Milk and Cream Industry

Milk and Cream Processing Industry

This report is based on Porter’s “five forces” analysis framework to explore the economic factors that affect the profit as well as output of Australian milk and cream processing industry. Before July 2000,  state governments monopolistic controls the supply and pricing of fresh milk to support the dairy industry. However, on July 1st, 2000, the deregulation of dairy sector makes the dairy market a competitive one on price basis among various processors. Now, the free market for fresh milk and cream has arrived.

Market Definition

This analysis is confined to companies that produce primary pasteurised milk and process raw milk to produce milk and cream products which has various fat level. The manufacture of cultured buttermilk, yoghurt, flavoured milk as well as milk powder are not included in this market for its rather complicated produce process. The geographical scope of milk and cream process competition is limited to the milk and cream products manufactured and processed in Australia and been sold to both  domestic and overseas market. There are four multinational major companies account for nearly sixty percent of market share in Australia, Lion, Parmalat Australia, Saputo Dairy Australia and Fonterra. Those companies mentioned above play a dominant role in the Milk and Cream Processing industry in Australia, while the remainder of the market are small- to medium-size processors who provide milk or cream to smaller domestic region.

Internal rivalry

There are four leading international companies dominate the milk and cream processing market with approximately sixty percent of market share while numerous small- to medium-size company, for instance, A2 company, try to compete with them to earn a share in domestic as well as overseas market. The Herfindahl-Hirschman Index for this market is below 0.25, indicating that the market share concentration is moderate. Beside the four dominant companies each can roughly account for fourteen percent of the market share, other companies’ market share can barely excess three percent (except Norco Co-operative,which take up up to five percent of the market share). However, past five years have witnessed a decrease trend in market share since medium-sized milk producers were gaining market share from the dominant companies by meeting the demand of niche markets. Although some medium sized company has taken a share from the market, strong competition lead to some small-sized firms exiting the market.

The considerably large quantity of firms is just one factor that may intensify the internal rivalry. Another factor is the consolidation and rationalisation of those global companies. Those multinational major companies like Lion and Parmalat, can make the best of their global brand awareness as well as economies of scale in producing to explore local markets in Australia. Furthermore, the changing consumer demand also led to alliance between local company. Those customer who has difficulties drinking cow’s milk found that it is the A1 protein in fresh milk that lead to the discomfort. They can easily consume milk that contains A2 protein only. This specific consumer trend is detected by Fonterra, who chose to form a partnership with A2 milk company to meet the growing demand of those experience digestive issues when consuming regular cow milk. In this instance, both companies will benefit a lot from their partnership. Fonterra can utilize the technology and distribution of A2 company when producing A1 protein free milk, while A2 company can boost its global market by making use of Fonterra’s supply chain and production capabilities. The consolidation between either two major companies, or one major firm and one medium-sized firm, is going to heat up the internal rivalry to a much intense level.

Besides from the alliance between companies,  product differentiation has taken a vital part in company competition. Although major companies have taken up a considerable proportion of regular market share, they still manage to expand their market by providing innovative products to satisfy particular consumer needs. For instance, Lion has promoted its Pura New 2% range of milk which is marketed as permeate free(Thomson, 2018).Many companies also provide low-fat, low-carbohydrate milk for those customer who have fitness requirement.

In the early 2011, a milk war broke out in Australia. Major supermarket such as Coles, Woolworth discounted their private-label milk to 1.00 a litre. The private-label milk is produced by those big company like Fonterra who has contract with the supermarket giants, or by small dairy farm in Australia. Because of its reasonable price, private-label milk takes up approximately 25 percent of the milk sold in supermarket and grocery and this proportion is expected to grow larger(Ibisworld.com, 2019). According to IBISWORLD, the private-label milk will outperform branded milk in the next five years (Ibisworld.com, 2019). So the growing consumption of private-label milk can lead to a more intense competition for companies to fight for the contract with major supermarket.

Entry

The entry barriers for the milk and cream processing industry after the deregulation in 2000 is medium. One of the biggest difficulties for the new entrants may be the brand loyalty builded by the well-entrenched major companies like Lion, Parmalat. Other than their considerable market share, most of them also have signed the long-term contract with the supermarket to provide private-label milk to rape new entrants’ market share. It’s difficult for new firm to secure such partnership opportunity with supermarket and grocery. Facing the growing demand of private-label milk, those new entrants who cannot gain contract with supermarket will find it even harder for them to take a share of the milk and cream product market.

Major incumbents also can benefit from their economies of scales because of its large output and production experience, which can lead to a lower product price and attract more customer. With the huge investment in technology, equipment and distribution, major incumbents can easily beat the new entrants by a lower price and brand loyalty, let alone that most of the new firm enter the industry and establish them mostly in low-priced, no-branded segment(Thomson, 2018). In additional, leading companies also have enormous advertising budget to promote their products as well as rape those new firm’s potential market, in which aspect new entrants may fail to put advertisement in a variety of media.

The entry barriers are high but not that overwhelming. Some successful examples of the new entrants like A2 company, they cut their share by providing special milk to meet the needs of niche market, although the technology and equipment investment in providing specialty milk is also a huge budget. Those brands which provide specialty milk will attract clients with specific needs in niche market and successfully sell their milk and cream products in a higher price because the customer in niche market may have limited choice than regular buyer.

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