The past year has been pretty tough for dairy giant Arla Foods. CEO Peder Tuborgh explains the, rather than dwelling on past troubles, the company has its eyes fixed on better times to come.
“The worst part is the milk prices we are seeing. It's very low, historically low, and I see that it's hurting our farmers and they are struggling”
-Peder Tuborgh, CEO, Arla Foods
It's the end of a long week for Peder Tuborgh - and he's making no attempt to sugar coat the situation that his company is in. Just days earlier he unveiled Arla Foods' plan to save €134 million in 2009 - a restructuring exercise that will see it slash 250 jobs across it's operations worldwide. The move followed the news that the company has been forced to drop its milk price amidst plummeting dairy consumption worldwide: "There's nothing good to say about this," says Tuborgh. "It has to be done unfortunately. It's a very tough programme and we will be taking away a significant number of projects that are not commercially orientated in the short term. We will achieve this by turning every stone in the company."
And there will be a lot of stones to turn. Arla Foods is one of the key players in the international dairy industry with production facilities in 12 countries and sales offices in 20 countries. Its products, which include major brands Lurpak, Anchor and Castello are distributed around the close and its core markets include Denmark, Sweden, the UK, Finland, Germany and Poland.
Focussing on short-term profit is the only way to prevent further deterioration of the company's situation which saw it achieve profits that were €46 million below budget in 2008- meaning the supplementary payment to Arla's co-operative members has dropped to €0.003 per kilo of milk. The effect on them has, says Tuborgh been the most difficult effect of the financial downturn for him to witness: "The worst part is the milk prices we are having. It's very low, historically low, and I see that it's hurting our farmers and they are struggling. To me that is the worst part - to be witness to that."
The bigger picture
Despite the fact that 2008 ended on a sour note for the dairy giant, it still forged ahead with the its growth strategy, unveiled earlier in the year, which focuses on innovation, core markets in the North Hemisphere and expanding new markets in Russia, the US and China. As part of its strategy to grow market share in the core market of the European Northern Hemisphere, the company is in the process of acquiring dairy products Fresh Nijkerk from Dutch rival FrieslandCampina. A ten-year licence agreement has also been signed for the use of the Friesche Vlag brand of products for ten years in the Netherlands. The deal will significantly strengthen Arla Foods' presence in Northern Europe, says Tuborgh: "This is a very important step for Arla Foods. It makes the Netherlands a core market for our company and we believe that we have a lot to offer the Dutch consumers. It's perfectly in alignment with our strategy to become the preferred provider of dairy products," he goes on to say. The deal includes the acquisition of the popular Fresh Nijkerk brands Breaker, Milk&Fruit, Kwarkyoghurt and Melkunie. Within its existing portfolio however, Arla plans to consolidate its products into three globally recognised brands, Castello, Lurpak and products branded under the Arla name itself. This strategy is aimed, says Tuborgh, at creating greater brand impact for the company's products and strengthening its marketing activities: "We think that with those three brands we will be able to focus on marketing activities but also create a more visible and greater brand impact for the consumers where we choose to operate. We have numerous brands and I think too many times there is the spreading of marketing resources across the board."
The decision to market products under the Arla banner itself also reflects the company's wish to strengthen its presence outside its established markets in Northern Europe, as Tuborgh explains: "We have done so (used Arla as the main brand) in Denmark and Sweden which are our two original markets. But outside of those markets, Arla has not had a dominant brand positioning - maybe apart from in Germany. But we are refocusing and re-shaping the Arla brand. We have a very good ideas of the values that we want to associate with the brand and the kinds of products that we want to deliver for consumers under that brand."
As part of its branding efforts and in a bid to persuade cash strapped European consumers to spent more on higher quality dairy products, Arla Foods has launched its Closer to Nature campaign. This part of the company's aim to become the world's most natural dairy company, which will involve reducing its use of fossil fuels, using natural fertilisers, improving its animal husbandry practices and working to improve the sustainability of the company's packaging: "We are focussing on Lurpak and Castello and Arla as brands with the headline Closer to Nature which we think is the right position for our brand. It's all about natural products and environmentally friendly procedures throughout our production and distribution processes. It's a major programme that we are running at the moment in order to align and adjust our assortment (of products)." Describing how the company plans, in particular, to improve the sustainability of its operations, Tuborgh says: "We're aiming to reduce our carbon dioxide emissions by 25 percent going up to 2022. That's throughout the whole value chain. We are looking at transport, using biofuels and providing education on that for people driving the vans and collecting the milk. We are better planning to routes to minimise the distances driven and we are investing €25million in environmentally friendly technology alone."
The company's increased focus on branding and reputation building follows a period of controversy for the company, during which it become embroiled in China's melamine contamination scandal last year. At the time production at the factory of its Chinese joint venture partner Mengniu Dairy after milk powder produced there tested positive for melamine contamination.
Since the damaging incident Arla has introduced new testing procedures at the facility where production of milk powder has resumed. Tuborgh said: "We (Arla Foods and Mengniu) were definitely hurt by the melamine scandal. I think we handled it correctly and ethically. We pulled back our products immediately and we've set up an extremely thorough testing procedure with our partners where we test our products four times throughout the entire production process. When the milk arrives, whenever it is transferred through the dairies, when it goes through production and when it's being prepared for distribution. We're also labelling the products directly onto the paging to inform customers that our products are tested and safe to consume."
Having survived the melamine crisis and, in 2006, a mass boycott of Arla Food products across the Middle East (see below), Peder Tuborgh has proven himself to be a CEO with the backbone to see his company through a crisis. The latest storm blowing Arla's way could however prove to be the most challenging yet. Turborgh admits that this is a stressful and "emotional" time for him and his management team with some tough decisions to make.
However, he says, seeing the impact his decisions make on the company he runs is one reason why, for now, he's staying put no matter how tough things get: "The best part of the job for me is to be close to the impact of the decisions that I make or participate in making. And of course I have very good people around me which I enjoy every day and that is joyful."
Feeling the heat
In 2006 Arla Foods' Middle East sales plummeted during a boycott of Danish products in the region following the publishing of cartoons depicting the Prophet Muhammad by a Danish newspaper. At the time the company's sales dropped to zero in the Middle East and it was forced to cut 100 jobs as a result. The company said the stopping of its Middle Eastern sales has cost the company US£2million a day.
In March of that year Arla took out a full-page advertisement in a Saudi Arabian newspaper apologising for the cartoons and stressing Arla's respect for Islam. This attracted fresh controversy in Denmark where politicians and women's groups criticised the company's actions. A month later Arla Foods said its foods were re-appearing on the shop shelves in the Middle East.