Clover upbeat about dairy’s prospects

Clover recently posted improved interim results showing a 7,9% revenue increase, a margin partly attributed to higher retail prices. Other positive news from the company was the completion of a repositioning project, Cielo Blu, followed by the acquisition of Dairybelle’s UHT plant in the Western Cape and Dairybelle’s yoghurt plant in Bloemfontein.
An upbeat Johann Vorster, Clover’s CEO, spoke to Nan Smith.

Clover upbeat about dairy’s prospects

Some say you’ve shifted your position in the market and are now a beverage supplier rather than a dairy supplier. How do you respond to that?
You could say it’s the opposite. Beverages have been part of our brand for a while, but make up only 20% of the business. Water is the one sector where we’ve expanded but we’ve been in the iced tea market for five years since we bought Real Juice Beverage company. We’ve contracted more heavily into yoghurt and custard, and are about to launch a milk-based energy cereal with Future Life.

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Clover recently acquired Dairybelle in the Western Cape. Is it the company’s policy to acquire more dairy businesses?
Yes, very much so. For the first four years after listing, we concentrated on Cielo Blu because we knew shareholders would want us to get that right. Now that’s done and by the end of December we’ll be on-line. The focus up to now has been internal, but from here on we’re going to be externally focused.

We’ll be expanding our own brands and categories, entering new categories and going into an acquisitive growth phase. We can do this now because we have the infrastructure and spare capacity. The Dairybelle acquisition was the perfect opportunity for us because we could buy the factory and put all the product through our supply chain. There are still some regional opportunities in South Africa, so acquisitions are definitely on our horizon.

Is market expansion in Africa part of your strategic plan?
Our overall strategy is category expansion, brand expansion and then expansion into the export market in Africa. Our drive into Africa will be clearly orientated towards scale and looking for business where we can add definite value. We think there’s potential for dairy farmers to grow in our country and service the African export market. We’ve got the land, the water, the willingness and the technical skills and expertise.

Right now, we’re talking to government, and it definitely sees the value of our expansion into Africa. Farmers see the value in expansion as a way of bringing emerging dairy farmers into the sector. And we see the value in exports. Our partnership with New Zealand dairy company Fonterra gives us an edge, because Fonterra knows the African market well.

You could say that Africa is potentially our oyster, but exportable product must be able to compete with the best in the world. Investment in technology, to make that happen, would require government help. We hold the opinion that you can’t do business north of here without ownership of the plant. So we aim to partner with smaller businesses that have been around for a while but need expertise in fields with which they are not familiar, such as merchandising. We can provide a number of services such as procurement and the ability to derive quality through technical skills, such as driving down somatic cell counts.

The African dairy industry is ruled by UHT plants, which are notoriously difficult to run. We have a high score in
the UHT market because we have more than 20 Tetra lines here, which gives us a broad skills base. Another aspect would be the use of powder produced here for reconstitution elsewhere.

There’s talk that Clover has lost market share in the UHT, fresh milk and cheese markets over the last 10 years. Your comment?
We’ve lost some share in UHT during the last three years, but we’re working hard to get it back and we’re making gains. Our packaging has been redesigned for better pouring ability and has a better look. In fresh milk we consistently gained every quarter for the past decade until June last year. We probably lost because we were in engagements with retailers over price increases and when they came through our share dropped a bit. Now we’re back up where we should be and of course we’re looking at increasing rather than losing market share.

There seems to be a bigger demand for fresh milk. What do you think is driving it? Can you comment on the effect Prof Tim Noakes may have on the market?
Demand is most likely driven by urbanisation and the entry of retail stores into previously unserviced areas. I think the desire for fresh products is aspirational, which happens as the middle class gets bigger. I think it will gain traction as people see the value in fresh produce and as the anti-fat drive loses ground. Increasing refrigeration also contributes to increased demand. The ‘Noakes effect’ is difficult to quantify, though our full fat products in milk and butter are doing well. People are starting to perceive butter as a healthy product.

There’s talk in the market of a supply problem and low stocks. Are you experiencing this?
There’s no shortage of raw milk at the moment. In fact, we’re in a stock-building phase now and I think we’re headed for a big surplus. Our supply is 11% higher than in the previous season in January. The reason we’re paying high prices for milk right now is not because of shortages but because of competition for raw milk as Danone has needed to get supply since it exited from our chain. Of course, we’ll soon go into the normal seasonal winter shortage, which is a natural trend. We handle it through reconstitution where we can. We haven’t seen any major increases in demand that could not be accommodated.

Have the company’s good results elicited a positive response from shareholders and the market?
The share price came down a bit despite the good results, which is a bit of a surprise. Our results were very good and I’m proud of what we’ve accomplished. It’s especially encouraging when you take into account that we managed to have a balanced result because we spent R47 million more than during the same period last year in research and development, marketing and launching into new categories.

We haven’t cut costs that much as we’re still a young organisation and want to grow, so we’ve invested heavily in IT, technology and processes. I’m a great believer that you can ‘‘save yourself bankrupt’’, though of course I am responsible about costs and make every cent count. However, one must invest in the future, as keeping up with technology is particularly relevant in the dairy industry. We want to be around for another 117 years so we aren’t short-term investors looking at knee-jerk fixes. During the six months that we were down, we just went back to basics.

Can you tell FW readers what your aim was with the Cielo Blu project?
It was to reposition our factories closer to pasture lands and to create capacities. That has been done now and most of our plants are in the right location, with the sole exception of the Lichtenberg factory, where we are looking for the right solution.

It’s difficult to get prices from processors and they seem to vary, so – are you squeezing the farmers?
I won’t be drawn into that argument but I will give you a technical analysis. The milk price-to-feed cost ratio is known to break even at a ratio of 1:4. Below that line there will be shortages, as happened in February and March last year. Above the line, we know that the environment stimulates milk production. We’ve seen this every four years and currently prices are high.

I believe that farmers are the backbone of every country and that they should be making a lot of money. Unfortunately in this country because we are not an export market and don’t have export plants, the only mechanism the country has is to let the producers take the knock to balance the equation. Volume growth is important in this industry because it absorbs inflation. When farmers go through hard times as they did last year I believe they should get a sufficient long-term increase after that to make up for it. So to answer your question: I think that farmers are getting a good price currently and they deserve it.

Are you paying a winter premium and can you describe how your quota system operates?
Yes, the winter premium is already in operation in the Eastern Cape. In KZN there is a growth and density premium, which means you get paid for an increase in volume on the previous year and on the density of dairy farms in your cluster. We pay the density premium to encourage lower transport costs.

We still use the quota system, which we call the Clover unique milk procurement system.There is a contract system in place for farmers who don’t own quota but we are careful about not allowing this to affect our quota holders. Recently, a number of farmers sold R19 million of quota, but there were applications for R41 million worth. This is a sign that some of our existing suppliers want to expand while others are looking at supplying milk through Clover. In times of oversupply, the quota pays its way because it holds its value.

Our prices have not dropped as they have on the international market, which is an achievement we value.

Phone Morné Reinders (Instinctif Partners PR) on 011 050 7520.

This article was originally published in the 17 April 2015 issue of Farmer’s Weekly.