Dutch Lady’s growth strategy in trying times

  • Business
  • Monday, 02 Jun 2008

Dutch Lady Milk Industries Bhd managing director Hans Laarakker is a man on a mission.

Growing the business has been on the top of his agenda since he took over the reins of one of the country's most established milk product players some two years ago.

His task is made even harder as margins are eroded due to skyrocketing prices of raw materials such as skimmed milk powder and palm oil.

Dutch Lady factory in Petaling Jaya.

“In the past, the agenda has been very much focused on productivity and fine-tuning the organisation. Now the emphasis is on growing the company, innovation and product quality.

“We also try to mitigate the cost increase through better product mix and cost savings. We will have to work very hard to restore profitability and it is not something that we can do in a few months,” he told StarBiz.

Dutch Lady's results for the year ended Dec 31, 2007, were pretty commendable – despite being plagued by rising costs – as net profit rose 9.7% to RM47.3mil and revenue grew 18.6% to RM609.2mil.

However, net profit for the first quarter ended March 31, 2008, recorded a sharp drop of 58% to RM6.3mil versus the same quarter last year despite a 21.7% jump in revenue for the period as raw material costs continued to rise.

In fact, margins were already on a downtrend in the fourth quarter of 2007 and Laarakker expects the trend to continue into the first half of the year.

“Therefore, we do not foresee 2008 revenue and profit to be higher than last year but profitability is expected to go up again in 2009 as raw material prices soften and sales grow,” he said.

Costlier powdered milk

The cost of powdered milk, which constitutes about 50% of Dutch Lady's total costs, has increased tremendously in the past 18 months.

”Powdered milk, which we used to buy at US$2,200 per tonne in the first quarter of 2007, has surged to US$5,000 per tonne in the first quarter of the year.

“We cannot pass all the costs to consumers, so we absorb a big chunk of it ourselves. Palm oil and tin prices have also risen,” Laarakker said, adding that a big amount of milk was sourced from New Zealand or the global market.

Dutch Lady has increased product prices by about 5% in April so far and Laarakker is hoping to avoid any further increase this year.

“We expect the price of powdered milk to have peaked in the first quarter and for prices to be lower from the current quarter onwards. Therefore, we do not need further product price increases.

“Powdered milk prices are still very volatile at this moment and unfortunately, it will never come down to the levels of Q107,” he said.

Nevertheless, Laarakker is still very optimistic about the growth potential of the country's milk market and aims to continue growing Dutch Lady's topline results by 15% to 20%, going forward.

“However, to grow at this rate, we cannot sacrifice our investments in branding, products and capacity building.

“There would also be an increase in advertising and promotion expenditure to achieve the targeted topline growth. They don't come by themselves,” he said.

Growth areas

Dutch Lady's main area of focus to grow the business is the higher margin infant and toddler categories such as infant milk, growing-up milk as well as some special products for younger children.

Another market the company is eyeing in the next year is dairy products for the family such as regular liquid and powdered milk and low-fat yoghurt.

“We are also exploring a new avenue – products/propositions to keep people drinking milk. Asians tend to stop drinking milk after some time unlike those in the Western countries who drink milk their whole life,” Laarakker said, adding that the company started with zero-fat drinking yoghurt last year which was very successful.

He plans to introduce more products tailored for children and young adults in the remainder of the year.

“Sometimes, it may not be a brand new product but new packaging and making them available in different stores or outlets,” he said, adding that the company improved the packaging of Frisco infant milk powder and received very good feedback.

Capital expenditure

To meet the higher topline growth, Dutch Lady plans to invest RM100mil to RM120mil in the next three years for capacity expansion and factory upgrades.

“Our lines are all running at nearly maximum capacity. We are outsourcing our logistics/warehouse function and this will free up space to expand capacity at our current site in Petaling Jaya,” Laarakker said.

With the expansion, Dutch Lady's capacity is expected to increase by about 50% in the next three years, thus lowering its unit cost due to economies of scale.

Increasing dairy consumption

Dutch Lady is going all-out to increase dairy consumption in the country to create more awareness of the goodness of milk and as a strategy to boost sales.

Laarakker noted that a majority of Malaysians drink a glass of milk every fortnight or every month.

“I firmly believe the dairy market in Malaysia can still grow a lot if you look at consumers' health awareness and increasing income.

“There is still a very low consumption per capita in this country. People are dropping off the dairy scale after reaching six years old,” Laarakker said.

He added that the dairy market, which has been growing 3% to 5% every year in the country, rose over 10% last year as consumers shifted from unhealthy beverages to healthier drinks, especially milk. “We also see huge growth in volume this year despite the increase in price.”

Dutch Lady is on a month-long Spread the Goodness of Milk campaign, organised in line with the Government's efforts to create a healthy and active Malaysia. As part of the campaign, it celebrated its own nationwide milk day yesterday by distributing some 50,000 milk packets free throughout the country.

In conjunction with the movie Kung Fu Panda's release on Thursday, Dutch Lady will be sponsoring a series of children's activities related to the movie nationwide.

The company has a 20% share of the overall dairy market. The company has a 55% share in the UHT and sterilised milk segment, while Growing-UP milk has a 30% share.

Feasible plan?

Dutch Lady, in trying to grow its business to mitigate thinning margins, could face intense competition from competitors such as Nestle (M) Bhd and Fonterra Brands (M) Sdn Bhd, which are also embarking on similar strategies.

Nestle plans to spend some RM240mil this year to expand its production capacity.

Fonterra recently unveiled its power brand strategy in line with the company's aggressive growth plan moving forward whereby the company will focus on three high-performing brands – Anmum, Fernleaf and Anlene – for faster growth, better margins and greater market appeal.

The company aims to increase innovation and marketing investments on these three brands by 30% in financial year 2009.

Nevertheless, analysts believe Dutch Lady is in a strong position to defend its turf and even grow market share via its growth strategies.

Established brand

An analyst noted that Dutch Lady was a well-established brand and its products gained high consumer acceptance. “I still see a lot of potential for growth for Dutch Lady. Its UHT milk is making huge inroads in the country – the health-conscious younger generation, especially those in the mid- and high-income range, are drinking more milk.

“If you go into a mamak shop nowadays, the ratio of Dutch Lady UHT milk versus Milo in the shop is about 1:1 compared with 1:5 or 1:3, say, five years ago,” he said.

He pointed out, however, that Dutch Lady's focus on only milk products made it very susceptible to milk prices. “At times like this, the company really suffers,” he said.

He is optimistic the company can boost sales by focusing on the infant and growing-up milk categories. “The company can reap rewards if it does things rationally, step by step, and does not overdo the advertising and promotion expenditure,” he said.

Another analyst noted that by raising production and sales, Dutch Lady would be able to play the “volume game”, thus reaping the benefits of economies of scale.

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