Press reports indicate that Nestlé has created a modular factory that can be established in half the time of a conventional factory, and at 50 to 60% of the cost. The factory consists of easy-to-assemble component sections and is intended to offer “a flexible, simple and cost-effective solution for creating production sites in the developing world”.
Africa is seen as the main target market for this factory design, where “a fast, flexible and cheaper way” of entering the market is desired. It is often considered “risky” investing in these countries, given the lack of infrastructure and reliable electricity supplies. The modular concept means that this type of factory can be established in line with evolving market requirements; or it can simply be disassembled and moved to another site.
The first countries to be targeted are all in sub-Saharan Africa and include Malawi, Mozambique, Rwanda, Tanzania and Uganda. The initial investments will be small, with careful analysis of how activities in different product categories develop. The first factories are to be established in the next 1 to 3 years. Modular factory units will focus on “setting up simple processes like repacking and mixing dry goods”, rather than the manufacture of more complex products.
Nestlé representatives claim that “the modular factory concept is very flexible in terms of repacking coffee and milk powder,” and that these, alongside cocoa beverages, are the most suitable product categories for this type of manufacturing facility.
Creating these factories needs to be set against a background of volatility in global dairy product prices; prices fell by 26% (from very high levels), in the 4 months up to June 2014, before beginning to recover some of the losses. It is anticipated that global dairy prices will not recover until 2015 because of Chinese stockpiles. Rabobank forecasts that the current lower dairy prices will curb milk production growth in major producing regions (down from 4.7% in the first half of the year to 1.8% in the second half of the year).
Meanwhile, Nestlé has announced a new milk supply agreement with the UK dairy cooperative, First Milk, to expand the supply of fresh milk for use in its Kit Kat and Nescafé brands (such as its Café Menu range of hot chocolate and cappuccinos). The contracted volumes and prices provide First Milk farmers with “protection against the volatility of markets”. The new contracts reportedly reflect “Nestlé’s commitment to a relationship built on the foundations of a short sustainable supply chain”.
Nestlé has joined Arla in developing low-cost processing solutions linked to reinforcing its presence in African markets for simple dairy, coffee and cocoa beverage products (see Agritrade article ‘ Arla launches turnkey milk powder packaging facility in Côte d’Ivoire’, 27 October 2013). This needs to put in the context of the increasing volumes of EU milk powder that will be available for export following the abolition of EU milk production quotas, and the volatility in global market dairy prices.
Having ready access to related processing units, which allows the consumer-ready packaging of milk powders, serves to reduce the vulnerability of companies such as Nestlé and Arla to price volatility on global dairy markets.
These types of investments could help stimulate local production of simple dairy products to meet expanding local demand, but if linkages to local milk producers are not developed, they could undermine national efforts to expand commercially marketed milk supplies in a number of ACP countries.
This potentially raises important dairy sector trade policy challenges, as the basis of regulation of milk powder imports could have a significant bearing on the development of local milk to dairy supply chains.
At the corporate level, importing milk powders in bulk and repackaging locally to meet growing demand would appear to sit uneasily with Nestlé’s stated commitment to developing relationships “built on the foundations of a short sustainable supply chain”.
In this respect, lessons could potentially be learnt from the experience of FrieslandCampina’s operations in Nigeria, where efforts are under way to expand local sourcing of milk over time and reduce the use of imported milk powders (see Agritrade article ‘ Expanding Dutch corporate involvement in local milk procurement in Nigeria’, 15 April 2013).