period last year.

To support Arla’s overall cost reduction ambition, the company’s Good Growth 2020 strategy includes an ambitious cost improvement target of €400 million (US$451 million), to be reached by the end of 2019. Arla says the program started at the beginning of 2016 and the first €100 million (US$113 million) of saving are on track for the end of this year. 

As part of its strategy, Arla also restructured the organization with 500 white collar redundancies and expects to see the first cost improvements take effect in the second half of this year and achieve annual savings of around €35 million (US$39.5 million) in 2017 and beyond. 

The company also says the difficulties in the current global dairy market are reflected in its performance price of Euro-cent 30.0 per kg in the first half of 2016. 

“The challenging market situation affected our ability to safeguard the milk price for our farmer-owners, who have suffered the consequences of the oversupply of milk in Europe. Despite these difficult market conditions, we continue to outperform our international peer group. We anticipate to be at the high end of the range of our expectations of 103 to 105 versus our peer group index for the full year,” adds Knight.

“The severe downturn in the market over the last two and a half years has been an eye opener. To me, the difficult market situation makes the strength of being an international dairy cooperative even more obvious. We do not have to stake all our milk in one single market or a narrow product portfolio. In a difficult market, we have paid a milk price above our peers. I am confident that our strategy will continue to deliver positive results for Arla’s owners in the years to come,” adds chairman of Arla Foods, Åke Hantoft.

Arla remains positive for 2016 and expects revenue for the full year to be between €9.5 billion (US$10.7 billion) and €9.8 billion (US$11 billion) and the profit share to be within the target range of 2.8 percent and 3.2 percent by year-end. 

Milk volumes finally seem to be flattening in Europe which means prices are leveling out and a much more stable market is predicted for the rest of 2016. 

“Looking at the second half of 2016, we see a positive trend taking hold as the milk production is declining again in Europe and prices are starting to go up. This will be a much welcomed development for Arla and for our farmer-owners. We have already announced our first increase in the on-account milk price to our farmers with effect from September, and we do expect an improving market situation as we move towards the end of the year.”

“Our success in the second half of 2016 is reliant on our ability to continue to deliver our Good Growth 2020 strategy, and thereby improve the milk price to our hard-pressed farmers,” adds Tuborgh.

Choose Goodness
Meanwhile, in the same week as Arla Foods reveals its performance for the first half of 2016, it’s “Choose Goodness” breakfast campaign has been launched in a bid to kick start the appetites of UK consumers in the morning. 

Arla Foods UK has launched a major new breakfast campaign as part of its £100 million (US$117 million) commitment to support healthier eating among consumers as part of a strategy to increase revenue by almost a third by 2020. There will be a series of campaigns, initiatives and programs launched over time to encourage healthier food choices and highlight the nutritional qualities of dairy products. 

The Choose Goodness campaign is fronted by TV chef Gizzi Erskine (pictured) who is encouraging the British public to upgrade the most important meal of the day, through adding more variety into their breakfast repertoire. She has created seven recipes, one for each day of the week, to encourage people to mix-up their breakfast routine and add more diary where possible.

It comes after Arla research showed 82 percent of people eat the same thing every morning, even though a majority (51 percent) know that breakfast is considered the most important meal of the day. 

This is why the Choose Goodness campaigns challenges people to commit to “seven great days” of nutritional, protein-rich breakfasts, inspired by Gizzi and including a range of Arla dairy ingredients.

The online campaign features advice and inspiration on how to do breakfast properly, backed up by a comprehensive social media campaign encouraging people to share their own seven great days of breakfast using #choosegoodness.

So far the campaign has been performing well online, reaching around three million people to date through Twitter, Facebook and Instagram.

Tomas Pietrangeli, Arla Foods UK, managing director, said: “As part of our ambitious new strategy for growth, we want to educate consumers on the benefits of dairy products wherever possible.”

“Campaigns such as Choose Goodness are a great example of the ways in which we can support and promote healthier eating habits. The videos have been getting a great response across social media, and we encourage people to have a look for inspiration to choose goodness in their breakfast before reaching for the same thing they always do.”

by Gaynor Selby