It hasn’t been so bad for Vinamilk, the undisputed heavyweight champion of the category, which accounts for half of the overall milk market. Formally known as Vietnam Dairy Products, Vinamilk has invested heavily in increasing its production this year, and now has a total of 120,000 dairy cows churning out more than 950 tonnes of raw fresh milk a day.
It is expected to increase this to 200,000 next year, with double productivity, in part thanks to the opening of Vietnam’s biggest dairy farm in March, at a cost of VND1.2tr (US$51.7m) in the southern province of Tay Ninh.
Covering 685 hectares, the new property is home to a herd of 8,000 cows, and provides 100,000 liters of fresh milk per day, equivalent to 40m liters annually. It has also opened the first of an anticipated four hi-tech dairy farms with high productivity expected from a paltry number of acres.
But other dairy producers aren’t so bullish, with IDP dairy among those seeing hopes of eating into Vinamilk’s share fade as it rakes up sizeable losses.
Having this month published its figures for the last financial year, the dairy producer recorded a loss of VND43.8bn (US$1.9m), to take its balance sheet to VND700bn (US$30.2m) in the red. According to VinaCapital, which owns 60% of the company, the value of its investment in IDP has dropped to US$25m, a sharp fall from US$35m three years ago.
Tran Bao Minh, IDP’s general director, says it has become extremely difficult to compete with market leaders like Vinamilk.
“The companies with powerful financial capability just need to spend 10% of their revenue to run marketing campaigns and the amount is equal to the annual revenue of small companies,” he said after announcing the results.
Another smaller dairy, Hanoi Milk, has not been suffering as badly as IDP, but it is still not assured of a sustainable future. The company finally made a modest profit of several hundred million dong in the first half of this year.
Ha Quang Tuan, Hanoi Milk’s chairman, says it has been struggling to compete with regular promotions by the likes of Vinamilk, and like IDP, does not have anywhere near the budget needed to make a dent through its marketing effort.
According to the Vietnam Milk Association, the revenue from the dairy sector reached VND109tr (US$4.7bn) in 2018, an increase of 9% over 2017. From 2010-2018, it saw an average growth rate of 12.7% per year.
Trade pact impact
Another big threat to dairy players looks like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade pact signed between 11 countries that Vietnam entered at the start of this year.
Under the CPTPP, dairy products from Japan, Singapore and New Zealand are now no longer subject to any import tariffs. This will translate to reduced prices for foreign brands from these sources, and as such increased competition for local brands.
Allowing access for these dairy majors is expected to drive up competition in Vietnam, especially at a time when an increasingly urban, affluent and health conscious population is looking for products that originate from these countries.
A report released by analyst Rong Viet Securities said the dairy market has been moving away from core Vietnamese products, whereby 70% of these are made from reconstituted milk, which has a nutritional value that is lower than fresh milk in terms of vitamins and minerals.
“[Consumers] now prefer high-quality, organic milk products as well as those from walnuts and macadamia nuts [and] demand for reconstituted milk has dropped,” said the report.
CPTPP’s signing has prompted a growing number of foreign companies to show interest in the Vietnamese dairy industry, a trend that is likely to be further buoyed by the CPTPP implementation.
Coca-Cola burst into the Vietnamese dairy end-product market with a new milk drink line earlier this year. The multinational unveiled three brand new Nutriboost UHT milk products as part of its strategic alliance with Fonterra in Southeast Asia that has been giving Vietnam’s smaller diary companies the willies.
New Zealand-based Fonterra has become one of the biggest dairy operators in Vietnam, holding a 57% share of the dairy foodservice market as of 2017. The company has been supplying dairy ingredients in the country for more than four decades, and operating a consumer brands business for two of these.
In the long term, the writers of the Rong Viet Securities report anticipate a positive long-term growth trend for the dairy industry, with per capita milk consumption expected to increase.
By starting off from a low level of 26 liters per person per year, compared to 35 liters in Thailand and 45 liters in Singapore, there is plenty of room for growth—and foreign companies know this, and want part of it.
Japan’s Asahi Group this year set up a joint venture with Vietnam’s Nutifood, which will focus on bringing in Japan-standard products for children. The venture is the first by Asahi to work with a foreign player in consumer products, indicating how importantly the Japanese food major sees Vietnam’s growing market. Though the products are initially being formulated by Nutifood, they are still being produced in Japan.
Other global dairy brands also entered Vietnam’s market many years ago, including Abbott, FrieslandCampina, Mead Johnson, Nestlé and some smaller milk brands. These have promoted investment in marketing, research and development of new products for the local market.
It is to be seen whether smaller domestic brands can keep their heads in the face of international competition and the strength of the local market leaders. They have a lot on their plates and hopefully, for them, they can keep up with the changing face of an unpredictable market.