Dairies: Land of milk and money

Le­banon’s grow­ing dairy in­dus­try faces some teething trou­bles

Executive Magazine - - Contents - By Paul Cochrane

De­mand for dairy prod­ucts, milk es­pe­cially, is surg­ing across the world as a re­sult of changes in global di­ets and the mar­ket­ing of its pur­ported health benefits. Global turnover was fore­cast to reach $335 bil­lion in 2014, based on 5 per­cent an­nual growth, driven by de­mand in Asia and par­tic­u­larly China, which is slated to over­take the United States as the largest dairy mar­ket by 2017, ac­cord­ing to fig­ures from mar­ket in­tel­li­gence provider Euromon­i­tor.

When it comes to such a health sen­si­tive prod­uct, this ram­pant growth has had its com­pli­ca­tions, es­pe­cially in re­la­tion to en­sur­ing hy­giene stan­dards, and to the ques­tion­able use of ad­di­tives, preser­va­tives and for­mu­las to meet bur­geon­ing de­mand and to spur on prof­its. Rocked by do­mes­tic dairy scan­dals, China has been lim­it­ing the amount of for­eign pow­dered milk for­mula al­lowed into the coun­try.

While the Le­banese dairy sec­tor is in no way com­pa­ra­ble in size or con­sumer be­hav­ior to China, there are par­al­lels. The lo­cal dairy sec­tor has grown and di­ver­si­fied over the past decade. For­eign and in­sti­tu­tional in­vestors have en­tered the mar­ket, brand­ing and ad­ver­tis­ing has bal­looned, and com­pe­ti­tion is now cut­throat. In­gre­di­ent and hy­giene scan­dals have also erupted, in part due to com­pany malfea­sance, un­der­hand com­pe­ti­tion and gov­ern­ment ac­tion, as well as in­ac­tion.

CREAM OF THE CROP

The reg­u­lated sec­tor is dom­i­nated by the ‘Big Four’ dairies. Taanayel Les Fer­mes leads with al­most half of the li­censed mar­ket and Khoury Dairy is sec­ond, fol­lowed by Can­dia (Liban­lait) and Dairi­day, ac­cord­ing to Blominvest Bank data. Then come the medium sized brands with seven digit rev­enues peak­ing at $10 mil­lion, such as Cen­ter Jdita, Hawa Dairy, Mass­abki and Laqlouq. There are also the small scale brands and non branded prod­ucts, which ac­count for an es­ti­mated 40 per­cent of over­all dairy pro­duc­tion, reg­u­lated and un­reg­u­lated.

Lab­neh, la­ban and cheese (hal­loumi fol­lowed by akkawi and dou­ble crème) still dom­i­nate lo­cal pro­duc­tion and sales, but fresh and long life (UHT) milk are grad­u­ally re­plac­ing pow­dered va­ri­eties. Sales are up by 10 per­cent per an­num for the past two years, and more dairies are of­fer­ing fresh milk and UHT, with Cen­ter Jdita soon to re­lease its own lines.

Fla­vored yo­gurt, pro­bi­otics and ice cream are also grow­ing niches, while goat dairy pro­duc­tion is in­creas­ing (see box). Such growth is be­ing driven by heavy mar­ket­ing and brand­ing, as well as changes in con­sumer tastes. “The pop­u­la­tion is in­creas­ing and the con­sump­tion of milk is up as many Le­banese have trav­eled to the US or Europe, and come back with be­hav­ior learned there. That’s why there’s change,” says Mazen Khoury, pro­duc­tion manager at Khoury Dairy. “Ten years ago you didn’t see peo­ple drink cold milk — al­ways hot — but now you see it in the fridge, like in the US.”

While still a small mar­ket, per capita con­sump­tion of dairy prod­ucts is on the rise, says Khoury, but com­pe­ti­tion is tough. It is telling that Saudi Ara­bian dairy gi­ant Al­marai tried to en­ter the mar­ket over the past year, but aban­doned its at­tempt due to low sales.

In­sti­tu­tional in­vest­ment has heated up the com­pe­ti­tion, push­ing brand­ing and the need for re­turns. While Khoury Dairy is still a fam­i­lyrun busi­ness, Taanayel Les Fer­mes has Kuwaiti in­vestors, Dairi­day (Le­vant Bev­er­age & Dairy In­dus­tries) has in­vest­ment from Na­jib Miqati, and Bank Audi has in­vested in Liban­lait.

The ‘Big Four’, how­ever, are putting the squeeze on the medium sized dairies, which lack the means for ad­ver­tis­ing cam­paigns and to buy shelf space at su­per­mar­kets. “We fight the com­pe­ti­tion with our qual­ity, but I’m not sure how long we can con­tinue like this as we can’t pay like the com­peti­tors. There’s not much lo­cal com­pe­ti­tion over qual­ity, it is fight­ing with cap­i­tal,” says Wakim El Hawa, Gen­eral Manager of Hawa Dairy, which pro­duces some six tons per day and has an an­nual turnover of about $2 mil­lion.

LACK OF REG­U­LA­TION

One of the key prob­lems, re­ported again and again by li­censed pro­duc­ers, is that the sec­tor lacks over­sight and reg­u­la­tion. In­deed, nei­ther the size of the sec­tor, nor its pro­duc­tion size, num­ber of op­er­a­tors or even its true value, are known, with cur­rent an­nual turnover es­ti­mated con­ser­va­tively to be about $200 mil­lion, although some es­ti­mate it to be as high as $500 mil­lion in­clud­ing im­ports.

“In terms of over­all pro­duc­tion, we don’t know, as a good pro­por­tion of the sec­tor is small scale, which doesn’t reach the su­per­mar­kets,” says Shadi Ha­madeh, chair of an­i­mal and ve­teri­nary sciences at the Amer­i­can Uni­ver­sity of Beirut (AUB). “So on the one side are big dairies, which are in­ten­sive and fo­cused on cows, and on the other side [are] a huge num­ber of small hold­ers, [us­ing] sheep and goats which are very much tra­di­tional agropas­toral [and] are ser­vic­ing vil­lages.”

While the com­mer­cial dairies came un­der fire for ad­di­tives and hy­giene stan­dards in early and late 2014 (see be­low), smaller dairies have not come un­der scru­tiny from the gov­ern­ment or the me­dia.

“There are a lot of small dairies with­out li­censes and dis­trib­u­tors. No reg­u­la­tions, no tax­a­tion and they can put pow­der or starch in [their dairy prod­ucts] as no one will go af­ter them. The gov­ern­ment only vis­its the sev­eral legal fac­to­ries and not the il­le­gal ones — it is a big prob­lem,” says Alexy Shdeed, CEO of Cen­ter Jdita, which pro­duces 20,000 tons of

SUCH GROWTH IS BE­ING DRIVEN BY HEAVY MAR­KET­ING AND BRAND­ING, AS WELL AS CHANGES IN CON­SUMER TASTES

dairy prod­ucts a year, with rev­enues of about $10 mil­lion.

His com­ments are echoed by Khoury Dairy. “Many fac­to­ries are with­out li­censes, but for us, the Min­istry of Agri­cul­ture vis­its two or three time a year, and the health min­istry checks reg­u­larly. It keeps up im­prove­ment in our fac­to­ries,” says Khoury.

SMALL SCALE, BIG CON­CERNS

While com­mer­cial dairies have im­proved qual­ity con­trols in re­cent years, ac­cord­ing to Ha­madeh, it is the un­reg­u­lated sec­tor that poses ma­jor con­cerns and is a fac­tor in driv­ing com­pe­ti­tion be­tween brands.

“There are no reg­u­la­tions when it comes to milk and dairy prod­ucts. You can buy milk from a per­son who has three or four cows be­hind his house and [who is] not reg­is­tered with any min­istry. Any­one can then pro­duce cheese and sell it to a su­per­mar­ket,” says Maya Mok­dad, an ex­ec­u­tive mem­ber of the Le­banese As­so­ci­a­tion for Food Safety, and a dairy sec­tor re­searcher at AUB.

In ru­ral ar­eas, brands are not com­mon and dairy prod­ucts are of­ten not la­beled by man­u­fac­tur­ers. “I don’t have a prob­lem with nat­u­rally made prod­ucts, as you can throw them away af­ter a day or two [due to lack of preser­va­tives], but at same time, you need to know who is accountable if there is, say, an out­break from a bad cheese,” she adds.

The lack of trace­abil­ity extends back to small scale sup­pli­ers, who typ­i­cally lack ac­cess to af­ford­able ve­teri­nary care and im­mu­niza­tion pro­grams. “Most don’t test the milk, and the cows are not sub­jected to vac­ci­na­tion pro­grams, which is a ma­jor prob­lem, as they may have a dis­ease, Mas­ti­tis, due to un­hy­gienic con­di­tions. It is very com­mon, ac­count­ing for around half of all cat­tle-re­lated dis­eases, ac­cord­ing to the agri­cul­ture min­istry’s most re­cent study some three years ago,” says Mok­dad.

This is of con­cern, as many dairies do not have their own herds and source from lo­cal farm­ers. How­ever, the Min­istry of Agri­cul­ture has worked to im­prove sourc­ing via milk col­lec­tion cen­ters, of which there are 40 in the Bekaa and Akkar re­gions — where nearly three quar­ters of dairy herds are lo­cated — col­lect­ing some 150 to 200 tons of milk per day from 3,000 farm­ers.

Mean­while, in Novem­ber, a tri­party com­mit­tee of the in­dus­try, econ­omy and agri­cul­ture min­istries was es­tab­lished to pre­vent the sale of dairy prod­ucts from un­li­censed sources and fac­to­ries. Whether the move will trans­late into bet­ter reg­u­la­tory over­sight of the sec­tor is an­other mat­ter how­ever, given the num­ber of peo­ple in­volved and their eco­nomic de­pen­dency on small scale pro­duc­tion, po­lit­i­cal affini­ties and the lack of in­spec­tors to cover the whole coun­try.

THE ‘SCAN­DALS’

The com­mit­tee was set up fol­low­ing Econ­omy Min­is­ter Alain Hakim’s an­nounce­ment in late Novem­ber that he would close the doors of sev­eral medium sized dairy firms for vi­o­lat­ing food safety stan­dards. The move came just a week af­ter the health min­istry shut down a num­ber of restau­rants and slaugh­ter­houses for al­leged hy­giene vi­o­la­tions.

Hakim told the press that “th­ese fac­to­ries com­mit­ted se­ri­ous, first de­gree vi­o­la­tions that di­rectly af­fect the health of cit­i­zens as shown by tests and analy­ses,” and would shut the fac­to­ries down “es­pe­cially af­ter the own­ers ig­nored warn­ings to rec­tify the con­di­tion of the fac­to­ries.”

One of the dairies named by Hakim said that they were “shocked” by the an­nounce­ment, as no in­spec­tors had vis­ited or given them a warn­ing, only find­ing out on TV what had hap­pened. “It is not true they will close the fac­tory, and the gov­ern­ment didn’t tell us the prob­lem or the re­sults. It’s a game of the big com­pa­nies to re­move us from the com­pe­ti­tion,” said a mem­ber of Hawa Dairy’s man­age­ment.

Cen­ter Jdita was also sin­gled out by the min­is­ter for its lab­neh, which,

“MOST DON’T TEST THE MILK, AND THE COWS ARE NOT SUB­JECTED TO VAC­CI­NA­TION PRO­GRAMS”

iron­i­cally, won a Prod­uct of the Year Award (voted by con­sumers) in March. Shdeed said none of the fac­to­ries had been closed, de­spite the min­is­ter’s state­ment, and his lab­neh had had 62 mil­ligrams of potas­sium sor­bate, above LIBNOR’s limit of 50 mil­ligrams per kilo­gram. He stopped pro­duc­tion of lab­neh for two days to ad­dress the is­sue.

The is­sue in Novem­ber pales in com­par­i­son to what hap­pened in March 2014, when TV pre­sen­ter Joe Maalouf in his LBCI show “7ki Jeliss” car­ried out lab tests on lab­neh in Switzer­land that showed traces of Natamycin in Khoury and Dairi­day lab­neh, and sor­bic acid in Mass­abki lab­neh. Natamycin is a food preser­va­tive used to pre­vent the growth of mold. In Europe it is con­fined to be­ing a sur­face preser­va­tive for cer­tain cheeses. In Khoury’s case, it was be­ing used in­side the lab­neh. Natamycin is ap­proved by the US Food and Drug Ad­min­is­tra­tion and is used in sev­eral coun­tries in­side dairy prod­ucts, although LIBNOR (the Le­banese Stan­dards In­sti­tu­tion, which is af­fil­i­ated to the in­dus­try min­istry) does not al­low its use.

“The in­ten­tion was not as claimed on TV, that it was danger­ous. We told LIBNOR, OK, maybe we used it and did not men­tion it in the in­gre­di­ents but we did noth­ing wrong for the health of con­sumers,” says Khoury. “We had a risk as­sess­ment done by AUB on Natamycin con­sump­tion and it is very safe.”

Fol­low­ing the show, Khoury re­moved Natamycin and the case has been closed by LIBNOR, but the ex­pose had a neg­a­tive im­pact on the dairy’s sales, drop­ping by 60 or 70 per­cent. Khoury Dairy then went on the of­fen­sive, invit­ing TV chan­nel MTV to visit its fa­cil­i­ties.

“We made a 90 per­cent re­cov­ery as peo­ple saw the tech­nol­ogy, the hy­giene and the pas­sion, and we got the trust back. [As of Oc­to­ber] we’ve re­cov­ered by 96–97 per­cent,” says Khoury. “In my opin­ion there’s no bad mar­ket­ing as maybe 1 mil­lion Le­banese had heard of us be­fore, now ev­ery­one has.”

Many of the dairy pro­duc­ers in­ter­viewed by Ex­ec­u­tive sym­pa­thized with Khoury Dairy, es­pe­cially when they con­sid­ered the un­der­hand com­pe­ti­tion it sup­pos­edly faces, with the LBCI show only run­ning ad­verts for a dairy not sin­gled out for Natamycin or sor­bic acids. Fur­ther­more, two pro­duc­ers who spoke with Ex­ec­u­tive al­leged that Can­dia (Liban­lait) uses heat treat­ment to make lab­neh, which is for­bid­den by law, and fur­ther­more re­moves all ben­e­fi­cial bac­te­ria, but has not been taken to task for this. Liban­lait did not re­spond to in­ter­view re­quests.

This in­ci­dent cer­tainly showed public con­cern about what is in food prod­ucts, de­spite Natamycin be­ing a com­mon preser­va­tive. “Since dairy is a huge mar­ket, con­sumers were scared as they didn’t un­der­stand it. If an­other is­sue of pathogens comes up, con­sumers will ask for greater clar­i­fi­ca­tion,” says Mok­dad.

While the brands will be kept on their toes to make sure qual­ity stan­dards are up to par, much more needs to be done to over­see the whole sec­tor in or­der not to crip­ple a bur­geon­ing eco­nomic seg­ment that is not overly af­fected by eco­nomic and po­lit­i­cal in­sta­bil­ity.

“Things won’t change un­less con­sumers are aware of food safety reg­u­la­tions, and the gov­ern­ment has to im­ple­ment such sys­tems. What is needed is not stan­dards to push dairies out of busi­ness, but [to] train them to be up to stan­dard, that is the chal­lenge for the whole sec­tor,” adds Mok­dad.

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