The political situation with Iran is of course a concern to all of us here in the region. Daily news are frankly becoming somewhat disconcerting, and yesterday’s sabre-rattling about the Strait of Hormuz certainly did not help alleviate my fears. But even with all this political grandstanding and sabre-rattling, it is my assessment that the economic sanctions on Iran are now really starting to bite, and neither the dairy nor beverage industries are immune. Let me give you a few of the main points that I believe will have an impact on development and structure.
Removal of Subsidies – the prospect of lower government income from oil exports is most probably the main cause for the government’s removal of subsidies, of which there were several, on several levels. For our industry, hikes in prices of fuel of course hit distribution costs in this vast and decentralised country. And for dairy specifically, the industry is yet to recover from the 2011 removal of subsidised milk. This milk used to be filled by hundreds of fresh milk producers in chilled plastic pouches, and sold early morning to consumers at prices considerably lower than commercial milk. Granted, quality of this product was not great, but consumers used it mainly to turn it into other dairy products at home, notably yoghurt and a special Iranian fermented milk drink, doogh. Given that in the last full year of subsidised milk in place this programme amounted to more than 1.8 billion litres you can of course only imagine what shockwaves this is now sending through the industry. Smaller dairies are reportedly closing on a daily basis, and the available milk pool in Iran is now shrinking through slaughter of milking cattle. On top of that, there have also been problems with the school milk programme, a programme led by the desire to promote dairy nutrition in the population. Originally announced to cover around 200 million litres for 2012 – no small number by all accounts – there are now signs that payments to dairy companies are slow and that various dairies simply cannot afford to wait for payment.
Foreign Currency – the banking sanctions are arguably the most damaging ones to the industry. It is increasingly difficult for Iranian companies to source the necessary foreign currency reserves to guarantee payment for imported goods and services. Payment loopholes that may have existed – Turkey, UAE – are increasingly being closed. Exports are now being actively pursued (both for commercial dairy products and, notably, for bulk fruit concentrates), with Iraq being a particularly popular destination, in order to procure much-needed Dollar or Euro reserves for companies. Black market forex rates are now emerging. And while Iran has always prided itself on relative self-sufficiency, there are certain things that dairies and beverage companies need but are either not available at all domestically, or not in the required quality or quantity, or somewhere in the sourcing chain are dependent on imported raw material. Nevertheless, there has been domestic investment for items somewhere up the supply chain – domestic beverage can making started a few years back, there are now a couple of aseptic carton producers, domestic filling machinery suppliers are coming up increasingly, often in conjunction with some Chinese input… The Chinese are certainly looking around the industry, but even for them the currency situation is becoming difficult. And all the investment up the supply chain remains meaningless as long as raw material (eg paper stock, sheet metal etc.) still needs to be imported.
Inflation – this is now starting to become horrible, caused mainly, once again, by the sanctions. Iranians have always been good at coping – face it, they had to – but consumption and shopping patterns are now really starting to change, even for what may be regarded as staples or essentials. Meat, fruit and vegetable consumption is now starting to drop. The commercial dairy sector so far has fared relatively well, considering, but there are early signs that beverage consumption growth, which was tremendous recently, is starting to dip. Iranians love their juices and nectars and malt beverages, but if problems are starting to arise to even get staple foods sorted on a household budget, we may well see the start of a downturn in what once looked as unassailable growth rates.
Foreign companies – there are of course Western companies operating in, or dealing with, Iran. There are various forms – joint ventures, licensing arrangements, direct trade, and indeed the never-ending stream of dhows from the UAE and Musandam over to Bandar Abbas…. US companies have to tread particularly carefully. But somehow both Coca-Cola and Pepsi manage to have their brands filled in Iran (although they can’t be involved in sales or marketing of course). Aujan are there with direct investment (both in JNSD filling and a can-making facility). Nestle products are made in Iran, Danone and Fromageries Bel have joint ventures there, Tetra Pak, Combibloc, Elopak, APV, Krones, Sidel – all have sales operations of some sort in Iran. All of those are walking a tightrope of compliance with Iranian rules, with sanction rules, with country of origin rules, with UN rules, with EU rules…. An absolute nightmare, for sure. But a country of 75 million people just cannot be ignored by the global dairy and beverage industry.
But not all is bad news – 2011 and 2012, rather remarkably, also saw some new start-ups and diversification projects in both dairy and beverages. Coca-Cola licensee Khoshgovar is now filling MINUTE MAID JNSD in aseptic PET (one of the very few in the region). Milad with its DOMINO brand is a new spin-off from leading dairy Mihan, confectionery company Shirin Azal went into juice products and a new JNSD company, Zarrin Jam Marina, used its considerable distribution strength through a sister diaper business to gain market share for its SUNSTAR product pretty quickly. A sign that Iranian industrials have fantastic capability of operating well under intense pressure….
I’m about to embark on another, undoubtedly interesting, trip to our neighbour. I will keep you posted on my forecast thoughts. For now, best of success in dealing with this most difficult of subjects.
Watch out for our Iran market reports on dairy and beverages!
With my best wishes,