Dairy Processors in Market Share Mayhem

the crunch is eventually coming

When Shoprite imported millions of litres of cheap long life milk from Poland, it put its biggest fresh milk supplier in a ditch. Now a bitter milk turf war has emerged and with no sign of ending soon

In Brief

  • This year Shoprite imported 46 million litres of cheap long life milk from Poland, causing hard times for many dairy businesses in Western Cape Province
  • An ongoing milk turf war pitting small dairy processors against Shoprite’s biggest fresh milk supplier has put the livelihoods of operators across the value chain at risk
  • For consumers benefiting from the price wars, the gains can only be short-term 

At the Oakland Dairy manufacturing plant in Philippi big steel machines hum from 4.00 AM and men, suited in white overalls, work deftly on the production line.

It’s here, 24kms from Cape Town CBD, that 100,000 litres of milk churns through the plant every day. Fresh farm milk is trucked in huge tankers to the factory where it is fed through a convoluted maze of pipes. In about 14 hours the milk is pasteurised, homogenised, packaged in sachets or bottles and whisked away by distributing partners.

The product ends up on the shelves of various outlets (catering to the lower end of the market), spazas, house shops, and hotels and restaurants across the province. CEO of Oakland, Jan van Niekerk, has spent R50 million so far to set up the sophisticated operation.

A former dairy farmer, Jan launched the processing business 12 years ago and was determined to dominate in the lower market segment. Through sheer hard work and forming strategic partnerships that have compartmentalised him to the processing operations, the business with a turnover of R170 million (2014) has weathered many storms to become a force in its turf. But things are no longer rosy for Jan – this year he was upbeat about improving on the company’s turnover by at least R30 million, however, this is now unlikely to happen.

The source of Jan’s downturn and wrath is Darling Romery (Pty) Ltd, one of the largest dairy processors in the province. Sometime this year Darling decided it wanted a chunk of the lower market segment and moved in, offering ridiculously low prices for its fresh milk branded Mr Milk, costing R.5.00 per litre. Unable to match the low prices, Oakland Milk is now smarting from the onslaught.

Oakland Dairy in Phillipi - the R50m investment faces serious risk

Jan’s business strategy has always been to produce high volumes and sell at low prices. But if he were to lower prices further, Oakland would fold. About Darling’s manoeuvre, he says; “The intention is to kill us. The low prices are clearly not sustainable, and now everyone in the value chain - farmers, processors, distributors and agents - is at risk.”

So, why is Darling desperate to diversify its focus market?

The answer, in two words, is Shoprite Checkers.

This year the retailer imported 46 million litres of cheap long life milk from Poland. And now a lot of businesses in the dairy industry are feeling the brunt of a totally man-made problem.

It’s difficult to tell a story about Shoprite Holdings without mentioning its billionaire chairman, Christo Wiese. In September this year, Weise was in the news rebuking government for introducing policies that curb economic growth. Well, he may have been right.

However, when Weise - South Africa’s richest man ($6.7b, R96.2b, Sept 2015) – admits scheming to hide funds from South African Revenue Service, we must hold the cheers and wonder if the pot is calling the kettle black. The scheme emerged in 2010 when Weise was caught at Heathrow Airport trying to smuggle £675,000 in cash into Luxemburg.

A more recent fiasco associated with Shoprite Holdings is the investigation by the National Credit Regulator into cases of reckless lending. The regulator found the Group’s associated companies to have been selling retrenchment and occupational disability insurance covers to pensioners and old age grant recipients.

Regardless of the above, Shoprite’s move to import millions of litres of long life milk is hurting the country’s economic growth and food security.

The narrative of the Polish milk is more than Wiese and Shoprite. Our inquiry on the irregular imports took us to the early days of the conflict in eastern Ukraine.

When the western nations (European, US, Australia and Canada) thought about imposing economic sanctions on Russia, it appears the fate of European food exports to that country might have been overlooked. In retaliation, Russia banned food imports from the west. Consequently, small-scale farmers in countries such as Poland, Finland and Norway suffered. Without a ready market, their agriculture sector was doomed despite the state subsidies enjoyed by the farmers. Enter Shoprite Holdings.

Full details of the deal that saw the retailer buying 46 million litres of Ultra-Heat Treated (UHT) milk branded Crystal Valley, are not available. For Shoprite to be able to sell one litre for R8.95, its buyers must have made a steal. The price may even drop should the need arise to clear the stock quickly. Did the retailer consider the implications for local milk producers? Seemingly not. The modus operandi is familiar, as can be testified by the pensioners now traumatised by debts – the result of reckless lending practices by the Group’s subsidiaries.

Darling Romery, which is the largest supplier of fresh milk to Shoprite Checkers in the Western Cape, was among the first victims of the Polish milk. With more consumers opting to buy the cheap imported UHT milk, we are informed Shoprite slashed volume and price of Darling’s fresh milk. The processor then set its sights on poor areas, where established players like Oakland are now on the defensive.

While fair competition is healthy and can benefit consumers, the worry is that Shoprite and Darling’s price wars can only bring short-term gains to consumers.

And as Sameer Parker, managing director of Dairy Mart - one of Oakland’s distribution partners - succinctly put it; the crunch will eventually come, because it is impossible for the industry heavy weights to sustain what they are doing.