A Fragmented European Dairy Market - Marketing Assignment Help

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Introducing the dairy industry

Dairy products are food products made from milk derived from cows or other mammals. Since the beginning of recorded time, people have been consuming milk-based products. Milk is a prime source of high-quality proteins, fat, and most importantly calcium, which are all important for developing and maintaining healthy bones and muscles. Because of these qualities, milk and milk-based products have traditionally been an important part of a balanced diet for children as well as for adults.

Today, more than six billion people across the world consume milk and milk-based products. The dairy market has come to consist of not only plain milk but also cream, cheese, yogurt, butter, and other products based on milk.

Dairy globally – a quick introduction

Global dairy demand is mainly driven by growing populations, rising income levels in emerging markets, and other basic macroeconomic factors. As average income levels are increasing in the emerging markets, people in these respective countries are changing their dietary habits to include more protein, including dairy, which especially fuels global dairy demand.

While demand primarily stems from emerging markets, the majority of the supply of raw milk comes from developed regions. Europe and the US have a milk surplus, meaning that they produce more milk than is being consumed, while Africa, Asia, and the Middle East have a milk deficit. As most dairy products are perishable, this geographical detachment is challenging dairies to develop flexible and efficient supply chains to avoid costs of wastage.

The dairy industry is further characterized by extreme volatility in raw milk prices, especially in recent years. Price volatility is felt throughout the entire dairy industry value chain, as high prices imply more value for the farmers’ raw milk, while it squeezes profit margins downstream and vice versa. This emphasizes the need to run a cost-efficient business and develop strong brands. Running a lean supply chain while being able to leverage brand equity in terms of premiums, consumer trust, and loyalty can enable dairies to even out the effects of unstable raw milk prices.

A fragmented European dairy market

The European dairy industry is characterized by a strong dairy culture and high level of consumption per capita, especially within traditional categories such as yogurt, cheese, and drinking milk products.

Overall, dairy sales growth is expected to be sluggish the coming years, primarily given declining sales of plain white drinking milk. Over the past decade alone, plain white milk – the third largest dairy category – declined by more than €3 billion in retail sales in Europe, and there is no sign of this development ceasing.

When tending to other traditional dairy categories, for instance cheese or yoghurt, the dynamics within Europe is highly fragmented on a country by country basis. The UK, Germany and the Nordic countries are expected to grow in these categories, whereas more Southern European countries are expected to decline, for instance Italy and France.

However, low growth does not equal zero opportunities in Europe. Opportunities lie in carefully matching countries and product mixes in order to capitalize on distinct developments in traditional as well as newer dairy categories. A great number of new dairy and dairy-alternative products are gaining traction, including lactose-free, almond, and soy milk-based products. Milk alternatives, for instance almond- and soy milk, are expected to experience double-digit growth rates in the coming years.

Dairies in Europe are challenged with navigating in a regional market with very fragmented dynamics. The question is how to develop and execute cross-country scalable and cost-efficient solutions unlocking the potentials of the market.

The young consumers in Europe

While dairy has been an integral part of a European daily diet, today’s relationship to food, and by implication dairy, is vastly different than yesterday’s. Pioneered by the millennial generation, consumers are much more demanding about foods’ content, texture, production method and origin, and point of purchase. This has been aided by a more digitalized environment democratizing the narrative on well-being and sustainable living. Health, trust, and convenience are on the millennial mind today.

Natural, fresh, and healthy

Millennials are pushing forward the health agenda, manifesting concepts such as “clean” eating, nutrition first, and “a better me”. The concept of clean eating demands that food is as close to its original, natural state as possible, freeing it from additives and artificial substitutions. In order to avoid food safety issues and to maximize the nutrition benefits, there is also a demand for food to be fresh when it is on the shelves.

Millennials are more educated about nutrition than ever before and as a result are more prepared to prioritize their food choices accordingly. Shifting between being carnivore and vegetarian or following lactose-free or gluten-free diets are examples of new ways that people are thinking about nourishment by trying to stay clear of certain food elements. There is especially a growing enthusiasm around plant-based food due to its perceived nutritional value, and the environmental, ethical, and health scares associated with non-vegan foods.

Amidst this health agenda, more people seem to find that daily milk consumption is unnecessary without clear benefits and is simply “not worth it”. The merits of the nutrition in dairy are being questioned, while many alternatives for maintaining your dietary health criteria are available.

Conscious and ethical living

Trust in traditional authorities and commercial brands is eroding as a result of food scandals, greater access to information, and a growing awareness of risk. Instead of traditional authorities, peer-to-peer advice and opinions have become a larger influencer and are widely available online, especially through social media. Never before have people been exposed to so much information from so many different sources or been more critical of that information as they are now.

Furthermore, millennials are becoming aware of how their consumption habits are impacting the environment and the well-being of employees, local communities, and animals. Although the willingness to purchase ethical products is not always evident in actual purchasing behavior, there is a clear desire to buy them and an expectation of corporate responsibility.

Competitive landscape

The dairy industry is comprised of farmers, who supply milk, dairies, which process and develop milk into milkbased products, and retailers, who sell these to consumers. Downstream, dairies are effectively competing for and sharing shelf space at distributor brick-and-mor - tar stores. With many alternatives usually available at each store, gaining consumer attention is challenging. Furthermore, changing consumer trends are inviting new dairy and dairy-alternative players to the playing field, which is putting pressure on established dairies to increase their brand equity.

Incumbents shifting focus

The European dairy industry is very fragmented, and dairy companies remain similar to one another, despite diversified product portfolios. In order to gain leverage over competitors, dairies in Europe have expanded mostly through mergers and acquisitions, as this has provided them with economies of scale in production, a wider product portfolio, and a broad distribution net - work. Economies of scale and rich product portfolios are especially important in the Europe, as the food retail sector is consolidated, forcing players to compete on price and offerings.

More recently, dairies have focused on brand building to differentiate themselves from competition. As it is, no dairy company has been able to build a brand on a pan-European level, since the industrial focus has primarily been on cost optimization and product innovation. To accommodate rising concerns about sustainability, dairies have also focused on develop - ing non-genetically modified feed and raising animal welfare standards. These have, however, come to be a prerequisite rather than a differentiator. With the mar - ket stagnating, the major industry players, including Groupe Lactalis, Danone, Arla Foods, and Müller Group, have increased their investment in innovation and re-branding to meet current trends and to differentiate dairy in order to gain consumer trust and loyalty.

Explosion of smaller players

Niche players having strong emotional engagement are starting to gain headwind , with several new and diverse companies entering the dairy industry. In Scan - dinavia alone, over 100 companies have entered the industry within the past 5 years. It is relatively easy for artisan producers of premium dairy to enter in Europe, since there is a large regional supply of milk available to tap into to develop new products and the value chain is easy to outsource.

Capitalizing on new dietary habits, these companies offer anything from conventional dairy products such as premium cheeses, new dairy products such as high-protein milk-based beverages, and dairy alterna - tives such as soy- and almond-based products. By tar - geting smaller groups with tailored products and a clear brand purpose, small entrants manage to build strong, valuable connections with their consumers. Individual small players are tough to spot, as they are utilizing dig - ital or other channels not covered by syndicated data. While they struggle with scaling, they are still eating into profits and revenue in all local settings, and many of them are being bought by Groupe Lactalis, Danone, and other larger dairies.

Private label dynamics

One of the major features of the European dairy indus - try is private labels – retailers selling products under their own brand name. These hold around 30% of the European market share and are popular primarily due to a higher level of trust, price competition, and avail - ability of high-quality products across several price segments. Private labels are especially strong in France, Germany, and the UK.

The increasing significance of private labels presents a contrasting market dynamic, as hypermarkets and supermarkets, which are dairies’ customers, are now simultaneously becoming their competition by pushing their private label brands. This creates a need for dairies to have a clear strategy and grow their own brands alongside the retailer brands.

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