June 10, 2011

 

Japanese dairy makers face strong competitors

 

 

Key Japanese dairy product makers are dipping their toes into the Asian market but experiencing a fierce battle against bigger European and US competitors, together with rapidly growing local producers.

 

An executive with Meiji Holdings Co. (2269) said the company is finally ready to make inroads in Asia. Japan's top dairy product firm announced in late April that it will make and sell chilled milk and yogurt in China. On May 19, it said it will boost capacity at its joint venture in Thailand.

 

Meiji plans to invest about JPY8 billion (US$99.9 million) in the two projects. In China, a wholly owned subsidiary will take charge of the entire production process from procurement of ingredients to quality control. Meji estimates its capacity in China will reach about 24,000kl, equal to that of its main domestic plants. Meiji intends to double its production capacity for milk and chilled beverages in Thailand to 200,000kl a year in five years' time and expand its sales channels to neighbouring countries.

 

To achieve its goal of tripling overseas sales to JPY150 billion (US$1.87 billion) annually over the next 10 years, expanding in Asia is a top priority for Meiji.

 

Megmilk Snow Brand Co. (2270), the third-largest dairy maker in Japan, aims to double its overseas sales to JPY10 billion (US$124.8 million) within several years. It will boost production at a baby formula plant in Australia and expand sales in China and Thailand. It is also considering exporting cheese products to Asia or making them locally. Number two producer Morinaga Milk Industry Co. (2264) started to conduct market research and scout for new businesses in China.

 

The Japanese makers hope to expand their Asian operations to make up for shrinking business at home. The domestic market for their mainstay milk products has been contracting by 3-5% every year over the past decade. But some industry officials say the Japanese firms were slow off the mark in Asia.

 

They began making and selling baby formula and other products in the region in the 1980s and '90s. Their brands are respected in the baby formula market, and their products sold strongly after a Chinese dairy firm was found to have spiked its powdered milk with melamine, a toxic industrial chemical, three years ago. But the Japanese companies sell only products with long shelf lives, and they failed to lay the groundwork to profit from wide product lines.

 

Other food processors are more successful. Ajinomoto Co. (2802) sells its products in about 130 countries and regions. Kikkoman Corp. (2801) makes around 40% of its sales outside Japan. In contrast, overseas sales account for only 1-5% of the total for the three dairy makers. Their strategies and earnings look weaker than those of brewers, which have been buying up foreign rivals.

 

European food giants Nestle SA and Danone SA were the first to sell milk drinks and yogurt in Asia. In recent years, Asia's home-grown dairy firms have grown stronger as well. Hangzhou Wahaha Group Co. and others are expanding rapidly. Rumours are swirling that they may launch buyout bids for their Japanese competitors.

 

The Japanese dairy makers need to capitalise on their quality control advantage and high value-added products to compete with foreign rivals, which have the upper hand in terms of cost and sales channels. Meiji often sends people from Japan to its Chinese plant to inspect products, and to suppliers to monitor quality and ensure traceability of ingredients. It aims to promote its high product quality to attract wealthy and middle-class consumers in urban areas who are concerned about food safety.

 

Markets in Asia will test Japanese dairy makers' ability to catch their foreign rivals.

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