"Alberta Bakery Manufacturing Industry"
Agri-Business Expansion Agri-Processing Alberta’s Dairy Processing Industry Synopsis Introduction This profile of Alberta's dairy processing industry is intended to guide strategies that support industry growth and to establish benchmark information on Alberta dairy product manufacturers. The information came from secondary research and interviews with over 50 per cent of the dairy processors in Alberta. Dairy Industry Defined Dairy manufacturers process dairy products for wholesale distribution from raw milk, processed milk and dairy substitutes. Products manufactured include, but are not limited to: fluid milk and cream products, milk beverages, cultured milk products, cheddar and specialty cheeses, processed and packaged cheese, ice cream and ice cream novelties, skim milk and whey powders, condensed milk, butter and butter blends, and goat and sheep milk and cheese. These products fall under the North American Industry Classification System (NAICS) code 3115, 31151, and 31152. The Canadian Market Situation The dairy industry is the fourth largest sector of the Canadian agri-food economy after grains, red meats and horticulture. In 2003, dairy farming generated $4.5 billion in total farm cash receipts. During the same period, sales from Canadian dairy processors amounted to $10.4 billion in value, representing 14 per cent of sales in the Canadian food and beverage sector. From 1999 to 2003, the compound annual growth rate (CAGR) of the market was approximately 4.4 per cent. Canadian per capita consumption of dairy products has remained relatively stable in recent years. Fluid milk consumption continues to decline, especially the consumption of whole and 2% partly skimmed milk. The consumption of 1% partly skimmed milk and skim milk continues to show slight increases. Despite the trend away from higher fat milk, all categories of cream are showing increases mainly due to increased consumption of specialty coffees and desserts. Butter consumption is also increasing slightly as a result of shifts away from margarine. The use of mozzarella in prepared meals and fast food, and the sale of variety grated cheeses are part of the reason for an increase in consumption of specialty cheeses. However, ice cream consumption continues to slide. With ever increasing varieties and flavours, yogurt has been able to increase its overall appeal and per capita consumption. Canada's orderly marketing system is designed to provide sufficient fluid milk for the domestic consumer market that accounts for about 45 per cent of the total milk available. It also encourages the production of sufficient volumes of industrial milk and cream to meet domestic demand for manufactured dairy products such as cheese, yogurt and ice cream, as well as certain planned exports. In its facilitative role, the Canadian Dairy Commission helps build consensus within the industry, which characterizes the overall approach to orderly marketing in Canada's dairy industry. The dairy processing sector is concentrated and mature, with 15 per cent of Canadian plants owned by the three largest processors in the country. Parmalat, Agropur and Saputo process 70 per cent of the milk produced in Canada. The competitive environment in a commodity market forces the larger processor to 1 focus on cost efficiencies rather than new product development. Private label products are strong performers in the concentrated milk, fats, spread and powdered milk sectors. The maturity of the market and retailer consolidation is forcing dairy manufacturers to be more active in new product and package development. Although changes in consumer trends are creating product innovation opportunities, it is also creating challenges to design packaging that make dairy products more convenient and easier to consume away from home. Product competition within retail categories is on the rise as the substitution of dairy products with non- dairy products is being driven by consumer demand. Soy, potato and rice beverages are all examples of substitute products that are competing for traditional dairy product space and consumer loyalty. As the demand for functional foods and better-for-you products increases, dairy processors will face a higher number of substitute products. In 2003, Canadian dairy exports totalled 179 million kilograms, representing a decrease of nine per cent when compared to the previous year. This decrease can be attributed to the December 2002 decision of the World Trade Organization (WTO) Appellate Body, which mentioned that Canada’s practice of exporting milk through the Canadian Export Milk (CEM) program constituted an export subsidy. Since 2003, following the WTO ruling and uncertainty in the market, Canadian exports have continued to decrease, while the volume of imports has been increasing. In 2003, imports under International Trade Canada’s Imports for Re-Export (IREP) totalled 59.1 million kilograms, an increase over the previous year. Between 1997 and 2003, the use of the IREP has increased by 782 per cent. The sharp increase can be explained by the fact that some companies have substituted milk supplies, from the now defunct CEM, with imported dairy products that are then processed and re- exported either as dairy products or as further processed products. The main products imported under the IREP are butter and milk fats, whole and skim milk powder, cheese, milk protein concentrates and casein products. The Alberta Dairy Snapshot Alberta has 31 commercial dairy manufacturers involved in the production of both traditional and specialty dairy products. In addition, there are 56 Alberta further processors that hold Special Milk Class Permits. These permits allow processors to acquire dairy ingredients such as butter, cream and cheese for secondary manufacturing. The dairy industry is a highly controlled and regulated industry. Milk production and sales are regulated through a Supply Management System (SMS). It is designed to provide a balance between the demand for fluid milk and the supply of industrial milk. Alberta currently holds 6.9 per cent of the national Milk Sharing Quota for industrial milk. Industrial milk is distributed to manufacturers within a cascading class system in which priority is given to the production of Class 2 products (yogurt, sour cream and ice cream), then Class 3 products (specialty cheeses and cheddar cheese). Generally, there is sufficient milk to satisfy all of the processor demand, but there is also a production quota cap imposed by the SMS. Figure 1: Size Distribution of Alberta Dairy Product Manufacturers, Based on Number of Employees (2004) 2 29% 13% 1-25, small 26-100, medium 100+, large 58% Source: Alberta’s Agricultural Processing Industry Directory 2004, Info Canada Business Data Disk, and Statistics Canada Alberta’s dairy industry is recognized as a mature industry. Three key dairy processing companies, Parmalat Canada, Saputo Dairy Products Canada and Agropur Cooperative, dominate the Canadian market and are firmly established in Alberta’s market. Lucerne Foods Ltd. (A Division of Safeway) and Foothills Creamery also have a strong provincial market share. Saputo is Alberta’s largest dairy processor, with five facilities. An estimated 87 per cent of the dairy manufacturers in Alberta are small to medium-sized enterprises (SMEs), with staff levels less than 100. Although they account for only 13 per cent of Alberta’s dairy processors, the larger companies with more than 100 employees dominate the sector and the market. These are state-of-the-art manufacturing plants that in most cases are producing large volumes of traditional dairy products. The small and medium sized companies utilize the industrial milk supply to manufacture a wide variety of both traditional and specialty dairy products. These include butter, ice cream, yogurt, specialty cheeses and organic products. Alberta to Canada, Industry Benchmarks Table 1: Dairy Products (except frozen), NAICS 3115, and/or 31151, 2003 BENCHMARK ALBERTA CANADA ALBERTA SHARE IN CANADA 2 1 Manufacturing establishments 45 422 2 Number of employees (2002) 1,200 17,538 6.8% 2 Value of shipments $1.007 billion $10.4billion 9.7% Shipments growth 1990 to 2003 99.0% 44.3% - 2 Total value of food and beverage shipments $9.5 billion $73.7 billion 12.9% 2 Share of food & beverage mfg shipments 10.6% 14.4% - 2 Manufacturing value-added $188 million $2.5 billion 7.5% 3 Value of exports (31151) $10.2 million $292 million 3.5% 3 Value of imports (31151) $5.2 million $393 million 1.3% 2 Investment in capital machinery and equipment N/A $207.7 million N/A Retail ACNielsen data (31151) N/A $4.8 billion N/A 4 Under-utilized capacity 40% N/A N/A 2 Average annual per capita expenditure (2001) $225 $237 - Gross Domestic Product (current $)2 $187.2 billion $1,290.2 billion 15% Population 3.2 million 32 million 10% 1 Statistics Canada records 45 processors in 2003, while 2004 AAFRD estimate of processors is 31. 2 Source: Statistics Canada. 3 Source: Statistics and Data Development Unit, AAFRD. 4 Based on 16 of 31 respondents of Alberta companies interviewed in 2004-05 by AAFRD. 3 The dairy industry is Alberta’s second largest food processing sector, generating over $1 billion in manufactured shipments in 2003. This total represents about 10.6 per cent of total food and beverage shipments. The growth in value of shipments is estimated at 5.2 per cent, when compared to the previous year. In the 2002-03 dairy year (August to July), 6.2 million hectolitres of milk were produced, with about 3.4 million hectolitres or 55 per cent going into fluid milk products (milk, cream and milk beverages). The remaining 45 per cent went to industrial uses (cheese, butter, yogurt, ice cream and other processing). Although fluid milk shipments, the largest product category, have remained stagnant over the last several years, the dairy industry’s total annual average growth rate (AAGR) from 1990 to 2002 is recorded as 2.2 per cent. This growth may be partly attributed to a rise in consumer demand for cheese, yogurt and ice cream. Figure 2: Alberta Dairy Products: Sales of Manufactured and Value-Added Goods, NAICS 3115 (1990–2004) Alberta Value of Dairy Products Shipments and Value-Added 1990 - 2004 Value of Shipments and value-added 1,500 (million $) 1,000 Sales of manufactured goods/shipments 500 Value-Added 0 0 2 4 6 8 0 1 2 3 4 9 9 9 9 9 0 0 0 0 0 19 19 19 19 19 20 20 20 20 20 Year Source: Annual Survey of Manufacturers, Statistics Canada and Statistics and Data Development Unit of AAFRD NOTE: NAICS 3115 includes dairy product manufacturing and ice cream and frozen dessert manufacturing. 2002 and 2004 data suppressed due to confidentiality Key Findings • Dairy manufacturers most frequently stated that market development through expanding to high- end retailers and specialty distributors, and pursuing well-developed market channels would strengthen their market position. • Driven by an increasing market demand by consumers seeking better-for-you (BFY) products such as yogurt, quality indulgent products such as high fat ice cream treats and specialty products such as ethnic cheeses, manufacturers see considerable opportunities to expand into niche markets and build consumer loyalty. • Increases in the cost of fluid milk as a raw material over the last decade has restricted the competitiveness of dairy products and the growth in value added. • Dairy product exports from Canada and Alberta have been significantly restrained since the December 2002 decision of the WTO Appellate Body which ruled that Canada’s practice of exporting milk through the CEM program constituted an export subsidy. • Less than 10 per cent of Alberta’s dairy processors or further processors are using programs such as the Import for Re-Export Program (International Trade Canada) and Duty Deferral Program (Canada Border Services Agency). • Alberta manufacturers encounter a high level of competition from outside Alberta borders. Imports of cheese from the United States and Europe, or butter from New Zealand and Australia, are often cost competitive even with the tariffs applied on the imports. • Controlling operating costs and lean manufacturing are critical for producers as they strive to offset high input costs, increase production runs and provide lower inventory flow costs. • Small to mid-sized operations have the opportunity and ability to pursue niche markets through specialization, product and package innovation, and unique value-added items as these products are more labour intensive, less likely to be mass produced and require shorter plant runs. This 4 allows small to mid-sized operations to differentiate themselves from large corporate dairy processors. • There is a critical shortage of skilled workers in the industry and over 13 per cent of the dairy processors interviewed suggested this challenge will increase in the years to come. In addition, the lack of a stable, unskilled workforce is a major industry challenge. • Dairy processing is considered a higher-risk business due to the high capital investment required for operation. The dairy industry's slow growth rate, high cost of ingredients and other escalating business costs (e.g. Workers’ Compensation Board, fuel and freight costs) are driving return on investment down. Thus, there is little or no incentive for new market entrants. • Whereas large dairy manufacturers stated they are more interested in volume production to gain competitive edge through economies of scale, the majority of mid-sized companies focus on developing niche markets while trying to increase efficiencies and reduce per-unit cost to remain competitive. The majority of small companies are content with servicing local or regional markets. • Companies viewed advanced research and development as a method to become and/or remain competitive by meeting evolving consumer and industry trends. Regardless of size, companies stated product innovation is pivotal in advancing market share. Industry Resources Government Contacts Alberta Agriculture, Food and Rural Development (AAFRD) Agri-Business Expansion Division Livestock Products Branch Tel: 780-427-7325 Web site: www.agric.gov.ab.ca Dairy Agencies/Associations Canadian Dairy Commission (CDC) The Dairy Processors Association of Canada (DPAC) The Dairy Farmers of Canada (DFC) Alberta Milk Alberta Dairy Council Tradeshows American Dairy Products Institute/American Butter Institute Annual Conference www.adpi.org/ American Cheese Society Conference www.cheesesociety.org/displayconvention.cfm International Dairy Deli Bakery Association Annual Seminar & Exhibition www.iddba.org/conf.htm Worldwide Food Expo www.worldwidefood.com Publications and e-Journals 5 Dairy Foods Magazine www.dairyfoods.com Cheese Market News www.cheesemarketnews.com Cheese Reporter www.cheesereporter.com Web Sites www.agr.gc.ca search “dairy” www.cdc.ca/cdc/ www.milkingredients.ca www.dairyinfo.gc.ca www.dairyfarmers.org www.albertamilk.com Gathering and analysis of marketplace information contributed in part by InnoVisions and Associates. Information in this document is provided solely for the reader’s information, and while thought to be accurate, is provided strictly "as is" and without warranty of any kind, either expressed or implied. 6