Tara Dairy Ltd. is about to complete construction of its new dairy on an 80-dunam site (20-acre) in Netivot, which will double the company's output. The move will force the company to greatly boost sales within a short time to cover the fixed costs of the larger production lines. Sources inform ''Globes'' that Tnuva Food Industries Ltd. has set up a response team to minimize the damage from Tara Dairy's plans. Strauss Group Ltd. (TASE:STRS) will also seek to strengthen its position.
"A dairy has fixed costs, and it must do everything to increase production," a top dairy industry source said. "Fixed costs are dead money, which is why there is great pressure to boost sales. Tara has invested a fortune in the new dairy, and there is nothing sadder than a non-working dairy. The pressure to produce will be immense."
The source added, "Strauss will also be affected, but Tara has clearly targeted Tnuva; they're targeting Tnuva first and they'll hit Tnuva. Tara will target big categories dominated by Tnuva, such as yellow cheeses, milk, cottage cheese, white cheese, and sour cream. These are very tempting categories, which boost sales volume, even though most are price controlled and there is little money in them."
Israel's dairy market totals NIS 7.3 billion in consumer prices. This does not include the institutional market (restaurants, hotels, hospitals, and so forth). Tnuva is a monopoly in the dairy industry, with a 57% market share and its dairy turnover is estimated NSI 4.4 billion a year, amounting to 60% of the company's total revenue and accounting for most of its profits.
Strauss has a 23% market share, and Tara has 10%. The move to the new dairy will enable Tara to double or more its market share because the new dairy is modular, enabling the company to expand production lines.
A market source says, "Tara is stagnant. It's had two bad years, and things aren't going smoothly there." This is seen in the drop in the company's market share to 9.4% in August from 10% in August 2011. The company currently produces just over 200 million liters of milk at its Tel Aviv dairy, which is working at full capacity. Tara says that this is the reason why it has not been able to reach a 20% market share in any category in which it operates. "In most categories, Tara is working at full capacity. It cannot sell more," it says.
The rules in the dairy market are about to change, and Tnuva is trying to set them in advance. An assessment by Giza Singer Even estimates that Tara's new dairy could cost Tnuva NIS 272 million in lost revenue over three years (2013-15).
Sources at Tnuva say that the team meets regularly to set strategies for countering Tara, including price wars and the launch of new products, as well as by blocking Tara's ability to buy raw milk from dairy farmers. Contracts with dairy farmers are set for one year, during which the dairy commits to buying all a farmer's milk. The Dairy Law limits a contract with a dairy farmer to three years, after which it can be renewed. The price of raw milk is the minimum price, and dairies have the right to sign contracts at higher prices.
Sources at Tara say that the company's objective is not just to create large sales volume, but also profits, which is why it is targeting profitable categories, such as chocolate milk and puddings.
A market source said that Strauss will exploit the opening of Tara's new dairy to strengthen its position. "Strauss will also go to war. When there is chaos, there is competition, and everyone wants to exploit the opportunities," says a source in the industry, pointing to Strauss's loss of market share since 2008.
Published by Globes [online], Israel business news - www.globes-online.com - on September 20, 2012
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