Australian Dairy Business

Question: Discuss about the Australian Dairy Business. Answer: Introduction The dairy industry involves rearing of animals and their harvesting in order to procure milk which can then be processed into several dairy products in line with the demand of the various segments. The dairy products demand id increasing in Australia as the household income tends to increase especially with the economic growth witnessed from 2010-2014. Additionally, there is a sizable increase of Australian dairy products in the Asian markets where there has been significant rise in the living standards. Besides, there has been a shift in the dietary habits both in Asia and Australia towards various processed dairy products. Also, the Australian dairy products demand in Middle East continues to remain high. It is estimated that 7% of the total global trade arises from the dairy industry exports. Besides, considering the contribution of this industry to rural development, it is without doubt one of the most significant industries in Australia. As of March 31, 2014, Australia produces about 9.24 billion litres of milk annually (Australian Dairy Industry, 2014). The dairy processing industry based in Queensland and NSW (New South Wales) cater to the household market unlike the players based in South Eastern Australia which cater to the export market. Objectives The objective of the given report is to carry a thorough review of Australian dairy industry. Besides, the intermediate market structure would also be identified which would facilitate better understanding of the industry dynamics and how the firms in this industry are typically expected to operate. Besides, this understanding of the industry would enable the evaluation of the business model being pursued by Inglenook Dairy and critically review the same. Based on this critical evaluation of the underlying strategy based on the market structure prevailing in the dairy industry, recommendations could be offered so that the company could leverage the opportunities available in the market and simultaneously ensure the sustainability of the commercial viability of the business. Australian Dairy Industry - Structure and Production Stages The Australian dairy industry is quite significant in size. The Australian dairy industry structure is based on cooperatives as there are large farmers who are involved in the dairy business with large production and processing capabilities. As a result, these tend to operate their operational processes related to collection, processing and distribution on a large scale. As these large farms tend to be limited in number, hence there is an oligopoly in the Australian dairy market. However, it is noteworthy that at present a significant number of milk producers and processors are operating but with the increasing competition in the industry, the smaller players are paving way for larger players which tend to more competitive. This is responsible for the overall industry becoming more competitive with regards to other foreign players (Augustin et. al., 2013). There are two main production stages for the dairy industry namely the actual production of raw milk and the processing of the same. For raw milk production, it is imperative to indulge into rearing of cows in a bid to maximize yield. In order to enhance the shelf life of milk and enhance the suitability for human consumption along with further processing, it is necessary to extend heat treatment to the raw milk (Dairy Australia, 2016). This raw milk is being produced by various small farmers who lack the requisite finance and technical know-how to process it into myriad of dairy products. The large farmers tend to procure pasteurized milk from these small farmers so as to process it further and derive value added dairy products with significantly greater shelf life. The large farms tend to employ the small farmers as sub-contractors so as to ensure assured and quality supply of raw milk for carrying on further operations. They may even procure certain processed dairy items from smal l processing plants so as to produce products with further value addition. The various dairy products are produced by these large farms and distributed further to the consumers. However, at times, the small milk producers and small processers may also provide the retail market with products for sale directly (Douphrate et. al., 2013). Dairy Industry- Intermediate Market The role of the intermediate market is to provide the goods and services for the final product or services which are then sold to the consumers. These are a key component in the vertical integration of any industry. For the dairy industry, the intermediate market comprises of those farmers who actually rear the cows to produce the raw milk and also provide intermediate processed goods for further processing to larger farms which produce the final products meant for consumption. The intermediate level is very competitive which is apparent from the high concentration of businesses at this level. This is in sharp contrast to the retail end of the dairy industry which tends to be oligopolistic as there are only handful distributors of dairy products. It is noteworthy that besides the intermediate industries that act as provider of raw milk and other intermediate processed goods, there are other industries which contribute to the overall value chain (Douphrate et. al., 2013). An example o f the same would be the machines that are deployed in the rearing of cows which is done at the intermediate level. Besides, there would be certain specialized equipment that would be used from milk processed and hence would have to be sourced from dedicated suppliers. Additionally, quality feedstock would be required to feed the cows so as to ensure quality yield of milk. This is usually dealt with by the agriculture sector which ensures regular and uninterrupted supplied of green fodder. Besides, in order to feed the primary processing units serving as intermediate market, transport facilities are required to transport milk from the milk producers. Also, considering the demand of Australian dairy products in the international market, there is sizable demand for transformation services so as to ensure that the products from both intermediate market and retail sector are delivered in a timely manner to the consumers (PWC, 2011). Market structure implications From the above, it is apparent that the producers of raw milk which have a small size face conditions similar to perfect competition as these provide their supply to large farms which are into dairy processing. It is highly likely that these cooperative farms which are exceptionally large tend to have dominance over the smaller producers and farms which is reflected primarily in the underlying price offered to these players. Since, these smaller producers of milk tend to act as sub-contractors to the larger players, hence only a small amount of profit reaches the intermediate market especially when they do not sell their products directly to customers (Mulley, Lean Wright, 2014). The pricing power primarily rests with the large dairy farms functioning as cooperatives which themselves also have to face a high competition. Increasingly, the retailers are playing increasing role due to which they also have a say with regards to the prices. In the butter and ingredient market, it is app arent that the oligopoly structure is evident with the dominance of only a few players. However, with the regard to the other produced derived from milk, formula pricing is dominant. In this, the retailers and consumers tend to use a particular reference price which is already quoted. While previously the market power rested with the large producers of processed dairy products but gradually over the last few years there has been a decisive shift in the favour of the retailers i.e. supermarkets. This is witnessed in the contractual relation between the supermarkets and the large dairy farms. Besides, considering the fact that the supermarkets in Australia are primarily controlled by only two players namely Coles and Woolworths, the bargaining power of the cooperatives have declined. However, despite this, in the dairy industry a sizable profit is earned by the large farms operating as cooperatives (Ashton et. al., 2014). At the same time, there is no denying that the retailors ending up as the point of contact for the customers tend to have a high pricing power especially in wake of the frequent price wars. Inglenook Dairy - Current Strategy Inglenook dairy is the producer of quality milk in Australia which can be distinguished from the other producers as it is completely non-homogenized. The homogenised milk has very limited positive health effect and is not preferred. As discussed above, the raw milk producers tend to face a high degree of competition and tend to have limited profits (ABC Rural, 2013). However, the company aims to distinguish itself from the other players in the industry. As a result, the company has the strategy of vertical integration whereby it has not limited the business scope to only production of raw milk but has expanded the scope to include milk processing and distribution as well. Additionally, the company has also focused on product differentiation as an enabling strategy so as to build a sustainable competitive advantage (Abc.net.au, 2016). Since the company has gone for forward integration, thus it is comparatively more independent as it is not dependent on the whims of the large farms in the cooperative sector. Additionally, with the company getting into distribution of finished dairy products to consumers, it has also been successful to escape the dependence on the supermarkets and other retail companies. Besides, due to product differentiation, it is possible for the company to target specific segments such as particular coffee shops, restaurants etc. Hence, the strategy of the company provides scope to sustain in a hyper competitive industry (Augustin et. al., 2013). Besides, even in case of milk also, the company focuses on healthy products such as low fat milk and is thereby able to differentiate itself from other peer group firms. The strategy of the company whereby it aims to cater to niche markets is referred to as boutique model. In the process, Inglenook is creating a high value model whereby the consumers a re willing to pay a premium for the product offerings due to their superior quality and better suitability to the needs of the client. It is expected that the company on back of the present model could build a competitive advantage over the peers due to the different business strategy that it has embarked. Opportunity Threats Australia has an established diary industry which commands a premium in the global market. As a result, the industry has been able to focus on the usage of start of hard rearing and processing techniques which not only saves on the cost but also leads to an overall improvement in the quality of the product. Further, considering the increased demand of dairy products in Asian markets coupled with their higher purchasing power, there is a potential opportunity which could be tapped by the Australian dairy industry and especially companies like Inglenook (Chandan, Kilara Shah, 2015). Additionally, the demand from the developing world is also expected to rise on account of change in dietary preferences which are becoming more inclined on processed foods in all spheres including dairy. However, it is possible that the industry may not be able to process this higher demand if it does not modernise the manufacturing processes that it deploys. As a result, the dairy industry also provides l ucrative opportunities to other ancillary industries which may be indirectly benefitted due to rapid strides in the dairy industry. In this regard, the following pie chart is of help. Source: Dairy Australia, 2016 The major threats to the industry pertain to the volatile climate coupled with the policy regime adhered to by the government. As the inputs continue to become more expensive, the production cost for dairy farms is on the rise. Due to the frequent incidence of extreme climate, there is a shortage of requisite grazing fields for the cattle as a result of which the cattle farmers have to invest incremental money in higher quantities of green fodder (Hanslow et. al., 2014). This may have adverse implications for the production of milk both in terms of quality and underlying price. Therefore, it is imperative that these large dairy farms should invest in doing the requisite R D activities so as to overcome these issues. Besides, due to industry deregulation, the competition level in the industry has further soared. Also, the underlying government policy with regards to dairy also tends to be fluctuating which adds to the woes of the industry (Harris, 2016). Considering the safety of dai ry products, there is frequent updates in the policy which does not serve the interest of the sector. Conclusion Considering the buoyant export market and the contribution of the dairy industry to the development of the rural areas, it is beyond doubt that the industry is exceptionally critical. However, with the cost pressure increasing on the industry, there is a need for the industry to constantly innovate so as to maintain the competitiveness in relation to the other international players. It is likely that the industry may get further consolidated considering the increasing pricing power at the distribution level and also the high competition margins and shrinking profit margins especially for the small farmers. In order to emerge successful in the cut throat competition, it makes sense for the companies engaged to differentiate not on basis of cost but rather on basis of product. The existing companies taking a cue from the strategy pursued from Inglenook should aim to become integrated players rather than focusing on a single operation. Further, considering the virtual duopoly in retail and there increasing clout in the distribution, the big dairy farms should focus on building a distribution network so that higher margins could be obtained. Additionally, it makes sense to cater to the niche segments and in the process emerge victorious in the competitive market and also gain a sizable market in the export markets of Asia which are increasingly open to higher value products coupled with healthy foods. Hence, it is imperative that the dairy firms should aim to enhance their understanding about the target consumers changing taste and cater to the same. References Ashton, D., Cuevas?Cubria, C., Leith, R., Jackson, T. (2014). Productivity in the Australian dairy industry:pursuing new sources of growth. ABARES research report 14.11, Canberra. Augustin, M. A., Udabage, P., Juliano, P., Clarke, P. T. (2013). Towards a more sustainable dairy industry: Integration across the farmfactory interface and the dairy factory of the future.International Dairy Journal,31(1), 2-11. Australian Dairy Industry (2014).Dairy Australia, Retrieved January 2, 2017 https://www.dairyaustralia.com.au/Industry-information/About-the-industry/About-the-Australian-dairy-industry.aspx Chandan, R. C., Kilara, A., Shah, N. P. (2015).Dairy Processing and Quality Assurance, London: Wiley-Blackwell Dairy 2012 Situation and Outlook Summary Report. (2016). Dairy Australia. Retrieved 2 January 2017, from https://www.dairyaustralia.com.au/~/media/Documents/Stats%20and%20markets/S%20and%20O/S%20and%20O%20May%202012/Situation%20%20Outlook%20Summary%20Report%20FinalLR%20FINAL.pdf Douphrate, D. I., Hagevoort, G. R., Nonnenmann, M. W., Lunner Kolstrup, C., Reynolds, S. J., Jakob, M., Kinsel, M. 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(2014), Market preparation: Cattle Production and Trade, Retrieved 3 January 2017, from https://sheepjournal.net/book/prelims.pdf PWC. (2011). The Australian Dairy Industry| The Basics. PWC, Retrieved 3 January 2017, https://www.pwc.com.au/industry/agribusiness/assets/australian-dairy-industry-nov11.pdf