: Week 1 Case Study Assignment

undefinedList and explain four government-related actions that has contributed to Almarai’s success in Saudi Arabia. (40 points): Min. 300 words– Case study: Almarai Company: Milk and Modernization in the Kingdom of Saudi Arabia

For the exclusive use of A. Aldaej, 2021. 9 -7 1 9 -0 2 0 REV: MAY 1, 2019 KRISTIN FABBE SAFWAN AL-AMIN ESEL CEKIN NATALIE KINDRED Almarai Company: Milk and Modernization in the Kingdom of Saudi Arabia On October 3, 2018, Almarai Company CEO Georges Schorderet entered a small neighborhood grocery shop, or bakala, in the Saudi Arabian capital of Riyadh, his home of 14 years. As in many food retailers across the country, this shop contained an Almarai-branded refrigerator filled with Almarai’s fresh milk, yogurts, and other perishable products. These refrigerators were a legacy of Almarai’s early years, when the company—faced with the problem that many Saudi groceries lacked refrigeration— decided to solve the distribution bottleneck by supplying chilled infrastructure to the stores itself. This proactive approach to problem solving, though expensive, had been part of Almarai’s ethos ever since its founders first attempted dairy farming in the desert in 1977. In the 41 years since, Almarai had scaled its herd to over 100,000 cows and achieved yields among the best worldwide. Almarai was now a vertically integrated producer and distributor of branded dairy, poultry, juice, infant nutrition, and bakery products, with SAR 14 billion ($3.7 billion) in 2017 revenues and a large presence across the Gulf. (See Exhibits 1–3 for financial information.) For Schorderet, this shopping trip had special resonance: in a matter of hours, he would announce his retirement. The Switzerland native was departing at a time of change in Saudi Arabia, a nation facing a tighter economic reality after years of oil-fueled prosperity. In 2018, the country’s 33-year-old crown prince, Mohammad bin Salman, was taking steps to restructure the economy, including cutting subsidies and price controls, implementing new taxes, and introducing incentives to increase Saudi nationals’ participation in the workforce, where foreigners traditionally held the majority of roles. Almarai had matured over the past decades in an era of favorable domestic politics, economics, and demographics; being founded by a Saudi prince was also not a trivial advantage. State subsidies and cheap energy had kept Almarai’s feed and water costs low; its incumbent position in fresh dairy gave it a strong brand position; and its rapid growth along with that of the country as a whole had helped to obscure operating inefficiencies. But like Saudi Arabia itself, Almarai was contending with a new reality in 2018: higher costs, intensifying competition, deterioration of a key retail channel, tighter household budgets, and a shrinking consumer base for its flagship products. Professor Kristin Fabbe, independent researcher Safwan Al-Amin, Executive Director Esel Cekin (Middle East and North Africa Research Center), and Agribusiness Senior Researcher Natalie Kindred prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2018, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. This document is authorized for use only by Abdulaziz Aldaej in International Management and Agribusiness: Spring 2021 taught by ASHOK MISHRA, Arizona State University from Feb 2021 to May 2021. For the exclusive use of A. Aldaej, 2021. 719-020 Almarai Company: Milk and Modernization in the Kingdom of Saudi Arabia As he reflected on these challenges, Schorderet took solace in the company’s strengths. Almarai had built a world-class dairy operation in the Arabian Desert and was named one of Forbes most innovative firms in 2017; 1 surely it could navigate whatever lay ahead. He knew Almarai needed to defend its position in Saudi Arabia, where bakalas, its main sales channel, were under pressure. At the same time, Almarai needed to find new sources of growth, such as entering new product categories or geographies. How could Almarai maintain an edge in the changing Saudi context? Should it try to recreate its dairy production model in a new geography with an underdeveloped fresh dairy sector, such as in Southeast Asia? What advice should Schorderet give his successor? Saudi Arabia The Gulf’s largest country in both population and area, Saudi Arabia was home to 33 million people in 2018, including about 13 million expatriates. In recent years, economic trends and policy changes— many of them tied to Saudi Arabia’s national strategic plan, called Vision 2030—were having profound effects on the country’s businesses and consumers. For instance, as part of its “Saudization” program, the government was pushing to increase private-sector employment of Saudi nationals and making it costlier to employ foreigners. In another significant change, the government was reducing the financial support that it directly and indirectly provided to Saudi households. These changes were impacting food and agriculture firms in several ways, including through the greater price sensitivity of consumers and the shrinking supply of foreign labor, which made up over 80% of the agricultural workforce. 2 Agriculture and Food Security Like other oil-rich, water-scarce Gulf States, Saudi Arabia depended heavily on food imports. Although the country’s oil wealth had historically enabled it to source what it needed, the government was wary that, at times, import dependence could pose a vulnerability. During the 1970s oil embargo, for instance, there were fears that major Western grain exporters would retaliate by terminating shipments to the Gulf. And in the decades since, major agricultural producers such as Argentina, India, and Russia had temporarily suspended exports of key commodities due to domestic crises such as worker strikes, drought, food price inflation, and depletion of grain stocks. 3 In light of such risks, in the 1970s Saudi Arabia set a strategy of achieving food security through self-sufficiency. The government introduced a range of direct and indirect subsidies to stimulate development of domestic agriculture and food processing. Aided by these supports, large swaths of desert were converted into farmland, which was irrigated using water drawn from underground aquifers. Some programs were very successful in boosting output. In wheat, the government launched a program that initially guaranteed Saudi farmers SAR 3,500 ($933) per metric tonne (MT), an enormous sum in the 1970s. By the early 1990s, the country was self-sufficient in wheat and exporting a large wheat surplus. 4 By the 2000s, however, the realities of water scarcity forced an evolution in policy. Large-scale production of water-hungry crops like wheat had used up billions of gallons of water, just as urbanization, population growth, and economic development were driving up household water use by washing machines, dishwashers, and modern bathrooms. 5 Government investments in desalination technology were helpful in increasing the water supply, but potentially not enough to meet projected demand for human consumption, never mind agriculture. In response, the state began scrapping self-sufficiency targets for certain high-water-use crops and discouraging their production. In 2008, it announced a gradual end to its wheat-purchasing program, with domestic production largely ending by 2016. 6 Similar curbs—mainly enacted by removing supports like production subsidies and price guarantees—were placed on other crops, including barley and green forage used for animal feed. 7 The results of these reversals were dramatic. From 2006 to 2016, 2 This document is authorized for use only by Abdulaziz Aldaej in International Management and Agribusiness: Spring 2021 taught by ASHOK MISHRA, Arizona State University from Feb 2021 to May 2021. For the exclusive use of A. Aldaej, 2021. Almarai Company: Milk and Modernization in the Kingdom of Saudi Arabia 719-020 imports of wheat rose from 2,286 MT to 3.6 million MT, and of forage products from 2,280 MT to 386,000 MT. 8 Meanwhile, policies were introduced to stimulate investment in relatively resource-efficient foods like poultry, as well as technologies such as advanced drip irrigation and greenhouse farming. 9 Steps were also taken to increase the availability and affordability of processed feed, a more waterefficient substitute for the forage, raw barley, and other feedstuffs traditionally used by Saudi farmers. 10 In a further bid to shore up the grain and feed supply, the government encouraged private Saudi firms to cultivate farmland in other countries, with some or all of the harvest to be exported to Saudi Arabia. 11 In 2017, Saudi Arabia produced 1.7 million MT of grains, fruits, and vegetables, 760,000 MT of broiler meat (chicken), and had a livestock population of 10 million sheep, 3.4 million goats, 813,000 camels, and about 350,000 cows. 12 In total, domestic production supplied about 20% of the country’s food needs. 13 In 2016, food and agriculture imports, including feed products, totaled 24.7 million MT at a value of $15.7 billion. 14 Over 50% of the imported volume was barley, maize, and wheat. 15 Almarai History In 1977, with the Kingdom’s food-security push in full swing, Saudi Prince Sultan bin Mohammed bin Saud Al Kabeer a saw an opportunity to build a domestic dairy industry and supply fresh dairy products to the Saudi market. At the time, the country had no large-scale dairy production, nor the cold chain infrastructure necessary for storing and distributing fresh milk; the dairy market consisted of imported milk powder and recombined milk products (made locally using imported milk powder). Al Kabeer partnered with Masstock Group Holdings, a large Irish agribusiness owned by two brothers, and set up a farm in central Saudi Arabia with a herd of 300 black-and-white Holstein cows shipped in from the United States. They named the company Almarai—the Arabic word for “pastures”—and soon began producing fresh milk and laban, a traditional fermented yogurt drink. Although Almarai adopted many practices from international dairy markets, there was no template for operating a modern dairy farm in the desert, where rocky sands stretched to the horizon and temperatures reached as high as 50º Celsius (122º Fahrenheit). From the outset, farm managers had to rely on experimentation and innovation. In the absence of grass pastures for grazing, Almarai trucked in alfalfa from other parts of the country and developed special compound feed mixes tailored to the desert climate. A milestone came in 1985, when Almarai installed a water-misting system to keep the cows cool. Over time, the company added fans, humidity controls, and air conditioning to maintain an inside temperature of 28º to 29º Celsius, ideal for productivity. By the 1990s, these and other advances had allowed Almarai to increase milking frequency from three to four times per day. Alongside Almarai, the favorable policy regime gave rise to other domestic dairy producers and marketers, including Al Safi, founded in 1979 (Al Safi would form a joint venture with French dairy giant Danone in 2001), and Nadec, founded in 1989. 16 Another competitor, Saudia Dairy & Foodstuff Company (Sadafco), was founded in 1976 but did not operate farms. From the outset, Almarai’s leaders sought to distinguish the company by emphasizing family-focused products and a strict commitment to quality. These values were later enshrined in Almarai’s brand message, “Quality You Can Trust.” Building demand for fresh milk took time, explained Hussam Abdulqader, chief marketing officer: “At first people didn’t want fresh milk. Powdered milk was king. The game changer for Almarai was laban. It is a traditional food, so people were open to trying our product. The same happened when we a Al Kabeer belonged to one of the most influential branches of the Saudi royal family, with stakes in many businesses. 3 This document is authorized for use only by Abdulaziz Aldaej in International Management and Agribusiness: Spring 2021 taught by ASHOK MISHRA, Arizona State University from Feb 2021 to May 2021. For the exclusive use of A. Aldaej, 2021. 719-020 Almarai Company: Milk and Modernization in the Kingdom of Saudi Arabia began producing yogurt: there was already a familiarity, and that helped us gain acceptance. Eventually, that acceptance extended to fresh milk.” Over time, Almarai built a reputation as a trusted local brand, an image it leveraged when launching new products. As an example, Abdulqader recalled when Almarai introduced cheeses that competed with popular imported brands: “We weren’t the first, we had the same quality as the competitors, so we had to be different. Our difference was being local, so we put a lot of communication behind that message. For example, we ran a campaign proposing that consumers eat the product with local breads that have very high affinity in Saudi Arabia and complemented the Almarai cheese taste profile. It was very successful.” Almarai invested heavily in processing, always keeping capacity ahead of demand. Unlike in traditional dairy-production markets, where processors often sourced milk from a network of independent farmers, Almarai’s entire milk supply came from its own farms. This self-reliance extended to distribution. In the absence of a preexisting cold chain to safely store and transport fresh milk, Almarai created one itself, including developing its own chilled depots and truck fleet and installing refrigerators in food retailers (see Exhibit 4 for a photo). Almarai gave refrigerators to bakalas for free; the shopkeepers paid for electricity, which was historically cheap, mainly due to subsidies. Over time, bakalas became integral to Almarai’s business model. In supplying refrigerators, Almarai enabled the bakalas to diversify their offerings and increase overall sales. In turn, bakalas provided an essential distribution pathway, allowing Almarai to penetrate neighborhoods and introduce consumers to fresh chilled dairy products on a broad scale. Bakalas gradually became known in Saudi Arabia as the main destination for fresh milk, which was especially preferred among expatriates from countries like Egypt and India. (Among Saudi nationals, laban was the most popular chilled fresh dairy product.) Some competitors also placed their own refrigerators in bakalas alongside Almarai’s. By the early 2000s, Almarai had about 4,000 employees and was producing a range of dairy products, including milk, laban, yogurt, cheese, and butter. It had also begun making fruit juices using imported concentrates. Its products, sold under the Almarai name and other company brands, were becoming mainstays of retailers in Saudi Arabia. Meanwhile, Almarai extended its presence across the Gulf Cooperation Council (GCC) region, comprising Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates (UAE). The GCC’s per capita fluid milk consumption was low compared to many countries: annual consumption averaged 21 liters per capita in 2004 (34 liters including laban), versus 98 liters in Australia, 72 liters in the European Union, and 66 liters in Brazil. However, the region’s relatively high per capita disposable income, young population, and annual population growth of 4% made it an attractive market. Families with children, in particular, saw dairy as an important nutritious product. In 2005, Almarai—by then fully owned by Saudis; Masstock sold its equity in the late 1980s— executed a public offering of 30% of its shares. Almarai had sales of nearly SAR 1.9 billion at the time. Over the next 12 years, the company invested SAR 30 billion to support rapid growth. It entered the bakery segment in 2007 by acquiring Western Bakeries, a Saudi producer and marketer of breads, pastries, rolls, cupcakes, and other products under the L’usine brand; and by entering a joint venture with a Greek firm, Chipita, to produce and distribute its 7Days brand (individually packaged cakes, croissants, etc.). In 2009, Almarai diversified into poultry by acquiring a Saudi poultry operation. In 2010, it entered the infant formula business through a joint venture with U.S. infant nutrition company Mead Johnson Nutrition. On the international front, Almarai set up distribution units across the GCC, and it entered Egypt and Jordan through a 2009 joint venture with PepsiCo; Almarai held 48% and PepsiCo 52%. The joint venture, called IDJ (International Dairy and Juice Limited), was responsible for expanding the dairy 4 This document is authorized for use only by Abdulaziz Aldaej in International Management and Agribusiness: Spring 2021 taught by ASHOK MISHRA, Arizona State University from Feb 2021 to May 2021. For the exclusive use of A. Aldaej, 2021. Almarai Company: Milk and Modernization in the Kingdom of Saudi Arabia 719-020 and juice businesses of both partners across the region. The geographic scope originally covered the Middle East (excluding the GCC), Africa, and Southeast Asia, but was later reduced to the Middle East and North Africa. The vision was for IDJ to acquire and develop firms in these geographies and to build an export business from the partners’ existing resources. All the while, Almarai continued upscaling and expanding its dairy operations. By 2017, the company operated seven large dairy farms in Saudi Arabia and two small farms in Jordan, with a total herd of 107,000 dairy cows plus 80,000 young cows not yet in production. (An internal construction team designed and built fit-for-purpose infrastructure for the farms.) To secure a source of feed after the phase-out of domestic forage production, Almarai acquired and rented farmland in Argentina (36,600 hectares) and the U.S. (11,300 hectares), where it grew alfalfa and shipped it back to Saudi Arabia. The company also made substantial investments to improve breeding (performed in-house), barn and milking parlor design, computer systems for controlling inputs and monitoring productivity, feed composition, disease control, and other areas. From 2005 to 2017, Almarai’s annual milk production rose from 40 million liters to nearly 1.5 billion liters, with an average annual yield of over 14,000 liters per cow. (See Exhibits 5 and 6 for international dairy yield and production data.) To protect quality, Almarai tightly controlled its milk supply from the moment of production. After milking, raw milk was quickly chilled from an initial 38º Celsius to 4º Celsius using a state-of-the-art refrigeration system directly adjacent to the milking parlors. The milk was then transported to Almarai’s three central processing facilities—the newest, completed in 2018, was heavily automated— where it was pasteurized, processed into a range of fresh and long-life dairy products, and bottled and packaged for distribution. (Juice products were also produced at these plants.) Schorderet Takes Over Schorderet held senior roles in the Swiss aluminum and airline industries before moving to Saudi Arabia in 2004 to become Almarai’s chief financial officer and, in 2011, its chief operating officer. He was named CEO in 2015 after his predecessor became the Minister of Agriculture. b “At the time, the dairy, juice, and bakery segments were doing well—these were Almarai’s ‘fort’—and the rest were notyet-performing assets,” he recalled. “There had been a tendency not t …
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