Southeast Asian dairy in a churn

By Richard Whitehead

- Last updated on GMT

Analysts have identified several factors that explain why Southeast Asia has become a dairy growth outlier. Pic: ©Getty Images/szefei
Analysts have identified several factors that explain why Southeast Asia has become a dairy growth outlier. Pic: ©Getty Images/szefei

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Until very recently, Southeast Asia was a dairy wasteland. Supermarkets would all stock milk, cheese and yogurts, but in a fraction of the quantities one might expect to see in organized retail in other parts of the world, while food processors would look to other segments for their ingredients.

For many people, the word “milk​” would refer to nothing other than soya, almond or coconut. To suggest a cow was involved in its production would only draw smiles.

But now the region is seen by many analysts as among the most vital in the dairy world.

Compared to established dairy markets, consumption remains low in Southeast Asia, but its importance lies in the speed of its growth.

The region consumes less than 20kg of dairy per capita each year, compared to 300kg in developed markets such as Australia. But according to data from global agribusiness researcher Rabobank, consumption in Southeast Asia is expected to grow by 3% every year until 2020. Compared to minimal growth in Australia, and even falling consumption across Europe, the region is a dairy marketeer’s dream.

Southeast Asia is becoming the most important area for the trade of dairy products​,” as industry analyst CIAL put it in an end-of-year report for 2017.

Pace, not quantity

The Indonesian and Vietnamese markets are expected to see the fastest pace of growth, at 3.9% and 4.5% a year respectively. This is due to the lightning-fast development of their economies based on a young and fast-growing population.

Even though the Netherlands and France, the colonial powers that once governed these nations, had strong dairy traditions back at home, they were unable to instil a taste for milk products up until the time they retreated. As a result, growth in these countries has started from a low baseline.

Likewise, to the south in Malaysia, with its large ethnic Chinese—and associated lactose-intolerant—populations, there has been little tradition of incorporating dairy into regional cuisines, both home-cooked and processed.

As a more mature economy with a more Western outlook compared to its neighbors, however, Malaysia has witnessed demand growth chug along to the point it is being seen as one of the standout performers in liquid milk consumption.

Kuala Lumpur released figures last year that put this at nearly 20 per-capita liters a year. At the same time, former prime minister Najib Razak announced a strategy to promote more widespread dairy use, and a plan to ramp up domestic production with a target of producing 2.25bn liters of milk by 2050—though many believe this figure to be unobtainable.

Milk demand is on the rise too in Singapore, which saw a 12% increase in consumption from 2011-16, though curiously some studies have found that half of the republic’s population do not drink at all. This means the other half of residents guzzle large quantities of milk to bring about Southeast Asia’s highest average consumption, at over 60 liters per year, according to Euromonitor data.

Thailand has been active in promoting dairy use for decades, and has targeted milk drinkers from a young age. In 1992, Bangkok authorities launched their first initiative to encourage the consumption of milk in schools, and Thailand now has one of the most advanced dairy industries in the region.

It now produces some 45% of the dairy consumed in the country, compared to an estimated collective 3% by other Southeast Asia countries, except for Indonesia and Vietnam, which register at 20% each, according to Rabobank. The Philippines depends on imports for all but 1% of its consumption.

The Food and Agriculture Organisation of the United Nations has been particularly impressed with Thailand’s progress: its data suggests its school milk program helped per-capita consumption increase more than elevenfold by 2002, to 23 liters a year. The FAO also credits the scheme for helping push down rates of child malnutrition from 18% when it began to under 5% in 2006.

US dairy licks its lips

"Southeast Asia is probably one of the most dynamic dairy markets in the world​," said Dalilah Ghazalay, regional director of the US Dairy Export Council’s Southeast Asia office.

"This region does not produce much milk and needs imports​,” Ghazalay said of America’s second biggest export market, after Mexico.

In value terms, suppliers sent shipments worth over US$690m of milk powder, cheese, butterfat, whey and lactose to Southeast Asia in 2017, up 3% on the previous year, according to an analysis of US Department of Agriculture year-end data. At the same time, cheese exports to the region grew by 6,000 tons last year, an increase of 52% over 2016.

Analysts have identified several factors that explain why Southeast Asia has become a dairy growth outlier, including the region’s impressive economies, booming populations, and thriving food industry. These come in addition to increasingly westernized foodservice industries and a trend towards healthier lifestyles.

Growth drivers

The International Monetary Fund projects strong and steady growth of 5-6% annually up to 2019 for the so-called Asean-6 most economically important Southeast Asian nations, with low or declining unemployment rates. This figure will actually be higher, however, once their less developed neighbors are factored in. As a result, economic conditions are fueling middle class expansion and dietary shifts.

At almost twice the population of America, Southeast Asia’s is vast and growing at roughly three times its pace. As many of these nations become more urbanized, lifestyles are becoming faster-paced with more time pressures and changing social habits that demand convenient foods containing increased dairy ingredients.

Sixty percent of the Vietnamese population is now under 35—a young and dynamic segment that is driving demand for new processed and fast-food products. At the other end of the scale, in highly urbanized and developed cities like Singapore which boast five-star hotels and upscale dining, there is a growing opportunity for high-end cheese, for example.

According to the US Dairy Export Council, the implementation of the Asean trading bloc, with a reduction in trade barriers coupled with rising demand, has proven extremely attractive to food and beverage firms.

To take advantage of this, USDEC says, local and multinational companies are investing in countries like Indonesia, Malaysia and Singapore to build capacity and product development capabilities to not only service national demand but to export to the broader region, and even to places like China, the Middle East and Africa. This has created a significant market for high-value dairy ingredients made to tight specifications.

Foodservice is becoming a factor in dairy consumption as Southeast Asian countries modernize in this regard. Although chain restaurant penetration varies by nation, as a whole the region is not nearly saturated. Vietnam got its first Starbucks five years ago, and McDonald’s two years later, and both outlets were an immediate hit. In a nation of 90m, that offers a lot of room for milk and cream for coffee and cheese for burgers.

Meanwhile, Southeast Asian consumers, often backed by government initiatives, have grown much more knowledgeable about dairy’s role in health and nutrition.

For example, Vietnam’s National Nutrition Program, which is set to run until 2020, encourages calcium consumption for bone strength, milk for infant health and overall dairy as part of a healthy diet to raise average height levels.

Trust in dairy is driving people to incorporate milk, cheese and other products containing dairy into their traditional diets. At the same time, functional foods are becoming more prevalent, especially in the more developed economies like Singapore, Malaysia and Thailand.

Still challenges

Now that many Southeast Asian supermarket shelves are stacked with row upon row of dairy items, the future looks bright for exporters, but there are still challenges. Export margins, for instance, have tightened significantly due to oversupply of imports and strong competition from local players

Supply chains—not the first thing one thinks of in developing nations that dominate the region—need to be improved, especially for shipments of products that don’t fare well in Southeast Asia’s heat and humidity unless treated carefully. Moreover, access to hinterland regions is often costly and time-consuming.

Analysts such as Rabobank recommend the wider establishment of partnership models with distributors that can deliver a prominent market entry and supply chain strategy.

This can help reduce costs, and assist in navigating the complex and inherent risks associated with regulation​,” it suggests, though cautions that “engaging a dedicated importer or distributor may require complimentary investment in marketing activities behind-borders.​”

And while companies are balancing the needs of local market opportunities, the volume growth and margins locally are well below those on offer in export markets.

The commercial reality for exporters is that a large portion of capacity will be dedicated to lower-margin and higher-volume business. As a result, careful selection of private label contacts and manufacturing customers is required to ensure appropriate levels of production are maintained without jeopardizing profitability.