Market Analysis European Dairy Industry
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Dairy Industry
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European Dairy Industry: margins under pressure despite sales growth

Mathieu Geuskens published on December 27, 2021

The European dairy industry has grown at an average annual rate of 7.7% between 2016 and 2019, according to the latest publication of our trendreport of the Eurpean Dairy industry. We analyzed the financial data of more than 250 European dairy companies. Companies with a focus on milk powder and/or the food-service segment show the most growth: 13.7% and 13.3% in the same period. However, the margins are under pressure sector wide.

The dairy industry remains to be a growth market, but margins are pressured

The European dairy industry is a mature market that is well established and organized in terms of product arrays and distribution channels. A decisive driver for the sector is the price dynamic of raw milk – which is determined on a global market. Hence, the price levels contribute to the relatively strong sales growth in the industry over recent years. Overall, the net sales CAGR of the industry is 7.7% in 2016-2019. This is caused by the milk price on the one hand (index 119 for the milk price versus index 128 of overall net sales growth in 2016-2019) and by a growing demand for protein products in Europe and export opportunities outside of Europe (like with milk powders such as to China) on the other hand.

Milk price vs net sales development (index 2016 = 100)

Looking at growth by product group, it is noticeable that milk powder companies stand out with a CAGR of 13.7% in 2016-2019, as do Foodservice focused cheese companies (13.3% CAGR in 2016-2019 compared to less than 9% for cheese overall). Based on the data that’s already in for 2020, Foodservice focused cheese and fresh dairy companies managed to secure stable margins, although their net sales decreased. Milk powder focused companies saw steady growth in net sales, but their margins showed a sharp decline. However, like many Agri-Food industries, the margins are pressured. The industry's average EBIT margin decreased from 3.3% in 2016 to 2.4% in 2019.

Average EBIT vs Net Sales CAGR % by product group

Dutch companies lead the way in term of investments, Polish companies on the rise

Between 2016 and 2019, investments in additional capacity were made across the European dairy sector. Dutch companies are leading the way as a result of the abolition of milk quotas: significant investments have been made to process the increased supply of milk. Furthermore, Polish companies are uniquely able to significantly increase the ratio of turnover to assets - the capital efficiency. In other areas, Polish dairies also performed above par with average net sales growth of 15.3% in 2016-2019 and increasing export figures.

TFA index vs Net sales index 2019 (index 2016 = 100)

Larger companies have more grip on the market, also in COVID year 2020

Larger companies are better equipped to maintain higher sales and margins than smaller players. The EBIT of the largest companies (>€500 million net sales) is consistently higher than the EBIT of smaller companies. On top of this, the very large companies performed significantly better in COVID year 2020, with modest growth in net sales (+1.6%) and an improved margin to 5.7% EBIT. This is a stark contrast to smaller companies that reported a revenue decline of -13.6% and EBIT of 1.9%.

The data points to clear economies of scale that create a reinforcing cycle for large dairy producers, such as a better ability to cope with milk price dynamics and having a stronger financial position to negotiate and invest. But there is a threshold: on average, real economies of scale seem to occur only above ~€500 million net sales.

Average EBIT vs Net Sales CAGR % by company size

European dairy industry is gearing up for the future

With an average solvency level of 37.6% in 2019, the dairy industry is financially healthy and ample investments are being made. Overall, the investment levels are in balance with the pace of the net sales growth and exceed depreciation, which indicates the industry is expanding its asset base in a controlled fashion - gearing up for the future.

Data proves that size is the way to go: it provides a grip on market dynamics and efficiency gains that help mute the cost increases that come from environmental regulations. With the remarkable growth of milk powder traders set apart, dairy-producing companies seem to be in the best position for future success in the internationalizing dairy industry. Achieving coordination to maintain a growth balance that creates value instead of an oversupply, seems to be the biggest challenge in the European dairy industry.

Read more about this and other developments in our trend report: "Drivers of performance: market analysis of European Dairy Industry". You can download the trendreport for free via the button below. 

Trendreport Dairy

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Mathieu Geuskens

Senior Analyst Food & Agri /