Making a splash

“The one major challenge in a big saving programme will always be to convince the hundreds of managers to buy into the idea”
-Peder Tuborg

For anyone who made a living selling milk, 2009 was a difficult year. Raw material prices plummeted as global demand for the white stuff slowed to a trickle. For many dairy companies, the unfavourable market conditions were a death knell, but for Denmark-headquartered Arla Foods, they prompted an ambitious programme of cost savings that have exceeded even the company's own targets. Now looking ahead to a future of new products, territorial expansion and an ongoing growth strategy, CEO Peder Tuborgh has many reasons to believe that 2010 will be a far better year than its predecessor.

A major focus for the company over the course of last year was making savings with a target of KR840 million. What were the key challenges you faced in making these gains without negatively impacting your business?

The target was KR840 million, but we actually achieved savings of KR1 billion, so we exceeded the target by quite a bit. I think that the one major challenge in a big saving program is, and will always be, an organisational challenge to convince the hundreds and hundreds of managers throughout the organisation in many countries, to buy into the idea of really going through all kinds of costs and projects. After that it's executing the saving program with speed and swiftness. It was and will also in the future be an organisational challenge to run such a program, but I think we succeeded very nicely. I also think, looking back on it, that it was very healthy. We are more competitive today than we were prior to this program.

And that was something you managed to do without negatively impacting your organisational effectiveness?

Of course, there's always a risk in doing such a thing, but we did it very quickly, defined the saving areas across the many countries and many, many functions, and we did that in a few weeks. I think the planning phase was in total three or four weeks, and from there on it was just about executing. The speed of the program also ensured that we didn't hurt the organization for too long.

You've unveiled an ambitious growth strategy over the next few years. How are you going to achieve this, given the difficult conditions, both in the dairy industry and the wider economy?

We are very happy about our strategy here, the content of the strategy, how it's described and the targets that we have. As regards to the overall turnover growth, we have moved the target a few years down the line so that it's no longer 2013, but 2015. That's being very realistic about the market modus operandi that we have seen in 2009. It's very tough, and, as you know, we have recently been through some very tough times.

What are the key spokes of your strategy in terms of growth over the next few years?

Basically it is about three areas. There is a lot of detail behind them, of course, but it breaks down to three areas. One centres on innovation and adding value to milk, innovating new products and new product lines, and the organic growth area. Second, it is to participate in whatever structural changes we see in our industry. We have a long track record over years and generations of doing that, and we'll try to see if we can team up with other industrial players. There are many, many ways of doing that. If we can participate in the restructuring of our industry, it will keep on going and I think it will speed up. Finally it's also about keeping a very efficient and lean company. Those are the three strategic pillars.

The dairy industry has had to endure some very challenging conditions over the last few years as milk prices plummeted. Was this purely down to a drop in consumer demand or can some blame be placed at the door of the EU's dairy policy?

I do not think that it has had anything to do with EU's milk policy. I think the EU's milk policies are more of a consequence. But I think the real reason behind the tremendous drop in milk prices, if that's what you're looking at, was of course the economic crisis that the whole world came into. That also hurt our industry. You can call that a drop in global consumer demand, and also a shift from more expensive products to cheaper and more discounted products. I think that had a major impact. One also has to remember that in the end of 2008, where the financial crisis was really starting to hurt all industries including our own, we, in our industry, had the melamine crisis in China.

That led to, at least for a while, a tremendous drop in consumption in China, and at the same time we also had - in the end of 2007 and the beginning of 2008 and throughout until the summer - one of the largest outputs of milk production throughout the world. So, there was a combination of a large output and then consumer demand globally dropping, which was exacerbated by the melamine crisis. What we see today is that the Chinese consumption seems to be back on track and is growing very impressively, so we don't have that factor at the moment.

What role does expanding into new markets sort of play in Arla's future plans, and which other places in the world are you currently targeting?

We trade with many countries, but we have our stronghold in the European hemisphere. Our core markets are especially in northern Europe - UK, Scandinavia, Germany, Holland - you could say that those are the prime core markets. We have then also expressed that we will focus more investments in the future in growing economies like Poland, Russia and to some extent the US, and definitely the Middle East, where we had the crisis back in 2006 and 2007. We recovered as much as could be expected, actually more than we could have hoped for, and so the Middle East is definitely on our radar for going forward. And then, of course, it's China, where we have a very good joint venture with one the biggest dairy companies in China, the Mengniu Dairy Company.

Are there particular challenges in terms of expanding in totally different territories? Do you have to modify your approach depending on where you're looking to expand?

Of course. On the one hand, we are very keen to globalise our approach to how we do processing, production and achieving synergies in our organisation. But on the other hand, we have a long tradition of also adapting our approach to the markets, to whatever local conditions are needed. So, it's a mix of a very global intent, you could say, but being very realistic about how we do it so that we also adapt ourselves to whatever global conditions we face. Especially in the food area and in the milk area and the cheese area, consumption patterns are different and one has to be flexible.

Investment in processing is a key priority for Arla. Why is processing seen as being so important?

It's really about adding value, which is the right strategic way of expressing it. We're a cooperative owned by 8000 farmers, and we are teaming up in other countries also with other farmers. It's our obligation to add value to the milk that they process on their farms. The biggest source of our milk is in northern Europe, where the costs of living for our owners are higher than other places in the world. This means that we have only one way of going forward, and that's adding value to milk and through means of innovating our products and innovating our technologies.

Over the last year, companies like Nestle have been able to take advantage of lower milk prices to improve their margins. I assume that the way Arla is structured meant that you couldn't do the same?

We were born the other way around, you can say. We are a cooperative owned by farmers, which means that our prime objective is to maximize the price of milk. That's quite different. This is a reality for all cooperatives, it is something that we enjoy and it gives us a very clear obligation to add value to milk. If you look at many other countries, in Europe you will find that there are many other organisations like us. There are many big cooperatives that have exactly the same mission in life, you could say.

What role does technological innovation play in improving your processing capabilities and developing new products for sale?

Innovation goes in all kinds of directions. It's not only about innovating new products for consumers and customers. It's also about ensuring that we are at the front in terms of using the best technology that you can find.

You talk about adding value to milk. What kind of key trend and product areas are looking to do that in?

We are very keen on health issues and healthy products. We are very keen on investing a lot of R&D in that area. We're focusing on investing a lot of our R&D in innovation efforts in the area of making natural products. I think we are today one of - if not the - largest milk or dairy cooperatives in terms of the size of our organic milk pool. We have more than 500 million liters of organic milk, so that's just one example of something that we're pursuing. We believe that there are many other trends. There is one clear trend; that consumers wish to make sure that the products, the food that they're eating, is as natural as possible. That's at least the position we're looking at. So, health and naturalness are very clear drivers in our innovation strategy.

China crisis

As if the global situation was not hostile enough over the last few years, the scandal of melamine tainted milk powder in China further rocked consumer demand. Officially responsible for the deaths of at least six babies plus the sickening of tens of thousands more – though there is widespread belief that even these figures underestimate the true extent of the damage caused – the deliberate contamination led to the execution of two dairy officials, prison terms and millions of dollars of fines. Centred around the firm Sanlu, the crisis caused considerable embarrassment to the Chinese authorities ahead of the Republic’s hosting of the Olympic Games.

Despite the strong response in this case, unscrupulous producers adding melamine to products in order to artificially raise their protein content has become an all too common problem in China, where regulators have struggled to cope with the problem. Pet food adulterated with the substance found its way to the US in 2007 and, more worryingly, melamine tainted dairy products have been found on Chinese shop shelves as recently as January of this year. In an age of global trade where contaminated products can quickly find their way into the shopping baskets of consumers across the world, this is an issue with potentially massive implications. The dairy industry in particular can certainly do without any more bad news.