Land of milk and money.
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Demand for dairy products, milk especially, is surging across the world as a result of changes in global diets and the marketing of its purported health benefits. Global turnover was forecast to reach $335 billion in 2014, based on 5 percent annual growth, driven by demand in Asia and particularly China, which is slated to overtake the United States as the largest dairy market by 2017, according to fi- gures from market intelligence provider Euromonitor.
When it comes to such a health sensitive product, this rampant growth has had its complications, especially in relation to ensuring hygiene standards, and to the questionable use of additives, preservatives and formulas to meet burgeoning demand and to spur on profits. Rocked by domestic dairy scandals, China has been limiting the amount of foreign powdered milk formula allowed into the country.
While the Lebanese dairy sector is in no way comparable in size or consumer behavior to China, there are parallels. The local dairy sector has grown and diversified over the past decade. Foreign and institutional investors have entered the market, branding and advertising has ballooned, and competition is now cutthroat. Ingredient and hygiene scandals have also erupted, in part due to company malfeasance, underhand competition and government action, as well as inaction.
Cream of the crop
The regulated sector is dominated by the 'Big Four' dairies. Taanayel Les Fermes leads with almost half of the licensed market and Khoury Dairy is second, followed by Candia (Libanlait) and Dairiday, according to Blominvest Bank data. Then come the medium sized brands with seven digit revenues peaking at $10 million, such as Center Jdita, Hawa Dairy, Massabki and Laqlouq. There are also the small scale brands and non branded products, which account for an estimated 40 percent of overall dairy production, regulated and unregulated.
Labneh, laban and cheese (halloumi followed by akkawi and double creme) still dominate local production and sales, but fresh and long life (UHT) milk are gradually replacing powdered varieties. Sales are up by 10 percent per annum for the past two years, and more dairies are offering fresh milk and UHT, with Center Jdita soon to release its own lines.
Flavored yogurt, probiotics and ice cream are also growing niches, while goat dairy production is increasing (see box). Such growth is being driven by heavy marketing and branding, as well as changes in consumer tastes. "The population is increasing and the consumption of milk is up as many Lebanese have traveled to the US or Europe, and come back with behavior learned there. That's why there's change," says Mazen Khoury, production manager at Khoury Dairy. "Ten years ago you didn't see people drink cold milk -- always hot -- but now you see it in the fridge, like in the US."
High on a hill
Goat dairies are getting a little less lonely
Dairies continue to move into new lines, with Khoury Dairy expanding its goat dairy production, while a new firm, Goutblanc, is solely focused on goat dairy.
Goat dairy products are popular in the countryside, but have not made the same inroads commercially. Holding such development back was a hygiene scandal with small scale production some 30 years ago that has lingered in consumers' minds; dairies have tried before to set up commercial goat farms but could not find a viable market. As a result, the founders of Goutblanc started raising 60 goats as a trial in 2006, and only started selling on the market in late 2014 once they had 600 milking females and felt there was enough niche demand.
According to Mazen Khoury, production manager at Khoury Dairy, goat products are less than 10 percent of the Lebanese dairy market, but are set to become a trend. The dairy has some 3,000 goats, and the firm is expanding production of cheese. Market leader Taanayel Les Fermes also produces goat products, but only Khoury and Goutblanc have automated goat milking facilities.
Goutblanc is banking on the rise in consumption of dairy products to help drive demand as consumers diversify their tastes. "Marketing has changed people's habits and the tradition of eating food, and we are catching up in terms of [goat dairy] consumption with Europe and the world. So in our thinking, the Lebanese consumer will catch up, goat dairy produce will become a trend and we will be able to produce liquid goat milk," says Walid Bou Habib, the company's owner and general manager. He expects a return on their investment of $2.5 million within three years.
Aware of the renewed focus among the public about hygiene conditions, Goutblanc built its facility in Annaya according to specifications from French standards body AFNOR while Jihad Daher, a trained agricultural engineer and the dairy's technical manager, has spent several years involved in goat husbandry. "A problem here is there's no scientific support or vets specialized in goats, so we need to control all of that ourselves," says Daher.
While still a small market, per capita consumption of dairy products is on the rise, says Khoury, but competition is tough. It is telling that Saudi Arabian dairy giant Almarai tried to enter the market over the past year, but abandoned its attempt due to low sales.
Institutional investment has heated up the competition, pushing branding and the need for returns. While Khoury Dairy is still a family-run business, Taanayel Les Fermes has Kuwaiti investors, Dairiday (Levant Beverage & Dairy Industries) has investment from Najib Miqati, and Bank Audi has invested in Libanlait.
The 'Big Four', however, are putting the squeeze on the medium sized dairies, which lack the means for advertising campaigns and to buy shelf space at supermarkets. "We fight the competition with our quality, but I'm not sure how long we can continue like this as we can't pay like the competitors. There's not much local competition over quality, it is fighting with capital," says Wakim El Hawa, General Manager of Hawa Dairy, which produces some six tons per day and has an annual turnover of about $2 million.
Lack of regulation
One of the key problems, reported again and again by licensed producers, is that the sector lacks oversight and regulation. Indeed, neither the size of the sector, nor its production size, number of operators or even its true value, are known, with current annual turnover estimated conservatively to be about $200 million, although some estimate it to be as high as $500 million including imports.
"In terms of overall production, we don't know, as a good proportion of the sector is small scale, which doesn't reach the supermarkets," says Shadi Hamadeh, chair of animal and veterinary sciences at the American University of Beirut (AUB). "So on the one side are big dairies, which are intensive and focused on cows, and on the other side [are] a huge number of small holders, [using] sheep and goats which are very much traditional agro-pastoral [and] are servicing villages."
While the commercial dairies came under fire for additives and hygiene standards in early and late 2014 (see below), smaller dairies have not come under scrutiny from the government or the media.
"There are a lot of small dairies without licenses and distributors. No regulations, no taxation and they can put powder or starch in [their dairy products] as no one will go after them. The government only visits the several legal factories and not the illegal ones -- it is a big problem," says Alexy Shdeed, CEO of Center Jdita, which produces 20,000 tons of dairy products a year, with revenues of about $10 million.
His comments are echoed by Khoury Dairy. "Many factories are without licenses, but for us, the Ministry of Agriculture visits two or three time a year, and the health ministry checks regularly. It keeps up improvement in our factories," says Khoury.
Small scale, big concerns
While commercial dairies have improved quality controls in recent years, according to Hamadeh, it is the unregulated sector that poses major concerns and is a factor in driving competition between brands.
"There are no regulations when it comes to milk and dairy products. You can buy milk from a person who has three or four cows behind his house and [who is] not registered with any ministry. Anyone can then produce cheese and sell it to a supermarket," says Maya Mokdad, an executive member of the Lebanese Association for Food Safety, and a dairy sector researcher at AUB.
In rural areas, brands are not common and dairy products are often not labeled by manufacturers. "I don't have a problem with naturally made products, as you can throw them away after a day or two [due to lack of preservatives], but at same time, you need to know who is accountable if there is, say, an outbreak from a bad cheese," she adds.
"Most don't test the milk, and the cows are not subjected to vaccination programs"
The lack of traceability extends back to small scale suppliers, who typically lack access to affordable veterinary care and immunization programs. "Most don't test the milk, and the cows are not subjected to vaccination programs, which is a major problem, as they may have a disease, Mastitis, due to unhygienic conditions. It is very common, accounting for around half of all cattle-related diseases, according to the agriculture ministry's most recent study some three years ago," says Mokdad.
This is of concern, as many dairies do not have their own herds and source from local farmers. However, the Ministry of Agriculture has worked to improve sourcing via milk collection centers, of which there are 40 in the Bekaa and Akkar regions -- where nearly three quarters of dairy herds are located -- collecting some 150 to 200 tons of milk per day from 3,000 farmers.
Meanwhile, in November, a triparty committee of the industry, economy and agriculture ministries was established to prevent the sale of dairy products from unlicensed sources and factories. Whether the move will translate into better regulatory oversight of the sector is another matter however, given the number of people involved and their economic dependency on small scale production, political affinities and the lack of inspectors to cover the whole country.
The committee was set up following Economy Minister Alain Hakim's announcement in late November that he would close the doors of several medium sized dairy firms for violating food safety standards. The move came just a week after the health ministry shut down a number of restaurants and slaughterhouses for alleged hygiene violations.
Hakim told the press that "these factories committed serious, first degree violations that directly affect the health of citizens as shown by tests and analyses," and would shut the factories down "especially after the owners ignored warnings to rectify the condition of the factories."
One of the dairies named by Hakim said that they were "shocked" by the announcement, as no inspectors had visited or given them a warning, only finding out on TV what had happened. "It is not true they will close the factory, and the government didn't tell us the problem or the results. It's a game of the big companies to remove us from the competition," said a member of Hawa Dairy's management.
Greg Demarque | Executive
Part of Khoury Dairy's production facilities
Center Jdita was also singled out by the minister for its labneh, which, ironically, won a Product of the Year Award (voted by consumers) in March. Shdeed said none of the factories had been closed, despite the minister's statement, and his labneh had had 62 milligrams of potassium sorbate, above LIBNOR's limit of 50 milligrams per kilogram. He stopped production of labneh for two days to address the issue.
The issue in November pales in comparison to what happened in March 2014, when TV presenter Joe Maalouf in his LBCI show "7ki Jeliss" carried out lab tests on labneh in Switzerland that showed traces of Natamycin in Khoury and Dairiday labneh, and sorbic acid in Massabki labneh. Natamycin is a food preservative used to prevent the growth of mold. In Europe it is confined to being a surface preservative for certain cheeses. In Khoury's case, it was being used inside the labneh. Natamycin is approved by the US Food and Drug Administration and is used in several countries inside dairy products, although LIBNOR (the Lebanese Standards Institution, which is affiliated to the industry ministry) does not allow its use.
"The intention was not as claimed on TV, that it was dangerous. We told LIBNOR, OK, maybe we used it and did not mention it in the ingredients but we did nothing wrong for the health of consumers," says Khoury. "We had a risk assessment done by AUB on Natamycin consumption and it is very safe."
Following the show, Khoury removed Natamycin and the case has been closed by LIBNOR, but the expose had a negative impact on the dairy's sales, dropping by 60 or 70 percent. Khoury Dairy then went on the offensive, inviting TV channel MTV to visit its facilities.
"We made a 90 percent recovery as people saw the technology, the hygiene and the passion, and we got the trust back. [As of October] we've recovered by 96--97 percent," says Khoury. "In my opinion there's no bad marketing as maybe 1 million Lebanese had heard of us before, now everyone has."
Many of the dairy producers interviewed by Executive sympathized with Khoury Dairy, especially when they considered the underhand competition it supposedly faces, with the LBCI show only running adverts for a dairy not singled out for Natamycin or sorbic acids. Furthermore, two producers who spoke with Executive alleged that Candia (Libanlait) uses heat treatment to make labneh, which is forbidden by law, and furthermore removes all beneficial bacteria, but has not been taken to task for this. Libanlait did not respond to interview requests.
This incident certainly showed public concern about what is in food products, despite Natamycin being a common preservative. "Since dairy is a huge market, consumers were scared as they didn't understand it. If another issue of pathogens comes up, consumers will ask for greater clarification," says Mokdad.
While the brands will be kept on their toes to make sure quality standards are up to par, much more needs to be done to oversee the whole sector in order not to cripple a burgeoning economic segment that is not overly affected by economic and political instability.
"Things won't change unless consumers are aware of food safety regulations, and the government has to implement such systems. What is needed is not standards to push dairies out of business, but [to] train them to be up to standard, that is the challenge for the whole sector," adds Mokdad.
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