In a year of volatility and global disruption due to COVID-19, the farmer owned European dairy cooperative Arla quickly reshaped the business to meet the spike in home consumption and high demand for trusted household dairy products while offsetting negative impacts in other sectors.
In 2020 Arla grew global branded sales volumes with 7.7 percent due to the cooperative's global portfolio of popular brands such as Arla® and Lurpak® and strong market positions. Despite revenue losses in Food Service and Global Industry Sales, total group revenue was EUR 10.6 billion (compared to EUR 10.5 billion in 2019.)
Due to the strong financial position, Arla’s Board of Directors has proposed to the Board of Representa-tives to pay out 1.75 eurocent per kg milk for the supplementary payment which is 0.75 eurocent higher than the standard 1.00 eurocent per kg milk.
Arla’s pre-paid milk price to farmer owners was kept relatively stable compared to the volatility seen across the dairy industry. However, 2020 was a challenging year for many Arla farmers due to tough cost environments and added complexities on farms.
Arla’s performance price - which measures the value Arla creates per kilogram of owner milk - was 36.9 eurocent in 2020 compared to 36.6 eurocent in 2019.
“The Arla pre-paid milk price to our farmer owners has been kept at a competitive and relatively stable level throughout 2020 compared to our peers, and the Board of Directors is very pleased to be able to also propose a higher supplementary payment to the Board of Representatives due to our cooperative’s 2020 results. That said, we fully recognise that farmers are facing increasing production costs and additional requirements. This is a challenge across Europe that needs to be met by actions across the dairy industry and its wider stakeholder group,” says Arla Foods Chairman Jan Toft Nørgaard.
In-home consumption drove demand
As consumers were forced to stay home for much of the year, the number of family meal occasions increased significantly, and many consumers turned to cooking and baking. This boosted sales of Arla’s global brands Lurpak®, Arla® and Puck® that delivered strategic branded volume growth of 14.6 per cent, 3.0 per cent and 11.7 per cent respectively.
“This is without doubt the most challenging crisis Arla has ever operated within. Due to the cooperatives agility, we were able to reshape our business and redirect large milk volumes almost overnight to meet the increased demand for our quality household dairy products, while minimizing the negative impact from other market sectors such as foodservice.
"Thanks to our farmer owners and our employees we have been able to play our part in maintaining food supply and I am extremely proud that we have been able to provide safe working conditions for our people, of the service levels we have provided to our customers and of the results we have delivered,” says Arla Foods CEO Peder Tuborgh.
The significant increase in retail offset the overall declines in Arla’s foodservice and global industry sales business. Foodservice sales saw an initial drop of 45 per cent in the Spring of 2020, then quickly regained momentum over the summertime, weathering the second and third waves of COVID-19 with further shutdowns of workplaces and across the hospitality sector. Arla’s branded foodservice business in Europe was overall 12 per cent down from 2019.
Growth in commercial segments
Arla focuses its activities on four commercial segments. Despite global logistics and supply chain challenges due to COVID-19, both the Europe and International segments strengthened the quality of business, gained market positions and grew core brands due to retail demand and e-commerce sales in 2020.
Arla Europe represents 60 per cent of the business and delivered overall branded volume driven growth of 5.9 per cent driven mainly by Lurpak®, Arla® and Starbucks® and with highest branded growth in the UK, Germany and the Netherlands. Overall Europe revenue increased to EUR 6,413 million compared to EUR 6,353 million in 2019.
Arla International represents 19 per cent of the business and delivered branded volume driven growth of 11.6 per cent driven mainly by Lurpak®, Puck® and Starbucks®. Particularly the MENA region delivered branded volume driven growth of 20.1 per cent. Overall revenue increased to EUR 1,975 million compared to EUR1,802 million last year.
Arla Foods Ingredients (AFI) a 100 per cent owned subsidiary of Arla, increased the value-add ingredient business driven by growth in the Pediatrics and Medical Nutrition segments. The food segment and Child Nutrition Manufacturing business delivered slightly below 2019 levels due to COVID-19 impact and delays. Overall AFI revenue increased to EUR 716 million compared to EUR 710 million in 2019.
As a result of increased sales in retail, Global Industry Sales, (formerly Trading), which is business-to-business commodity sales, experienced weakened prices along with a decrease in the overall share of milk sold by 2.3 percentage points compared to 2019. Revenue therefore decreased to EUR 1,541 million from EUR 1,662 million.
Transforming the business despite crisis
Arla’s transformation and efficiencies programme Calcium secured savings of EUR 130 million, primarily from supply chain efficiencies and optimized marketing spend, but also due to reduced expenses as many office employees worked from home. The accumulated Calcium savings are now EUR 354 million since the launch in 2018 with the end goal of EUR +400 million in sustainable savings by the end of 2021.
“Over the last three years we have transformed the way we work, spend and invest across Arla. This transformation was put to the test when the COVID-19 crisis impacted the world, but today it is very clear that the work the business has done through Calcium helped us to successfully handle the sudden and very challenging disruptions such as COVID-19. It has shown how far we have come and how the transformation has become a natural part of our DNA and our ways of working,” says CFO Torben Dahl Nyholm.
Arla continues sustainability journey
In 2020 Arla took further sustainability action across its value chain, including packaging, moving from fossil to renewable energies in its supply chain and piloting new technologies in its logistics fleet. The most prominent step forward was the implementation of Climate Checks on 93 per cent of all Arla farms across seven European countries. The climate data delivered by farmer owners creates one of the world’s biggest externally verified climate datasets on milk production and will help farmers benchmark and inspire each other in their work to lower their emissions even more.
“Arla’s farmer owners are already among the most climate efficient in the world and we are committed to creating a sustainable future for dairy farming. The Climate Checks programme creates a solid foundation for us to accelerate our transition and I am very proud that so many of my colleagues are participating in this very important work and together are creating such strong results,” says Chairman Jan Toft Nørgaard.
Expectations for 2021
2021 is expected to be another challenging year as COVID-19 continues to impact the global dairy industry, the global economy and people’s livelihoods around the world. Arla expects core brands to continue to deliver branded volume growth, but at a more modest rate than in 2020.
2021 will also be the first year with the new Free Trade Agreement between the EU and the UK, which removed significant risk to Arla. The business has a range of plans in place and is well prepared to handle the non-tariff barriers in the new agreement.
Arla plans to invest EUR 700 million in 2021 driven by structural investments, Calcium initiatives and Arla’s sustainability agenda. Major projects include the completion of the powder tower in Pronsfeld, Germany, continuing the mozzarella capacity increase project in Branderup, Denmark, and upgrades to the production site in Bahrain, as well a continuation of strategic investments in AFI.
“2021 will be another year of uncertainty and global disruption as the COVID-19 crisis stretches into the year and the first signs of a recession are starting to show. We need to be vigilant in ensuring the health and safety of our people and farmer owners while securing business continuity and growth. But it is also a year where we hopefully will see the world open up again as vaccines are rolled out so I am cautiously optimistic for 2021,” says CEO Peder Tuborgh.
Group revenue outlook for 2021 is expected to be EUR 10.3-10.6 billion, net profit share will be in the range of 2.8 to 3.2 per cent, and leverage is expected to be in the lower end of target range of 2.8-3.4.
Arla will publish its Annual report and CSR report on February 25th.
Annual Results 2020 key figures:
- Group revenue: EUR 10.6 billion
- Performance price: 36.9 eurocent/kg
- Milk volume: 13.7 billion kg
- Net profit share: 3.2 per cent
- Calcium savings: EUR 130 million
- Leverage: 2.7