Riyadh – Decypha: Cooled cowsheds, temperature-regulated water networks, the latest supply chain technologies, imported cows, and imported feed; the dairy industry in Saudi Arabia has seen unparalleled developments over the past 40 years. The kingdom currently produces 74% of the GCC’s dairy production volume, according to a report by Mordor Intelligence, an India-based think tank, published in November 2016. It exports 20% to 30% of its dairy production to GCC countries making over $533 million in 2013, according to Zenith International, a food and drink consultancy.
Meanwhile, local consumption has continued to outgrow local production by almost 33.3% since 2004 to date, according to data from the U.S. Foreign Agriculture Service, a government body. “People are concerned about cutting down their consumption of fatty and high-calorie foods, thereby shifting to healthy dairy products,” noted the Mordor Intelligence report.
What is remarkable is that Saudi Arabia receives very little rainfall, making it an unsuitable natural habitat for cattle. Meanwhile, dairy cow production and milk expiry can drop by up to 20% if temperatures increase beyond 25 degrees, according to research by the University of Missouri in the USA. In Saudi Arabia, the average ambient temperature is above 25 degrees from March until November.
Building the Dairy Industry
High temperatures and little rainfall mean that initial investments and overhead costs are significantly higher for Saudi-based dairy investors than in cooler countries. However, cheap oil and a supportive government which has been looking to achieve food self-sufficiency since the 1970s have offset these high costs.
High demand growth rates also helped offset these costs, as Saudis have a natural affinity for milk and dairy products. It is the second most consumed food category since 2011, according to IMF data. Between 2011 and 2015, dairy consumption increased by 20.6%, according to Alpen Capital, a GCC-based investment bank. Supporting this growth is that consumer spending in Saudi Arabia has continued to grow from SAR 220 billion in 2014 to SAR 260 billion by the end of 2017 despite falling oil prices since mid-2014.
To increase sales at home and regionally, dairy companies in Saudi Arabia direct a significant portion of their investments to improve packaging, increase social media presence and increase advertising campaigns through various channels, according to the report by Mordor Intelligence. “New product development in the dairy products category has slowed down and instead, companies are focusing on packaging improvements and extensive campaigning,” it said.
Almarai
Almarai is the second oldest surviving dairy producer in Saudi Arabia, created in 1977 between two Irish investors and Prince Sultan bin Mohammed bin Saud Al-Kebeer. It is the biggest dairy producer in the kingdom with a market share of around 45% of the dairy market by value, according to the Mordor Intelligence report. It is also the most vertically integrated company in the world, even having its own training academy from which it chooses new employees. In 2016, it was ranked 40 on the Forbes 100 most innovative companies list. Almarai achieved a net income of over SAR 2 billion in 2016, a near 8.7% growth over the previous year. Almarai has trading companies in the GCC and two factories located in Jordan and Egypt.
Last year in the local market, Almarai achieved a 50% market share by value in the yoghurt and sour milk category, according to a Euromonitor report published in December 2016. It also achieved a 46% market share in fresh milk sales last year, as reported by Feed Navigator, a specialized news portal. In the cheese market Almarai has a 27% market share by value and 28% market share by value in drinking milk products, according to the Euromonitor report. In 2016, Almarai entered into the powdered milk business for the first time, fortifying its position as the most diverse producer of dairy categories in MENA. Also in the same year, Almarai acquired a 14,000 acre plot in California to secure feed for near 190,000 cows.
Looking ahead, Almarai seems to be cautious at least until 2021. “The plan will focus on monitoring operating costs, optimizing use of available resources, and targeting deployment of capital investment worth SAR 14.5 billion ($3.87 billion),” said a press release published mid-2016. This money will be spent on “replacing existing assets, improvements in production capacities in farms, and manufacturing and distribution facilities and expanding into other geographies,” added the release.
Alsafi Danone
This is the second biggest dairy producer in Saudi Arabia with a 21% market share, according to the Mordor Intelligence report. Alsafi was founded in 1979. In 2001 it was acquired by French Danone Group. The Saudi-based company currently produces several of the French company’s brands including Danette and Actimel along with its own brands including Alsafi Labneh, Al Safi Milk and Safio, long-life plain and flavored milk. It exports to UAE, Oman and Iraq.
Al Safi Danone doesn’t publish any reports about its future plans or financials. However, the coming three years might see more new products coupled with a reduced advertising budget. This is because, in February, its parent company, Danone, announced that it plans to cut global costs by EUR 1 billion over the coming three years, as reported by Reuters in February 2017. The plan will see cutting in spending on marketing and general expenses. The saved cash will be directed to developing new products, according to the news report.
Nada Dairy
Despite being a family company, Nada Dairy is the third biggest dairy produce in Saudi Arabia with a 13% market share. The company was established in 1982 by Sheikh Mohammed Bin Abdullah Al Othman in the Eastern Province of Saudi Arabia. The company’s main focus is plain and flavored, fresh and long-life milk products produced by 20,000 cows, according to the company’s website.
The company is prioritizing the introduction of new and innovative products. They were the first to introduce guava-flavored and pineapple-flavored fresh milk in 2011 and 2015, respectively. In 2016, they launched Greek yoghurt and diversified into iced cappuccino and latte, both mostly comprised of milk. To attract more kids to buy their flavored milk, the company named two of their flavored milk products Dauyah and Azzaz (both common Saudi names) in 2014.
The National Agriculture Development Company (NADEC)
NADEC is the fourth biggest dairy company in Saudi Arabia with a 9% market share. It was established in 1981 by royal decree. The state currently owns 20% while the rest is traded on the Saudi Stock Exchange. In 2015, the company inaugurated its own R&D center to develop new products and packaging solutions. Yet, in 2016, the company saw its net profits decline sharply to SAR 100 million from SAR 141 million due to a massive 218% increase in the “cost of funding and other costs” which reached SAR 73 billion. NADEC mainly exports to Gulf countries.
The company has 75,000 cows producing 1.2 million liters of milk as of 2016, according to the company website. The company produces milk, yoghurt, labneh and fresh cream as well as plain and flavored UHT milk, pudding, six different types of packaged cheese and butter. The company’s six dairy farms to produce 3.4 million packed products every day.
In December 2016, NADEC inaugurated a new factory to produce plastics used to package their dairy products. “The factory will enhance quality control, reduce costs,” said Abdulaziz Al-Babtain, NADEC Managing Director and CEO in a press release. “[It will] create an integrated system for producing dairy and juice plastic packs... taking into account the potential increase of production capacity according to future growth plans.”
Others
Saudi Arabia’s oldest surviving dairy company, Saudi Dairy & Foodstuff Company (SADAFCO), was originally a joint venture created in 1976 between three dairy regional companies. By 1990, all three merged under this jointed venture. The company is controlled by Saudi and Kuwaiti businessmen who listed it on the Saudi stock exchange in 2005. It has three factories and 19 depots in Saudi Arabia. It also has depots in Qatar, Bahrain, Kuwait and Jordan, which serve exports. Uniquely, SADAFCO produces ice-cream along with other traditional dairy products. In 2016, it had the biggest market share in ice-cream with 21.8%. For plain milk, the company is the second biggest with a market share of 30.7%, according to its 2016/2017 annual report. Those two product categories make up 79% of the company’s profits. By March 2017, the company recorded a net profit of SAR 301.8 million, up 15.7% compared to a year earlier.
A prominent dairy producer is National Food Industries Co. (Luna), which was founded in 1993. If we exclude cheese, yogurt and drinking milk, Luna is the biggest dairy producer in Saudi Arabia with a market share of 20% at the end of 2016, according to the Euromonitor report. It dominates the sweetened condensed milk market with 39% market share as of 2016. The company also produces flavored canned milk, sterilized cream, UHT milk, cheese spreads, packed cheddar cheese, powder milk and evaporated milk. Luna only meets local demand.
Ornua Saudi Arabia uses a business-to-business model where it sells unbranded dairy to other companies. It was created in 2013 after Ireland's Ornua acquired 75% of Al Wazeen Trading cheese manufacturing facility for EUR 20 million. It currently produces white cheese, labneh and mozzarella as well as powder milk. Its clients include Panda, Carrefour and Riyadh Foods.
The Future
Demand for dairy is expected to boom given that half of Saudi Arabia’s population is under the age of 26 and 27.3% are under 14, according to UN statistics in 2016. This age group is growing by nearly 500,000 babies every year, which should be enough to guarantee continued growth in demand for dairy products.
The growth in consumption of drinking milk is most evident among females, according to the Euromonitor report. “As employment rates among women are rising, so are women more desirous of keeping their bodies in shape and health in check,” said the report. Demand for milk is expected to grow by an average of 11.62% annually until 2020 while its production will only grow by 4.9% according to the Mordor Intelligence report.
Yoghurt and other milk products on the other hand will see the most innovation, according to the Euromonitor report, to prevent sales from stagnating due to the dull nature of the products. Until 2020, production will increase at an annual 5.39%, according to the Mordor Intelligence report. “The consumption of these products will always be on the higher side owing to the extremely hot weather of the country for most of the year. Since yoghurt and sour milk products are expected to bring cooling relief, demand will remain high,” said Euromonitor.
Cream production will grow by 28.9% a year. UHT milk will grow by 8% a year, according to the Mordor Intelligence report. The exception is cheese whose retail value dropped by 7% in 2016 from an average of 11% from previous years, according to the Euromonitor report. The main reason Saudi Arabia’s economy faltering due to falling oil prices. “This will eventually hurt the economy and have an effect on people’s spending. Consumers are more likely to downgrade to lower-priced products and look more for discounts and sales than ever,” said the Euromonitor report.
The bigger threat however is water scarcity. “The GCC region is facing extreme water scarcity due to persistent decline in its renewable water resources,” said Mahboob Murshed, managing director of Dubai-based investment bank Alpen Capital to BQ magazine early 2016. “This could have an indirect impact on the local production of dairy products and hinder its growth.”
By Tamer Mahfouz
