Beating the competition of
imports.
The experience of dairy processors in
Poland supplying the supermarkets
The -WB-CEI-FAO Workshop on
Agriculture, Agri-Business and the Retail
Sector in South-East Europe
Sarajevo, May 24-26,2004
Situation in Poland before 1989
• More than 350 dairy processing co-operative organised in
Central Association of Dairy Co-operatives
• Strict regional allocation of milk collection and product
distribution
– No competition
• All local dairies produced the same products to supply the
local markets
– Short product shelf life
– Cheese, butter, SMP production in some regions of Poland with
milk overproduction
– High seasonality of production
May 26,2004
Beating the competion of imports
Piotr Maj
2
Situation in Poland before 1989
• Dairy products distribution organised by regional
dairy warehouses belonged to Central Association
(storage and product transfer)
– Local distribution organised by local dairies
• Government established prices (relatively low) for
dairy products and raw milk (relatively high)
– very high production subsidies
– Huge consumption of dairy products
May 26,2004
Beating the competion of imports
Piotr Maj
3
Consequences
• Dairy co-operatives had to process more
than better
– Relatively low quality of products
• Dairy co-operatives had no experience in
competition on market
• Production subsidies (difference between
sales volume and costs of production)
May 26,2004
Beating the competion of imports
Piotr Maj
4
Recession times in early ’90
• Politically driven changes in economy
– Dissolution of Central Association, each cooperative
became independent
– Small increase in number of processors (co-operatives,
private and foreign)
• Huge inflation
– Very though time for companies with investment credits
• Termination of production subsidies
– Huge increase in dairy product prices(1300%) and rapid
decrease in demand
– Raw milk prices fall dawn
May 26,2004
Beating the competion of imports
Piotr Maj
5
Number of milk producers and
raw milk supply in 1989-2002
year
Number of
milk
producers
1989
1.400
2000
Raw milk
supply for one
farm (l)
Average daily
dalivery for
one farm
11.305
8.075
22
420
6.580
15.666
43
2001
385
7.025
18.247
50
2002
350
7.219
20.626
56
May 26,2004
Raw milk
delivered to
processors
(mln l)
Beating the competion of imports
Piotr Maj
6
Recession times in early ’90
• Market became competitive
• Poland became open for foreign companies
(multinationals)
– With much better resource and market experience
• Large import of new dairy products
– Polish processors faced modern products, nice packed,
professionally introduced on market and with much
better quality
May 26,2004
Beating the competion of imports
Piotr Maj
7
Recession times in early ’90
• Changes in distribution
– Dairy industry lost its distribution chains
– Former co-operative and state retailers lost their
position
• Private warehouse and retail became more important
– Some dairies kept their local markets other try
expansion (less or more successful)
May 26,2004
Beating the competion of imports
Piotr Maj
8
Number of retail outlets
400
350
300
250
200
150
100
50
0
85
May 26,2004
86
87
88
89
90
91
Beating the competion of imports
Piotr Maj
92
93
9
Changes in distribution during
last 10 years
• Concentration of wholesalers
– Some of them bankrupt
• Rapid expansion of multinational chains
• 30% to 50% dairy products are presently distributed by
–
–
–
–
Cash and carry
Hypermarkets
Supermarkets chains
Discount stores
• Concentration of Polish retailers
May 26,2004
Beating the competion of imports
Piotr Maj
10
Changes in consumer paterns
• New products promoted by foreign companies
– Competition hawever they have also built new
categories of products
• Consumer became more conscious of product
range availability, quality and brand
• New trends in nutrition
• Convenient packages
• Expecting more value added products
May 26,2004
Beating the competion of imports
Piotr Maj
11
Other issues
• Foreign companies grew together with
retailers for decades
• Polish producers (not only dairies) had to
face large retailers in just few years
– Very well trained stuff
– Luck of experience in dealing with specific
requirements
– Difficult negotiations
May 26,2004
Beating the competion of imports
Piotr Maj
12
First strategies developed by
Polish dairy companies
•
•
•
•
Product differentiation strategy
Cost and price leading strategy
Market penetration
Foreign investor
– Or alliance with foreign companies
• Concentration (not successful on beginning)
May 26,2004
Beating the competion of imports
Piotr Maj
13
Crucial marketing factors seen by
Polish dairies vs. foreign
companies
• Wide product
assortment
• Effective distribution
channels
• Total market share and
sales scale
– Volume of processed
milk
May 26,2004
• Marketing based
strategy
• Sales volume and
market share
• Sales promotion
• Sales structure
– profitability
Beating the competion of imports
Piotr Maj
14
Main sources of Polish dairy
development
• „Environment”
– Adequate natural environment
– Milk production was always important stable
source of farmers income
– Private structure of Polish farms
• Large state and co-operative farms closed their
production
– High unemployment- luck of other income
source
May 26,2004
Beating the competion of imports
Piotr Maj
15
Main sources of Polish dairy
development
• Ability of fast adjustment to fast moving market
conditions and fast changing consumer (and also
customer) needs
– Managerial skills and leadership
• Involving personnel and farmers
• Lower dairy product prices - low cost production
– Raw milk price
– Lower trade and marketing costs
May 26,2004
Beating the competion of imports
Piotr Maj
16
Main sources of Polish dairy
development
• Developing in short time resources to
produce new dairy products and introducing
them on market
–
–
–
–
Investment in new production lines
Changes in technology and packaging
Improving distribution
Developing marketing activities
May 26,2004
Beating the competion of imports
Piotr Maj
17
Main sources of Polish dairy
development
• Economic, marketing and management
advisory and training
– Not only source of knowledge but also
information and experience exchange
• Farmers training
– Developing quality of raw milk
– Concentration of milk production
May 26,2004
Beating the competion of imports
Piotr Maj
18
Main sources of Polish dairy
development
• Publicity, influence on political decisions
– Influence on trade barriers (custom tax etc.)
• Some of foreign producers had to move some production to
Poland
– International negotiations (EU accession)
– Agriculture policy intervention on dairy product market
• Stabilising farmers and processors income and ensuring
investment
– Dairy products generic promotion
May 26,2004
Beating the competion of imports
Piotr Maj
19
Main barriers of development
• Unwilgness to concentration
– Wrong experiences from past
– Personal aspects
• “Production oriented” management
– Difficult to implement new marketing activities
or management rules
• Not enough financial resources
May 26,2004
Beating the competion of imports
Piotr Maj
20
Financing of development (both
on farm and processing level)
• “Internal” financing – farmers
– Low price paid for farmers
– Long period of payments
– Shares paid by farmers
• lower than nominal credit rate loans
sponsored by Polish government
• SAPARD, PHARE programs
• Suppliers
May 26,2004
Beating the competion of imports
Piotr Maj
21
• Many Polish processors started to compete with
imported products or produced in Poland by
multination companies
– Not only price but also as product and service quality
• Developing HACCP programs and quality
standards (egg. ISO certification), investing in
brand building allowed Polish dairy processors to
became partners to distribution chains.
– Some companies decided to produce product under
distributors brand (own label)
May 26,2004
Beating the competion of imports
Piotr Maj
22
Types of successful companies
• Large, national scale processors
– Big volume of production (economy of scale)
• Big chains need stability of deliveries
– Few production specialised factories
– Active national promotion
– Large resources (financial, production, human
etc.)
– Wide product range
May 26,2004
Beating the competion of imports
Piotr Maj
23
Types of successful companies
• Local companies
– Very high local awareness (local publicity)
– Very effective local direct distribution
– Often very flexible and more fast in their
activities on local market
– regional products
• Entering in one retail outlet of chain often opens
opportunity for further expansion
May 26,2004
Beating the competion of imports
Piotr Maj
24
Types of successful companies
• Niche product companies
–
–
–
–
Lower volumes
Few niche products
High margin
However still satisfying consumers (and those
customers)
May 26,2004
Beating the competion of imports
Piotr Maj
25
Brand is always an asset
• Consumer (and consequently distributors)
are willing to pay better price for product
– Better margin for producer
– Retailers must have those products on their
shelf's
• Recognised brand helps to introduce new
products on the market
May 26,2004
Beating the competion of imports
Piotr Maj
26
Importance of raw milk and
working together with farmer
• Better price allows to pay more for raw milk
– That allows farmer to invest and produce more and
better
• Milk price based on quality
• On time payments
• Better service and advisory – compensate
payments
– Feeding, fertilisers.
– Training
• Implementing higher level of raw milk standard
May 26,2004
Beating the competion of imports
Piotr Maj
27
Quality and product standard
• Safety of product (HACCP)
• Product has to be the same all time
• Essential to keep recognised brand on
market for long time
• Wide understand quality
– Service
– Distribution
– Sales activities
May 26,2004
Beating the competion of imports
Piotr Maj
28
Quality and product standard
• Developing of new standards of cooperation with large retail distributors
– Own label products
– Implementing of EDI standard
May 26,2004
Beating the competion of imports
Piotr Maj
29
EDI Standard –need co-operation
of both sides
• Speed up sales procedures
– Ordering and invoicing
• Workload reduction
• Cost reduction
• Better information flow (eg. sales and
stocks level)
• However needs additional investments
– Web sites the most simple way
May 26,2004
Beating the competion of imports
Piotr Maj
30
• Companies with proper quality, brand,
consumer willing to buy product, volume
(market share etc.), market and customer
oriented –are and will stay in business.
• For discount stores some aspects are less
important but safety of product and
deliveries stability - always.
May 26,2004
Beating the competion of imports
Piotr Maj
31
Threats
• Cost advantage of dairy production will
decrease
• Polish dairy processor are still not enough
market oriented
• Concentration of dairy production is still to
law (both on farm and processor level)
• Competition from EU companies
May 26,2004
Beating the competion of imports
Piotr Maj
32