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Functionality driving European dairy expansion

Reduced European subsidies, increasing competition and declining profitability are driving dairies into the value-added milk market for growth opportunities, according to new findings by UK-based organic and natural products business research consultancy, Organic Monitor.

Dairy groups such as Denmark's Arla and the Dutch Campina have started an added-value milk drive partly as a result of the reduction in EU subsidies, while Finnish dairy Valio and Germany's biggest dairy, Nordmilch, have formed an alliance to develop 'special products' such as functional milks and probiotics.

In Britain, functional and flavoured milks are the fastest-growing segment in the dairy industry, and have been a major factor in boosting all milk sales for the first time in about 30 years.

Organic Monitor noted sales of value-added milk expanded by 39 per cent in 2005, and this sector now comprises more than six per cent of drinking-milk sales in the UK. High growth rates are projected to raise the market share to more than 10 per cent in coming years, with British dairies investing in value-added milk products as they shift away from commodity offerings. Food giants such as Nestlé and Unilever are being enticed into the market by growth potential and low barriers to market entry. "Major multinationals are moving into the sector as well. You only have to look at the way Unilever has expanded their cholesterol-lowering offerings with Flora pro.activ so they now offer it in a one-litre carton you buy as you would regular milk for the fridge," Organic Monitor director Amarjit Sahota told FF&N.

"Functional milk is somewhat of an unknown quantity but dairies and other food companies see it as a platform for functional experimentation that could take off and yield significant profits. The R&D investment in functional dairy is vast right now and the fruit of that is beginning to appear on the market."

Organic milk and functional milk segments are growing the fastest, with products such as Dairy Crest's St Ivel Advance recording buoyant sales. Fortified with marine-sourced omega-3 fatty acids, Advance is marketed as 'clever milk' and promotes its ability to assist learning and concentration. Similar product launches are expected to drive growth in the functional milk market.

"Flora pro.activ in the one-litre format and St Ivel Advance is taking up the middle ground between traditional and functional milk," Sahota observed.

The organic milk market is showing even stronger growth, with many retailers reporting 50 per cent sales increases in 2005. The market has been boosted by studies highlighting organic milk's nutritional superiority over regular milk, including higher levels of vitamin E, omega acids and conjugated linoleic acid. The surge in demand has led to local organic milk supply shortages after years of oversupply with imports increasingly meeting the shortfall. Sahota noted countries such as Germany, Portugal, Denmark, France and Sweden mirrored the UK organic dairy situation where demand surges have led to undersupply, except in Denmark "whose organic milk supply is vast."

"Between 1999 and 2006, the market has gone full circle," he said.

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