Australia / Analyst Insights
New Whey: Cheese and Yoghurt Makers Benefit from Premiumisation
by Matthew Reeves
Aug 28 2019

The Australian Dairy sector has been under pressure over the past five years. Domestic milk prices have declined over the period due to excess supply in global markets. Domestic milk production has also declined to its lowest level in more than a decade, partly in response to lower prices and drought conditions in the eastern states. These trends have affected the Dairy Cattle Farming industry’s profitability, leading to a rising number of industry firms closing down establishments or exiting the industry entirely.

Reduced milk production has affected output in downstream dairy industries, such as the Cheese Manufacturing industry and the Yoghurt Production industry. In the Cheese Manufacturing industry, this reduction has led to a rising number of firms leaving the industry over the past three years. Although beverage company Lion Pty Ltd has not officially exited the industry yet, the firm is the most recent high-profile example of this trend. In October 2018, Lion announced it would sell its entire Dairy & Drinks business, which includes milk, cheese and yoghurt production. Despite a turnaround in profitability, Lion’s Japan-based parent company, Kirin Limited, deemed the ongoing capital requirements too great.

Despite this reduced output, revenue for both industries has grown over the past five years. Revenue for the Cheese Manufacturing industry has grown at an annualised 2.9% over the five years through 2018-19, and revenue for the Yoghurt Production industry has grown at an annualised 1.3% over the same period. These industries have benefited from increased product premiumisation due to rising demand for higher quality cheese and yoghurt. Specialty cheese varieties, such as fetta, brie and camembert, have grown in popularity among Australian consumers. These specialty varieties are priced at a premium compared with everyday cheese, such as cheddar, and have provided a significant boost to the industry, both in terms of revenue and profitability. This boost has also created opportunities for small players that focus on niche products, such as cheese made from goat or sheep milk. As a result, enterprise numbers have increased overall for both industries over the past five years.

In April 2019, Saputo Dairy Australia, the local arm of Canadian dairy giant Saputo Inc, announced its intention to acquire Lion’s cheese business. This business includes the Tasmanian Heritage, South Cape and King Island brands. Saputo have said that they see growth opportunities in these brands, particularly as the consumer market increases its focus on premium products. This acquisition is currently before both the ACCC and the FIRB.

A similar trend has occurred in yoghurt production over the past five years. Rising health consciousness over the period has had a dual effect on the Yoghurt Production industry:

  • Consumers are increasingly turning away from artificially sweetened foods, including sweetened yoghurt, which has led to an overall decline in per capita yoghurt consumption.
  • However, ongoing demand for natural and Greek-style yoghurt, and probiotic yoghurt, which command premium prices, has led to an increase in industry revenue over the past five years.

 

The trend towards premiumisation in both yoghurt and cheese production is anticipated to continue over the next five years. Real household discretionary income is forecast to rise over the period, allowing consumers to increase their spending on non-essential goods, such as premium cheese and yoghurt. Whether manufacturers in these industries can make the most of this trend will depend on milk supply. Milk production is projected to rise slightly but be volatile over the next five years.

Related industries:

Cheese Manufacturing in Australia

Yoghurt Production in Australia

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