Guest Editorial
Early adopters plus satisfied customers equals growth

by Matt McKnight

Matt McKnight is vice president of export ingredients marketing and industry affairs for the U.S. Dairy Export Council. He contributes this column exclusively for Cheese Market News®.

Editor’s note: This is the second in a five-part series on burgeoning Southeast Asian dairy markets and opportunities therein. Part I on Indonesia ran in the Nov. 9, 2007, issue of Cheese Market News.

Part of the ongoing mission of the U.S. Dairy Export Council is to present foods and ingredients to cultures that might be unaccustomed to their tastes and uses, and to food manufacturers that might be leery of change.

That’s one of the great things about the Philippines.

Not only has the country exhibited a bond with and appreciation for U.S. food and culture that is unique to Southeast Asia, it has shown itself to be an early adopter of new U.S. dairy ingredients and open to innovation, particularly if it reduces costs. To U.S. dairy suppliers, that translates into a major customer.

Last year, U.S. sales to the Philippines were on target to rise 11 percent to more than 71,000 metric tons, putting the country among the top five U.S. dairy export destinations for the sixth consecutive year. Fueled by high international prices, U.S. dairy export value was up 60 percent through November, suggesting sales would clear the $150 million mark by year-end 2007.

Primarily an ingredients market, around 95 percent of U.S. volume to the region is skim milk powder (SMP), whey and lactose. U.S. whey exports have doubled in the last five years and SMP shipments rose from 6,875 metric tons in 2002 to 33,332 metric tons in 2006.

The United States trails only New Zealand in dairy export market share in the Philippines — the only Southeast Asian nation, besides Vietnam, where we can claim a No. 2 position.

The reasons for Philippine affinity for U.S products, as well as for U.S. dairy export success, are many.

• The United States has deeper roots in the Philippines than perhaps any other Southeast Asian nation, going back more than 100 years when the United States established a presence there during the Spanish-American War.

• Like much of the developing world, the Philippine economy is strong. Annual GDP growth has been averaging 5 percent since 2002. Last year, it hit a 31-year high of 7.3 percent, and analysts project a bright 2008 despite clouds looming for the global economy as a whole.

• A well-developed food processing industry caters to the nation’s 91 million people through a supermarket and foodservice chain every bit as modern as the United States. In part because of the success of U.S.-style restaurants, like the 600-plus-unit Jollibee Foods Corp., American cheeses — Cheddar, Colby, Cream Cheese, Monterey Jack and Mozzarella — have always been popular in the Philippines.

The nation is in fact the largest market for U.S. cheese in Southeast Asia, on track to purchase 1,200 metric tons in 2007, a gain of nearly 18 percent over the previous year. Until 2005, Australia had been supplying many of the “American” varieties, but currency values helped make already-desirable U.S.-origin cheeses more competitive.

• The Philippines is nowhere near producing enough milk (or other foods for that matter) to feed its population. It is estimated that imports comprise more than 90 percent of its dairy consumption. The country is the largest food ingredients importer in Southeast Asia.

• Philippine food technology is advanced and research and development progressive. Domestic manufacturers welcome new ideas and experimentation to produce existing and new products, particularly if they lower the overall cost of formulation or extend shelf life.

In the late 1990s, for example, with the backing of U.S. Dairy Export Council educational seminars and marketing communications efforts, the Philippines became the first large-scale adopter of U.S. whey and lactose for food use in Southeast Asia, starting with bakers, ice cream makers and canned milk processors. Soon, WPC-80 became a standard ingredient in bakery and meat applications.

• And last but not least, in general, Philippine buyers make fewer custom specification demands than any market in Southeast Asia since they primarily service domestic customers rather than regional export buyers. Of particular benefit to U.S. dairy suppliers is that U.S. products need not be Halal certified — a requirement for exporting to most other Southeast Asian nations.

The top concern in the Philippines is price. The Philippines is the first Southeast Asian market to experience consumer resistance when prices rise. Manufacturers are highly conscious of the fact and will lower their margins to avoid losing their customer base, while seeking alternative supplies and products.

On the price front, U.S. suppliers have been helped by the U.S. dollar, which lost 5-10 percent of its value vs. other major currencies in 2007, improving the U.S. competitive position compared with exports from the EU and Oceania. Economists are predicting the U.S. dollar will again lose 5-6 percent of its value this year vs. major world currencies. In addition, some nations’ suppliers are opting to de-emphasize the Philippines in their market plans and seek higher returns from what are considered “higher profit” markets, opening the door wider to U.S. suppliers, particularly those not Halal certified.

Philippine affinity for U.S. products means the United States has plenty more dairy potential there. As in other export markets, inconsistent supply has negatively affected U.S. growth. The United States, for example, could be an even bigger cheese exporter to the nation if it could deliver on a consistent basis.

In addition, as in other nations, U.S. sales have room to grow by aiming higher. Despite emphasis on price, U.S. suppliers can move up the value chain, much as they moved whey and lactose from feed to food use over the last decade.

For instance, the United States saw its SMP sales decline when Nestlé sold its milk canning operations to domestic manufacturer Alaska Milk. Alaska had a four-decade relationship with Australian dairy suppliers, and Australia has done a good job of meeting the company’s needs. U.S. purchases are currently a “last resort” if Australian shipments fail. But Alaska would be more inclined to buy from the United States at all times if U.S. suppliers could consistently meet specs for specific factors, such as scorched particles and whey protein nitrogen levels.

U.S. suppliers have arguably done a better job of meeting buyer demands in the Philippines than in any other market in Southeast Asia, and the market has grown by more than 150 percent in volume since 2002. But even with satisfied customers, there is always more room for more growth.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.