This article first appeared in The Edge Malaysia Weekly on October 21, 2019 - October 27, 2019

DUTCH Lady Milk Industries Bhd (Dutch Lady Malaysia), whose share price has fallen 6% so far in 2019, warns that its profits could take a hit in its financial year ending Dec 31, 2019 (FY2019) because of rising raw milk prices and a weaker ringgit against the US dollar.

“This year is going to be tougher in terms of profitability on rising raw milk prices and fluctuation in foreign exchange (forex) rates. However, the biggest yardstick for us now is that we are able to drive more volume,” says Dutch Lady Malaysia managing director Tarang Gupta.

The 42-year-old Tarang, who took the helm of the country’s largest dairy company in January last year, believes it needs to invest more in product innovations to drive sales volume. This formula would mean sacrificing short-term profit for long-term gain.

“Dutch Lady Malaysia has not been innovating for a very long time. This year alone, we saw seven new product innovations. We are going to focus on growing these innovations and identifying opportunities where we can grow,” he tells The Edge in an interview.

“If we continue to do the right thing, the business will follow. Today, when consumers open a pack of Dutch Lady milk, they know what they are getting. As a brand, we will always stick with providing high quality and nutritious milk products,” he says.

In the first half of FY2019, the group’s net profit dropped 21.3% year on year to RM51.09 million while revenue fell 2.3% y-o-y to RM508.59 million owing to higher raw material prices and forex woes.

While the group’s sales volume rose 2% y-o-y in 1HFY2019, margins suffered due to product mix changes as consumers shifted from higher-value milk powder to lower-value liquid milk.

However, this downside is partly due to the group’s pricing strategy to make milk affordable and drive penetration for long-term growth by increasing consumption.

Tarang points out that the country’s milk consumption of 0.3 litre per week (about two glasses) pales in comparison with the government’s recommendation of one to two glasses per day.

“The [household] penetration [rate of milk] is only 35% to 36%. So there is a huge opportunity for growth here. And that was the whole plan that we made last year, that is, driving penetration of milk via innovations to capture multiple occasions. To do this, it has to come with the right pack at the right price,” he adds.

Citing Dutch Lady +Protein as an example, Tarang says the product was introduced to strengthen its premium-brand proposition. It also introduced Rakyat packs, sold at RM1 each and targeting the bottom 40% of income earners.

“We have also moved towards introducing healthy beverages. Currently, milk is predominantly consumed in the morning but there are many more occasions when people can drink milk. During my previous interview (in November last year), I have said that we want to start driving [milk consumption for] multiple occasions. Dutch Lady Juicy Milk is one of them. It has the flavour of juice, but with milk. This product is for afternoon and evening moments,” says Tarang.

Other examples are Dutch Lady’s Ros Bandung and Kurma-flavoured milk. The company introduced the two products during the Ramadan season. “The products drove our market penetration during the period significantly,” he notes.

“Of course, as a businessman, I would like to make more money. But if I see that making that money comes at the cost of consumers drinking less milk or diluting the quality of the product, that is not our strategy because our long-term purpose is to drive more nutrition. As such, we are looking at efficiency to improve our profitability.

“We are confident to continue driving the growth in volume. The more we are able to get more and more households to consume milk, our performance in the medium to long term is going to be better rather than just looking at the short term,” he says.

Dutch Lady Malaysia’s finance director Jurian Duijvestijn also attributes the weak 1HFY2019 revenue to the softening of the infant and toddler formula market category.

“We saw an 8% to 9% decline in the category and there are a few reasons for this. One is that the number of babies born in Malaysia is slightly decreasing. Second, the government is encouraging breastfeeding as breast milk is the best nutrition for babies. Thirdly, we are seeing mothers exiting the category and moving [their babies] on to solid foods sooner,” he explains.

Duijvestijn also expects the reintroduction of the sales and service tax in September last year to impact the group’s bottom line this year.

“There is only so much that we can pass on [additional costs] to consumers. We are trying to mitigate the impact through efficiencies,” he adds.

Tarang concurs, noting that consumers are growing more cautious about their spending.

“We do see consumers exiting the infant formula market category. Our responsibility is to hold the consumers in that category and bring them to the liquid milk market category. This is where we ask ourselves, ‘Can we create other alternatives so that consumers will continue to stay with us?’ We don’t want mothers to start moving into products that are not healthy.

“Another thing we observe in the infant formula market category is that consumers do trade down from premium products to mainstream, which is where Dutch Lady is in,” says Tarang. In the infant and toddler formula market category, the group has introduced Dutch Lady Milk Powder that retails at a more affordable RM15.90 per pack.

Fresh from investing in a new line to produce 1-litre UHT milk at its Petaling Jaya plant in Selangor, Tarang says the company has no plans to further expand capacity for now. “Our investments are going to be more towards how do we see innovation for the future.”

Dutch Lady Malaysia, a 50.97%-owned subsidiary of FrieslandCampina BV, has a 25% share of the overall dairy market. As at June 30, 2019, the company’s cash and bank balances amounted to RM30.2 million. It has no borrowings, except for a RM15 million bank overdraft.

Shares in Dutch Lady Malaysia closed at RM58.60 on Thursday, translating into a market capitalisation of RM3.7 billion.

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