Almarai prospers on diet of dairy

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At what is claimed to be the world’s largest integrated dairy company, young men in white overalls hose down parlours while black-and-white Holstein cows stand patiently as milk is sucked from their udders.

It is a process that is repeated almost non-stop throughout the day. Almarai churns out 674m litres of milk a year from a herd of some 55,000 cows that are spread across six farms and milked four times a day.

The setting could not be further removed from the landscape of rolling green fields normally associated with dairy farming. These farms are in the midst of sprawling desert in the heart of Saudi Arabia. Outside temperatures can exceed 50°C in the summer and, rather than lush grass, the cows lie on sand.

By means of high-tech equipment and a farming system modelled on dairy producers in California and Arizona – which includes mist coolers for the cows – Almarai has evolved into one of Saudi Arabia’s best known non-oil brands.

It has averaged a 28 per cent compound annual growth over the past five years. While many companies in the region have delayed projects and expansion plans as they feel the pinch of the global economic crisis, Almarai intends to invest SR6bn ($1.6bn) on expansion and development in the next five years.

It is also plans to move beyond its home market in the Gulf by forming a joint venture with PepsiCo that will set up entities to produce and sell dairy products and fruit juice in Africa, the Middle East and Asia.

PepsiCo will hold a 52 per cent stake, Almarai 48 per cent, and the two companies will look to build the business through a combination of greenfield projects and acquisitions, says Georges Schorderet, chief financial officer at Almarai.

“I still believe there is substantial growth in our existing market in the next two to three years. But if we want to secure long-term growth we need to expand outside the GCC [Gulf Co-operation Council] into new categories,” he says.

“We have the know-how and technology we can utilise in other countries – capitalising on our key strengths. We are not going with a junior partner. PepsiCo is one of the leading food companies in the world.”

Almarai’s target is to double turnover and profit by 2013, he says, and the company has been seeking acquisitions.

In addition to the dairy farms, it manages production, packaging and a vast distribution network that delivers food and fresh dairy products (including yoghurt, cheeses, pastries and fruit juices) to 42,000 retailers throughout the six Gulf Arab states daily.

Almarai recently bought a 75 per cent stake in Teeba, a Jordanian food and dairy company, and is in talks to acquire Beyti, an Egyptian dairy company, and Hail Agriculture Development Company, a Saudi poultry and animal feed company.

Two years ago it acquired a bakery, and last month the company announced plans to invest SR650m to launch a baby food division, which it expects to be fully operational by 2011.

“We used to be a dairy company, but we’ve become a food company,” Mr Schorderet says. “European companies worry about increasing growth from 2 to 3 per cent or cutting jobs, but our challenge here is to cope with double-digit growth and find the right 2,000 people to support our growth.’’

But the pace of expansion has caused some investors to question if the ambitious company is spreading itself too thin.

“The deal with PepsiCo looks good on paper, since the company may expand geographically and diversify into non-carbonated juices,’’ says Laurent-Patrick Gally, an analyst with Shuaa Capital.

“Some investors are worried but we judge by results. Most risks are 18 months off or so, but we have not seen signs of an earnings miss so far.”

Mr Schorderet says aggressive expansion has enabled the company to double its turnover twice in the past decade and the financing has been arranged for a five-year plan.

Almarai’s net income increased by 36 per cent to SR910.3m in 2008, and it reported net income of SR197.4m in the first quarter of this year, a 22 per cent increase on the same period last year.

Analysts attributed the group’s growth to increased market share, which stands at 46 per cent of the juice and dairy market in the GCC region, according to Almarai.

It also benefits from the kingdom’s cheap energy costs and its subsidies for livestock feed. In spite of the economic slowdown in the region, officials say Almarai’s sales grew 18.5 per cent during the first quarter.

The company was set up by Prince Sultan bin Mohammed bin Saud Al Kabeer in the late 1970s during the first oil boom, when the government began a drive to make the country, which is bereft of rivers and lakes, self-sufficient in certain crucial foods.

Some analysts question whether large-scale farming is sustainable in the kingdom given its finite water resources. The government last year announced it would be phasing out wheat production by 2016 to protect the little water that is left.

But Mr Schorderet says dairy farming is different because “you cannot import fresh milk from a distance”.

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