Thirsty Thoughts Milk Substitutes

1. Thirsty Thoughts Milk Substitutes • Annual Market Quantification • September 2011

2. Setting the scene The total world production of milk in 2007 was 677.7 million tons, growing to 692.7 million tons in 2008 and a further growth to 709.7 million tons in 2009. Of this, the full cream milk powder production was 24 million tons while the skim milk powder market in 2009 was approximately 25 million tons. The major exporters of these 2 products in 2008/9 were: Full cream milk powder: New Zealand, EU, Argentina and Australia Skim milk powder: USA, New Zealand, EU and Australia Milk production, and therefore the production of milk substitutes, is affected by global situations and circumstances and the many different influences that determined the ability of countries to produce a healthy milk supply. This is affected by many conditions including;- favourable weather conditions, feed prices and safety concerns. Historically the supply and demand of milk products has had major influences on the pricing and the production of powdered milk substitutes. South Africa’s milk production has increased steadily over the past 2 years and in 2008 grew by 3% in contribution to the worlds total milk production. Milk powders have always formed a ‘milk bank’ in times of surplus, allowing the long term storage of milk that can be reconstituted in shortages. As a result, the industrial volumes of powdered milk substitutes can be very volatile year on year. 2

3. 2010 Category Breakdown 3

4. 2010 Channelling • Demand for milk substitutes is fairly evenly distributed with wholesale and retail sectors each taking a third of the volumes, and the last third being shared by industrial and direct supply to foodservices. 4

5. Annual Growth Rates 5

6. Market Trends – Milk Powders • The milk substitutes market is dominated by powdered creamers which make up three quarters of the volume. Within that, full cream milk powder volumes equal skim milk powders and powdered milk blends. The milk powders category is very volatile with an overall volume decline of 3.8% in the base year, after a decline of 10.3% in 2009. However, growth of 8.2% is expected in 2011, followed by a further volume increase of 1.9% in 2012. • Much of the decline in 2009 was a result of milk shortages in the previous year, leaving little milk available for dehydration. Milk supply improved in both 2009 and 2010 but much of the volumes were utilised to replenish cheese supplies. • Full cream and skim milk powders both showed conservative volume gains, the volume decline in the category being driven by losses in powdered milk blends. • The powdered milk market has lost 3.3% of its volume per year over the last decade. The products were essential in when many households were without electricity and not able to shop daily. The increased electrification over the last few years and increased affordability and availability of UHT milk has put pressure on particularly the skim milk and powdered milk blends products. 6

7. Market Trends – Powdered Creamers • The powdered creamer market has seen fairly consistent but limited volume growth over the past few years. The 2.9% increase seen for the 2010 year is similar to the growth rate recorded for the previous year. In fact, there has not been any significant change to the growth rate since the slightly higher 5.5% increase seen for 2007. • The category has seen some shifts in terms of players entering and exiting, but overall market demand from a consumer perspective has remained constant, thus producer movements have had little bearing on the market size as a whole. • Within the local market there has been continued diversification of the category into sub-categories, such as coffee creamers and tea creamers. This level of innovation has served to renew interest in the category overall. • Given the local and international consumer trend to greater awareness of food ingredients and labelling, the category has come under increasing pressure. The consumer move to consumption of low fat, natural ingredients is completely incongruent with the high fat content and perceived synthetic nature of powdered creamers. While the creamers offer a convenience benefit, this might not outweigh the drive to greater health and wellness, and thus the category may face volume erosion in the long term. • The market is expected to show only limited growth in the short term, with an increase of 2.2% anticipated for both 2011 and 2012. 7

8. Thirsty Thoughts Milk Substitutes For more information, contact: Jan Wegelin Research Manager Tel: (011) 615 7000 Mobile: 082 938 0744 www.bmi.co.za