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FACTORS INFLUENCING COMPETITIVENESS IN THE DAIRY SECTOR.docx2

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					                                        CHAPTER ONE
                              INTRODUCTION TO THE STUDY
1.0 INTRODUCTION
Competitive methods are actions taken or resources used in the overall strategy development
process and are increasingly important to managers seeking to increase the performance of their
firm (porter, 1980). The national economy since the year 2004 has recorded an increasingly
positive growth. In the year 2005, the growth was registered at 5.8%. This growth is attributed to
two main reasons, sound management and a strong investment drive from the private and public
sector. The impressive economic growth rate is as a result of rising in new ideas of wealth
generations, in terms of the coming up of several Small and Medium Enterprises (SMEs) across
the country.


1.1 BACKGROUND OF THE STUDY
In the 20th century, competition was moderate but this is no longer the situation as emerging
market are now characterized with uncertainty, diverse global players, fast technical changes,
widespread price war s and endless re-organization and re-engineering of both products and
processes (Davis, 1999).




Performance evaluation is widely used in every aspect of business world (cotler, 1998)
the timely preparation and availability of financial statements assist top management in the
process of examining the conditions and performance of a company. (Tomsezn, 1988) this is the
process of financial performance measure. It also serves to identify the company’s strengths and
weaknesses in terms of money markets and growth.


Examination of the company’s performance in terms of predetermined standards provides the
most significant management information and helps management in decision making process.
This is done both theoretically and practically.




                                                   1
Such an evaluation entails comparison of current or most recent results achieved by organization
with corresponding financial plans. Hence, it is necessary to have a set of well-defined plans to
ensure sound evaluation of company’s financial performance.


An effective evaluation of the company’s performance also entails comparison of financial
results attained by organizations with the corresponding results acceptable in a particular
industry. Such a comparison is usually accomplished by means of special ratios, known as
financial ratios. These ratios are frequently used not only by managers, but also investors,
creditors and various financial institutions.


Financial performance evaluation represents an important managerial responsibility and
comprises the following elements: Current financial analysis, Comparative financial analysis,
and financial ratio analysis.


Performance evaluation methodologies within the different aspects of utilities of utilities
activities have to be used in order to ensure the maximization of regulatory welfare, without
importance of whether Return On Investment (ROI) are implemented since both customers
welfare as forms of efficiency and sustainability are very important for prosperous future of
related sector.


1.2 Profile of Meru Central Dairy Cooperative
Meru Central Dairy Co-operative Union was registered under the Co-operative Societies Act on
23rd May 2005. Prior to that, it was an activity of the former giant union known as Meru Central
Farmers’ Co-operative Union (MCFCU). The registration of a new union was necessitated by a
restructuring process that was spearheaded by the Ministry of Co-operative Development and
Marketing which was aimed at improving efficiency and effectiveness of the former giant union.


The area of operation of the Dairy union is the greater Meru Central district which has now been
subdivided into four administrative districts namely Imenti North, Meru Central, Imenti South
and Buuri.



                                                2
The core business of the Union is milk processing and marketing.           The union also offers
Artificial Insemination (A. I.) services to the farmers and has established a demonstration
/learning site for dairy farming.


The first Dairy Co-operative Union known as Meru District Dairy Union (MDDU) was formed
in 1967 by three primary co-operative societies. These societies are Katheri Dairy Farmers Co-
operative Society, Naari Dairy Farmers Co-operative Society and Buuri Dairy Farmers Co-
operative Society. These societies came together primarily to pull their resources together in
order to transport their raw milk to the nearest processing plant owned by Kenya Co-operative
Creameries (KCC) in Kiganjo in Nyeri District, a distance of about 110 Kms from Meru Town.



1.3 Statement of the Problem

Since milk market liberalization in May 1992, competition in milk processing and marketing has
increased significantly in the industry. Since then, the Board has licensed over 40 private and
dairy co-operative processors to process and market milk and milk products.
The industry has a processing capacity of 2.5 million litres per day. The Kenya Cooperative
Creameries (KCC) is estimated to have a processing capacity of 1.2 million litres of milk per day
and the other processors combined have a processing capacity of about 1.3 million litres of milk
per day. This is being challenged daily by the small milk processing cooperative societies.
Meru Central Dairy has been recording an average of 1.3% market share growth in the market
from the year 2005. Thus this research focuses on establishing the factors that influence the
competitiveness of the Dairy cooperative.


Meru Central Dairy Cooperative Union’s core business is milk processing and marketing and
serves 13 primary cooperatives with 5,553 members from four districts in Meru. The product
range includes pasteurized one day fresh milk, two weeks shelf life milk, cream, fermented milk,
ghee, butter and ice cream. In 2009, the union lost two affiliate cooperatives supplying 7,000
litres of milk daily to a private company. This has threatened the survival of a rural SACCO that
draws its main and regular contributions from the dairy union and the whole social network in
Meru. We hope to reverse these trends. The main objective of the project is to increase milk


                                                3
production from 6,769,645 litres to 16,845,043 litres by end of 2013. To help achieve this, 13
milk coolers (capacity 1,200 litres each) and milk loading pumps will be installed, and one road
tanker of 7,000 litres capacity will be purchased to ease milk collection and boost milk intakes.


1.4 OBJECTIVES OF THE STUDY
Main Objective
This research focused on establishing the factors that influence the competitiveness of the Dairy
cooperative.


Specific objective
   i.       To establish the influence of marketing channels in developing the competitiveness of the
            industry
 ii.        To investigate the influence of marketing strategies in developing the competitiveness of
            the industry
 iii.       To investigate how pricing strategies influence the competitiveness of the dairy industry



1.5 Research Questions
     i.        How does marketing channels influence the competitiveness the dairy industry?
     ii.       Which marketing strategies influence the development of the competitiveness of the
               dairy industry?
     iii.      How does pricing strategies influence the competitiveness of the dairy industry?




1.6 Significance of the study
The study on factors that influence the competitiveness of the Dairy cooperative was of
significance to the following groups.



The Management

The management of the dairy industry will benefit from the findings of the study by
implementing the recommendations which will ensure that they use a different marketing mix in

                                                     4
attracting retaining customers so that they are able to increase the sales. These findings and
recommendations will also enable the management of the dairy industry rectifies the mistakes
which have been done in the past and changing their trends as far as competition is concerned.




Stakeholders

The stakeholders both in private and public sector will get information on how proper marketing
mix are made and implemented to increase the chances and levels of sales in a competitive
market. The stakeholders will also get an opportunity to review the marketing strategies used by
dairy firms and make necessary adjustments in areas where it necessary. With an effective
marketing mix dairy firms are able to capture a bigger a target audience therefore increasing the
market share of the business while satisfying the customer’s needs and wants thus increasing
their outcomes and revenues




Employees

The employees in the dairy firms will also get an opportunity to contribute in matters affecting
the management of the firms in terms of sales. This will motivate them and give them an
opportunity to openly express their ideas and contributions in the organizations.




1.7 Limitations of the study
In coming up with this research project, the researcher did encounter several limitations; the
study was limited to the Meru central dairy, but the findings can be generalized for all dairy
firms because most of them have similar layouts and structures. Due to the nature of the work
performed by the respondents, the research took a lot of time in data collection and analysis.




                                                 5
1.8 Scope of the study

The study was carried out in May and June 2011 in Meru Central Dairy Firm. It will adopt a
descriptive research design with a target population of 300 staff from the dairy firm and the
farmers. Purposive sampling design was used by the managers and heads of departments, while
Simple random sampling design was used for junior employees and the farmers. The sample size
for the study will be 100 respondents. Data was collected using semi structured questionnaires
and analyzed using quantitative methods. The findings were then presented in frequency
distribution and percentage tables.




                                              6
                                       CHAPTER TWO

                                 2.0 LITERATURE REVIEW

2.1 Introduction

This chapter summarizes the findings of literature on factors that influence the competitiveness
of the Dairy cooperative. It gives a summary of how marketing channels, marketing strategies
and pricing strategies have been used to influence competitiveness of dairy cooperatives.

2.2 Review of past studies

The researcher will review past studies in regards to competitiveness of dairy cooperatives. This
will be done so that the researcher can understand the role of the independent variables in
influencing or affecting dependent variables.




Kenya's economy is heavily dependent on agriculture. Generally 75% of Kenyans earn their
living from farming either directly or indirectly. Kenya is among few African countries whose
food production has kept pace with its population growth. Only in 1984, a year of drought was
there a registered deficit in food production. Agriculture usually brings in over 6% of foreign
exchange earnings and provides raw materials for Kenya's agro-industries, which account for
about 70% of all its industrial production. (Dairy Report, 2010)




Presently, the dairy industry is regulated by the Kenya Dairy Board, established under Section 4
of the Dairy Industry Act Cap. 336 enacted by Parliament in 1958. It is from this Act that the
Board derives its mandate. Kenya is largely self-sufficient in milk production. Currently, the
production stands at 3.1billion litres per annum, though this is sufficient for domestic
consumption, a lot more is required for the export market. Milk production in Kenya is based
mainly on cattle, more so the dairy herd. Milk is also obtained from camels and goats. Kenya has
an estimated cattle population of 13 million heads with dairy, mainly grade cows, amounting to
3.3 million and beef amounting to approximately 9.7 million.(Dairy Report, 2010)



                                                7
The Kenyan dairy industry is based mostly on smallholder milk production. About 600
000smallholders produce some 70% of the country’s marketed milk. Approximately 56% of this
milk is sold raw in the unregulated informal market; leading to public concerns about hygiene
and safety.(Dairy Report, 2010)




The Government of Kenya, in recognition of the role of private sector in spear heading
industrialization, has put in place a policy framework to foster the creation of a conducive
environment for private sector participation in economic development. The Kenyan dairy
industry has potential for spurring substantial growth in the economy. Some of the investment
opportunities available include artificial insemination services, dipping services, clinical
services, rearing of livestock for dairy products and milk processing for local and regional
markets. Attractive incentives are available to investors.(Dairy Report, 2010).




Milk production & processing

The country has about 3.3 million livestock of milk producing ability and 70% of total milk
production comes from grade and zebu cattle. Milk production is in excess of 3.1 billion litres
per year and the country is self-reliant in milk and milk products except in years of drought.

The installed processing capacity in the country is estimated at 900 million litres per year. The
total recorded milk production rose by 14% from 178 million litres in 2002 to 203 million litres
in 2003.(Dairy Report, 2010).




Since milk market liberalization in May 1992, competition in milk processing and marketing has
increased significantly in the industry. Since then, the Board has licensed over 40private and
dairy co-operative processors to process and market milk and milk products. The industry has a
processing capacity of 2.5 million litres per day. The Kenya Cooperative Creameries (KCC) is
estimated to have a processing capacity of 1.2 million litres of milk per day and the other

                                                 8
processors combined have a processing capacity of about 1.3million litres of milk per day.
(Dairy Report, 2010).




2.2.1 Marketing Channels

A marketing channel is a set of practices or activities necessary to transfer the ownership of
goods, and to move goods, from the point of production to the point of consumption and, as
such, which consists of all the institutions and all the marketing activities in the marketing
process. A marketing channel is a useful tool for management. An alternative term is distribution
channel or 'route-to-market'. It is a 'path' or 'pipeline' through which goods and services flow in
one direction (from vendor to the consumer), and the payments generated by them flow in the
opposite direction (from consumer to the vendor). A marketing channel can be as short as being
direct from the vendor to the consumer or may include several inter-connected (usually
independent but mutually dependent) intermediaries such as wholesalers, distributors, agents,
retailers. Each intermediary receives the item at one pricing point and moves it to the next higher
pricing point until it reaches the final buyer. (Kodhek, 1999).




Dairy production is a major activity in the livestock sector and an important source of livelihood
for about600,000 small-scale farmers. Apart from milk, dairy animals also provide manure, other
marketed products such as calves and curling’s as well as other intangible benefits such as
insurance and status symbol. In 1995, the value of dairy production was estimated at Ksh. 23.1
billion equivalent to 14% of total value of agricultural production (Kodhek, 1999).




In 2000 milk production was estimated at 2.3billion litres of which 63% was marketed, 30% was
consumed at home and the rest 7% fed to calves(Republic of Kenya, 2002). The value of this
production is estimated at Ksh 35.2 billion equivalent to25% of gross agricultural output
recorded in 20001. Despite this significant contribution to the national economy and households
incomes, the dairy industry is besieged by a number of technical, economic and institutional
problems, which seems to have escalated in the recent past. Although smallholder dairy

                                                 9
production contribute over 56% and 70% of total and marketed milk production, respectively
Omore et al, 1999), the productivity per animal in these farms remains low.(Kodhek, 1999).




Erratic payments, low farm gate prices and low sales as a proportion of total production
especially evening milk, unreliable market outlets and limited access to veterinary and A.I
services are all factors that negatively affect productivity and performance of the dairy sub-
sector. However, the potential for increasing dairy productivity in the country and especially the
smallholder dairy remains great. For instance, the average yield per cow in smallholder farms is
as low as 1,300litres per year as compared to the best world practice of 4000-6000 litres.
Increased productivity in the dairy sector will not only enhance farm incomes, nutrition, reduce
poverty but will also supply dairy products to the growing urban populations. According to the
current development plan, Kenya’s population was approximately 30.4 million people in 2001
and it is estimated that in 2008 the population will be 35.4 million (Republic of Kenya, 2002).
By then, it is estimated that the country’s milk demand will be around 2.6 billion litres as
compared to the current demand of around2.1 billion litres. This calls for not only higher
production but also better organization of the marketing chain. Since the liberalization of the
dairy industry in 1992, new institutional arrangements in milk collection, processing and
marketing have emerged. At the farm gate level, informal marketing channels dominate with
most farmers using this channel. (Kodhek, 1999).




These channels include hawkers, brokers, self-help groups as well as neighbours and business
establishments like hotels. In total, the informal market channel is estimated to control 60% of
the total marketed milk. Dairy co-operatives, which used to be an integral part of the formal milk
collection and marketing, have been relegated to buyers of last resort. Furthermore, the
cooperatives are also marketing a big proportion of their milk directly to urban markets. The 45
licensed milk processors with an estimated daily intake of 600,000 litres handle the rest of the
market share. This is as compared to over one million litres per day, which Kenya Co-operative
Creameries (KCC) used to handle during its peak. In as much as these new institutional
arrangements in milk marketing have offered expanded business opportunities and enhanced


                                               10
competition, they do offer major challenges to the growth and development of the dairy industry.
(Kodhek, 1999).




The informal marketing channels not only expose the public to health and hygiene related risks
but also continues to stifle the growth of the formal milk sector. For instance, out of the installed
milk processing capacity of 2.2 million litres per day only about 26% of this capacity is currently
being utilized. This has limited value addition in the milk chain while contributing towards
increasing consumer prices for packaged milk. The internal production, processing and
marketing constraints have also played a major role in diminishing the competitiveness of the
dairy sector in Kenya. (Kodhek, 1999).




This has occurred to the extent where milk powder imports are said to out-compete locally
produced milk. This development not only constrains the domestic milk market but also closes
opportunities for expanding export market. This paper re-evaluates some of the aforementioned
issues. The objective is to identify areas of relevance to public policy, which can be used to
increase productivity and efficiency along the milk supply chain. Specifically, this paper first
reviews the supply and demand situation in the country. It is followed by an evaluation of milk
production (supply) issues ranging from cost of production and competitiveness of the various
production systems. (Kodhek, 1999).




A hybrid of the structure-conduct performance and new institutional economics is then applied to
analyze the various milk-marketing channels. Of special interest are the levels of market
concentration, marketing margins, investments along the milk marketing chain and the co-
ordination of the chain. The paper also evaluates the international trends in dairy production,
processing and marketing. The evaluation is aimed at identifying challenges and opportunities or
development of a dairy export strategy in Kenya. The final section highlights some of the
challenges that confront the dairy industry in the post-liberalization era. (Kodhek, 1999).



                                                 11
The predominance of smallholder crop-dairy farms in the highland areas as the major suppliers
of marketed milk in Kenya reflects the strong historical linkages between cash crop co-operative
marketing systems (especially tea and coffee, but also pyrethrum) and dairy production and
marketing. Kenya therefore has given less emphasis than, for example, Uganda, and is doing less
currently than Tanzania, to increase marketed milk production from pastoralist and agro-
pastoralist systems. The competitiveness of these systems in comparison with marketed milk
from the intensive smallholder crop-dairy farms will depend on the costs of milk collection and
transport, particularly where distance-sensitive informal (raw milk) markets predominate as they
do in Kenya

Unit costs of the support services (input supply; animal health services; milk marketing) for
dairying decrease as production density increases (Walshe et al, 2009). Consequently, production
systems nationally become highly differentiated in structure of production and achievement of
biological potential, effects which have recently been quantified in central Kenya by applying
combined household and GIS analytical methods to current production systems (Staal et al.,
2009).




2.2.2 Marketing Strategies

Is a process that can allow an organization to concentrate its limited resources on the greatest
opportunities to increase sales and achieve a sustainable competitive advantage. Marketing
strategies serve as the fundamental underpinning of marketing plans designed to fill market
needs and reach marketing objectives. Plans and objectives are generally tested for measurable
results. Commonly, marketing strategies are developed as multi-year plans, with a tactical plan
detailing specific actions to be accomplished in the current year. Time horizons covered by the
marketing plan vary by company, by industry, and by nation, however, time horizons are
becoming shorter as the speed of change in the environment increases. Marketing strategies are
dynamic and interactive. They are partially planned and partially unplanned.

The marketing of milk itself was liberalized in1992. (Ngigi 2005, Muriuki et al, 2003). Milk
prices were decontrolled and KCC’s monopoly on urban markets was revoked, ending 60 years
of KCC dominance.

                                               12
Following liberalization two groups of player centered the dairy sector to compete with KCC and
gradually take over its milk marketing and processing roles. The first group were small-scale
milk traders, who moved in in large numbers to buy raw milk from farmers and sell it to
consumers. The rise of these small-scale traders both contributed and responded to the collapse
of marketing cooperatives during the 1990s. Leksmono et al. (2006) cite estimates that, by 2004,
there were 40,000 such informal vendors accounting for 86% of total retail milk sales in Kenya.
The shift to raw milk sales was dramatic, contrary to the thrust of official policy since the
colonial period and, therefore, controversial. However, many poorer consumers preferred the
option of cheaper raw milk, rather than more expensive pasteurized milk, whilst some allegedly
preferred the taste of raw milk (Leksmono et al. 2006). Ngigi (2005) notes that in Kenya much
milk is drunk in tea and coffee, and that Kenyans habitually boil milk for these uses, hence
reducing the need for pasteurization.




The second groups of new players were formal private processors. According to Ngigi (2005),
the first of these were commercial farms (such as Brookside, Delamere and Illara), with their
own milk supplies, which integrated forward into processing. By 2005 there were 45 registered
processors. However, whilst many entered the market initially, not all were successful and some
concentration in activity took place after a few years. The private processors, like KCC, found it
hard to compete with the informal milk vendors, given the preference of many consumers for
cheaper raw milk3. Through their representation on the board of KDB (representation not
extended to informal milk vendors) and through advertising campaigns, they tried to restrict the
activities of informal milk vendors, but so far without success (Leksmono et al. 2006).




There are mixed views and perspectives regarding the effect of liberalization on the sector. Many
donors and international organizations like ILRI, who had championed the reforms, feel that it
was a good thing, creating opportunities for small traders vending milk. Others argue that policy
reforms, including the liberalization of milk prices in 1992, produced mixed outcomes at best.




                                               13
Competition in the milk market led to sharply higher farm-gate prices in nominal terms.
However, as shown by Ngigi (2005), these price rises were much more modest in real terms.
Indeed, real prices only rose during 1993-95. By 1999 the average farm-gate price in real terms
was back to pre-liberalization levels. Then, as shown in Figure 3, it fell even in nominal terms
over the next couple of years. Meanwhile, the introduction of cost sharing for inputs and services
as a result of the reduction in subsidies in the late 1980s meant that many farmers were not able
to respond to higher prices due to problems accessing inputs and other support services.




Whilst price increases as a result of liberalization were modest in real terms, liberalization also
led to increased price volatility for producers. This is in part the inevitable result of replacing an
administered pricing system with market competition. However, changes in the processing
industry also contributed to this increased volatility. According to Ngigi (2005, p41), the
combined capacity of the private processors rose steadily during the 1990s, reaching 500,000
liters per day by 1999. Higher figures for private sector capacity are implied by Leksmono et al.
(2006) and by Ngigi (2005, p51-52), which quote KDB figures that show private processors
handling 600,000 litres per day in 2000 – at low capacity utilization due to competition from
informal vendors selling raw milk. Ngigi (2005, p51) claims that KCC’s average daily milk
intakes during 1986-1991, during which time KCC aver-aged 77% capacity utilization, was
20,000 litresper day or around 360,000 tons p.a.4. If so, a figure of 600,000 litres per day
handled by private processors in 2000, combined with the 370,000 litres per day handled by
(New) KCC in that year, compares well with this figure. However, unlike KCC, none of the
private processors had the capability of turning excess milk into milk powder during times of
glut. Thus, seasonal peaks in production post-liberalization have at times led to sharp falls in
prices.




Exposed to market competition, KCC’s inefficiency and other internal problems led to its
gradual demise in the 1990s. An initial symptom of its malaise was delayed payments for milk
deliveries by farmers, which eroded farmer confidence in KCC, thereby further reducing supplies
received. KCC collapsed in 1999, leaving many farmers unpaid for their milk deliveries.


                                                 14
Looking back to Figure 1, we see that national milk production had already fallen from its late
1980s peak prior to milk market liberalization. The ending of subsidies on inputs and support
services contributed to this. For several years after 1992, production remained essentially static.
However, it began to pick up again from 1999 and has since passed the peak levels achieved
prior to liberalization.




One final observation on the post-liberalization era is that official policy and, even more so,
legislation have lagged behind structural changes in the sector. As with many agricultural
activities in Kenya, a number of old laws remain on the statute books, but are either no longer
enforced or are subject to varying interpretations. Official attitudes towards informal milk
vendors have been a particular area of uncertainty and cause for concern since 1992, although
there has recently been progress in this area (Leksmono et al, 2006).




In 1993, the Kenya Dairy Development Policy was formulated to guide the dairy industry
through the liberalized market environment. This policy document has since been revised a
number of times into various drafts, but not yet implemented or even finalized. It was updated in
1997 and revised in 2000 after wide stakeholder consultations. At this point it was accompanied
by a Draft Dairy Industry Bill. The policy was revised again in 2004 and 2005. It was presented
for stakeholder consultation in April 2006 and has currently reached a draft Sessional Paper stage
awaiting presentation to the cabinet together with the Draft Dairy Bill. From the discussions with
stakeholders, there is a feeling that policy is not leading the sector. It is lagging behind the
developments in the sector. Policy is also not seen as reflecting the reality of the industry and is
also not guided by evidence.(Leksmono et al, 2006).




2.2.3 Pricing Strategies




                                                15
One of the four major elements of the marketing mix is price. Pricing is an important strategic
issue because it is related to product positioning. Furthermore, pricing affects other marketing
mix elements such as product features, channel decisions, and promotion.




Supply

The supply of milk and dairy products to the end consumer emanates from two main sources:
industrial dairies supplying pasteurized milk and milk products and farmers, traders and hawkers
selling raw milk. Processors sell pasteurized milk, in packages, to formal retailers for about Ksh
46-48/litres who then generally retail it for about Ksh 50-52/litres.   Meanwhile, milk bars and
hawkers are retailing raw milk at between Ksh 30 and 35/litres to poorer clients. As the hawker
visits the home directly, the customer provides his own packaging and the raw milk retailer will
sell him any quantity that he desires.(BDS in Subsector Analysis – Springfield Centre, July
2002)




Overall, as noted above, the supply of milk is increasingly coming from smallholders in the form
of raw milk. The collapse of the KCC, which had controlled the sector for so long broke down
many of the systems used to control the supply of milk through the formal dairies.(BDS in
Subsector Analysis – Springfield Centre, July 2002)




Demand

Demand for milk is strong. There is a growing population, which should normally lead to growth
in consumption. However, dropping per capita GDP is reducing the purchasing power of many
households. Since the marginal propensity to consume milk is fairly high, it means that in times
of dropping incomes they either consume less or change their purchasing habits to buy cheaper
products. As noted above, the price of raw milk is substantially cheaper than most milk is
purchased for use in other beverages, such as tea, not for direct consumption. Surveys have
shown that 100% of households boil their milk. In the poorer neighborhoods, where milk is


                                                16
being sold door to door by hawkers, the milk is often consumed immediately. (BDS in Subsector
Analysis – Springfield Centre, July 2002)




Smallholder farmers

The dairy subsector is comprised of a wide range of direct actors. The 625,000 smallholder
farmers dominate the scene and account for about 2.5 million dairy cows. For almost half of
them, dairy is their main source of income and they treat it as a business. Only a minority of
them do not treat milk production as a priority. But the smallholder farmers are a diverse group.
They use different production techniques (some intensive, some extensive), mix dairy with other
agricultural crops, and use different management practices (i.e. use of artificial insemination).
Many of them market their products very differently as well.(BDS in Subsector Analysis –
Springfield Centre, July 2002)




Smallholder farmers will have on average four dairy cows. They appear to only commercialize
about 64 percent of their production, but many take a diversified strategy of self-consumption,
sale to neighbours, sale to local outlets, sale to traders, and sale to the cooperative. They have a
need to balance the return per litre, the certainty of purchase, the immediacy of payment, the risk
of non-payment and the need to maintain transactions record with the cooperative for access to
services during the peak production period.(BDS in Subsector Analysis – Springfield Centre,
July 2002)




The price received by the farmer is a function of:

•      Distance from markets (prices increase closer to Nairobi and other urban centres)

•      Whether the supplier is in a milk surplus or deficit area

•      Channel selected – to traders, co-operatives, local retailers or processors

                                                17
•      Willingness to take on marketing functions (search out buyers, transport to buyers etc.)
and incur the cost of transport to get to the market

•      Amount and quality for sale (small amounts make it less worth pursuing active marketing
strategies and large amounts may be difficult to dispose of, requiring securing a guaranteed
market such as a processor but at a lower price)(BDS in Subsector Analysis – Springfield Centre,
July 2002)




It appears that significant amounts of milk are lost through poor roads (buyers cannot get in),
especially in the rainy season, and that the poor roads add to the cost of transport. Some milk is
lost due to lack of cooling, especially evening milk that is for next day collection.Milk yields for
the smallholder farmer tend to be low, averaging about 5 litres per day. But this will depend on
the breed of cow, the veterinary services, the feed, and the milking techniques.(BDS in Subsector
Analysis – Springfield Centre, July 2002)




The average daily income generated through milk production by the farmers we interviewed was
1,356 ksh. (Approximately US$173) (With the range being 40 to 4500 ksh.).




Expenses included the following:

•      Tick Solution – 1020 ksh/month

•      AI Services – between 580 and 5,000 ksh when needed

•      Bull Services – 500 ksh (when needed)

•      Dairy Meal – average 745 ksh (70 kg. sack) (frequency of purchase depends on number
of cows, and intensity of feeding regimen)

•      Other Feed (bean residue) – 800 ksh/week

•      Napier Grass – 500 ksh (every 3 days)

                                                 18
•      Water – Average 60 ksh/day

•       Dehorning – 100 ksh when needed

•      Veterinary Services – 1000 ksh when needed




The incomes presented would not have been possible without the original investment in the
purchase of a grade cow, the use of AI and veterinary services, the purchase of feed for zero
grazing, and related investments. Without grade cattle, milk output is minimal if non-existent.
Hence, we can say that without accessing the technology and BDS available to dairy farmers,
any income earned from milk production would be non-existent.(BDS in Subsector Analysis –
Springfield Centre, July 2002)




Large scale farmers

Medium to large scale farmers with substantial dairy herds primarily produce for the large
dairies. They pay for labour and for their feed, as well as all other services. Yields average 17-
19 litres per day during lactation, but can be as high as 30-35 litres. So it is clear that they are
more productive than the smallholders. Given their much larger quantities of production, they
must have a reliable market; hence they sell primarily to the dairies. If the demand from the
dairies drops (as it has with the drop in production from the KCC), then the large farmers are
more vulnerable. They typically sell at prices of ksh 16-19/litre. (BDS in Subsector Analysis –
Springfield Centre, July 2002)




Traders

There are an estimated 4,000 traders buying and selling between 500 and 1000 litres per day.
Trading brings milk from a production surplus to production deficit areas, in particular the urban
centers. Many of the cooperatives and self-help groups (see next section) also serve as traders.
Traders typically pick up from smallholder farmer collection points and drive to poorer areas of


                                                19
cities or other wholesale point for onward sale to hawkers, milk bars and other retailers. They
use pick-ups, small trucks, or bicycles, depending on their distance from the market. (BDS in
Subsector Analysis – Springfield Centre, July 2002)

Buying from the smallholder at xx, they will then wholesale at Ksh 22-26/litre to milk bars,
hawkers or dukas, or perhaps even retail it themselves at Ksh 30-32/litre.




Co-operatives/Self-Help Groups

The number of dairy cooperatives appears to be growing, along with their membership.
However their sales value in real terms is dropping.     Initially developed to supply the KCC,
many of the early cooperatives had high levels of mismanagement. Though they did very well
immediately after the liberalization of the market in the early 1990’s, when they were the
principal source of supply, many have suffered because of increasing competition from other
private marketing channels, the traders, and processors. This has siphoned off much of their
intake.   Many cooperatives are now adapting, trading raw milk directly into the cities as
well.(BDS in Subsector Analysis – Springfield Centre, July 2002)




The statistics on growing numbers of cooperatives might reflect the creation of new, privately
run and focused cooperatives (reflecting the resurgence of the smallholder dairy farmer), while
not recording the disappearance of the old-line coops. (BDS in Subsector Analysis – Springfield
Centre, July 2002)




There are many advantages to belonging to a cooperative, especially access to immediate credit
for inputs and personal needs, as well as access to subsidised inputs from their wholesale store.
Cooperatives also provide a safety outlet for farmers who are already selling through other
channels, especially during the peak production season when there is a surplus of output. It
appears that only about 38 percent of marketed milk goes through cooperatives.          (BDS in
Subsector Analysis – Springfield Centre, July 2002)


                                                20
For isolated dairy farmers, cooperatives serve the crucial function of bulking and marketing. In
more accessible regions they compete for farmers’ milk against the other direct sale
opportunities. Cooperatives buy at Ksh 17/litre, compared to private traders who will pay Ksh
20-22/litre, because they have fewer overheads and are more efficiently organized. As a result,
many cooperatives are now acting like a trader, taking the pick-up directly to the market, or else
becoming processors. The two largest cooperatives are not processing, but are suffering from
low capacity utilization rates. (BDS in Subsector Analysis – Springfield Centre, July 2002)




Processors

There are 29 licensed processors processing almost 600,000 litres/day. The largest eight process
over 80 percent of this. Large processors appear to be increasing their market share at the
expense of the smaller ones. Some of the better smaller ones are specializing in a limited range
of high value products, such as yoghurts and fresh juices. The key seems to be a combination of
a ready supply of milk at good prices (stemming from regular payment of milk suppliers),
combined with strong distribution and branding.(BDS in Subsector Analysis – Springfield
Centre, July 2002)




Top end processors don’t pay high prices (Ksh 16-19/litre delivered), but they pay regularly and
on time. This provides enough incentive for suppliers to provide them with at least some regular
supply. Bigger processors are investing in cooling facilities in selected surplus areas where there
are low cost producers to ensure access to cheap milk. They can then bulk transport their milk to
the dairies. The processors place a heavy emphasis on maintaining the cold chain.(BDS in
Subsector Analysis – Springfield Centre, July 2002)




Most processors use the Tetra-Pak system of packaging. There are some experiments with
pasteurized milk in pouches. These have not yet been successful in the retail market, but bulk


                                                21
packs are common in the catering and institutional supply market. Considering that the Tetra-
Pak package adds about 15 percent to the cost of the end product, there is incentive to find
cheaper packaging.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Of the small processors interviewed, each one was producing yogurt, but not all were producing
mala. We can get some idea of their income and expenses from the individual processor write-
up in Appendix 4 – Economic Analysis of Processor Income and Expenses. The average amount
of milk purchased by these five entrepreneurs is calculated at 487 litres/day, and the average
amount of yogurt produced is 44.5 litres/day (plus one person processing 230 litres of mala/day).
The cost of the milk averaged 22.5 ksh (purchased either from a handler or a producer). Prices
charged for yogurt range from 40 ksh to 90 ksh/litre, although most is sold in 250 ml
containers.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Expenses incurred by processors included the following:

•      Initial capital investment for equipment: 8,000 – more than ½ million ksh.

•      Bottles – between 5 and 30 ksh each

•      Business License – 9,000 ksh/year

•      KDB License – 3,500 ksh/year

•      Cart License (Mobile Cart Sales License) – 2,640 ksh/year

•      Health Inspection – 1,200 ksh. ½ year

•      Electricity – Up to 4,500 ksh/month

•      Salaries – Up to 46,000 ksh/month

•      Wood fuel/Charcoal (for jua kali pasteurizers) – 300 ksh/day

•      Other Ingredients for Yogurt (sugar, culture, flavor) –


                                               22
•      Labels -




A processor must make a significant investment in technology to carry out the processing
business. Although the simplest equipment – a jiko, several large sufurias, the culture, and
packaging materials can cost as little as 700 ksh, a small scale processor can pay many thousands
of shillings for imported pasteurizing and cooling equipment. Without a “guaranteed” market for
yogurt, a processor will think first before making ANY investment.(BDS in Subsector Analysis –
Springfield Centre, July 2002)




Retailers

There are several different types of retailers. Data from 1990 calculated almost 2,000 small and
large retailers in Nairobi, which is probably an underestimation of the number of kiosks alone
and is likely to have increased considerably by 2001.       Large retailers deal only with the
processors, selling only refrigerated packaged pasteurized milk in large urban centres. The range
and breadth of products is considerable with multiple brands of milk, cheese, yoghurts, butter
etc. Some of the longer life products are imported as are packaged infant milk powders.(BDS in
Subsector Analysis – Springfield Centre, July 2002)




There are also many small retailers in urban areas, many of which are not licensed to sell/handle
milk. Those in Nairobi and other major cities sell packaged pasteurized milk and/or raw milk in
poly-bags. Some have refrigeration, but many do not to, requiring pasteurized and raw milk to
be sold quickly and twice-daily stocking.      Those suppliers with good distribution would
presumably be able to gain market share just through availability.(BDS in Subsector Analysis –
Springfield Centre, July 2002)




Additionally, there are specialist milk retailers (Milk Bars) in many urban areas, which KDB
estimated to be selling an average of 200 litres/day. These require specific licenses from KDB

                                               23
to operate, but it seems that many do not have them. KDB have licensed about 300 Milk Bars
nationally, but any trip to the slum areas of Nairobi would indicate much larger numbers of
specialist milk retailers, let alone the many small dukas/kiosks that also sell milk. As well as the
KDB license, licenses are required from the local councils, which are very costly for a small
retailer.   The Milk Bars visited did have basic testing equipment such as a hydrometer and
alcohol testing kits for water adulteration and bacterial development. They also tried to use
established and regular suppliers, in one case developing its own supplier quality assurance
system. Having a member of staff with a “good nose” to detect old milk, despite the use of
hydrogen peroxide, was a more informal quality check.(BDS in Subsector Analysis – Springfield
Centre, July 2002)




Margins in Nairobi for milk retailers/milk bars were between Ksh.4-8/litre. Sales of other
products particularly Mala and drinking yoghurt were smaller but of much higher margins.
Competition from Hawkers in Nairobi is intense though many milk bars will sell at wholesale to
Hawkers, making only Ksh.2/litre.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Hawkers incur lower fixed and variable costs (KSh. 0.20 per litre) and show higher returns to
labour per litre (23% of sale price) than milk-bars (where fixed and variable costs = KSh1.00 per
litre; returns = 10% of sale price). Consumption is mainly of liquid milk. 29% of households in
Nairobi bought raw fresh milk (5.5. litre average/month). Shops and hawkers were the main
purchase points for most buyers of raw milk in urban areas – Nairobi 63% of raw milk. Raw
milk was ranked “best” overall. Ranking criteria were taste, price, shelf-life, butter-fat content
and availability.(BDS in Subsector Analysis – Springfield Centre, July 2002)




There is a temptation for hawkers to adulterate or sell old milk and then move on. However,
given the number of hawkers, it would be reasonable to assume that many would work a
particular area and seek to build up regular clients. Any short-term gain from adulteration would



                                                24
soon be exposed and they would need to move on to a more uncertain area. (BDS in Subsector
Analysis – Springfield Centre, July 2002)




As would be expected, cooperatives make payments to the members only after receiving
payments from the customers. In the case of the societies dealing with the KCC, cheques are
made out on regular basis to the societies. However, the statement of payment showing quantities
of milk received by the KCC comes separately, always much later. It is the contention of the
societies that they must wait for this statement to ascertain any discrepancies there might be
before making any payments to members, and this inevitably leads to delays in payment to
members. (GOK/WB/DDWG. 2008).

Even where societies decide to pay before receiving the statement, there are contingency
arrangements. These can take the form of advances to members or payments based on the
previous month's information. The final payments are then only made when the society receives
the statement. The active dairy cooperatives try and make payments to members monthly
whatever the pay-out rate. The most disturbing issue for some cooperatives are the payments
being in arrears in some societies for three or more months. Kakamega and Taita-Taveta Dairy
Societies have been cited as cases in point. (GOK/WB/DDWG. 2008).

Even more serious is the case of dormant societies, particularly in Kilifi, where large sums of
payments due to members are locked up in a society that is no longer in business. The delay in
paying members, and more so the failure to make any payments at all, are serious matters. They
are bound to undermine the faith and commitment to the cooperatives included. The negative
image of cooperatives is thus generally linked first and foremost to problems with payments to
members.(GOK/WB/DDWG. 2008).




Channel One - Raw milk direct from Farmer to Rural Consumer

Farmers, predominantly smallholders, have always supplied milk for consumption by neighbours
as the most efficient way to dispose of surpluses quickly and cost effectively for payment or



                                              25
other form of value exchange. Research in the Nairobi Milk Shed indicated that 42% of
smallholders sold to neighbours as their main market.




Farmers do supply more distant consumers directly either in rural or urban centres, depending on
individual circumstances such as the amount of surplus, the cost of transport and the availability
of sales in the immediate locality. There are obvious economic trade-offs for the farmer in both
extra costs and time incurred, limiting how far and how much effort farmers will make. The
perishable nature of the product is also an important limiting factor in terms of the potential
market. (BDS in Subsector Analysis – Springfield Centre, July 2002)




Prices paid by consumers depend on the region (milk-surplus/deficit area), but even more so the
micro-locality of milk available in the immediate neighbourhood. The agreed price will depend
on the balance of power between smallholder farmer and rural consumers, but will be limited by
rural households relatively low purchasing power. Price information at the micro-level is both
hard to obtain and likely to be highly variable. Anecdotal information from Karen and Kiambu
suggest that the prices paid by neighbours at Ksh.22-24/litre, were the highest obtained for the
farmer from any source (normally Ksh.17-22/litre) and the lowest paid by any consumers
(normally Ksh.30/litre).      The directness of the channel with no intermediaries or
transport/processing costs results in considerable cost savings to both parties. The lack of
availability of pasteurized milk and the high cost of long-life milk in rural areas mean that there
is little real competition for raw milk.(BDS in Subsector Analysis – Springfield Centre, July
2002)




The vibrancy of this channel depends on what happens to rural incomes, rural population and
continued growth of supply in the particular areas. Logic would suggest that this is a favoured
channel for smallholder farmers because of the premium price, simplicity and immediate
payment relative to other channels. It is therefore likely to remain strong and continue to grow,



                                                26
even if the rural population and incomes are growing more slowly than urban population and
income.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Channel Two - Raw milk via intermediaries to urban consumers

It is estimated that more than 80% of milk consumed in urban areas is raw milk. This is an
important and highly efficient channel accounting for 30% of all marketed milk.




Smallholder farmers will supply any surplus, over and above self-consumption and that supplied
via channel one, to either traders, co-operatives or self-help groups. According to research, 22%
of smallholders in the Nairobi Milk Shed sold to traders as their main market outlet and 12% to
Co-operatives and Self-help Groups.      These bodies act primarily as intermediaries to bulk the
milk (for transport and other economies of scale) and get it to urban markets. Speed is essential,
given the perishable nature of milk and time of day also seems to be critical, with the best prices
and highest chance of selling early in the morning, with a second peak in early evening
coinciding with consumers need for milk. (BDS in Subsector Analysis – Springfield Centre, July
2002)




Despite the number of intermediaries (often two sometimes more), the chain appears to be very
efficient at getting milk from rural producers to urban consumers at the right time and at the right
place. The ruling prices are between Ksh.30-35/litre with hawkers at the low end and milk
bars/retailers at the higher end. Local factors, such as the number of outlets selling milk and
local income levels are important. Price paid to the co-operatives and self-help groups depend
on distance from the market and whether the milk was delivered. Many co-operatives and self-
help groups have begun to take the milk in their own vehicles (usually pick-ups), park at a
known place in a slum area and wholesale it to milk bars and hawkers at Ksh.23-26/litre. (BDS
in Subsector Analysis – Springfield Centre, July 2002)




                                                27
There will be occasions when milk is returned unsold from Nairobi, especially in the peak
production periods however, there are also examples of shortages of milk at specific times and
on particular days, in particular areas. The market does not function perfectly, but it does
operate very efficiently for both intermediaries and consumers with available supply usually
cleared at prices well below the main alternative product (packaged pasteurized milk). (BDS in
Subsector Analysis – Springfield Centre, July 2002)




Whilst some players in this channel are licensed to sell milk (Co-operatives, Specialist Milk Bars
and some Traders), many are not (Hawkers, Kiosks, Dukas and many Pick-up Traders). The
returns from this channel appear to be good for these players (particularly those who are not
licensed) and there can be extra profits to be made from adulteration by water, margarine and
hydrogen peroxide (by intermediaries and producers).(BDS in Subsector Analysis – Springfield
Centre, July 2002)




Indications are that consumers prefer raw milk because it is whole milk without having any of
the cream removed (to make butter and other products). This is in contrast to package milk from
large processors, which has its butterfat content ‘standardized’ down through partial skimming.
This is true across income ranges indicating continued increasing demand for raw milk even as
real incomes rise. The issue of shelf life of raw versus pasteurized milk is of little relevance to
consumers given that most milk appears to be consumed immediately with at least 60% used in
Tea (boiled) and with 98-100% awareness of the need to boil milk before consumption. As
most households in the slum areas buy and consume immediately (as there are few households or
even retailers with refrigeration) pasteurization would seem to be necessary only because of the
length of time in the large processor’s distribution chain and for the limited number of
households that can refrigerate. (BDS in Subsector Analysis – Springfield Centre, July 2002)




Given the highly informal nature of this channel, volumes, value and growth in urban raw milk
sales are hard to determine. The KDPA and other industry sources suggest 80-90% of urban


                                                28
liquid milk volumes are supplied in this way and that this is a growing channel relative to
packaged pasteurized milk. Urban populations are growing more rapidly than rural population,
as are urban incomes. The recent slowdown in GDP per capita growth will limit the overall
market for milk but, as indicated earlier, this may encourage trading down, with a greater effect
on packaged pasteurized milk.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Indications from research by the Smallholder Dairy Project are that milk sold through the
informal sector (effectively channel two) creates three direct jobs per hundred litres and one
indirect job, whilst processed pasteurized creates less than one job per hundred litres.       This
emphasizes the potential impact of developing this channel for employment and poverty
impact.Overall the swift delivery of raw milk from farm to (poorer) consumers in urban areas at
relatively low prices appears to be highly efficient and the channel that is growing. (BDS in
Subsector Analysis – Springfield Centre, July 2002)




Pasteurized packaged milk to urban consumers

This is the smallest of the three liquid milk channels (c.12% of milk), with a daily average of
593,000 litres processed by 29 firms. Large dairy farmers and co-operatives fulfill a bulking
function making it simpler and more economical for processors to contract with one large
organization for supply. They may also ‘cool’ the milk to increase its shelf-life and maintain its
quality, depending on whether they have the facilities. (BDS in Subsector Analysis – Springfield
Centre, July 2002)




Bulk transport is provided by (large) processors to a central facility, usually located near to the
market.    Milk is pasteurized and packaged as liquid ‘fresh’ milk or treated at Ultra High
Temperature (UHT) for long-life milk. These are distributed directly to large retailers and small
retailers through the processors’ transport and delivered directly to institutions for resale or use
in catering. (BDS in Subsector Analysis – Springfield Centre, July 2002)



                                                29
This channel is distinguished from the other two channels through the milk being pasteurized and
through its use of a cold distribution chain, at least as far as the retailers. This requires a higher
technology level and more complex production and distribution management resulting in higher
costs. Because these processors are in the formal sector, they also incur additional ‘business’
costs through payment of VAT and corporate taxes. All the major processors (with the exception
of Palm house) use tetra-pack packaging systems and materials. This is the format that KCC
originally used and which the Kenyan consumer has got used to. Therefore it has become the
norm for packaged pasteurized milk, even though it is technically not necessary and it adds
significantly to the cost of the product at Ksh. 6.4 per litre (c.13% of the retail price).(BDS in
Subsector Analysis – Springfield Centre, July 2002)




As well as being pasteurized, the milk is partially skimmed and homogenized. This enables the
processor to use the cream that is removed (the most valuable part of the milk) for making butter
and other high value products. The result is that processed milk has lower average butterfat
content (minimum 3.25% by regulation) than raw milk. Much of the research has shown that
consumers prefer raw milk to pasteurized ‘standardised’ milk, especially for making tea (its main
use). This may partially account for the use of raw milk in richer households in addition to
packaged pasteurized milk i.e. it is the skimming not the pasteurization that makes the
difference.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Processors appear to be buying milk for collection in bulk from co-operatives and farmers at
Ksh16-19/litre, depending on location. Higher prices are paid for milk delivered to the plants,
but the premium appears minimal (c. Ksh.1-2/litre). (BDS in Subsector Analysis – Springfield
Centre, July 2002)




Processors are selling direct to retailers at Ksh.46-48/litre for retail at Ksh. 50-52/litre, leaving
retailers with relatively small margins on packaged pasteurized milk of up to Ksh.4-6/litre. It is
difficult to establish the costs of packaging and processing, for reasons of commercial


                                                 30
confidentiality, but the consultant’s estimate is that it is around Ksh.27-30/litre. Distribution
costs from factory to retailer are carried by the Processor and may account for an additional
Ksh2-3/litre, giving a net margin of Ksh.12-18/litre before overheads. Whilst overheads are
likely to be high relative to other players, due to capital invested, marketing and the other costs
of managing a large business, it appears that the processors get the highest share of the profits
per litre in the channel. (BDS in Subsector Analysis – Springfield Centre, July 2002)




The suggestion from one of the main Processors is that the pasteurized milk market is growing at
2-3% p.a. Overall, this channel is probably growing slowly, reflecting increased urbanization
and medium to long-term income growth. However it is not as dynamic as channel two and
presents much lower returns to smallholders and small retailers.(BDS in Subsector Analysis –
Springfield Centre, July 2002)




Channel four – Milk Products to Urban Consumers

This channel is the smallest in volume and value terms, as the market for added value milk
products is still very limited and underdeveloped.




It shares much of the infrastructure of channel three as the milk is supplied from larger farmers
to medium/large processors or is supplied by the same source and co-operatives to small
processors. The large processors are removing cream from the milk (standardizing down) to
make butter, ghee and other products. They have also recently started making flavoured long life
drinks. The small processors differ from the large ones in that pasteurized liquid milk is not the
main product, rather they specialise in particular added value products such as yoghurt
(Eldoville) or cheeses with more chance of getting space in the major supermarkets. Distribution
is again crucial as the products require refrigeration and only appeal to a limited urban middle-
income group. There are some sales to hotels that cater for tourists and visitors. (BDS in
Subsector Analysis – Springfield Centre, July 2002)



                                                31
For yoghurt production, packaging and distribution costs are significantly higher than
pasteurized milk, but the retail prices of yoghurt gives a margin of Ksh. 8-11/150ml pot (Ksh.53-
73/litre of milk). Retail margins (sold via large retailers only) are similarly high. The long-term
prospects for this channel appear to be good, but its overall value to the dairy industry is limited
at present and for the foreseeable future.(BDS in Subsector Analysis – Springfield Centre, July
2002)




Dairy Sub-sector Dynamics

Of the four channels in the dairy sub-sector, the Urban Raw Milk channel (two) is by far the
most dynamic. This supplies c.80-90% of all milk into urban areas and operates very efficiently
to get milk from 625,000 smallholders in adjacent rural areas, right to the doors of urban
households, even though it may pass through several players to get there.             This milk is
considerably cheaper than the alternative pre-packed pasteurized milk and rich and poor Kenyans
alike prefer its taste.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Because of the ‘informal’ and illegal nature of much of this trade, it is impossible to get accurate
data on volumes and growth, but there appears to be sufficient demand to clear all the supply that
can reach Nairobi. The low incomes of most households and the preference for raw milk drive
the growth of this channel, despite the attempts of industry bodies, the Processors and the police
to stop the trade.(BDS in Subsector Analysis – Springfield Centre, July 2002)




The rural raw milk market is even more informal, characterized by many small direct
transactions between neighbours, which are impossible to monitor. As a very short supply chain,
it delivers the best prices to smallholder farmers and lowest prices to consumers (and probably
the best quality).   Its growth depends on what happens to rural incomes and increasing
availability of local supply. This is likely to be the preferred route for Smallholders due to the
best returns of all channels. (BDS in Subsector Analysis – Springfield Centre, July 2002)



                                                32
The large falls in the supply of pasteurized milk seen in recent years due to the decline of Kenya
Co-operative Creameries have probably bottomed out. There may be some limited growth
though there is continued rationalization amongst processors. Growth in this channel could be
stimulated by limiting the Raw Milk channels, as the overall level of demand for milk is high.
However, this has proved elusive in the past. It is more likely to come from increases in real
incomes, but the prospects appear limited at present and processors are looking to increase
volumes of Long-life milk for distribution to rural areas and for export to Uganda and
Tanzania.(BDS in Subsector Analysis – Springfield Centre, July 2002)




Channel four, which includes milk products such as cheese, butter, ghee, yogurt etc., is the
smallest of the four channels but is showing growth through innovation and potential for export.
However, domestic demand is constrained by static real incomes, particularly of the middle and
upper income households. It is likely to be a long time before these added value products are
regular purchases for a majority of households.(BDS in Subsector Analysis – Springfield Centre,
July 2002)




Milk is a price and income sensitive product. The ready availability of large quantities of raw
milk in all areas of Nairobi at affordable prices has stimulated demand, particularly for
smallholder milk from areas adjacent to urban areas.         Liberalization did cause a chaotic
transition, which is still ongoing, however, many of the supply arrangements have been worked
out informally and appear to operate efficiently, leading to continued investments and overall
growth in supply to meet an excess of demand.(BDS in Subsector Analysis – Springfield Centre,
July 2002)




                                               33
2.3 Conceptual Framework

Fig 2.1 Conceptual Framework


       Marketing Channels


                                                                Market Competitiveness of the
                                                                     Dairy Cooperative
       Marketing Strategies




         Pricing Strategies




Fig 1.1 Conceptual Framework

          (Independent variables)                                      (Dependent variable)




2.3.0 Explanation of the Conceptual Framework

2.3.1 Marketing Channels

A marketing channel is a set of practices or activities necessary to transfer the ownership of
goods, and to move goods, from the point of production to the point of consumption and, as
such, which consists of all the institutions and all the marketing activities in the marketing
process. A marketing channel is a useful tool for management. An alternative term is distribution
channel or 'route-to-market'. It is a 'path' or 'pipeline' through which goods and services flow in
one direction (from vendor to the consumer), and the payments generated by them flow in the
opposite direction (from consumer to the vendor). A marketing channel can be as short as being


                                                34
direct from the vendor to the consumer or may include several inter-connected (usually
independent but mutually dependent) intermediaries such as wholesalers, distributors, agents,
retailers. Each intermediary receives the item at one pricing point and moves it to the next higher
pricing point until it reaches the final buyer.




2.3.2 Marketing Strategies

Is a process that can allow an organization to concentrate its limited resources on the greatest
opportunities to increase sales and achieve a sustainable competitive advantage. Marketing
strategies serve as the fundamental underpinning of marketing plans designed to fill market
needs and reach marketing objectives. Plans and objectives are generally tested for measurable
results. Commonly, marketing strategies are developed as multi-year plans, with a tactical plan
detailing specific actions to be accomplished in the current year. Time horizons covered by the
marketing plan vary by company, by industry, and by nation, however, time horizons are
becoming shorter as the speed of change in the environment increases. Marketing strategies are
dynamic and interactive. They are partially planned and partially unplanned.




2.3.3 Pricing Strategies

One of the four major elements of the marketing mix is price. Pricing is an important strategic
issue because it is related to product positioning. Furthermore, pricing affects other marketing
mix elements such as product features, channel decisions, and promotion.




                                                  35
                                      CHAPTER THREE

                                3.0 RESEARCH METHODOLOGY

3.1 INTRODUCTION

This chapter spells out the process that was followed to be able to arrive at a conclusion on the
research questions and the research problem. The chapter starts by setting out the justification for
the methodology by taking a closer look at the research problems.



3.2. Research design

The appropriate research design that was adopted in this study was descriptive research .This is a
method of investigation which involves data collection and analysis in order to describe a
problem in its current status. The results are used to describe the current events or trends. The
advantages of using descriptive research are: It helps describe the current trends as they affect
the organization or people and no attempts are made to manipulate /control events as it’s based
on events in their natural state

3.3 Target Population

The researcher aims three categories of respondents these are the management, the staff and the
customers. Due to the limits of time, the researcher will narrow down the target population as
expressed in the table below.




                                                36
Table 3.1 Estimated target population size.

Population Category            Population Size                  Sample Size %

Management                     25                               14

Staff                          60                               32

Customers                      100                              54

Total                          185                              100

Source: Author (2011)




3.4 Sample Design

A sample design is a definite plan determined before any data are actually collected for obtaining
a sample from a given population. The population was further stratified into categories of
position. From each stratum, simple random sampling was used to select a sample size of 70
respondents across the categories.




Table 3.2 Target population sample size

Population Category            Population size        Sample Size     Percentage (%)

Management                     25                     15              21

Staff                          60                     25              36

Customers                      100                    30              43

Total                          185                    70              100

Source: Author (2011)

3.4.1 Sample Size Determination

                                                 37
Since the populations heterogeneous, the stratified random sampling is found to be the most
appropriate as it provides high level of accuracy due to it being proportional, giving each
category an equal chance of being selected and represented in the sample. Mugenda (1999)
further indicates that the advantage in stratified random sampling is that, it ensures inclusion in
the sample of subgroup, which would rather be omitted entirely by other sampling methods
because of their smaller numbers in the population.




3.5 Data Collection.

Due to the nature and scope of the study, the researcher has decided to collect the data. The two
major types of data were primary data and secondary data. Primary data are those which are
collected afresh and for the first time and happen to be original in character while secondary data
on the other hand are those which have already been passed through the statistical process.

3.5.1 Data Collection Instruments

These are tools, ways and methods of data collection. The researcher has included; interviews,
questionnaires and observation schedules as his data collection instruments.

All these methods will generate multiple sources of data which provide checks on the validity
and trustworthiness of the findings.




3.5.1.1 Interviews

This is oral administration of questions with the help of an interview guide. The interviews are
considered good in that they will provide rich data and insights, as they permit greater depth of
response, and allow interviewer to clarify and probe responses as well as make it possible to
obtain data required to meet specific objectives of the study. This enables the interviewer to
elaborate the purpose of the research and effectively convince respondents about the importance
of the research. This makes respondents give more complete and honest information.




                                                38
3.5.1.2 Questionnaires.

This is the written form of administration of questions. The researcher used a questionnaire that
tries to involve the respondents and get the real idea behind the scenes.

The researcher used self-completion questionnaire which was administered to the respondent.

The questionnaires were chosen as a data collection method because it is adaptable, low cost of
administration.

The questions were both closed and open ended closed questions included multiple choices. The
main reason was to make them simple in capturing data. for open ended questions, a space was
left for filling relevant explanation.




3.6 Data Analysis.

Qualitative data is expected from the interview with manager and some open ended questions of
the questionnaire. Raw data collected was systematically organized in a manner that facilitates
analysis. All the responses were categorized and relationship were to be established between the
categories. Evaluation and analysis to determine the adequacy of information, the credibility,
usefulness, consistency and validation of hypotheses was also conducted




                                                 39
                                       CHAPTER FOUR

           4.0 DATA ANALYSIS, PRESENTATION AND INTERPRETATION

4.1 INTRODUCTION

This chapter presents analysis and findings of the study as set out in the research methodology.
The results are presented on the factor influencing competitiveness in the dairy sector with a case
of Meru central dairy co-operative. The qualitative data was organized in broad themes that
answered the research objectives.



There are four subsections presented on the questionnaire. Section A is a general section which
answers general questions; Section B addresses the influence of marketing channels in
developing the competitiveness of the industry, Section C addresses the influence of marketing
strategies in developing the competitiveness of the industry and Section D addresses how pricing
strategies influence the competitiveness of the dairy industry. A total of 45 questionnaires were
distributed to the respondents. Thirty nine of them responded indicating a response rate of 87%.
Quantitative data was also organized in frequency counts and converted into percentages for
clear presentation.



4.2 Demographic Information
4.2.1 Response Rate
The study sought to establish the designation of the respondents.
The table below shows that majority of the respondents were marketing staff (36%), followed by
production and engineering with (33%), while (31%) were from the administration department.




                                                40
Table 4.1 Management, Intermediary and Staff
Category                Frequency                 Percentages

Administration          12                        31%
Production        and 13                          33%
Engineering
Marketing               14                        36%
Totals                  39                        100%

Source: (Author 2011)


Fig 4.1 Management, Intermediary and Staff



                                                                   Administration
                                Marketing                             31%
                                  36%




                                                                      Production and
                                                                       engineering
                                                                          33%

Source: (Author 2011)


The study found out that majority of the respondents were marketing staff (36%), followed by
production and engineering with (33%), while (31%) were from the administration department.




                                             41
4.2.3 Gender

The study sought to establish the gender of the respondents.

Table 4.2 Gender of Respondents

Gender                           Frequency                     Percentage
Male                             23                            59%
Female                           16                            41%
Totals                           39                            100%
Source: (Author 2011)



Fig 4.2 Gender of Respondents


                                        GENDER


                                  Female
                                   28%


                                                     Male
                                                     72%




Source: (Author 2011)



Results indicated that 59% of the respondents were male while 41% of the respondents were
female.




                                               42
4.2.4 Age Group
Table 4.3 Age Group

Age group                      Frequency                        Percentage
Below 25                       4                                10%
25-50                          35                               90%
50 and Above                   0                                0%
Totals                         39                               100

Source: (Author 2011)



Fig 4.3 Age Group




 50 and Above


         25-50
                                                                              Percentage

     Below 25

                 0%      20%        40%          60%      80%         100%


Source: (Author 2011)



From the study it was established that most of the respondents were between the age group of
25-50 (90%) while 10% of the respondents were below 25 and none was 50 and above.




4.2.5 Educational Background

It was deemed necessary and important to establish the level of Education of the employees
Meru central dairy cooperative because Education provides the human resource of the

                                            43
organization with the appropriate skills and expertise to consider the broader term,
“Competitiveness” which has been described as a kind of proactive- reactive continuum

Table 4.4 Educational Background

Level of Education               Frequency                         Percentage
Secondary                        2                                 5%
College                          23                                60%
University                       14                                35%
Totals                           39                                100%
Source: (Author 2011)



Fig 4.4 Educational Background


                                      Educational level
 70%
 60%
 50%
 40%
 30%                                                                              Percentage
 20%
 10%
  0%
              Secondary               College                University


Source: (Author 2011)



The study found out that majority of the respondents were colleges graduates 60%, 23% of the
respondents were university graduates while 2% of the respondents were from secondary
graduates.




                                                44
4.3Marketing Channels

4.3.1 Existence of Intermediaries

Table 4.5 Existence of Intermediaries

Category                         Frequency                        Percentage
Yes                              34                               87%
No                               5                                13%
Totals                           39                               100%
Source: (Author 2011)



Fig 4.5 Existence of Intermediaries

                              No Existence of Intermediaies
                             13%




                                                    Yes
                                                    87%




Source: (Author 2011)



From the study 87% of the respondents agreed that Meru Dairy cooperative used intermediaries
in conducting its business transactions while 13% of the respondents were of the opinion that the
cooperative was involved directly with the its market.




                                               45
4.3.2 Intermediaries assist in transactional functions

Table 4.6 Intermediaries assist in transactional functions

Category                         Frequency                         Percentage
Selling                          10                                26%
Risk taking                      9                                 23%
Buying                           20                                51%
Totals                           39                                100%
Source: (Author 2011)



Fig 4.6 Intermediaries assist in transactional functions

 60%
                                                                         51%
 50%

 40%

 30%              26%
                                             23%
 20%

 10%

  0%
                 Selling                  Risk taking                  Buying

                                         Percentage


Source: (Author 2011)



From the study it was established that majority of the intermediaries were involved in buying the
milk from farms with 51% response, 26% of the respondents indicated that intermediaries were
used in facilitating the selling of the milk products, from the 23% of the respondents was
established that intermediaries were used as a risk mitigation strategy because of the nature of
milk products.




                                               46
4.3.3 Intermediaries in logistical functions

Logistics is a major function of distribution since it facilitates the physical movement of the
products from the manufacturer to the consumer, therefore it deemed necessary to explore the
intermediaries involved in the logistical functions of Meru dairy cooperative.

Table 4.7 Intermediaries in logistical functions

Category                              Frequency                          Percentage
Concentration                         10                                 26
Storing                               9                                  23
Sorting                               4                                  10
Physical distribution                 16                                 41
Totals                                39                                 100%
Source: (Author 2011)



Fig 4.7 Intermediaries in logistical functions


                               Intermediaries in logistical function


 Physical distribution


                Sorting


                Storing


          Concentration

                          0%     5%        10%    15%    20%   25%     30%    35%   40%   45%

                                                 Percentage


Source: (Author 2011)



                                                        47
From the study it was found out that majority of the intermediaries are involved in the physical
distribution with a 41% response, this was followed by 26% that indicates that concentration is
another logistical function commonly used, 23% of the response indicates that intermediaries
were used as a storing strategy and 10% represented sorting as a logistical function that is merely
used by the cooperative.




4.3.4 Intermediaries in facilitating functions

Facilitating functions entails enabling the availability of the products in the right time, place and
at the right price. These functions depict the reliability of the manufacture to the consumer.




Table 4.8 Intermediaries in facilitating functions

Category                          Frequency                          Percentage

Financing                         13                                 33%

Marketing Research                12                                 31%

Grading                           14                                 36%

Totals                            39                                 100%

Source: (Author 2011)




                                                 48
Fig 4.8 Intermediaries in facilitating functions


                          Intermediaries in facilitating functions
 37%
 36%
 35%
 34%
 33%
 32%
                                                                             Percentage
 31%
 30%
 29%
 28%
              Financing          Marketing Research         Grading
                                Facilitating function



Source: (Author 2011)



The study found out that intermediaries facilitated the grading function with 36%, 33%
represents the financing function whereby it can be concluded that intermediaries assisted the
organization in financing its operations by purchasing the finished products from the dairy
cooperative, while 31% represents the marketing research function which shows that
intermediaries are used in conducting marketing research for the different range of the products
from the different regions that are markets of the dairy cooperative.




                                                  49
4.3.5 Channels used by Meru central dairy cooperative

Table 4.9 Channels used by Meru central dairy cooperative

Category                            Frequency                      Percentage

Direct channel                      20                             51%

Indirect channel                    19                             49%

Totals                              39                             100%

Source: (Author 2011)



Fig 4.9 Channels used by Meru central dairy cooperative


                        Channels used by Meru central dairy cooperative
 52%

 51%

 51%

 50%

 50%                                                                             Percentage

 49%

 49%

 48%
                   Direct channel                    Indirect channel


Source: (Author 2011)



The above study shows the responses of respondents on the channels used by Meru central dairy.
Based on the study, 51% of the total respondents indicated that direct channels are used mostly
to reach the various regions that are markets to the dairy cooperative, while 49% of the total
respondents indicated that indirect channels are used to facilitate the distribution function



                                                50
therefore that means that indirect channels are used on regions that the cooperative consider
necessary to use the indirect channels.




4.3.6 Rate of channels used by the dairy cooperative

Table 4.10 Rate of channels used by the dairy cooperative

Category                            Frequency                          Percentage

1-25                                25                                 64%

26-50                               14                                 36%

51-75                               0                                  0%

76-Above                            0                                  0%

Totals                              39                                 100%

Source: (Author 2011)



Fig 4.10 Rate of channels used by the dairy cooperative


                            Rate of channels used by the cooperative



  76 - Above


         51-75
                                                                                Percentage
         26-50


          1 25

                 0%   10%     20%       30%   40%        50%   60%   70%


Source: (Author 2011)

                                                    51
Based on the study, 64% of the respondents rated the channels used by the dairy cooperative on a
scale of 1-25, while 36% of the respondents rated the channels on a scale of 26-50.




4.3.7 Factors that the cooperative put to consideration while selecting its channels

Table 4.11 Factors that the cooperative put to consideration while selecting its channels

Category                          Frequency                             Percentage

Customer characteristics          9                                     23%

Intermediary characteristics      5                                     13%

Environmental characteristics     7                                     18%

Product characteristics           4                                     10%

Competitor characteristics        8                                     21%

Organizational characteristics    6                                     15%

Totals                            39                                    100%

Source: (Author 2011)



Fig 4.11 Factors that the cooperative put to consideration while selecting its channels


            Factors that the cooperative put to consideration while selecting its
                                         channels

                  Customer characteristics         Intermediary characteristics
                  Environmental characteristics Product characteristics
                  Competitor characteristics       Organizational characteristics
                                            15%
                                                        23%

                                      21%
                                                         13%

                                        10%       18%


Source: (Author 2011)

                                                   52
The above study shows the factors that are put into consideration when selecting channels that
facilitate the dairy cooperative operations. Based on the study, 23% of the total respondents
indicated that customer characteristics were a key factor when selecting the channel. 21% of the
respondents considered competitor characteristics as another major factor, 18% of the
respondents considered environmental characteristic as a factor of importance, 15% of the
respondents indicated that organizational characteristics are factors that are considered, 13% of
the respondents cited intermediary characteristics as a factor of consideration and 10% of the
respondents indicated that product characteristics were a must while selecting the channel to use




4.4 Marketing Strategies

4.4.1 Media used in advertising

Table 4.12 Media used in advertising

Category                          Frequency                        Percentage

Print and Broadcast               12                               30%

Billboard                         7                                18%

Display signs                     10                               26%

Packaging                         10                               26%

Totals                            39                               100%

Source: (Author 2011)




                                               53
Fig 4.12 Media used in advertising


                                Media used in advertising


    30

    25

    20

    15                                                                       Percentage
    10

     5

     0
           Print and    Billboard    Display signs   Packaging
           broadcast


Source: (Author 2011)



The study above shows the media used by the dairy cooperative to carry out its advertising. From
the study, From the 30% of the respondents it can be deduced that print and broadcast are media
channels used in advertising, From 26% of the respondents it can be concluded that display signs
and packaging were the media used to advertise products of the Meru central dairy cooperative
while from the 18% of the respondents it can be concluded that billboards were not frequently
used in advertising




                                               54
4.4.2 Does the cooperative conduct sales promotion?

Table 4.13 Sales promotion

Category                         Frequency                        Percentage

Yes                              34                               87%

No                               5                                13%

Totals                           39                               100%

Source: (Author 2011)



Fig 4.13 Sales promotion


                                  No
                                       Sales promotion
                                 13%




                                                 Yes
                                                 87%




Source: (Author 2011)



From the study above, 87% of the respondents indicated that sales promotion was conducted by
the Meru central dairy while 13% of the respondents cited that sales promotion was not
conducted by the dairy cooperative. From the majority of the respondents it can be concluded
that sales promotion was conducted by the dairy cooperative as a marketing strategy.




                                               55
4.4.3 Sales promotions tools used in sales promotion

Table 4.14 Sales promotions tools used in sales promotion

Category                              Frequency                          Percentage

Fairs and tradeshows                  18                                 46%

Contests and games                    16                                 41%

Premiums and gifts                    5                                  13%

Rebates                               0                                  0

Totals                                39                                 100%

Source: (Author 2011)



Fig 4.14 Sales promotions tools used in sales promotion


                            Sales promotion tools that are used in sales promotion


             Rebates


  Premiums and gifts

                                                                                           Percentage
  Contests and games


 Fairs and tradeshows


                        0            10          20          30          40           50


Source: (Author 2011)



The study above shows the sales promotion tools used by the dairy cooperative when conducting
sales promotion. From the study above, fairs and tradeshows was considered as the most used
sales promotion tool with a 46% response, 41% of the respondents did consider contests and


                                                      56
games as another sales promotion tool used in sales promotion while 13% of the respondents
indicated that premiums and gifts was a sales promotion tool used by the dairy cooperative.




4.4.4 Relationship between the cooperative and the community

Table 4.15 Relationship between the cooperative and the community

Category                         Frequency                        Percentage

High                             17                               44%

Moderate                         22                               56%

Low                              0                                0

Totals                           39                               100%

Source: (Author 2011)



Fig 4.15 Relationship between the cooperative and the community


                 Relationship between the cooperative and the community

                                  High    Moderate     Low
                                           0%

                                                     44%
                                 56%




Source: (Author 2011)



The study above shows the relationship between the community and dairy cooperative. Based on
the study, 44% of the total respondents ranked the relationship between the cooperative and the
community as high, while 56% of the respondents indicated the relationship was moderate.

                                                57
Therefore, from the majority it can be concluded the community and the dairy cooperative have a
mutual relationship.




4.4.5 Social Responsibility tools used by the cooperative as a marketing strategy

Table 4.16 Social Responsibility tools used by the cooperative as a marketing strategy

Category                          Frequency                           Percentage

Sponsorships                      14                                  36%

Events                            7                                   18%

Annual reports                    6                                   15%

Speeches and Seminars             12                                  31%

Totals                            39                                  100%

Source: (Author 2011)



Fig 4.16 Social Responsibility tools used by the cooperative as a marketing strategy


                  Social Responsibility tools used by the cooperative as a marketing
                                                strategy


    40
    35
    30
    25
    20                                                                         Percentage
    15
    10
     5
     0
         Sponsorships    Events         Annual         Speeches and
                                        reports          seminars


Source: (Author 2011)

                                                  58
The study above indicates the tools used in cooperate social responsibility. Based on the study
above, 36% of the respondents indicated that sponsorships were used as a social responsibility
strategy, 31% of the respondents considered speeches and seminars, 18% of the respondents
indicated that events are used as a marketing strategy under social responsibility while 15% of
the respondents considered annual reports as a social responsibility strategy that the cooperative
used. Therefore it can be concluded from the majority of the response that sponsorships,
speeches and seminars are the most used social responsibility tools because they enhance the
relationship between the dairy cooperative and the different stakeholders that are of interest to
the cooperative




4.4.6 Does the cooperative conduct fairs and tradeshows?

Table 4.17 Does the cooperative conduct fairs and tradeshows?

Category                         Frequency                         Percentage

Yes                              39                                100%

No                               0                                 0

Totals                           39                                100%




Fig 4.17 Does the cooperative conduct fairs and tradeshows?


                                  Fairs and Tradeshows
                                          Yes     No
                                            0%




                                           100%




Source: (Author 2011)
                                                 59
From the study above, fairs and tradeshows received 100% response from the total respondents
in the study meaning the fairs and tradeshows were conducted by the dairy cooperative and it
involved farmers and different players in the agricultural industry.




4.4.7 Frequency of fairs and Tradeshows

Table 4.18 Frequency of fairs and Tradeshows

Category                          Frequency                            Percentage

Weekly                            0                                    0%

Monthly                           0                                    0%

Quarterly                         8                                    21%

Semi annually                     22                                   56%

Annually                          9                                    23%

Totals                            39                                   100%

Source: (Author 2011)



Fig 4.18 Frequency of fairs and Tradeshows


                            Frequency of fairs and Tradeshows


         60

         40

         20
                                                                                Percentage

          0
              Weekly    Monthly   Quarterly    Semi      Annually
                                              annually


Source: (Author 2011)



                                                 60
Based on the study above, 56% of the respondents indicated that fairs and tradeshows were
conducted semi annually, 23% of the respondents indicated that fairs and tradeshows were
conducted annually while 21% of the respondents considered that fairs and tradeshows were
conducted on a quarterly basis. Therefore, based on the findings it can be concluded that fairs
and tradeshows were conducted mostly semi annually and annually.




4.5 Pricing strategies

4.5.1Basis for Pricing

Table 4.19 Basis for Pricing

Category                        Frequency                        Percentage

Product appeal                  15                               38%

Demand                          24                               62%

Totals                          39                               100%

Source: (Author 2011)



Fig 4.19 Basis for Pricing


                                        Basis for Pricing

                                     Product appeal   Demand


                                             8%




                                                92%



Source: (Author 2011)


                                              61
The study above shows the basis for pricing that the dairy cooperative uses while pricing its
products. Based on the study above, 62% of the respondents indicated that demand is the basis
for pricing while 38% of the respondents considered the product appeal to be the basis for
pricing. Therefore, it can be concluded that fluctuations in demand played a critical role in
pricing of products while product appeal determined the pricing based on competition from other
brands in the market.




4.5.2 Does the cooperative use pricing tactics?

Table 4.20 Does the cooperative use pricing tactics?

Category                        Frequency                       Percentage

Yes                             34                              87%

No                              5                               13%

Totals                          39                              100

Source: (Author 2011)



Fig 20 Does the cooperative use pricing tactics?


                                    use of pricing tactics
                                           Yes    No

                                            4%




                                                 96%




Source: (Author 2011)



                                                  62
The study above seeks to indicate if the dairy cooperative uses pricing tactics for its products.
From the study above, 87% of the respondents indicated that pricing tactics were used while
setting the price while 13% of the respondents indicated the pricing tactics were not used.
Therefore, it can be concluded from the majority of the respondents that pricing tactics were used
due the dynamic nature of the environmental forces.




4.5.3 Pricing tactics used by the Meru Central Dairy Cooperative

Table 4.21 Pricing tactics used by the Meru Central Dairy Cooperative

Category                                     Frequency                    Percentage

Business to business pricing 8                                            21%
tactics
Pricing       tactic     aimed       at 16                                41%
customers
Consumer price reduction                     15                           38%

Totals                                       39                           100%

Source: (Author 2011)



Fig 21 Pricing tactics used by the Meru Central Dairy Cooperative

                       Pricing tactics used by the Meru Central Dairy Cooperative

           Consumer price reduction



  Pricing tactic aimed at customers
                                                                                    Percentage

          Business to business pricing


                                         0        10     20   30     40      50


Source: (Author 2011)

                                                         63
The above study shows the pricing tactics used by the dairy cooperative. From the study above,
41% of the respondents indicated that pricing tactics were aimed at consumers, 38% of the
respondents indicated that pricing tactics were aimed at consumer price reduction while 21% of
the respondents indicated that pricing tactics were aimed at business to business. Therefore, it’s
evident that pricing tactics are aimed at price reduction for the consumers so as to attract a bigger
customer base.




4.5.4 Pricing strategies used by the cooperative

Table 4.22 Pricing strategies used by the cooperative

Category                              Frequency                           Percentage

Cost based methods                    16                                  41%

Competitor based methods              10                                  26%

Value based methods                   13                                  33%

Totals                                39                                  100%

Source: (Author 2011)



Fig 4.22 Pricing strategies used by the cooperative


                                           Pricing strategies


      Value based methods


 Competitor based methods
                                                                                       Percentage


         Cost based methods


                              0   5    10     15    20     25   30   35   40    45


Source: (Author 2011)

                                                      64
From the study above, 41% of the respondents indicated that pricing was cost based, 26% of the
respondents considered that pricing was competitor based while 33% of the respondents
considered that pricing was based on the value of the products of the dairy cooperative.
Therefore it can be concluded that pricing strategies were based on cost and competition.




4.5.5 Factors that determining the pricing of products

Table 4.23 Factors that determining the pricing of products

Category                         Frequency                        Percentage

Demand and cost                  13                               33%

Marketing mix variables          9                                23%

Competitors reactions            12                               31%

Legal constraints on price       5                                13%

Totals                           39                               100%

Source: (Author 2011)




                                               65
Fig 4.23 Factors that determining the pricing of products


                                         Factors that determining the pricing of products




                 40
    Percentage




                 30
                 20
                 10
                      0

                          Demand and Cost
                                              Marketing mix
                                                variables            Competitors
                                                                      reactions             Legal constraints
                                                                                                on price


                                                     Marketing mix                              Legal constraints on
                              Demand and Cost                           Competitors reactions
                                                       variables                                       price
       Percentage                   33                    23                       31                   13



Source: (Author 2011)



From the study above, 33% of the respondents indicated that demand and cost determined the
pricing of products, 31% of the respondents indicated that competitor reactions determined
pricing of products, 23% of the respondents considered marketing mix variables as a determinant
of pricing and 13% of the respondents indicated that legal constraints on price determined the
pricing. Therefore, demand, cost and competitor reactions are considered to be the major
determinants of pricing.




                                                               66
4.5.6 Pricing objectives used setting the price

Table 4.24 Pricing objectives used setting the price

Category                            Frequency                     Percentage

Survival                            0                             0%
Maximize current profit             12                            31%

Maximize current revenue            12                            31%

Maximize sales growth               6                             15%

Maximize marketing skimming         4                             10%

Product quality leadership          5                             13%

Totals                              39                            100%

Source: (Author 2011)



Fig 4.24 Pricing objectives used setting the price




           Product quality leadership

      Maximize marketing skimming

             Maximize sales growth
                                                                                   Percentage
           Maximize current revenue

             Maximize current profit

                             Survival

                                        0       10     20       30         40


Source: (Author 2011)



Based on the study, 31% of the respondents indicated that maximization of profits and revenue
were objectives for setting the price, 15% of the indicated that maximization of sales was a

                                                67
pricing objective of the dairy cooperative, while 13% of the respondents considered product
quality leadership as a pricing objective while 10% of the respondents cited marketing skimming
as a pricing objective.. Therefore, it can be concluded that revenue, profit and sales maximization
are the major pricing objectives of Meru central dairy cooperative




4.5.7 Does the cooperative evaluate and control pricing?

Table 4.25 Does the cooperative evaluate and control pricing?

Category                         Frequency                           Percentage
Response to low prices           12                                  31%
Response to high prices          9                                   23%
Response to light demand         8                                   21%
Response to high demand          10                                  25%
Totals                           39                                  100%
Source: (Author 2011)



Fig 4.25 Does the cooperative evaluate and control pricing?


                             Evaluation and control of pricing

                     Response to low prices      Response to high prices
                     Response to light demand    Response to high demand



                                       25%       31%

                                      21%
                                                23%




Source: (Author 2011)



                                                68
Based on the study, 31% of the respondents indicated that Meru cental dairy cooperative
evaluated and control their pricing when the response is low prices, 25% of the respondents
indicated that high demand necessitated control and evaluation of prices, 23% of the respondents
considered responses to high prices as basis for evaluating and controlling the prices and 21%
considered light demand as grounds for evaluating and controlling the prices. Therefore, basis of
evaluating and controlling prices from the study are low prices, high demand and high prices.




                                               69
                                      CHAPTER FIVE.


5.0 SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS.
5.1 Introduction
This last chapter includes summary of findings of the study, conclusions, recommendations and
suggestions for further studies in the related areas. The recommendations for further research
deemed necessary so as to determine the factors that influence competitiveness in the dairy
sector.


5.2 Summary of Findings.
5.2.1 Response Rate.
It was found out from the study that majority of the respondents were marketing staff (36%),
followed by production and engineering with (33%), while (31%) were from the administration
department.
5.2.2 Gender.

From the area of the study it was established that 59% of the respondents were male while 41%
of the respondents were female. Therefore there are more male employees in Meru central dairy
cooperative than the 41% female employees.

5.2.3 Age Group.

From the study it was established that most of the respondents were between the age group of
25-50 (90%) while 10% of the respondents were below 25 and none was 50 and above.

5.2.4 Educational Background.

The study found out that majority of the respondents were colleges graduates 60%, 23% of the
respondents were university graduates while 2% of the respondents were from secondary
graduates.

5.2.5 Existence of Intermediaries.

It was established from that intermediaries did exist in Meru central dairy cooperative. 87% of
the respondents agreed that Meru Dairy cooperative used intermediaries in conducting its

                                              70
business transactions while 13% of the respondents were of the opinion that the cooperative was
involved directly with the its market.

5.2.6 Intermediaries assist in transactional functions.

It was established that majority of the intermediaries were involved in buying the milk from
farms with 51% response, 26% of the respondents indicated that intermediaries were used in
facilitating the selling of the milk products, from the 23% of the respondents was established that
intermediaries were used as a risk mitigation strategy because of the nature of milk products.

5.2.7 Intermediaries in logistical functions.

It was found out that majority of the intermediaries are involved in the physical distribution with
a 41% response, this was followed by 26% that indicates that concentration is another logistical
function commonly used, 23% of the response indicates that intermediaries were used as a
storing strategy and 10% represented sorting as a logistical function that is merely used by the
cooperative. Therefore majority of intermediaries were used in the physical distribution and
concentration due to the capacity the capacity that the intermediaries have in terms of resources.

5.2.8 Intermediaries in facilitating functions.

Intermediaries play an important role in facilitating the operations of any organization. Therefore
the study found out that intermediaries facilitated the grading function with 36% response, 33%
represents the financing function whereby it can be concluded that intermediaries assisted the
organization in financing its operations by purchasing the finished products from the dairy
cooperative, while 31% represents the marketing research function which shows that
intermediaries are used in conducting marketing research for the different range of the products
from the different regions that are markets of the dairy cooperative.

5.3 Answers to research questions.

5.3.1 Effect of marketing channels on developing competitive advantage.

Channels serves as an agent between manufacturers or other suppliers of goods and services and
the consumer. Channels inform manufacturers or other suppliers of customer needs and wants.
Based on the study, 51% of the total respondents indicated that direct channels are used mostly

                                                  71
to reach the various regions that are markets to the dairy cooperative, while 49% of the total
respondents indicated that indirect channels are used to facilitate the distribution function
therefore that means that indirect channels are used on regions that the cooperative consider
necessary to use the indirect channel. Based on the study, 64% of the respondents rated the
channels used by the dairy cooperative on a scale of 1-25, while 36% of the respondents rated the
channels on a scale of 26-50.

Channels perform vital tasks and services important to the overall distribution process. They plan
channel arrangements, generate information, help in day to day decision making and sometimes
take up some risk from the channel members. Based on the study, 23% of the total respondents
indicated that customer characteristics were a key factor when selecting the channel. 21% of the
respondents considered competitor characteristics as another major factor, 18% of the
respondents considered environmental characteristic as a factor of importance, 15% of the
respondents indicated that organizational characteristics are factors that are considered, 13% of
the respondents cited intermediary characteristics as a factor of consideration and 10% of the
respondents indicated that product characteristics were a must while selecting the channel to use.

Communications media are channels used by an organization to communicate with their
potential, current and past consumers in order to influence their decision to buy the Company’s
product. From the study, From the 30% of the respondents it can be deduced that print and
broadcast are media channels used in advertising, From 26% of the respondents it can be
concluded that display signs and packaging were the media used to advertise products of the
Meru central dairy cooperative while from the 18% of the respondents it can be concluded that
billboards were not frequently used in advertising.

Sales promotion describes promotional methods using special short-term techniques to persuade
members of a target market to respond or undertake certain activity. The study established that,
sales promotion was conducted by the Meru central dairy with 87% response while 13% of the
respondents cited that sales promotion was not conducted by the dairy cooperative. From the
majority of the respondents it can be concluded that sales promotion was conducted by the dairy
cooperative as a marketing strategy.




                                                72
The study established that sales promotion tools were used by the dairy cooperative when
conducting sales promotion. From the study, fairs and tradeshows was considered as the most
used sales promotion tool with a 46% response, 41% of the respondents did consider contests
and games as another sales promotion tool used in sales promotion while 13% of the respondents
indicated that premiums and gifts was a sales promotion tool used by the dairy cooperative.

5.3.2 The effect of marketing strategies on developing competitive advantage.

The study established the relationship between the community and dairy cooperative. Based on
the study, 44% of the total respondents ranked the relationship between the cooperative and the
community as high, while 56% of the respondents indicated the relationship were moderate.
Therefore, from the majority it can be concluded the community and the dairy cooperative have a
mutual relationship which means that the community provides a favorable environment for Meru
central dairy cooperative to conduct its business.

The study established the tools used in corporate social responsibility. Based on the study, 36%
of the respondents indicated that sponsorships were used as a social responsibility strategy, 31%
of the respondents considered speeches and seminars, 18% of the respondents indicated that
events are used as a marketing strategy under social responsibility while 15% of the respondents
considered annual reports as a social responsibility strategy that the cooperative used. Therefore
it can be concluded from the majority of the response that sponsorships, speeches and seminars
are the most used social responsibility tools because they enhance the relationship between the
dairy cooperative and the different stakeholders that are of interest to the cooperative

Based on the study therefore, the researcher found out that fairs and tradeshows were conducted
semi annually with 56% response, 23% of the respondents indicated that fairs and tradeshows
were conducted annually while 21% of the respondents considered that fairs and tradeshows
were conducted on a quarterly basis. Therefore, based on the findings it can be concluded that
fairs and tradeshows were conducted mostly semi annually and annually.

5.3.3 The effect of pricing on developing competitive advantage.

It was established that demand is the basis for pricing with 62% response while 38% of the
respondents considered the product appeal to be the basis for pricing. Therefore, it can be


                                                 73
concluded that fluctuations in demand played a critical role in pricing of products while product
appeal determined the pricing based on competition from other brands in the market.

The researcher established that pricing tactics were used while setting the price. From the study,
87% of the respondents indicated that pricing tactics were used while setting the price while 13%
of the respondents indicated the pricing tactics were not used. Therefore, it can be concluded
from the majority of the respondents that pricing tactics were used due the dynamic nature of the
environmental force

It was established from 41% of the respondents that pricing tactics were aimed at consumers,
38% of the respondents indicated that pricing tactics were aimed at consumer price reduction
while 21% of the respondents indicated that pricing tactics were aimed at business to business.
Therefore, it’s evident that pricing tactics are aimed at price reduction for the consumers so as to
attract a bigger customer base.

It was established from 41% of the respondents that pricing was based on cost, 26% of the
response considered that pricing was competitor based while 33% of the respondents considered
that pricing was based on the value of the products of the dairy cooperative. Therefore it can be
concluded that pricing strategies were based on cost and competition for the dairy cooperative
products.

Among the total respondents 33% of the respondents it was established that demand and cost
determined the pricing of products, From 31% of the respondents, the researcher found out that
competitor reactions determined pricing of products, 23% of the response considered marketing
mix variables as a determinant of pricing and 13% of the respondents indicated that legal
constraints on price determined the pricing. Therefore, demand, cost and competitor reactions are
considered to be the major determinants of pricing

The researcher established from 31% of the respondents that maximization of profits and
revenue are objectives for setting the price, 15% of the response considered maximization of
sales as a pricing objective for the dairy cooperative. Therefore, it can be concluded that revenue,
profit and sales maximization are the major pricing objectives of Meru central dairy Cooperative.




                                                74
From the study it was established that Meru central dairy cooperative evaluated and control their
pricing when the response is low prices with 31% response, High demand with 25% of the
response and 23% of the respondents considered responses to high prices as basis for evaluating
and controlling the prices and 21% considered light demand as grounds for evaluating and
controlling the prices. Therefore, basis of evaluating and controlling prices from the study are
low prices, high demand and high prices.

5.4 Conclusion.

The research objectives on the factors affecting the competitiveness of the dairy industry
established that intermediaries were involved mostly on the activities of the dairy cooperative;
the study also established that the dairy cooperative used direct channels for its distribution. The
study established that print and broadcast as a major media channel for communication to the
target market. Fairs and tradeshows, contests and games are sales promotion tools that were
established to be used mostly by the dairy cooperative. Sponsorships, speeches and seminars are
the social responsibility tools that Meru central dairy cooperative use as a corporate social
responsibility strategy. It was also established that demand determined the pricing of products of
the dairy cooperative. Pricing tactics were used and they were focused on consumer and price
reduction due to the levels of competition. In addition pricing strategies were based on cost and
value of the products. Competitor reactions, demand and cost were established as factors that
determined pricing. From the study maximization of profits, revenue and sales growth were
determined as pricing objectives.



5.5 Recommendations.

The main factors that affect the competitiveness of the dairy industry is the lack of an integrated
marketing communication mix. The dairy cooperative should have a integrated marketing mix
that is integrated to the overall management strategy and involve all the players within the
industry. Marketing mix variables that are price, product, place, and people should also be used
according to the dynamics of the business environment and not to stick on particular strategies
that make the organization rigid to change.



                                                75
5.6 Suggestions for further studies.

Since the research was to establish the factors that affect the competitiveness of the dairy
industry. Further studies should be conducted on the effects of competition on the performance
of the dairy industry.




                                             76
                                         References

Bager, T. (1980).Marketing Cooperatives and Peasants in Kenya Scandinavian Institute of
African Studies, Uppsala, Sweden.

CBS (Central Bureau of Statistics). 1979. The Integrated Rural Survey 1977. CBS/IRS, Nairobi,
Kenya.

DANIDA (1991).Kenya Dairy Master Plan Study Reports. The Danish International
Development Agency (DANIDA) and the Ministry of Livestock Development, Nairobi, Kenya.

GOK/WB/DDWG. (1984). Dairy Development Working Group Report No. 1.Ministry of
Agriculture/Ministry of Livestock Development, Nairobi, Kenya.

Hyden, G. (1973). Efficiency versus Distribution in East African Cooperatives.East African
Literature Bureau, Nairobi, Kenya.

Mbogoh, S.G. and J.B.O. Ochuonyo (1990)."Kenya's Dairy Industry: The Marketing System and
the Marketing and Pricing Policies for Fresh Milk", Paper presented at a Workshop on Dairy
Marketing in Sub-Saharan Africa, held at Addis Ababa, Ethiopia, November 26-30, 1990.

Minishi, L.S. and T.M. Mutugu (1986)."The Role of Cooperatives in Agricultural Marketing in
Kenya -Their Efficiency and Effectiveness". Paper presented at the Kenya Economic
Association's Workshop on "The Role of Cooperatives in the Development of Kenya's Economy.
held at Kericho, Kenya, November 10-14, 1986.

Stotz D. 1980. "Grade Dairy Cattle, an Attractive Innovation for Small-scale Farmers in the
Highlands of Kenya". Quarterly Journal of International Agriculture 19 (2): 147-160.

USAID (United States Agency for International Development). 1982. USAID/USDA Dryland
Cropping Systems Research Project (Kenya): Joint Interim Evaluation Report.USAID, Nairobi,
Kenya.


                                              77
                                           APPENDICES II

QUESTIONAIRE

Am a student in Kenya Institute of Management pursuing a Diploma in Business Management.
A research project is one of the partial requirements for the fulfillment of the Diploma named
above. Due to this, one has the need to collect data and later analyze it.

This involves setting and distributing questionnaires to respondents. It is my humble request that
you will fill this questionnaire without any prejudice.

Any information given will be treated with the confidence it deserves.




Welcome.




SECTION A: GENERAL QUESTIONS

   (i)     Name -------------------------------------------------------------------

               (Optional)

   (ii)    Gender

           Male                                   Female

   (iii)   Educational background
           University                             College
           Secondary
   (iv)    Age
           Below 25                               25 – 50
           50 and above
   (v)     Category
           Management                             Staff
           Intermediary

                                                    78
SECTION B: MARKETING CHANNELS

  (i)        Is there an existence of intermediaries in Meru Central Dairy Co-operative?
             YES                               NO
  (ii)       In which of the following do intermediaries assist in among the transactional
             functions?
                Buying                    Selling
                Risk taking
  (iii)      In which of the following do intermediaries assist in among the logistical functions?

             Concentration                      Storing

             Sorting                             Physical distribution

  (iv)       In which of the following do intermediaries assist in among the facilitating functions?

             Financing                                Grading

             Marketing research

  (v)        Which of the following channels does Meru Central dairy cooperative mostly put into
             place?

             Direct channel


                          Producer                                  Organizational
                                                                    buyers


             Indirect channels


          Producer                    Distributors/Agents                Organizational
                                                                         buyers




                                                 79
   (vi)           How would you rate the type of channels used by the dairy cooperative?
                         1    - 5                 26 – 50
                         51 – 75                   76 and above


   (vii)          Which of the following does the cooperative put to consideration while selecting its
                  channels?
                  Customer characteristics                   product characteristics
                  Intermediary characteristics              competitor characteristics
                  Environmental characteristics             organizational characteristics




SECTION C: Marketing strategies

          (i)        Which media does the cooperative use for advertising?

                     Print and broadcast                  Billboards

                     Display signs                          Packaging

          (ii)       Does the cooperative conduct sales promotion?

                     YES                           NO

          (iii)      If YES in (ii) above which sales promotions tools does the cooperative use for
                     sales promotion?

                     Fairs and tradeshows                 Premiums and gifts

                     Contests and games                     Rebates

          (iv)       How would you rate the relation between the cooperative and the community?

                     High                                   Average/moderate


                                                     80
                    Low

          (v)       Which Corporate Social Responsibility tools does the cooperative use as a
                    marketing strategy?

                    Sponsorships                             Events

                    Speeches and Seminars                    Annual reports

          (vi)      Does the cooperative conduct fairs and tradeshows?

                    YES                            NO

          (vii)     If YES in (vi) how frequent?

                    Weekly                         Monthly

                    Quarterly                      Semi-annually

                    Annually




SECTION D: Pricing strategies

   (i)           Which of the following does the cooperative base its price with?

          Product appeal                             Demand

   (ii)          Does the cooperative use pricing tactics?

          YES                              NO

   (iii)         If YES in (ii) above which of the following?

          Business to business pricing tactics

          Pricing tactic aimed at customers

          Consumer price reduction



                                                     81
   (iv)      Which of the following pricing strategies does the cooperative use while putting into
             practice pricing strategies?

          Cost based methods

          Competitor based methods

          Value based methods

   (v)       Which factors does the cooperative use in determining the pricing of its products?
   -      Demand and cost

   -      Marketing mix variables

   -      Competitors reactions

   -      Legal constraints on price

   (vi)      Which of the following pricing objectives does the cooperative use in setting the
             price?
                 -    Survival

                 -    Maximize current profit

                 -    Maximize current revenue

                 -    Maximize sales growth

                 -    Maximize marketing skimming

                 -    Product quality leadership

   (vii)     How does the cooperative evaluate and control pricing?

Competitor’s response

   -      Response to low prices
   -      Response to high prices

                                                   82
Customer response

   -   Response to light demand
   -   Response to high demand




                                  83
                                   APPENDIX III

        TIME SCHEDULE



Activities                Feb   March        April   May   June


Preparation


Data collection


Data analysis


Report writing


Study report submission
& defense


       Source: Author (2011)




                                   APPENDIX IV

                                        84
         BUDGET

ITEM DESCRIPTION                                     SUB TOTAL

Desk research from different libraries stationary/   3,000
photocopy

Research instruments Questionnaire typing &          1,000
copies

Data collection                                      5,000

Data analysis fee                                    3,000

Final draft printing & binding                       1,000

Typing photocopy & binding                           1,000

Transport                                            2,000

Telephone                                            2,000

Stationary                                           1,500

TOTAL                                                20,500

         Source: Author (2011)




                                                85

				
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