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BABCOCK INSTITUTE DISCUSSION PAPER NO. 2007-3

COMPETITIVE STRATEGIES OF DAIRY PROCESSING FIRMS IN IRELAND

William D. Dobson

The Babcock Institute for International Dairy Research and Development Universi ly of Wisconsin-Madison, College of Agricultural and Life Sciences

140 Agriculture Hall, 1450 Linden Drive Madison, WI 53706-1562

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BABCOCK INSTITUTE DISCUSSION PAPER NO. 2007-3

COMPETITIVE STRATEGIES OF DAIRY PROCESSING FIRMS IN IRELAND

William D. Dobson

The Babcock Institute for International Dairy Research and Development University of Wisconsin-Madison, College of Agricultural and Life Sciences

240 Agriculture Hall, 1450 Linden Drive Madison, WI 53706-1562 USA

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Discussion Papers are those of the 3uthors;

they do not necessarily represent those of the

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Funding for this study was provided by CSREES USDA Special Grant 2006-34266-172.]4

ISBN 978-1-59215-118-3

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College of Agricultural and Life Sciences

240 Agriculture Hall, 1450 linden Drive

Madison, WI 53706-1 562

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© 2007 Board of Regents ofthe University of Wisconsin System

CONTENTS

INTRODUCTION

KEY ElEMENTS OF THE COMPETITIVE ENVIRONMENT FACING IRELAND'S DAIRY PROCESSORS

THE STRUCTURE OF IRELAND'S DAIRY PROCESSING INDUSTRY

STRATEGIES OF IRELAND'S DAIRY PROCESSORS

Strategies of Ireland's Big Four Processor-Exporters

Strategies of the Irish Dairy Board

Strategies of Glanbia pic.

Strategies of Oairygold Cooperative

Strategies of the Kerry Group pic

Summing Up on Strategies

REFERENCES

LIST OF TABLES AND FIGURES

Table 1. Irish GOvclllment Awards to Dairy Proce~sors, 2007

Table 2. Revenues and Geographic Scope of Operations rOT lreland's Big Four Dairy Processor-Exporters, 2006

Figure 1. Bos[ol1 Conwlring Group MatriX

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3

4

6

7

7

9

11

12

14

15

5

6

10

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COMPETITIVE STRATEGIES OF DAIRY PROCESSING FIRMS IN IRELAND

William D. Dobson'

INTRODUCTION

"The essenCe of jormu/afil1lS cOlllp~litiye ,':IrOfegy i.~ relalil1,r; (I compa/lY /0 its envimllmellt . ..

- M.E. POrter, Harvard Business School I 19, p.3]

This statement by Harvard Business School strategy guru, Michael Poner. pro"ides a bro<ld framework for «nalyzing the efFecti veness of sirslegies employed by

Ireland's milk processors and exponers. These tirms have adapted in differenl ways 10 the unique combi­

nalion of conditions in the Ireland dairy sector. These

inc lude a limited iolernal milk supply due to European

Union (EU) milk qUOtas. a li mited domest ic market

due [0 11 sm;'l ll popu lation. and ex treme seasonalily in

production clue lO a grass-b(lscd production sy~tem.

Ireland's dairy induslfY abo i ~ finding thut it needs to adjust 10 important changes in the economic­

pO!"ltica l env ironment. The country':i strong "Celric Tiger" economy hns o ea ted labor shorulgcs on dairy farms and raised milk processors ' COSIS, necessiun­ing changes in pllln~ alld operations. In addition, sea chitnges underway or ill prospect for EU ilgricultural policies have cre:med <In opcr<lli ng environment where Iri sh processor-exporrers discover til(\( a strong pt'c­mium is placed on opernting efficiently in I!volving dairy imernmiorlill markets.

Individually aod collectively, Ireland's dairy brlllS ila ve obtain.ed detailed information and analyses relat-

ing to Ihl!ir competitive environm<!nI and recommen­

dutions regarding options for operating profiHlbly in

that environment. Especiall y imponam i"llnong 'sources

of industry intelligence is the 2003 Prospectus·Proll1ar International (PPI) report emilled, S'I"oregic Dellelop ­

nu!1I1 Pial! for 'he Irish Dairy Pmcessil/~ SeCtOr [201-This discussion paper w ill c ite ;1 limited number of

figures and passages from Ihe PPI report bu t will nOt

duplicate the extensive amoums of malerial from (ho.I comprehensi ve publicalion since it is avni!able on the interoet.' However, queslions will be raised about cer­tain recommemJmions appeuring in that report.

This discussion pnper will briefly summarize key tlemenlS of the competitive environment facing Ire­land's dairy processors, the overall dairy industry Sl ructure Ihal flns emerged in Ireland, and the stnHe­

gies of Ihe process ing and e"poning firms in lreli"llld 's

dairy induslry, T ile profitability of Ireland's dailY

industry \V iII be shaped in imponant ways by how suc­

cessFully Ireland's miljor dairy firms implement their

st rntegies Md whether the stru tcgies produce their

hoped- fof results.

'The author is Prof.::s~or Emt!ritus. DeparlineUi 01 AgricuIUlr;o( nnd A.., pr;~u fcollOmi<.'s. and A:;l"ibtlsines~ Etonorni~l, B:.bcocl; I n~lill1le fur tntern~lIonal Dmf)' Research and [duc~IIQII . Universil}' 01 Wis(onsill,M,lUison. This report WIl$ plep,u-ed In <:Qnjunccioo IVilil a Babcock (n~!ilutc study of Ille dairy sector of tret~nd. A (OIIlJcnseti V(.>ls,on \If (hi.' mmel'illl I ~ Included In :I sepilr~!e DiscussiQll l'lIj)er relutin£ !O Ihe Qver,lll swdy. ~ Ao.:ce~sible 1)( lhe (fish Government DeparHllCni of A;;riculwrt:, Fhhcrie~. ond Food Wl!b~i l~

hap:lIlVw w .~gneu 1 tU re.gl.lv.leli ndel jsp?fi le=:publicDIIi ,ish _ da i,)'11 I\tJeX .xm I

Co mpetiti ve Strategies of Dairy Process ing Firm::; in Ireland -----------------

2 Babcock Insti tute Discu$$ lon P:J;>er No. 2007-3

Competitive Slr3;egies of Dai ry Processing Firms in frel and

KEY ELEMENTS OF THE COMPETITIVE ENVIRONMENT FACING IRELANO'S DAIRY PROCESSORS

Elements of Ihe cOlllpetitive environment summa­

riz.ed below will influence how successful Iri sh diJiry firms are likel y to be in executing their sll1ltegics:

(re land's rapid ly grow in g "Celtic Tiger"

economy has created strong domestic demand for dairy producls, but has put upward pressure on w ages and processors' COsts for elec triciry, g.as, and insurance in rece nt years.

Apprec intion of the Eu ro re lati ve 10 Ihe U.S.

dolla r and some non·ElIro zone currencies hils made Irish doiry products less competitive in international markets outside the Eurn zone. This developme nl is important since frish firms ex port about 80 pe rcenl ordai ry products produced in the country.

• Changes in EU dairy policies have created uncerrainties for the ind ustry. EU dairy policy changes include reduc tions in intervention prices for buller and sl..:im milk powder, elim ination of subsidies for firms using skim milk po\'.'der to produce milk-repl<lccr cal ffec.ds. and eliminati on of, or sharp reduc tions in. EU export subsidies for several dairy products. Milk quotns. which have becn a fi xture in the EU 'Si nce 1984, nre li kely to increase aflcr 2008 llnd be eliminated afrer2014120 15.

Profits avai lable from "selling into the Common

Agricultural Policy (CAP)" have caused Ireland to rely morc heavil y than mnny other EU countries on EU·CAP dfliry in lervention payments <lnd dairy export subsidies. In Ireland, produclion of commodi ty daIry produc ts -e.g., bUller, casein and skim mil k powder-which could be sold into intervention or exported with sub~iciies , has been emphasized. Profits fl'om the CAP howe retarded R&D effon s and industry efrorts to develop new vi\ lue·added (differentiated) dairy produ,·(s.

BiJbt.:ock In!:otitllte Discussion Paper No. 2007-3

Ireland's pas[ure-bQ~ed dairy fanning system cremes excess cnpac iry in !TIilk processing. Dairy processors operare at or near full capacity during May, June and July, but at only nboU! 60 percell I of capaci ty a ll an annual basis. This places Ihe Irish tirms at <t competi tive disadvantag.e in terms of processing costs compared (0 foreign processors who enjoy 11 more even seasonal milk now inlO thejr plnnts.

• Compe titive pressures cf1used major consolidations in Irelnnd'~ dairy processing industry duri ng the 1990s and early 20005. Howeve r, this consolidation n<l s nQI proceeded as far in Ireland as it has in New Zealand, Denmark, the Netherl;.mds, and Olher cou nt ries with ex.port­orientetl daily industries .

• Economic conditions in Irclnnd (c.f.., Ii milS" on capital avai lable from farmer members al\(j limits on debt ctlpi la l ;wai lable from lenders)

hilVe encouraged Jreland's dairy cooperat ives 1"0 develop innovn tive business arrangement s. Several have devised cooperative-public limited company business stru ctures that hnve enabled Ihe hybrid firms to ra ise capital in the share market <lnd gai n OI her adv<lolages.

Supemuukets have acquired addi lional m,lrket power in countries where In:t<lnd's dairy industry sells dairy productl'. The supermarkets require delivery 10 spec ification for prices Ibm rrcquently yield low margins for processors and distribu tors.

• Current or prospective profil .squeezes 'in Jre[ilnd 's dairy busmes5 have crcated incentives

for ll1ajor lei sh coopera ti ves to diverSify iOlO non ­dairy product lines and engage in foreign direc t investmelu.

3

Competitive Strategies of Dairy ProcessIng Firm s i n Ireland -------

THE STRUCTURE OF IRELAND'S DAIRY PROCESSING INDUSTRY

Ireland's dairy industry might be'. described as the

"Big Four" processor~exporters plus u competitive

fringe. T he Big Four consists of the Irish Dairy Board

(IDB), Glanbia, Dilirygold Cooperative ilnd {he Kerry

Group. The IDB is u coopenltive while the other three

I1nm <Ire cooper<ltive/public limited companies.

The IDB is <I commercinl cooperative that mar­

kets the products of member manufacturing cooper<l­

tives. The IDB does not have single-desk or monopoly

exporting privileges. Thus. Ircl<lnd's larger coopera­

[ive/public limited companies export clniry products for their own account.

The Big Four cooperatlVel; and coopenltive/public

lImited companies do business alongside many -:;rnaller

dairy cooperati yes {parr of lhe competitive fringe-), The

IrISh Cooperative Organization Society reports that D

toral of J I mUlti-purpose dairy coopera(ives exi~ted

ill Ireland in the mid-1OOOs [14]. Cooperatives and

coopef<ltive/public limited companies accOllnted for

99 percent of milk collection and 98 percent of milk

processing in ll"eland in this sanH~ period.

Irel<lnd's dairy processors place considerable

emphasis on bulk dairy producis. The PPJ repOrt

described [he composition of OUtput for \rclnnd's dairy

Industry in the early 2000s , as well as needed change,.

as follows [20, p. 89J'

Portfolio Products

Funcciomll & Organic Foods

COI)~lImer Produ<.:ls

Vatue-Adc1("d lngr.::djenr~

Base ProdU(:\~

Product Portfolio

In Enrly 2000s

Product Needed in20lS

Percent ofToLaI portfolio

Zero or trace 5%

Approx. 15% :W 20 '0 65 45

III the <.lbove schedules, func(ional products iociuoe

bioacrive spreads, certain yogurts, protein extracts, and

cerwin cheeses. Consumer products include thud ITIlI)":,

uniry desserts, yogurtS and" host of other branded

products. Va]ue·"dded ingrediellts provide uniquE' ben­

efits to buyers and food manufacturers through special

formulations or specinl applications of technologies, The base products Include bulk dairy products (bulk

bUller, skim milk powder, whole milk powder. cheese,

and cusein).

The recomrnendmion in the PPJ report cal!s for

increased productIon of value-added (differentiated)

dairy products by 2015. This reflects the assumption

thai Irel<lnd's dairy industry can develop competitive

advantage by producing more differentiated products

rather th<ln by continuing to focus heavily on bulk

products which, over the longer-full, typically can be

produced profitnbly only by low-<:ost producers pos­

sessing Ilwjor economies of scale,

PPI indicates that about 80 percent of the ml!k in Ireland was proce~sed by the six largest 11rm~ in 200 I r20 , p. 151. In this same year, one firm processe.d 80 percent or more of The milk in both New Zealand and

Demn<1I'K rind two tirms processed 80 percent or more

or the milk in rhe Netherlands. Such figures under­

stme the amount of concentrntion 1I1 milk production

ID New Ze<lJand, in particular, where one cooperative,

Fonterra. processes in excess of 90 percent of thut

!.:ountry's milk. Authors of the PPI report recommended (har fre,

land's dairy industry adopt s!rmegies thm would reduce

fragmentation for the following reasons [20. p. 251:

The re!a1il'ely large I1IlJ1lber of processors in Ille

Irish indllsl,.), lends 10 duplication ofl'/forl. poniw­

larly o/wpporl scrvices Stich as 1/~/url1l{/fi(ln tceh­IIvlogy, humon resources, finance al/d fl/wwgemeill.

le.wing, producr del'eloplIJen! (lnd markefitlf!. , (lnd

II/efficiencies in (fssembly (111ft pmce,\siIlX'

The repon recommended (hat the eflici ency of

Ireland'~ dairy processing industry be increased by

reducing the number of butter, mi,lk powder. case in find whey product proce::osing pll'lnts to ['ollr sites L20,

p, 9J], In (he early 2000s, there were 11 butter pl<lnts,

,II milk powder planls, ilnd 7 casein processlllg pt<lnts In Ireland.

The diagnosis and recommendation represent st[ln­

d<lrd argumenlS for merger of Finns in many dltfererll

industries. While there could be <ldvantnges of further

concentration of Ireland's dairy processing businesses,

the current competitive environment does not appe<lr

to provide Strong incentives for !"apid further industry

consolidation. Indeed, for the ~on of consolidation in

Competitive Strategies of D<liry Processing Firms in Ireland

TABLE 1. Trish Government AW(lrds to Dairy Proce~sors, 2007.

Recipienl

Big Four Firms:

Dalrygold Cooperative

Glanbia

Kerry Ingredients

Olher Firms:

Amlbawn Cooperative

Cnrbery Milk Proouc\s

GICllisk

J&L Grubb

Lakelands Coopenttive

Newmurket Cooperative

Tipperary Cooperative

Project No. !:

Project No.2.

Project No.3:

Project No. l.

Project No.2:

Project No. 1:

Project No.2:

Project No. I'

Project No.2:

Project No.3:

Project No. I:

Project No.2:

Town of Monl.lghan Cooperative

Wexford Creameries

Total

Source: Cheese Rel>Ortcr 131

Amount{$mil.) Purpose

12.7

4.7

74

13.0

12.2

13.3

7.8

9.3

9.2

4.2

13.0

4.2

3.1

4.4

11.8

9.1

7.4

4.7

3.5

$155.0

Improve quality and efficiency of cheddar cheese production. Incrense capacity and qu~lity of whey production.

Finance whey fractionflliz.ation initiative.

Increase production of speclllity cheeses at Mogeely plan!.

Expand specially cheese production at Ballymgget plant. Fi[llJnce initiative to produce speci<llized protein products.

Equip firm 's whey protein concentnlle facility at Bililyragget 10 focus on product$ developed to specificotion.

Develop new minernlized wh~y producing fncility at Listowel.

Consolid(lte and upgr;)de butter and skim milk powde; producing facilities at Listowei and Chadevi!le.

Improve and expand whey, skim milk PQwcler, and butter productIOn.

Expnnd prodllCtion of value·added cheeses and improve chee~ pro­ces::'>ing efficiency.

Install new dryer and eVilporator to manufacture customized. fractionated and nutritional value-added diliry-ba5ed mil\.. powder ingredients.

Develop facilities to recover vnlue-added whey components :lIld

produce edible-grade lactose.

Devclop facilities for manufacturing organic yogurt and organic milk for the UK and continentill Europe markets.

Double output and improve production efficiency for Castlel Blue <fnd other speciulty cheeses.

Improve capacity for producing high-value whey products for a niche export milfket.

lipgnlde the Bailieboro plant with a new spray dryer find upgr;Jde budding f;lcility to enhance processing efficiencies.

Improve and expnnd cheddilr cheese produclion and expand range of cheeses mnnufactured.

Upgrade, modernize, and exp,md the firm's Emmen\nl cheese pro· ducing facililY.

Upgr<lde the firm's buller packing facility.

Improve the firm's cheese producing facility.

Babcock Institute Discus:;ion Paper No. 2007-3 5

Competitive Strategies of Dairy Proce~~lllg Firms in Ireland --------------~----- ----------------

commodity processing recommended inlhe PPI reper!

to lll<lteri;:lIize there would need to be some sort of cen­

tral coordll1<1ting organization in frel<lnd's d:liry indus­

try with the power to force, or provide strong incentive~

for, sllch consolidnt;on. Few capitalisl economies have

such bodies. As noted laler, (Wo members of Ireland's

Big Four processor-exporters h<lve addressed potenlinl

weaknesses associaled with fragmenI<Hion by adopting

measures (hIt fall short of merger.

STRATEGIES OF IRELAND'S DAIRY PROCESSORS

This an"lysis first examines indu~lry sH"ategies of

both large and small firms and secondly completes a more detailed <lnulysis of strategie:- of Ireland's Big

Four processor-exporters.

Inferences regnrding the strategies being pursued

by [reJnnd's large and small dairy processors can be

gleaned from the information on the nwards made by Ireland's government to the country's dairy finYl:; in

2007 (Table I). The $155 million (40 percent oftowl)

in aW<Jrcis made by the government is to be matched

by spending by (he dairy (inns in the amount of $233 million (60 percent of (Otai). for a combined Iota I of

$388 million. The mntching fund:; requirement helps

to ensure (ha( Irish dairy firms attach strategic impor­

tance to Ihe projects financed.

Two major tendencies arc evident from the dMu

in Table I The first is (har (he government grants are

'limed at chnnging (he product mix of Ireland's dairy

industry in the direction of more value-added products.

Approximately rwo-thll'ds of the projects (measured

by dollar value) are directed primarily at incrensing

the production of value-added products, the remcllnlng

one-third are <limed mostly <H increasing the efFtciellcy

of rroduc(ion. Thus, the first trend is consistent with

recoOlmendations that the value-added portion of the

product pOllfolio of Ireland's dairy industry be sub­stantiCllly incn!i.lsed.

The second trend underscores the absence of incen­

(ives for further substantial mergers and cOllsolid<l­

lion of Ireland's dairy industry. Nille non-Big Four

nrms received grants, suggesting Ihnt tile govertlillent and the smaller (irms themselves beliel'ed they have a

chance 10 oper<He profiwbly as separate entiries. Also,

the grants to three of the Big Four firms appenr to con·

win few. if any, incentives for mergers. It would be

surprising tr it were otherwise. since (he EU Competi­

(ion Amhol'ilY said rhat rhe grrlll(S should not be lIsed

10 toster mergers.

TABLE 2. Revenlle~ and Geographic Scope of Ope~ations fOI' lreland's Big Four Dairy Processor·Exponer~, 2006.

Firm and Location 2006 Revenues of HClldl.jUllrtcrs (€Billion) Geographic Seope orOperation~ --~----------~ ----~--~-~--------------

Insh D~my Board, Dublin, Ireland 2.074

Glanbla. Kilkenny, Irel,md 2. tOO

O~lrygold, C01~ ::nd Mallow, Ire/unci 0_543

Kerry Group. Trake, Ireland 4.646

Expon S;lle~ made to 93 countries in 2006. The Board ODenlte~ OPI SpeCialty FO(,d~ Through which ir distribUics perish<lble and dry :>pcei<lhy food items In the U.S.

Mainlllin\ operntions in Irel<Jnd, Europe. and The U.S. ;Jnd h<ts

join!' venture businesses ill the UK, U.S., and Nigeria.

M[lill operation~ <JI"C located III Ireland with stib~jujarie.s in tlte UK, U.S. and Germany. Ttle firm ha~ en[ered into ajoint research progHlm wifh Ml!iji of J<lptln.

Sells food Ingred(enLS, fiavoring producls ond Nllet· food ilems in 140cOllntries. The Group has mnnuf<lclllring facilities In 19

count(les ::!Ild JIlteroa(iOI1[lI saks offi~<. in 20 other CQtllllnes. --------------------------------

Sources: [12.9.5. 15.22).

6 Babcock [nstitule Discussion Paper No. ::!007-1

Competitive St ralegies of Dairy Processing Firms in Ire land

Strategies of Ireland's Big Four Processor-Exporters

In addition to anDlyzing more fully how the strate· gies of the Big Fourcoincide with the va ll1e -~dded and concentration recommendations of [he PPl repol·c. rhis p!lper examines how closely those strinegies parallel the strategies described by ZW(lnenberg of Robobank.

Zwanenberg indicated that muhiftlceted growth stralegies are prominent jll the Strategies of lead ing firms in the world 's dairy industry. Such growth strate· gies, Zwanenberg reports, help [he fi rms to ac hieve the followiog. resu lls (23):

• Become more efficient in manufflclUring.

• Open new markets.

Gain market share and market power.

• Expand their brand portfolio.

Strengthen t.heil· innovative capacity.

• Secure milk suppJy.

• Improve their access \0 capital.

Revenues for 2006 und information on the geo· graphi!.: st:ope of operatiom for trel<lnd 's Big Four processor-exporters appe:lr in Table 2. The finns' 2006 revenues ranged from npproximately €O.s billion for Dnirygold Cooperative to €4 .6 billion far [he Kerry Group. With the exception of the Kerry C roup figure , the 2006 revenues for the four Irish linns were rela· tivel y sma ll compared to competing firms. in interna. tional markets. For example. FO(lte1T8 of New Zealand and Aria of Denmark-Sweden had 2006 revemlcs of €6.4 billions and €6.2 billion, respectivety (2,171 . fntan.lIional dairy-food giants, such as Nestl e, Kraft, Unilever and D<1rlone, had revenues thai were rnDny times larger than IDB, Glanbia, and D<lirygold.

The companHive revenue figures have relevance jf the Irish firms enter into head-w-hend competition wi th LIte larger firms In international markets , This would be the case, for example, If Ule ldsh fums sold dairy commodities in competition with Fonterrl;l. of New Zealand. Fonterra would likely enjoy s(;tlJe and othe r cost econ.omies not possessed by the Iri sh firms. If the Iri sh firm!> produce and se ll mostl y v"lue·added dairy products they would nO( necessari ly operate al a COSt disad vunlage to larger foreign fi rms. Hence, the merits of the movement (oward increasing sale~ of dif-

Babcock Institute Discussion Paper No. 2007-3

ferentiaLed products indicated by the pnueOl of gov. ernment awards find investments by Irish dairy firms, described in Tnble I.

lrelund's Big Four dairy processor exporters exhibit subSWntial geographic dispersion j)1 sales and roreign direct investment. This pattern, of CQurse, is most evi ­dent in the li gures for the Kerry Group, wh ich se lls rood ingredienrs and other food ilems in 140 countries . Thus, as a group Ihe Irish firms have placed emphasis on the "opening new markets" growth strategy men ~

tioned by Zwane.nberg.

Strategies of the Irish Dairy Board

Established in 1961, the IDB's major function is to market the products of ilS mcmber rnanufilC.:curing (.;ooperative!> and dfliry companies. The lDB a.ccounts for approximately 50 percent of Irel and's dairy export!> and owns Ihe well-known Kerrygold brond. The Board's main produC[ lines can be divided into three main segments: consumer business . food il1gredients and commodity trading.

The Board·s subsidiaries locaied in Eurove and rhe U.S. market <l number of branded Consumer produqs, dairy ingredients. and specialized grocery, delicatessen and gOllrmel food items of both Lrish and noo -(rish ori­gi n. In markets where the lOB dues nOT ha ve a subsid· iary, the firm 's sales are managed from Dublin through a network of dislribuloTS.

Expon sales of the lOB among the 93 countries: noted earlier were grouped as follows in 2006 {12, p. 15J;

Country or Region

UK

Other EU

AfricZi

Nonh J\merica

Central & South America

Middle/Far E:J~I

CIS

TOial

Percent of lOB Export S:illes

24

45

" " 4

100

The IDB reported strong sales in Ihe U.S. for 2006 (and predicted hjgher future s"les) through Irish D" iry Board IIlC, and the firm's DPI Specialt)' Foods Unit, as follows [12 , p.lI, 131:

7

Competi(ive Slr:Jtegies of Dairy Processing Firms in Ireland

Consllmer branded safes ill 'he USA jl/crelJsed by 5% over 2005, Ihe highlight beillg Kerrygold bUller, /lOW rallked as the number one impor/ed br{{/U/ in

the US. A number of !lew product:,· were /of/lu:hed ill

(afe 2006 which seCtlred SlrOllg dis(I"iblllioll ill key

!lariOl1ol retail IICUII/IIIS offerillg (In effective pflll·

form for additiul/a! gro l1'lh in 200 ... OP! ('oMinuet!

/0 .Hrengthen irs relaliol/ship wilh major rewilers

and aiso gailled addilional busillt?sS ;1/ lite food

sen;CI! lee/or. Turnover duri1lg 2006 ;lIcI"eo.,·ed by 14% year'Oll,year ((nd Ihe compnl7Y has noll' con­

.~oLid(t/ed il.f pMilioll (U une oflhe lap three lUuiol1{'/

m((rJ.:eler.~ (lnd dislriblJ/ol'.\· of .~peci({!t)' fnod pmd­

UCIS ill lilt:! U.S.

Dr. Noe l Cnwley, fo rmer !DB MaflJging Direc{or.

descri bed ill 200S hO\\l the IDB is addressing. cha l­

leng!!$. in i nlern(ltional dairy markels. The :Hatemenl.

appearing below, represent:::. a proxy for the Board's

stf<llegies 11 3].

The Iri:ih Dairy Buwd's r('.\"/)()IISIl (to challenge.,) is mU/li-jaceled t/nd continlles to foclf::, IHI lite

branded lIl/d food ingredients business. All olllhi­

liollS prugmnl 0/ new prodilci alld mark!!/ develop ·

ment (inclflding ewergi/lg Inarkel s ,H/cll as Chino) is

underway {uld j,s ill/emC//io/Ud pOri/olio oj bnll1ds.

led by Ker,-ygotd. will oe e.wel/d/!d, ~· Ir(!n[l./hened

ollll C(lIIsolidaled 0.\' oJ)prnJ)/"i(/lc.

Mr. Noel Coak ley. CUI)'ent Chief Executive of Ihe lOB. elrlbormed on lhe "bove swrement in th t: Board'~

2006AllnuaIRepon[1 2.p.I2J:

In !if/e with the Boom:'; orand expansion Sfrategy.

Kt'I"l"\'gold WliS {ounched in China with (I muge oj bulter (md (:h('ex(! products listed ..... ·ilh sfrategiL'

silpennark.er cflo i lls i/l Beijillg Ollt! Slumgh(li.

In <lnother strategic adjus lment m<lde ill 2006, the

lOB was reorganized illong tli v isional lines to form

three key business units: Consllmer Foods, Food lngre­

dients, (lnd Dislribtuion Plus, Illc . (DPI). the Board's

specialty food distribUlion business in the U.S. this adjustment was made 1"0 meet "evolving needs of (he

marketplace [12, p. 9)."

These com ments ind((,ue thai [he l OB i~ helping

Ireland's dairy proce~sor~ to implement str1ltegies

8

focus)ng more heavily on developing I\Ild mfHkel ing

v<llue-added dairy products. II is nOI deaf how much

of the IDB 's revenues are still obWined from commod­

ityexports.

Given Ihe ~ubst;1nti nJ number of smaller daily coop­

erntives {hut ollenne in /rel(lnd , there is n place in the

country for (In export marketing board. However, the

IDB's ro le may be increasingly conllned to ~rvi ng

{hI:! needs of the smaller processors since the proces­

$Of·members of Ire land '" Big Four have fhe abil ilY 10

export products for their own account.

lOB efforts to export more Irish dairy products for

larger processors could encounter Ihe "weRk selling"

problem that ex isted in New Zealand. The "weak sell-

109" nrgument says thnt when multiple sellers rrom

one country export dairy products into n foreign m<r r­

keL the sellers end up competing with one another

and driving down prices in {he de-.srinal ion marl-;e.[.

Thi s Mgumenl apparenl ly \Vils sufflciently importam

that prevention of "weak se lling" was used as (I p(lr­

ti il l jusli ticc\lion for keeping the New Zeal:lnd Di"liry Board 's (NZDB) sing le-desk (monopoly) exporl ing

pri vilege for mao)' years prior to 200J . However, by

2001 the New Ze<lland Dniry Group nnd Kiwi Coop·

erative-two cooperatIves tha t processed OVU 90 per·

cenl of the n~ilk in New Zefllnnd-had acquired such

srcong mMket ing capability thM there npparent ly was

lin Ie need for a se parDle dnl!y ex port marketing l10tlTcI

in New Zealand. As a resul t, the NZDB was merged

with these two cooperatives to form FOllterra, which does not have monopo ly e;-.port Jrlg pnvi!eges.

There l1la,y be ways to shorl -c)(cuil the " wei\k sell­

ing" preblem. For ex'lmple. Gb:mbia, which exports

cerlain dairy products through the lOB. reporb tlwl

the fi rnl monitors sa les La I~mi{ the nlllount of product

that i{ sell'S in direci competition with the IDB in for­

eign markel$..

A more serious.lhreac 10 lll;lInlninillg I DB Ope-.ffllions relutes to tre.nds in development of value-added prod ·

UCIS in lretand. As Ireland'S dairy ti rms deve lop cerW LIl

new vailie-ndded producc$, they need to be ill position

10 work with final cusromers to expla In [he technical

chCl!"<lCreristics and appl ications of the products . Firms

developing rhe new products also nt:ly wish to mnke

price conces .... iolls to {he fi nal cUSlomer. II is difficu lt to

exp lnln lechnicat char(lcceriSlics or make needed price

Baocock tnstitute D iscussion Paper No. 2007-3

Competitive Strategies of Doiry Processing Firms in lreland

concessions when working through fin inte rmediary such as {he IDB.

Strategies of Glanbia, pic

Glanbia ("pure food" in Gaelic) was fomled in 1997 from the merger of Avonmore Poods Md Waler­

ford Foods, two publicly traded dairy· food companies. The parent comp<lnies themselves were the proouel of

numerous mergers and Ilcquisitions, dating back 10 the 19605 nnd before.

The acquisitions of Avonmore and Waterford in rhe 19805 established both finns in inlernu,tionul m.arkets

Dnd helped shape the configurmion of Glartbia [101. Avonmore mnde-a series of strategic tu.:q ui sitions after a 1988 reorgani-zation, including 3: cheddar cheese and food ingredients business in Idaho, liquid milk and

cheese businesses in the UK, a mOLZarella cheese busi· ness in Nonh Wales, and Europenn mea[ busine~$es. Waterford in the 1980s made J] Illimber of acquisitions

In rhe UK and acquired cheese process ing plants in Wisconsin_ The 1980s we re a period of c>;perime r'll tl· lion for both firms during whil:h business units were established that were larer buill upon or spun off by

Glaobi<l . Glallbia's present core activities cOlls is t of the fol ~

lowing:

COllsumer Foods: In Ireland. G lanbiil has leading Illarket and brand posit io ns in liquid mille The firm 's brands inc lude Yoplail. Avonmore. Premier

and K i hneaden.

Food I',gredicllls: These operations Inc lude the firm's U.S. and Irish ingred icms businesses. The U.S. businesses Indude the Twin FaJl~. Gooding, and Richfield, Idaho aod Clovis. New Maleo

cheese operaliOll s.

NUlI'iliolf(Jls: Glanbia Nlilritiormls produces

functional and processed foods, spans nUlr:lion products, infant and ndultfoods, health produc.:ts and nutrilioll<li supplements. GIHnbirt':s technologies and capabi!i[ies in formulflting

whey proteins in the U.S. ancllreland represent the foundation for the firm·s Nutritionals business.

• Agribusiness (ltld Pmpcrcy: The principal functions of Agribusiness operfltions are flHD'I

Babcock Institute Discussion Paper No. 2007-3

input ~ates , feed milling, and gra.in trading in Irelnnd. The Property operation has the

I'es-ponsibillty of maximizing the value of the

firm 's prope rty pOl1folio.

The following statement describing GJanbia's activ­

ilies in the ea rl~ 2000s provides nn overview of how the firm's current strategies emerged [J, p. 5J:

GfaoiJja achieved anew phase in irs smwlh in 2000

when if signed an agreemenl with the Uniled State}. ,

Leprillo in which il Iransferred a 49 pcrcelll slake

il1 its Glanbia Chee.tc Division in e.w:/l(lIIge Jor

Leprillo's cheese techlloloSY. Ti,e deal made ·Glall­

bin /lIe leoding producer oj mo'C.arella and piz.~.fl

cheese - LepriHOS specilllty-in Europe. In the

Uniled Slates. Gfanbia's opcrmiollaljocus switched

tn Idnho. where it began (I tmge-scofe e.rp(lnsion

of ;IS cheese produclion jacility .. III 2003. tile

smllp created (I joillt "~l1t/lre lVith Dair.\' Farmeq

oj Amen'co (lnd SeteCled Milk Prodm:ers 10 build (I new whey processing pWIII.

As Glanbi(l conlinu-Itd to refine ils jocus, latger· illg the lIew (1IId jnsl·growillg '1II1Iriri(mal' foods

segmelll, tile complln.\· begol/ selling off its /JolI·core

segments. il/cluding j,s processed meat componelll,

which lIS sold in 2002 . _ . 1/1 2003, 'he ClJmp(fn.v alllwlln(,(Jlililllf if fwd reached un lIgreetllelll with

Urtlguay's COllupro/e Cooperm il'f: tn (:reOfe and

IIl(lI'kel d(liry prod/lcts for tile Lalill Americall m(Jr·

kel . Glanbia, already onc or Europc's top dairy groups, now SCI its sights on joining the ranks or the global dairy ginnts kmphosis supplied).

Glanbia's inililltives in tbe U.S , are consistent with

the objeclive of betoming a gJob~1 dairy giant, How~ ever. liS the figures in Table 2 indicate. the firm has a

slIbsl<lnt>al way to go before "chieving such status. A Glanbia OrnCilll interviewed by the study Ie am

indicf\led thai Glnnbia used the Boston Consulting Group's m.mix 3$ (I conceptuJl tool for formulating

:lcquisitiol) and clivestiture strillegies. The prescrip· [iolls recommended by the Boslon Consulling Group for lise of the matrix are ,,"ctunlly fairly strict However, many businesses-including Glnnbi~-use the device [0 obtain genera l guidance on which business units to ilunure and which [0 sel l.

9

Competiti ve Strategies of Dairy Processing Firms in Ireland

FIGURE 1. Bo~ton Consulting Group Matrix f211.

I '"~ St~rs Question Milrks ,."

4> 12% 0 ~lO% < 0

0 ., 8" 0

0

" '" ~ 0 • • '" 0 2% c.,shCows Do" ,,,

" 2, I< ." ." .1< ReJal ..... l' Markel Share

The business units falling in the different qU<ldrants

or in the Boston Consul ting Group matri x (Figure 1)

hove the fo llow ing meanings [21.1:

• S t~rs have high marke t share and high growth

potenril'l l.

• Cash cows hllVe re lati ve ly high marker sh<lre but slow growth pOlenti al.

• Question markets hove high growth potent i.1l bUL

low market sh:l re. Cash cows are sometimes used

10 generate cash needed \0 turn question ml'lrks

lOCO Slars.

• Dogs. characterized by low market share and low

market grow th Tate, are often divested.

The Jllilrkel share number:. on tile horizontal a"is of

Figure J refer 10 a business unit's slwre relallve to Ihal of Ihe nex i largest compeli tor. Thus, if a busine~~ unil

had" 20 percent market share anu the l<lrge:-;t compeli­

tor had fhe same market share Ihe ratio would be 1. 1.

A~S('IC i ;Hed wilh Ihe usc of tilt market growth rate vari­

able 011 Ihe vc:: rti cal axi s is (he assumpt ion thai econo­

mies o f scale c!xi st" in the industry and that business

units wi III a large m<l rket growlh rate wou ld gctler<tte

bHge omoun(s o f c;'lsh.

Glanbiil 's decis ion ill hue 2006, described below. 10

sell the firlll '$. iOleresr in Cheese Comprtny Holdings 10

UK j o int venture partner Milk Link Ltd ., appertrs to be consistent with a prescripti on thaI Illight emerge from

use of the Boston COrl$ulting Group malrix 11 8J:

10

Clanbio.the/ood and dairy group. has sold its inter­

ests {II Cheese Company Holdings (()I ' EUR 701llil-

lion. I(!!;s (han three years after seuil18 lip the jomt

I-'en/ure vehicle 10 target Ihe UK cht'ese markel.

.. Co/ltmem;/Ig on Ihe sale, Cfunhio group man·

ag illS directm; j olm Molone), said: We huve had {!

nlllfltoliy very salis/tI(:lvry relaliom'hip lIIith Milk

Link since 2004 d uring which Ihe Cheese COl71pa/1Y

has developed illlo a 51'On8 integrated bl/siliess. We

COlisider ll011110 be (III appropriate time 10 dispose of

our rcmaillillg im(!rest (/lid lofueus on the develop ­

men! oJ our/asl growing jJllemoriu lU/f bl/:!i il/{!;)·scs.

G lanbia o fficials did nOI refer (0 EU interven{i on

sales as cash cows. However . .such sules undoubtedly

once runclioneu much like cash cows. whi ch could

be used 10 gene nile funds 10 finance the development

of "ques(iof) mark s" into Star businesses or to tlcqui re

potenliai stars. For reasons noted enrlier. change.~ in

the EU-CAP have largely eliminmed such EU cllsh

cows. How well arc G lanbia's strategies workin g? Glan­

b ia reported ll1m {he firm's glob;) 1 market positions III

2006 were os indicated below.

u.s. : No. I in biliTel chce~e and whey protein

isol;ue. No, :; in lactose, and No.4 in Americ:lll

I.:heddor cheese .

/re/(Illd p osi lium : No. I proce ssor or l iqllid mi l k.

and crenm (bra.n ded product s) cheese. and bllner.

• £umpe: No. I supplier of cu slomized nutrIent

premixes a l,d pi zza cheese.

Globed: leading ~ upplier o f adv.:mced technology

whey prolelns nnd fraction s

The fi rm described the pe!formance of Southwest

Cheese In Ihe U .S D~ follows [8, p. 61:

SOuth wesl Cheese. a joinl venture II'itl! main P(H/'

IIcn D(lirv Farmers of America (I t/d Select Milk

Producers. Il7c., was cummissioned ill 2006. This

phllll, which prodllcey cheew! ami h'hey pro/f!IIIS.

is ba~·(!d in New Mexico and CCJl1lilll.l(!.\ to romp lip

10 Jill! capacity, forecast if/r thl!. second qll(lrler (lJ 2007. SO/lfhwC!st Cheese I~ rlfren(/y IJlVI./llciJJ8 /(1

world el({Ss standards and is / oreca.-'"I (0 pe'jorm m

p/(lIIlled ill 2007.

G lanbiil official s interviewed by the study le~m

cot1 fi rmed tha.I Southwest Cheese was performins up

to expec tations or better. T he o rti c; ials Iloled thut th e

Babcock In~til li te Di:;l.:ussion Puper No. 2007-3

Competitive Strategies of Dairy Processi'ng Firms in Ireland --- ---

new technotogy incorporated in the plant was easier to install and performed better than retrofitted equipment

installed to update Irish cheese processing operations. A Glanbia official interviewed by the study team

speculated that Southwest Cheese <lnd other large cheese plants in the U.S. will effectively eliminate

medium-!jlzed commodity cheese planb> as viuble competitors in the U.S. While this comment may

exaggerate the future structural cnange in U.S. cheese

processing, it is noteworthy. It suggests that tile U.S. cheese processing business in a few years will consist of a limited number of large commodity cheese plants

located near weStern milk production areas and many smaller specialty cheese plants located in Wisconsin

and elsewhere in the U.S. Additional summary Information on lhe focus and

effectivel'less of Glanbia's strategies appe:ars in G\an­bia PLC 2006 Results, as a progress report [8, p. 6]:

Irish operation::; col/li/lue to foclls 011 key aspects oJ business execUliol7 which dril'e performance. pra­dUelivir)" and cost competitiveness. Inrern(oiOllaf opera/lollS are expec/ed Iv pel/orm well III 2007

(IIId Food Ingredients USA, Nlilritivrwfs and Joini VentI/res are we/{ pVJi{ion.ed fi)r good grawlh , ..

Gfanbia IS succes.l/ully developillg a strategic inter­national presellce. which {oday represents nearly 40% oj revel/lie w1d profits. TIII's gives /he Group a strong pl(ltformJrorll which 10 continue 10 grow and develop overseas, AI the same lime, the Group COIl­

linlles fa cansistemly and solidly improve fhe long·

term sllstain{/bililY of lhe {rish dairy opermio!1s. As 10 the future, Chmhia is On lorgel to deliver dou­ble dig it eamin,!u grm1'lh in 2007 [Jnd we beliel·t! the outlook is po,I'ilive for sustained growlh.

The comments on the effectiveness of Glanbia's strategies suggest that the Ii rrn is working on Ilnprov­ing the efficiency of Irish opermions and plans to

focus most of its growth in the U.S. and other foreign locations. The efforts to improve the Irish operations inctude working with Dairygold Cooperative to share milk assembly and milk processing functions, Each firm levies a tol! charge on the other for reciprocal pro­

cessing. These reciprocal arrangements provide some of the cost savings of mergers without actually requir­

ing lhat the mergers take place.

B<lbcock InstilUte Discussion Paper No. 2007-3

In ~llmrl.1ary. Gianbia has i/nplemented several growth-oriented strategies that other leading world

dairy processors have pursued. The!>e include secur­ing milk supplies in the U.S. rmber thim in quom-con­

strained Irish dairy industry, becoming more efficient in manufacturing by establishing large U.S. cheese manufacturing plants, and opening new markets In

tne U.S. and Latin America, <Ill of which have helped

Glanbia gain market share and market power. Thus,

Glanbia's strategies encompass nenrly the fuH range of growth-oriented strategies identified by Zwanenberg.

Strategies of Dairygold Cooperative

Oairygold Cooperative, the smallest of Irelund's Big Four dairy firms in terms of total sales, processes about 20 percent of Ireland's milk !.Ill. Dairygold represents the 1990 merger of two long-established cooperatives, Michelstown Cooperative (founded in

'91 Y) and Ballyclough Cooperative (founded in 1908) [II]. Michelstown Cooperfltive and Ballyclough coop­erative both absorbed l7 smaller cooperatives prior 10

their [990 merger to form Dairygold. In recent years_ Dairygold has carried out a stflHegy

study and rationalization activities that reduced the cooperative's work force and increased the efficiency

of the firm's processing operations. The strategy study carried out in 2005 and early 2006 specified the fol­

lowing key objectives for the cooperative [II]:

Develop non-core assets into a sustainable, growing, profitable business.

Ring fence (separate) core businesses frOIl1 activitles cUiTying unacceptable risks.

• Set up non-core businesses to make an unassailable contribulion to milk/grain price.

• Give members access to the value of their <lssets not involved in servicing active farmers.

Maintain v"lue of Cllrrenl owners' assel base.

Allow members and the coopermive [0

experience capiw\ appreciation.

• Develop a dividend flow for members and core business.

Achieve a funding modeltha{ works effectively.

II

Compe titi ve Stra tegies of Dairy Processing Firms in i re l(lnd

The main change thaI emerged from this spec ifica·

tion of objec ti ves W<lS the splilling of the cooperative

inlo fWO components in 2006, consi sting of:

Cnre Farm BJJsin(!s~'e!i: The milk processing " lid agri -trading Core Fmm units were tasked with

maximizing falTTler suppliers' income and fMIn

gate prices and mimmizing farm input costs.

• Renx Holdings pIc: The uni t's in this un lisled pic

were charged with maximizing the return from

the cooperative's property, consumer foods, and

home hardware asselS, The Reox Holdings aSsets

also are expected (0 develop a dividend Stream

and shares wi(h liqu idi ty and real vtl lue,

Dairygold's ind l vidu<l\ farmer·members retni ll 100 percent ownership of the Core Farm Bus inesses and

Reox Holdings pic, Reo)!. sh'Hes can be held or ~o lcl by

Dairygokl's fanner-members at a time o f their choos­

jng, Th is 11ex ibility wilb respeu (0 holding or se ll ing.

~h; lI-es is Cl valu~b/e allribLl te, which many coopera­

tives 1()(:a!ed outside o f Irefand do not possess.

Oai rygo ld 's Chief E;l;eculive. Jerry Henchy,

des(.:ribed si rmegies of Ihe finn as follows in the Coop­

eralive's 2006 A nnual Report l5, p . .:\ I:

Dlljrygo/d will , , , cOlllinue /0 develop amI saUft'

"igher ,·aJ"e m(JfkefS /0 1' Ull il/creasil1g {U'I'("C/1I of its product ral/St , , ' Ow succ~ssf,,1 mOve infO 'he speciolly cheese l1Iorkers willi J{/I'I.~/)eI'R (/luI Mall­

chego cheese Ofe eX(lIlIples 0) how litis wil/ be

adriel'cd (/l1d we will built! /)J) 'his .\'/lCCl'.H w add

furth er vallie 10 ' , , (pm{/II/:ers'j milk ,mppl.\' in Ilu:

com/llg yeol'.\',

Dairygo/d is .llIlIy mpportiv(! oj industr), inil;tI­

tives 10 improve tile ejficiel/c.\' alld L'ompe1i l ivelleH

oj dnir)' processillg c(lpacl ty all 0 I/luiol/wide bosiJ

We believe (lull 0111' ground breakiJlg co·pr(weJ,\'

illg arn1llgemCill witll GJ(llIbia points the way jo/' ·

\"(/I"d ill ,IIis regard. The focus of Ihe int/uslI'Y IIIIISI

be 011 efficiell( processing, regardle.u nf the o""ner­

.1'1111' of /I/(! processillg lU.w!t.~. This will allnw pre­

Ci(l tll' I't!,\'(Jl./rCeJ Il) be cOltl'el1lrall!d on uchling valllC

rh l'(lllgh morket ;/I/IOWI,ioll alld new produci dew:l­

Opllltl11,

John Walsh, Oa irygoJd's Chai rman, descr ibed the

i1bove·rnen tioned co-process ing arrangement with

12

----------------GlanbiD in Dairygo!<I's 2004 Annual Reporc. as fol­

lows l4, p. 4J :

2005 opened wilh our {/II/lO/l/1cemem oj (f grollnd·

breaking co-p,'ocessing a",'ollgemelll wi,It Glanbia

pic. The G/(mbia {/I'rangemellf ' ~'ill l'(,'C IfS toke 011

25 milli(ln gal/oils {d milk anlwally jrom Ghmbia

/rom April 2006 lnr dair,. pr()('essill.l{ {U ,he Mitch·

elslowlI manujoe{l/ring lacility Ivl/ile GI'lf/b/(l Ivill

rake some 9 milliol! gallons 01 (lur cream /01' fhe

COl1lraCl f!1Ww!acfur;lIg oj Oairygold buffer 1)1 ils

Ballyrag8ef facility,

These comments are siraightfo rwtlrd descripl 10ns

of strategies to increase the proport ion o f va lue -added

product:::> in the coopermi ve's portfolio <lnu reduce pro­cessing COSh vin co-processing,

Strategies of the Kerry Group, pic

While no longer primari ly a dai ry linn. the Kerry

Group of II-e land provides a dramalic e:>:.ample of a firnl '" ~uccess rul strategic adjus lmcnl s 10 a some times hosl ile economic ellvironment.

The Kerry Group pic I!; now it dive:rsified food

ingredients, consumer foods Md bioscience compi\ny,

The firm grew from fl snl:.111 cooperative rhal had Sfl les or about U,S,$50 milliOIl in 1974 to a muhinruionil l

company with sales of €4.6 bil)ion (about U.S.$6, 1

billion) in 2(X16, a In"fold increllse.

Much of Kenfs growth In the lale 19805 and 1990s was llchieved by acquisitions of food ingredienls com­p<lnies, These acquisitions doubled Kerry's revenues

"bou t every Ii ve years during the lale 19aQ:, and 1990:-­Abollt two-thirds of the Kerry Group'!; revenues were

ol,)tl"l lnetl from food ingredient sales al the end of the )':190s,

An acciden t of hi:::>lory shaped the stra.egies of the

Kerry Ql'ganjZlttioll in imponant way .. , In the early

19705, ;1 bflJceHosis erad ication program reduced the

milk $UPP)Y of Ke lTy Cooperati ve (parent of the cur­

rent organiUllion) by <tboul 20 perCent. FOlcing (hi s

sitllnlion, rhe. Kerry Coope:rati ve':-; mnnagemelll and

board of direCfors concludeu lhat, if' the firm was to

grow, ir needed 10 reduce itg reli ;1nce on commod ity

dairy product!': aod diversify into tlifrerenriuted prod·

ucts. Accordingly. Ihe fi rm emb:lrked on a path !hl'lt

indudc;d the following strategies l6]:

B ... bcock ]nSlilule Discussion PLlper No, 2007·3

Competitive Strategies o f Dairy Processing Firms in Ireland

Emphasize product ion and sale of food

ingredients.

• Acquire fi rms selling branded food products.

• Beginning in 1986, exchange the assets of KelTY

COo per-Hive for a majority holding in a public

limited company, mainly to obtain capital for

growth ,

• Emphasize quality and continuity in management.

• Increase expenditures o n R&D to 2 to 3 percent

of saJes in order to remain competitive in the

food ingredients business.

• Emphasize growth through ilcquisilions,

especially of protilable food ingredients

businesses.

• In the early J9':Kls, seek 15 perce nt per yea r

eamings growth-IO perce nt "from organic

growth and 5 to 6 percen r (rom acquisitions.

[n May 2004, when Kerry completed the acquiSi­

tion of the former Quest Food 11lgre:Lli e:nt s business, thc Group established the Kerry Bio-Science d ivision

l16J. This division inl)ovates and applics ncw tech­

nologies relating to bio-ingredients and pharma ingre­

Llients for the pharmaceutical, culinary, snack , bakery,

conrectionery, dairy and beverage mllrkets worl<Jwide.

lmpJementing these strategies propelled the firm

inlO a world leadership position in food ingredietlls

and other highly differentiated produc ts. Simull ane'

ously, adoption of the se s trategit:s and oth ers noted

below cilused sales of Irish-based dairy prouucls to

decline (0 about 12 percent of the firm 's total revenues

II) the mid-2000s. Whi le the Kerry Graul' continues to I))ake a limited

number of acquisitions, the nature of the firm's over­

all SlrDtegies changed as the firm matured in the mid-

2000s, 35 noted below [15J:

• A reStfuclUring program was launched in 2006

to optimiz.e asse t use and enhance supply

c hain er6cienc ies wIth the gonl of increasing

effic iencies throughout the Group. This

action is expeCted 10 produce a 25 basis point

impro vement io Group trading margins in 2008 .

• The Group 's focus on research, development Dnd applicati on led to a 10 percent increase in roll -Out

Babcock InSti rute Di$cussion Paper No. 2007·3

of new products in 2006. Expenditures on these

act iv ities increased from € 125 milliml in 2005 to

€ 139 mill ion in 2006.

• A share repurchase program wns launched in the mid-2000s, suggesting that thi s use. or Group funds was more atlractive than avai lable

acquis itions o r other investments ..

These sorts of stfOltegic adjustments are to be expected from a firm ,hat wishes to consolidate and improve the effic iency o f operations after a period or rnpid growth .

How we ll ha ve the s traleg ies of the Kerry Group

worked in its dai ry-related unilS? The firm reponed the

foll owing results for 2006 [15 , pp.5, 9}:

In dairy markets, returns were lIegati\lely impocted

by tile relatively weak market t'ol/dilioll.'i ill fhe firSI

nine months of 2006. As Ihe EU franJiliOIlS from

direCT markel .~uppOl"fs throURh the proceSsing sec­

for /0 direct milk producer payment~· .. ~i}:, nificolIl

markel jfuclllatiol1s are possible depell<ielll upon supplyldemand balam .. 'es. While considerable firm ­

ing of illlcrnatiOllol dairy markets occurred prior

10 year-end. nevertheless {)rocessor re f/lTl1S lor 2006 were well belo~v fI,e previous year. With flu!

in cr(!(/si"R 11"(:.11(1 tow/lftl.~ /tealthy liJeJtyJe.~ amI

gl'Cwcl' dem(Jnd for welJn(! .. ~J I'l"odm·I.{, Krrry Dairy

IltgredielllJ luI.\" mode significl1l1f progress Ihmll,r:h

Ihe! dew:/opment oj milk proteins Iv;fh specifil' mllri·

t iolwi and fimc tiona I benejif;s. Further ;flves /meltl in

(Ioiry ]follor lee/llloiocy h(ls led fO innovlIlive devel· opmen ls ill culillary {/nd savory bakery markclS.

lVorking in partnership with Ihe Groups global

ingredients bw;il1esses .

III liIe UK and irish cheese c(ilegol'ie.~. Kerry

had (In exce/{ent year wilh good gm .... ·lh across all

bmnded ,,·egmenl.1". The Charfeville and Ca/eruille

/)Hlllds conlinlle 10 grow fhell" h'aC/ing marke l .\·/I(.lre

positions and (ht." eXlellsion of Ihe Low· L/:)w bral/d

infO cheese was /he market's ~t(/r perjol"mf:1" Ivillt

40% year-on .. year growllI . b7 rhe processed cheese set'/{Jr. £as/Singles brar/d sliwa has de,·lined sJighlly liS pril'(uf! label caprI/red Oil iI/creased fl!orke/ share.

The brand will. belleji' JrOlTi new pClckaging formalS

and increasing mad.c/iIlS support ill 2007 10 SUp­

pOl'l growlII in Ihe .wucking sector.

13

Competiti ve Strategies of Dairy Processing Firms in Ireland

K erry reported the following regarding the progress

of itS new Bio-Science Division (15. p. 6]:

Kerry Bio-Science comilU,ed (0 make good progress

il1 European //Iarke/s. Its "DwoFresh" range of

shclf-li/e ex /cmler PI'O(/UCJS re(:orded goud gruwlh

in rhe cheese, yugll/'I andjiuvored milk sU·lars. The

Dh'i);iol! 'l' Jull lille oj products, illcludinS emulsi­fiers, slooilit.£'f'l·, spe(io/ry prQlein.l' and el/l.ymc'\"

mnde encouraging progress ill Ihe dairy seef()/' as proceUDi'S seek produC/ differential ion through

innovalive hen"" offerings.

KelTY's success in lransforming itself from a sm<111

dairy cooperati ve into n profitable multina tional firm

provides lessons for da iry firms in Ireland and other

countries. Kerry's early deci~ions were pnrtly (I prod­

UCt of rln accidelll of history. However, (hose actions

alSO reflect Kerry's dec ision to nvoid tying Its fortune::;

10 the quota -limiled Irish dairy indu.wy. Secondly,

the firm pur5ued n !'l rJ tegy Ihat involved e~changing

Kerry Coopermive's assets for a majorilY hold 109 in a public limited compM)'. By se lling Kerry Sh<l res Oil

the Dublin and London exch:lnges, the Kerry Group

Wil:j able lO raise expansion c'l pilJl . Whi Ie Kerry's suc· ceS$es probJlOl y reside. more with continuou:i, cllpl1b le

managementlhan w' ith converting to u pic, the chililge

to a coopera ti ve/pit· may be WO rthy of emul,lIion by capital-shorl cooperatives located oLitside of Ireland.

Finally, Kerry's shift froll1 commodity dairy produc t~

10 ri i1Terenliaterl fI::Iiry rrQrillcl<;'. non.dairy rood pmll_

uct~, food ingredients. flavorings and biOSCience prod­

ucts may be a model for other dairy compr.nics.

Summing Up on Strategies

In summary, the strateg ies of lreland's diliry pro­

ce~ors rerre sen t reusonable, orthodox ndjuslments to

changes in the econolnic environment. The move on

Ihe p:lrt of the Irish rrocessors to increase Ihe produc l ion of va lue-added products is n $.uiwble adjustmenl

10 the decline in EU-CAP subsidies for commodilY dClifY I'rodLicts. Furthermore, Glonbia's sirnlegies ree,

14

ognize tl1m n producer of commodity products must

be <l large-scale, low-cos{ producer if it is to be profit­

abJe over the long-run. Hence, Ihe firm's decision to

build the large cheese and whey processing plants in

the U.S., which have a chance to produce commodi­

ties at <I profit, rlppears sound. G lanbia. o f cOurse, will find that the U.S. dollar earnings from chese plants will convert jnto a substantially smaller number of Euros

when returned to Ireland.

The problem of frngment<1tion of the industry has

been addressed in a number of ways. The co-process­

ing D!TDngements of G lanbia nnd DuirygokJ represent

efforts to achieve process illg efficiencies upproaching

those of <) lo rge-scale operator without actua l! y con­

solidating process ing p IMI!>. Also, the Kerry G roup,

which decided decades ngo, :llld many smn ller Irish

cooperatives, which decided more recently (with the

help o f the IDB), TO increase product ion of differen­

tiated dairy prodUCTS have adopted reasonab le stmte­

gie~. Their act ions will allow them to avoid having 10

compete directly w it l1 commOdity producers on a cOSt bnsis.

The Iri sh Dairy Board may have a Slll<lJier market

for its serv ices in the fu ture when a larger number of Irish processors begin to produce $pecialty dairy prod ­

uels. It is di fticul t La market such prodw::ts effectively

through all intermediary such il$ the fDB, but as long as lrel:md 's dairy industry rema ins somewhat fragmented

and commodity dniry prOduc ts remain impOrHtnt in the r orlfol io 01' frel:lIld's (biry in(lustry, thc lOB will have

n rolc 10 play i n the cCilIfl lry.

G lanbia nnd th~ Kerry Group huve adopted Stral­egies lhat span nearly the full liSt ment ioned by

ZWOInenberg. The o ne Me:! where there appear); 10

hflVe been liule strategic adjustment relntes to prob­lems associated widl the pronounced seasonalit y of

milk production. Glanbia. of course , has dealt w ilh Ihe

problem p4lrtly by establishing large di:liry processing

operations in the U.S. where seasonality of produclion

is lower. Finally, of course. all the stnllegies ana lyzed

are works ill progress.

Bnbcock Institute Discussion Paper No 2007-3

Competitive Strategies of Dairy Processing Firms in Ireland ------

REFERENCES

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4. DairygoJd Co-operalive Society Limited. "Annual Reporl, 2004."

5. Dairygold Co-openllive Society Limited. "Annual Report, 2006."

6. Dobson, W.O., J. Wagner, and R. Hintz. "When Will U.S. Finns Become Major Dairy Exporters ar.d Bigger

Direct Investors In Foreign Dairy-Food Businesses?" Babcock Institute Discussion Paper No. 2001-3, 29

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www.idb.ie/PRESSYE.HTM.

14. Kearns, G. "A Profile of the Irish Dairy Industry," preSen!fltjollto Delegation rrom the Bulgmian Ministry of

Agriculture and Forestry, undated.

I S. Kerry Group pic. "Results for the year ended 31 December 2006. preliminary statement," www.kerrygroup.

com.

16. Kerry Group. Profile 2006, http://kerrygroup.com/aboull_page.asp

17. Fonterra. "Annual Report 2005-06."

! 8. Oliver. E. "Glanbia in EUR 70m deal," The Irish Times. December 30,2006.

19. Porter, M.E. Competitive Strategy-Techniques for Analyzing Industrie~ and CompetitOrs, The Free Press. New

York,1980. 20. Prospectus-Promar International. "Strategic Development Plan for the Irish Dairy Processing Sector," 2003.

21. Wikipedia. "Growth-Share Mmrix, redirected rrom B.C.G. Analysis:' 2007. hnp://en.wikipedia.orglwikil

B.C.G._Analysis.

22. Wright ReportS. "Kcny Group PLC - Company Profile Snapshot," 2007, hnp:llwrightreporls.ecnexl.col11l

c011ls2/reporrdesc _COM PA N Y _ C372 EROOO. 23. Zwunenberg, A. "Collsolidation in the Dlliry Industry-A New Merger, Acquisition or Alliance Every 2.5

Days," Rabobank International Industry Note: Food & Agribusiness Research Issue 017-200 l. 1une 200 I, pp.

IA

Babcock ln~tit\Jte Discussion Paper No. 2007-3 15

Competitive Strategies of O;liry Process ing Finns III Irela nd

16 Bnbcock InSlitule DisCUSSion Paper No, 2007-3