‘Another difficult year’: Arla predicts slowdown in branded growth and falling commodity prices in 2023

Arla Foods posted a group revenue increase of 23.2% to €13.8bn - well within the co-op’s HY 2022 financial outlook for €13.5bn-€14bn - with retail and commodity price increases the main growth driver behind the favorable results.

With inflationary pressures forcing consumers to trade down, Arla’s branded volume-driven growth declined by 3.2%. There was a 4.3% overall drop in Europe (except the co-op’s Netherlands, France and Belgium cluster which managed a 1.3% growth) and 1.2% internationally (except the Middle East and North Africa and Southeast Asia, where a record growth was observed, by 4.3% and 21.3% respectively). The co-op also said its Chinese operations ‘struggled’ due to Covid lockdowns.

Europe’s top performer was Arla Protein, which delivered a 48.1% volume growth. This was followed by foodservice arm Arla Pro with 20.4% and the Starbucks business with 14.4%. The licensed ready-to-drink coffee assortment alone delivered a 12.4% growth despite price increases, reported the co-op. In the Middle East, cream cheese brand Puck delivered a 4.7% volume growth, ahead of the 2021 growth of 3.2 per cent.

Meanwhile, Arla Foods Ingredients grew its value-added volumes by 6.8% and its revenue rose 29.5% thanks to ‘strong demand’ for specialized whey protein and lactose products.

Increase in global industry sales (rising to 23.6% compared to 22.1% in 2021) as a result of commodity price rises were a ‘key driver’ behind Arla’s ‘competitive’ farmgate milk prices, the co-op claimed.

Butter and spreadable brand Lurpak experienced a volume decline of 7.6% on 2021, as did Castello (-6.9%) and Arla’s umbrella brand (-4.3%), which was ‘challenged’ due to higher prices and Covid normalization.

The co-op expects the economic impact to be 'most severe' in 2022 and 2023 and expects a return to growth from 2024. The Group will however revise down its branded growth indicator within Future26, the company's long-term strategy.

"The economic impact is most severe in 2022 and 2023 and Arla expects a return to growth conditions from 2024," the co-op reported. "Based on these assumptions, Arla expects its branded volumes to decline by -3.5% to -1.5% in 2023, and expect to start growing its volumes again from 2024 and onwards in the strategy period, in the range of 1-4%. Group revenue outlook for 2023 is expected to be €13.6bn to €14.2bn, net profit share will be in the range of 2.8-3.2% and efficiencies in the range of €55-85m.

Emissions:  reductions after years of ‘flat development’

Arla’s full annual financial and sustainability report is due out February 23, but the co-op released several headline stats around sustainability. The business has achieved a 2% reduction in scope 3 emissions, which brings the total to 9% on a 2015 baseline. This is the first time the co-op has reported a decrease in scope 3 emissions since 2018, when the co-op brought its scope 3 emissions down 1% to 7%; scope 3 emissions then remained at the same level through 2021.

But the co-op believes it is ‘on track’ to hit its target of 30% scope 3 reductions by 2030 as it plans to roll out its Sustainability Incentive model, where farmers can receive up to 3 eurocents per kg of milk for actions they take to reduce on-farm emissions. A total of up to €500m will be redistributed every year through the program, according to Arla.

Meanwhile, the co-op’s scope 1 and 2 emissions for 2022 have also decreased, by 4% on last year, bringing the total reductions to 29% against a target of 63% by 2030.

Arla CEO Peder Tuborgh commented: “In the past few years, we have accelerated our sustainability action to reach our target scope 3 CO2e emissions reduction by 2030. After a flat development in the past four years, Arla farmers have resumed their reductions as they managed to lower scope 3 emissions by two percentage points in 2022 and in total by nine per cent compared to our 2015 baseline.”

Looking ahead Tuborgh expects inflation and volatility to continue to impact the business. “2023 will undoubtedly be another difficult year with the challenging economic environment globally and the ongoing effects of the war in Ukraine continuing to impact the energy market and supply chains,” he said.

“We are currently seeing some easing of cost pressure on farmers, and as a result we expect the supply and demand balance to be restored on the dairy market over the course of 2023.

“Commodity prices, however, began a sharp decline during the fourth quarter of 2022, and we expect further decrease on the commodity markets in 2023. We also expect to see a continued slow-down in branded growth due to reduced buying power of consumers and fear of recession.”