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Aiming high

Released at: 20:37, 09/03/2015

Aiming high

Vinamilk is expanding worldwide to realize its goal of becoming one of the 50 biggest dairy companies in the world before 2017.

by Minh Tien

A subsidiary in Poland was established by Vinamilk on February 18 with capital of $3 million, which along with plans to acquire a French dairy company are the most recent major steps in it expanding its export markets in Europe.

Previously, in 2014, it successfully invested $7 million in acquiring a 70 per cent stake in Driftwood Dairy, one of the largest dairies in California. The plant has been operated efficiently by Vinamilk and generated revenue of more than $121 million in 2014. Earlier, in 2012, Vinamilk invested nearly $10 million to secure 19.3 per cent of New Zealand’s Miraka Milk, a company specializing in producing full-cream powdered milk in New Zealand, and successfully introduced a new 100 per cent fresh milk brand called Twin Cows.

Such smart moves have saved Vinamilk from a year full of challenges and it finished 2014 with quite a profitable result, especially given the market’s weak purchasing power and the increasingly fierce competition, as well as the impacts of the ceiling price placed on milk powder for children under the age of six. The company recorded turnover of nearly $1.7 billion, or 99 per cent of its initial plan, for growth of 13 per cent against 2013. 

Although satisfactory for many, the result may not make Vinamilk’s CEO Mai Kieu Lien smile, as fulfilling the dream of reaching revenue of $3 billion by 2017 and being among the world’s Top 50 will now involve the company growing by at least 20 per cent each year for the next three years.

Challenge after challenge

Vinamilk experienced similar rapid annual growth in the period from 2008 to 2010, of 22 per cent, 30 per cent and then a record 53 per cent, respectively. Then, even though sales volumes improved steadily over the years, growth slowed considerably, from 31 per cent in 2011 then 16 per cent and only 13 per cent in 2014.

This is perhaps understandable, as the size of the company is so large it can result in escalations and then slowdowns. But besides such internal issues, Vinamilk also had to face various external challenges that are not easy to deal with, such as policy risks, the rise of various competitors both domestically and internationally, gradual market saturation of the condensed milk segment, and weaknesses in Vietnam’s infrastructure affecting its delivery capabilities.

While not denying that Vietnam’s milk market still has great space for development, as milk consumption is relatively low compared with other countries in Southeast Asia such as Thailand and China, people may still hesitate to spend a little more on milk for the next few years due to the general difficult economic situation. 

Moreover, dairy products are among those that are subjected to negative social and economic effects. A recent survey by market research firm Kantar Worldpanel showed that milk consumption in Vietnam has slowed since 2012 in both urban and rural areas. Regarding government policies, the price ceiling on powdered milk for children under the age of six introduced last year certainly saw businesses like Vinamilk wobble.

No less importantly, the logistics costs for Vinamilk - especially transportation and distribution costs - remain relatively high due to Vietnam’s poor infrastructure. This factor becomes even more critical in the context of dairy companies moving to rural areas to compete while the urban market slowly becomes saturated.

However, the greatest challenge for Vinamilk probably comes from the continuous growth of competitors in the market, both domestically and internationally. It is now fighting fiercely in four key segments: condensed milk, liquid milk, powdered milk, and yogurt. It was recently reported that Vinamilk now accounts for 80 per cent of market share in condensed milk, 50 per cent in liquid milk, 30 per cent in powdered milk, and 90 per cent in yogurt.

It can be seen that the key to Vinamilk’s faster growth in the coming years will lie in its ability to expand its market share in the segments of liquid milk and powdered milk, in which it will face tough challenges. In powdered milk, for instance, especially the children’s segment, the habit of Vietnamese people to prefer foreign products is a major barrier for Vinamilk to overcome in order to improve its market share. Its main competitors in this segment are reputable foreign giants such as Abbott, Friesland Campina, and Mead Johnson. In liquid milk, Vinamilk faces a similar situation, fighting against Friesland Campina and even smaller players such as TH True Milk, Long Thanh, and IDP. 

In addition to its existing competitors, Vinamilk may also have to face major dairy enterprises in the region once the ASEAN Economic Community (AEC) is established late this year. A large market of 90 million people like Vietnam is certain to catch the eye of regional players.

Subsequent moves

Despite having to face such an array of challenges, CEO Lien and her colleagues still hold particular advantages that will allow Vinamilk to hold its lead, at least for the next few years.
In the liquid milk segment, a prerequisite for success is to be completely self-controlled in managing input sources, especially cows. The failure to acquire Da Lat Milk may be cause for regret, but Vinamilk was much quicker than its rivals in signing up to a partnership with the Duc Long Gia Lai Group to exploit their herd of 80,000 cows in the coming years. For now, according to analysis from FPT Securities, Vinamilk is still the leader among dairy producers in terms of herd size, with 68,000 heads (including their own and those under joint exploitation with farmers), outnumbering Friesland Campina by 32,000, TH True Milk by 35,000, and IDP by 58,000.

This scenario may change in the future, however, if Vinamilk fails to continue moving forward as many of its competitors try to develop large-scale input sources. Not too long ago, the Hoang Anh Gia Lai Group announced it would develop a dairy herd of up to 120,000 heads by the end of 2015, by which time their partner Nutifood will benefit when promoting the production of liquid milk. Meanwhile, IDP has managed to raise $45 million from the VOF investment fund (managed by VinaCapital) and Daiwa PI Partners for production expansion. At the same time, TH True Milk will utilize the 500 hectare pasture of Da Lat Milk effectively to develop their dairy herd.

To avoid the possibility of tougher domestic competition in the future, a new strategy expected to help Vinamilk grow is to explore and penetrate new foreign markets to boost exports. The strategy has already been implemented fairly well by the company. The value of exports in Vinamilk’s revenue structure has increased significantly since 2012, accounting for about 14 per cent of total revenue in 2013.

Another advantage that Vinamilk holds is that the government is increasing investment in the dairy industry. With the goal of producing 3.4 million liters of milk in 2025 and exporting more than $200 million in value, the dairy industry in general, with Vinamilk as the “pioneer” in particular, will certainly see more favorable conditions on offer.

With its solid financial resources, another strategy being applied successfully by Vinamilk is to implement mergers and acquisitions with both domestic and foreign dairy enterprises both in Vietnam and worldwide. Besides the acquisitions in the US and Europe mentioned above, Vinamilk’s $23 million plant in Cambodia will soon be put into production, in the second half of 2015, seeing it waiting at the front for any opportunities arriving from the AEC by exporting more to Myanmar and Laos.

Besides its effective strategies, existing conditions are also becoming more and more favorable for Vinamilk. For instance, the price of raw materials for powdered milk has been falling significantly since last year and has helped Vinamilk improve its gross profit margin. The ceiling on advertising spending being lifted has also allowed Vinamilk to foster its marketing activities and promote its products on a more massive scale.

In fact, the annual advertising and promotion costs of Vinamilk are substantial. Its latest report shows that the company spent more than $41 million on advertising and more than $44 million on promotions. These costs are expected to continue to increase in the years to come while in return boosting sales revenue by a considerable degree.

Nevertheless, to realize its goal of recording revenue of $3 billion by 2017 and being among the world’s Top 50 dairy companies, Vinamilk still needs to do better and the only way to do that is to make better decisions and respond better to market fluctuations and to the movements of its competitors. 

In order to do so, the company needs high quality human resources. It can’t be denied that Vinamilk is a large brand; large enough to easily attract top talent. But keeping them is another story, and many have come and gone, including a “marketing wizard” (now General Manager of IDP) who only stayed at Vinamilk briefly, and a marketing executive director who left last year. Perhaps it greatest concern lies in who will succeed the legendary 60-year-old Mai Kieu Lien when her term ends in 2016. The future of Vinamilk will then be in the hands of a new captain. Will the ship still be able sail for $3 billion by 2017? Where will it head after that? Such questions remain unanswered.

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