Big names, local producers battle for hot creamy market - Future of Polish yogurt industry is at stake
The recent tango between yogurt giants Danone and Bakoma is shaping up to be more than just the normal twists and turns seen in a potential merger.
The evolving courtship between the two Danone earlier this month stated its desire to increase its stake to more than 50% of the tightly held Polish yogurt maker will determine the future of the domestic yogurt industry itself.
Ten years ago in Poland, the closest thing to yogurt was the aluminum-foil covered glass bottles of sour milk (known as kefir), which was the sauce-of-choice on pierogi ruskie in milk bars or workers' main thirst quencher on a hot summer day.
"The market is developing very fast, Poles started eating processed (dairy products) three to four years ago and they got to like them very quickly," said Piotr Nurowski, marketing director at Dutch yogurt maker Campina.
Danone's recent upping of its stake in Bakoma to 35% and its desire to have an even greater influence over the company is testimony to how quickly and successfully the yogurt phenomenon has grabbed hold of the hearts and stomachs of Poland's populace.
At stake ultimately is not just who is going to control Bakoma, but who will reign over the yogurt segment in Poland.
With consumption expected to triple by 2005, this country has fast made itself one of the prime markets in Europe.
"The market is growing at about 20% a year," said Pawel Malyska, an analyst with BGZ brokerage house in Warsaw. "That' s fantastic, but it can be even better."
Literally hundreds of domestic competitors still control almost one quarter of the market despite the host of international competitors who have also joined the fray in recent years. They all, however, are up against France's Danone and Poland's Bakoma, which are the giants.
Germany's Zott, France's Yoplait and the Netherlands' Campina, are using all their marketing savvy to cement their own spot on the market. The added competition has local Polish dairy producers trying to buff up their own image and production standards to hold onto their home turf.
With total industry sales in 1998 reaching zl. 600 million ($171.43 million), and per capita consumption up by 40% over the 1997 level, yogurt has also gotten hold of the Polish household budget as well. Consumption is currently at the level of Argentina or Australia, according to the Foreign Agricultural Markets Monitoring Unit in the Foundation of Assistance Programs for Agriculture (FAMMU/FAPA). But market watchers and producers think that within a few years consumption will skyrocket to the enormous levels of yogurt swallowed in Germany and some of the Scandinavian countries.
"Clearly Poland is a market of great interest to every producer," said Kuba Mietelski, country manager for Dutch yogurt producer Campina, which has about 5% market share. "That's why we decided to (come) here a few years (ago). Everybody, all the biggest European market players want to be on the Polish market."
Despite the explosion in consumption, the battle for market share is not an easy one. Growth among individual companies depends not only on consumer consumption, but also on how much competition there is on the market.
That competition has sharpened in recent years, with Danone increasingly moving into this market, Bakoma solidifying its position and now Germany's Zott cleaning up with the hit of its brand, Jogobella. While calculating market share is less than scientific given the number of products and the importance of small local players, a rough breakdown shows Danone in the lead with 23-31%, followed by Bakoma with 22%-28% and Zott with 21-28%.
Where the calculations get fuzzy is what share the mass of local dairy cooperatives command. According to BGZ's Malyska, that ranges from 20-25% of the market. Those local producers give bigger international players such as Campina a run for their money nationwide. While on an individual basis local dairies are quite small, taken en masse they pose a formidable threat to even global food companies.
"They have very low prices and you have to remember there is very good local brand loyalty. It's a bit of a tradition and day-by-day usage," said Campina's Mietelski. "They still play a strong role. There are some that are so strong on a local level that no one has a chance to battle with them."
With national accounts such as hypermarkets accounting for only 20% of total sales and the remainder coming from neighborhood shops, the battlefront is very much on the local level.
Too little, too late
Last year showed all producers how fast the rules of the game can change on this nascent yogurt market.
What really shook the foundations of both local dairy cooperatives and some international companies was not the battle on the regional or local level, but how fast a new player can roll over a large chunk of the market. Benefiting from low 7% tariffs on yogurt imports from the European Union (EU), Zott's market share in 1998 jumped to 21% from a mere 9% the year before, BGZ's Malyska said. "Zott was the hit of the year," he said. The rapid domination not only caught yogurt producers by surprise, but the government as well.
Largely in response to pressure by Danone, Bakoma and dairy cooperatives, last April the government hiked duties from 7% to 35% on yogurts with 3% fat content.
"The majority of Polish producers considered it a scandal that the government allowed such large imports to dominate domestic sales," Malyska said.
But the impact of the hikes was short lived as importers started getting around the tariffs by lowering the fat content by 0.2% and importing at the former lower tariff schedules. Despite pressure by European trade partners to bring tariffs back down, the government set tariffs at 29% for all yogurt imports.
While players here deemed the government's move a step in the right direction, it came too late for many. Not only has Zott maintained its dominant position, it has since purchased an Opole-based dairy cooperative and yogurt producer and launched domestic production, thus reducing its exposure to the steep tariffs.
In addition to tariff hikes, another outcome of Zott's explosive entrance may very well be the merger between Bakoma and Danone, observers said. "Maybe this was the result of Zott' s investment," said Piotr Dabrowski, project manager at the Polish Agency for Foreign Investment (PAIZ) "Instead of fighting in certain areas, perhaps it is better to merge."
Bakoma's dominant position on the market is the story of a meteoric rise of a family business. Starting out 10 years ago in the frozen-fruit business, the family launched its yogurt operations with the assistance of German producer Onken a mere seven years ago. With the Komorowski family at the helm, in that short period of time Bakoma watched its sales rise to zl. 267 million ($76.29 million) in 1998, a 36% increase from the year before. Net profit for 1998 stood at zl. 30.3 million ($8.66 million), up 17% from the previous year.
The company, which is traded on the Warsaw Stock Exchange (WSE), had a market capitalization of zl. 515 million ($129 million) at its closing price of zl. 51.50 last Thursday.
Despite Bakoma' s surge to center stage, it is still a tightly held family business. According to a Sept. 13 filing with the Securities and Exchange Commission (KPWiG), four members of the Komorowski family possess 78% of the voting rights.
"Bakoma is an outstandingly family business," said Maria Morawska, an analyst at Bank Slaski.
Even with the advent of the Bakoma-Danone partnership, the Komorowskis have even kept Danone, the name the world equates with yogurt, at bay. While the company has a 35% stake in Bakoma, it only has 12.8% of the voting rights. The family showed little interest in changing that relationship even after Danone announced its desire to up its stake in Bakoma to 52.4%.
With or without Danone, Bakoma like the rest of Polish producers will now have to build up their defenses against Zott. "Our market is developing very rapidly," Malyska said. "The most optimistic (scenarios) foresee consumption doubling or tripling in a couple years time. A lot of things can happen along the way, but I'm an optimist."
