Current Situationand Prospects Fordairy Industry in Mexico

Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx International Journal of Current Research and Academic Review ISSN: 2347-3215 Volume 2 Number 10 (October-2014) pp. x-xx www.ijcrar.com Current Situationand Prospects Fordairy Industry in Mexico José G. Vargas-Hernández* L.A.F.S Edgar Ricardo Rodríguez Hernández, Centro Universitario de Ciencias Económico Administrativas, Universidad de Guadalajara, Periférico Norte 799 Edif, G201-7; Núcleo Universitario Los Belenes; C.P. 45100, Zapopan, Jalisco, México *Corresponding author email id: [email protected] KEYWORDS A B S T R A C T Collusion, Strategies, Market structure, industry JEL: D43, M1, L1, L6 The present research is to analyze the impacts generated in the dairy industry, particularly in the segment of whole milk: 1) Acquiring Aeroméxico by LALA 3) Strategies to be implemented by LALA and remain a leader 3) Femsa's foray in the dairy industry with the acquisition of Santa Clara and 4) the assumption of possible collusion with Santa Clara Alpura to address the high level of competition generated by LALA. It is important to know the structure of this market, analyze the system of regulated prices in the milk to understand the changes that will be in the coming years with these three big companies that compete to achieve hegemony in the milk market. Introduction Marketing of milk. This business strategy has been implemented and maintained the company LALA to be leading the dairy marketing Mexico with its products that generates more profit which is the whole milk. Besides of its respective acquisitions and partnership strategies that have strengthened its participation and visibility indifferent market consumers according to their preferences, generate that the current situation of the dairy industry in Mexico presents a heterogeneous production. In Mexico the bovine milk production is very heterogeneous in terms of technology, agro-ecological and socio-economically, including the wide range of regional climates and features of traditions and customs of populations. However, the dairy industry is the third largest activity in the branch of the food industry in Mexico, and depends on the availability of national milk growth (Ministry of Economy, 2012). The firm leader is taken as reference in the dairy sector in Mexico that according to the reports from Company LALA (2013) technological advances are the strategic variable that is used by the company and implemented both in the production and Increased demand is presented, with expansion of dairies firms implementing strategies to meet their goals, increasing milk production, decreasing costs and they 1 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx industry in the country generates 38,000 direct jobs and 200,000 indirect besides that there are between 65 thousand and 70 thousand producers in Mexico. have greater variety of products that can meet the expectations of their current and potential customers(Salazar,2009). Applying the above where a keystrategic variable that counts LALA's distribution network in cold in innovative packs that retain their products as long with high quality, achieving horizontal differences that are competitive advantages. In addition, LALA is featuring a variety of products for different segments of the given population purchasing power. Thus, it issuffering just preferences that are based onthe minimum requiredfor those entrepreneurs whohavethe idea of wanting to ventureinto this marketdueto stiff competitionand consolidationof largecompanies representingthisindustry.This analysisonly considers that the reference shall bethe current state ofLALA. According to theINEGIto determinethe market structureis considered to bethe resultshowed astatistic thatdoes not conformto the characteristics andcurrent situationsbeing experienced bythe industry.Such a resultwasthat this isperfect competitionbecause thedata includefrom the modestproducerof milk to thelarger one.Besidesthatnot only aremilk producersbutregarded alleconomic unitsengaged inthe production and marketingof products derived frommilkor dairy. Soit has been decidedtohave a more accurateand consistent data withwhat actually happensin the dairy industryinMexico. That is, considering the dataof the gross output of the most significantcompaniesin the industry with reference toits volume of production and participation in the data marketin 2012toidentify which are the companieswith the largest presence in the industry. According tothesensed information in the financial statements of the companies listed below, the official figures were shown in their websites respectively. This situation represents a difficult entry barrier to overcome because not only is to be established but to be maintained with heavy investments made by the company. This situation makes very complicated for micro, small and medium enterprises (MSME) to survive. New business chooses to form alliances with these large companies to become raw material supplier while facing another problem that is the pricing. Background The result reveals thatthe market structureis anoligopoly, characterized by a high degreeof concentration,significant entry barriers andproductdifferentiationdynamics. The industry is movingasa value network, with an oligopolistic market structure for differentiation or market segmentation. According to information from the Information and Statistics Agrifood and Fisheries (SIAP) (SAGARPA , 2013), milk production in Mexico during the past 12 years, has had an average annual growth of 2.46%, which means that in monetary terms this activity is equivalent to 20.34% of the total value of the livestock sector. This is to say that in 2012 achieved sales of over 53 billion dollars and ranked third in the national livestock production. The dairy 2 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx Table 1. IHH of Gross Production of the most important companies in the dairy industry. Economic units Lala Alpura Sello Rojo Santa Clara Nestlé Total Gross production (Thousands of pesos) 3139000000 949000000 350400000 Market share Squared IHH Contribution to IHH .686901 .207668 .07667 .471832927 .043125887 .005879411 .905183 .082734 .011279 Square contribution (Dominance index) .819356963 .006844989 .000127223 73000000 .015974 .000255183 .00049 2.3966 58400000 .01278 .000163317 .000313 9.81656e-08 4569800000 .521256724 .826329512 Source: Own elaboration with financial information of firms. characterized by a geneticdevelopmentbiotechnology, computer handling ofproduction systemsand extensivemarket development,coexisting withnumerousfamily production units, which are characterized by uneventechnological development andwith littlemarket development(SAGARPA,2010). Out of every10 glassesof milkdaily drinkinMexico, five areLala, three Alpuraand twoother brands. This createsa duopolythat controls80% of the dairy market, which produced 10,700million liters andgenerated sales ofabout 65,000millionpesosin 2010according to theMinistry of Agriculture,Livestock, Rural Development, Fisheries and Food (Secretaría deEconomía, 2012). This sameinstitution (SAGARPA,2010) has reportedthat the heterogeneity ofthe variousproduction systems isleading toa part of theprimary productive sectorto continue facingproblemsofquality in productionand consequentlyin marketingand profitability. This situation leads firmsto reducetheir herdsand eventheir retirementfrom productive activity, affecting not onlythe primary sectorbutdependentcompaniesof producing theseherdswith whohave agreementstoacquirethe raw materialand thenmarketing it. Such is in the case of SantaClarawho does not countwithcattle. Determinationof the problem Drinkingmilkhas forcedsome companiestoget creativeand produce a varietyof products thathave the samebenefits ofmilk. Sothatbythisconsumptionhelps preventdiseases such asarthritis, osteoporosisand otherconditions thatarerelated tobone demineralization, so nutritionistsrecommenddaily consumption(Salazar, 2009). Production ofMexicanprimary productive sectoris characterizedby heterogeneityboth productive andeconomicwhich somehowreflects the widedistributioninproductiveregions. Being in the same areasystems, large dairy firms havean advancedtechnological development, Based on this background, the research questionsare:What are the impact strategies ofAlpuracollusion betweenSanta Claraandalsothe acquisition ofAeroméxicobyLALAinits marketasthe dairy industry?How itwill affect the 3 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx lifeandexistenceof producingmilksupply ofoligopolymarket? who they are,what they wantto offerand analyzethe determinants ofdemand; from competition, analyzing how to surviveit, whichfactorsthetarget, what is the intensity of competitionin the sector orsubsectorservingthatbarriers to entry andexitis the same, how to improve the competitive position, how to overcomeresourcecapabilitiesandcompetenc e;with suppliers, improving relations with themand achievingimprovedvalue chainby streamliningprocessesbelonging to it;substitute products, impacting thedemand for the goodor service;potential competitors, which may reach the marketandincrease competition andrivalry in thesector (Porter, 1991) smallcompanies theresidualcharge Justification The goal ofevery business is tomaximize profits.Toachieve this objectivecancombinevarious factorsboth internal and external to the organizations. Itisconsideredthat theorganizational contextis critical tothis aspirationon the one handbecausetheresources and capabilitiesof the firmare considered to bemostimportantintangible resources. These intangible resourcesare of greater importance because are difficult to imitate andgiveadded valueto bothproducts and theimage of the company. Onthe other hand, intangible resourcesbecomea competitiveadvantage overotherfirms thatbelong to the sameindustry andpossibly incertainmarket segment. Objectives To analyze the productionand marketing ofmilkrelated to LALAmarket and its participationand impacts onthe dairy industry inMexico. The elements involvedinthesuccessful strategyisthe definitionof purpose andbusiness objectives, thorough knowledgeof the competitive environmentandthe objective assessment ofresources, a process that can also beimplementedon a personal level(Grant, 2006). Specific objectives: 1)To analyze theimpact thatthe incursion ofFEMSAthrough SantaClarain themilk marketinMexicoand the potential impactthatcould causeLALAinits ownershipandprofits of the company. LALAis consideredtohave reachedtobe the leading company because it took in to accountitscontextwithbothinternalresources andexternal capabilities as to develop strategies to implementand its evaluation will generate benefits and competitive advantages. 2)To deepenwhat would happen ifSanta Claraand Alpuraform acollusionto decrease the distancemarketpositioningthat hasLalaand to have greatermarket share.What areits benefits?What would be itsNash equilibrium? 3)Reasoningthe potential benefitsthat couldgenerateAeromexicoacquisitionby thecompanyLALA. According toPorter, heledthe modelof the fivecompetitive forcesand keysuccess factors. This model seeks to developa competitive advantageby determiningthe following,in relation to: customers, defining 4 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx focus onlower-income consumers, as it representsone of themost important growthopportunitiesfor the industry interms of volume.Lower incomeconsumersliving between2 and 8dollars a day,and are virtuallyvirgin territoryfordairy producerstoday, according to DennisJönsson, Presidentand CEO ofTetraPak.In that sense,TetraPakdrinksprojectedthat drinks based onlactic acid, milk for infantsand toddlers, as well as flavored milkrecordedthehighest growth ratesfor the periodbetween 2011and 2014. Methods The methods used inthe development ofthe research werenotexperimentalmethod becausethrough this, they could identify theimportance ofmilk in thebasic foodbasket andtheDrinkofconsumers.The research is based ondata fromINEGI, CONALEP, Secretaría de Economía, SAGARPAandofficialdata submitted by thecompaniesLALA, AlpuraandSanta Clarain theirofficialinternetpages. The analysis was performed fromthe theory and practiceof microeconomicsand strategic management. Collusion between Santa Clara and Alpura companies Analysisof results The two competing firms in the market face the inverse market demand function obtained based on own calculations with reference to the consumption in the years 2008-2011 and the prices of the leading company in this case LALA. It was considered as the base year 2007 due to the costs provided by the Ministry of Economy (Secretaría de Economía) isfrom this year and 2007, a year before the economic crisis in Mexico happened. For that,it is considered interesting based on these data what are the reactions that would have companies today. Impact of the acquisitionofCocaColawith SantaClaraintheindustry competition. It is intended toperforman analysisof the impact thatmay representthe incursionto milkmarketbyFEMSACompany backed byitsprincipalproduct generating benefits to CocaColain response to thetaxthat would apply tofoods considered"junk". FEMSA includes milkinits product portfolios. Added to itsOxxobusiness model, FEMSAhas the potentialto convertthesuccessfulmilk businessthroughits distribution channel: Femsatrade hasspecialized in offeringa solutionto the needs ofcustomers withsmall and convenientformat,which, withproper management, distribution, logistics and strategic locationof the unitshas allowed it to become the undisputed leaderof the retail marketing Mexico (The Economist,2012) FEMSAgoesfor Lalaand Alpuramarket. Retrieved May 20, 2014). Costs are determined based on data provided by the Ministry of Economy (Secretaría de Economía) pointing at specific concepts. Milk production presents a variety of conditions, ranging and determining a variety of production costs. Among the main factors influencing this item takes the degree of automation of the operation, type of livestock feed, type of race or specialized dairy cattle among others, as well as climatic conditions and water availability. When considering the level of technology in dairy farming, it is emphasized that the level of According toTetraPackReportsit is indicatedthat the struggle forthe dairy marketbetweenLala,AlpuraandFEMSAwill 5 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx production costs is higher in which it operates in an environment of increased mechanization. Thus, this trend is related to the weight of feed costs, overhead costs, depreciation, tax payments and financial expenses, mainly. In contrast, smaller farms with lower level of mechanization and in the brunt modernization costs corresponding to labor and do not have costs for financial services. Q= 53 The data are inthousands of liters. - P = 16 713 – 154.8q (16 713 – 154.8q) q 16 713 q 16 713 – 309.6 q = 2.83 309.6 q = 2.83 – 16 713 Q = - 16 430 / - 309.6 P = 16713 – 154.8 (53) P= 8 508.6 Note that the data is in thousands of liters so the price per liter would be $ 8.50. P = 16,713 - 154.8q where Q = q1 + q2, C1 = c2 = 2.83q 3.92qy π = 8 508 (53) – 3.92 (53) π = 450 The dairy market in Mexico has the inverse demand function. It is intended to analyze the possibility for companies Santa Clara and Alpura if they decide to form an alliance to share information and technology to increase profits and thus have greater market share and how this alliance would affect LALA participation. It is analyzed LALA's main competition according to the levelof production andmarket positionnationally,which isAlpuraand the entryofCocaColato the dairymarket isconsidereda crediblecompetitive threatby differentargumentswhich are analyzed andlistedin detaillater in thisanalysis work. Twomilkproducing companiesthat aredirect competitorsofLALAand characterizedby a horizontaldifferentiationin their products, in this case are taken by referencethewhole milk. Due to the incorporation of Coca Cola in the dairy market, it represents a credible threat and could affect the aspirations of the participating companies in the dairy sector in Mexico, forming a set of strategies among participants in order to meet your goal. Santa Clara having backing Coca Cola has a much wider distribution chain in the country and Alpura shares milk market participation along with LALA in Mexico with more than 50% share to the Alpura disadvantage. LALAbefore theincorporation ofCocaColawith milkSanta Claraprepares forthe threat thatat this timedoes not reflecttoo muchforLALA. However, ina futureSanta Clarawith thesupport ithasfromCocaCola, it isto be consideredduethedistribution chain thatis therethrough theOXXO. Alpurais one of theleading companies in thedairy marketinMexicoand SantaClara hasconsiderations andhassupport fromCocaColatoincrease itsmarket share. AssumingAlpurabeingthe leadercan setits output levelbeforeSanta ClaraHow muchproduce? HowSanta Claraoccur? What will bethe market price? What are thebenefitsof each company? Alpuraas the leader. To determinethe reaction functionit has: P = 16 713 – 154.8q 6 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx 16 713 – 154.8q (q1+q2) q2 – Game.Alpurapartnership Clara. 2.83q2 = 16 713q2 – – 154.8 q1q2 – 2.83q2 = 16 710.17 – 309.6q1 – 154.8q2 = 0 Q2= 108 – 2q1 1) Increase their market shares and profits, to face competition and strategies implemented by LALA. 2) Product-. Whole milk. Q= 27 16 713 - 154.8q1 + (108 – 2q1) q1 – (3.92q1) + – 108 q1 = 16 713q1 – – 3.92 q1 = 16 601.08 – 305.6q1= 0 Q1= - 16 601.0 / - 305.6 3) Payments-. Earnings estimates obtained by collusion and Stack elberg having Alpuraasa leader. 4) Strategies -. Collusion between Alpuraand Santa Clara Dominant strategy(450716,450 716) both companiesshouldthey suit themcollusionstrategy as itis theoptimalchoicewhichwill have better resultsbecausethey have no incentivetochange strategy. Q1= 53 Q2= 108 – 2(53) = 2 PRICE P = 16713 - 154.8 (55) Inthe event thatSanta Clarahas the supportofCocaColais considereda credible threat tothe dairy sectorcompetitors. Alpuraissecond inmarket sharebehind onlyLALA. Tosuit themboth companiesform an allianceto competeto LALAandavoid the monopolygiventhat the companyhasimplementedactionsconsolidate d astheleader. Santa ClarahasaddeditsOxxomodelhas the potentialto returnthesuccessfulmilk businessthroughits distribution channel, in addition to implementingtheactioncouldonlysellmilkAlp uraand SantaClaraintheOXXOstoresasreaction toLALAstrategiesincorporated intheMexican Stock Exchangeand alsothatrecentlyacquired theairlineAeromexico. P= 8.20 Benefits. Company Alpura P (q) - C= 8200 (53) - 3.92 (53) = 434 392.24 Santa Clara company. = 8200 (2) - 3.92 (2) = withSanta 16 392.16 It is noted that if companies decide to compete at this time would not be convenient for Santa Clara because accounts with only 2% of market share of milk in Mexico. The market share is 26 times lower profits and benefits of Santa Clara compared to Alpura. 7 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx Table 2. Payment matrix Santa Clara Collusion Competition (225 358, 16 392) Collusion (450 716, 450 716) Competition (434 392, Alpura (434 392, 16 392) 225 358) Source: Own elaboration In this casefocused on theresearch andon the assumptionthat the necessaryrequirements areachievedto transportmilkdistribution networkwouldnot only nationallybutinternationallyhaving the opportunity toincrease productiontocover 100% of the Mexicanrepublicof milkLALA. Havingthe opportunity to exportits product toother parts of theworld, asAeromexico servesthe following cities:Shanghai.Tokyo,Guatemala, SanJosé, Costa Rica, SanPedroSula,SanSalvador, Paris, Madrid, London, Bogotá, BuenosAires, Caracas, Lima, Quito, Santiago, SaoPaulo.Also Aeromexico servescities in the UnitedStates and Canada(Aeromexico, 2014). It is noted that if companies decide to compete at this time would not be in Santa Clara because it has only 2% of the market share of milk in Mexico. There are 26 times lower profits of Santa Clara compared to Alpura and it does not has own stables to increase production but depend on other livestock. Alpura currently under this issue will be indifferent to an alliance with that Santa Clara because it is a leader. This partnership goes beyond the moment but in the future Santa Clara could potentially have higher profit levels that would place between leading companies in the market because it has the capital to implement strategies and improve its infrastructure. Thus, Alpura increase participation and benefits with partnership with Santa Clara and especially that in the future may be more likely to reach LALA and snatch market share dominating. The dairy industryhas thefirst constrainthandlingmilkbelow7 Candstorage timeshould notexceed threedays.Pasteurized milkandfresh dairy productsshould be distributedin refrigerated vehiclesto avoid breaking thecold chain.Throughout the processofdistribution of milkand milk products, theimpropertreatment of the productis to be avoided, with excessivestacks, shock and overload, which can lead toother, friction, punctures and blowoutsthat causethe loss oftightnessof packaging(Tetra pack, 2014). Acquisition by LALA Aeromexico. With the acquisition ofAeromexicoby thegroup Lala, the probabilityof being able toincrease itsmarket shareandmaximize its profitsin both theairline industryandthe dairyindustry(GrupoLALA, 2013). 8 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx and increase its demand and therefore taking advantage of the situation to maximize benefits milk. Conclusions Mexicoh as good prospects for Dairy Products. A.TheR &Dis a pillar ofgrowth for businesses. B.The R &Dapplies to the entirevalue chain, including sustainability. C.It is increasingly challenging to find relevant and differentiated consume rinnovations. A. Impact of the Aeromexico by LALA acquisition C.is a necessarygood ratherinelastic. Cases occurredwheredespiterisingpriceof milkthere were increases inthe quantity demandedcontrary toestablishedtheory.It was observedthat in calculatingthe demand functionof themarket when pricesof 2012 and2013isconsidered, thisslopewaspositivebecausethere werenoticeablevariations inthe quantity demanded offactifthe pricewent upwhendemand increased, it was observed that the regulation ofmilk pricesis an influentialfactorfor a givenresultprovided. of Lala occupies 46% of the dairy market in Mexico and consumer preferences reveal that 60. 3% preferred whole milk, according to data provided by CANILEC. D.Boththe companyAlpuraas Santa Claraactionsuits themto form an alliance. In a game of collusion or competitionbetween companies Alpura and SantaClarabothcompanies like toform an alliance tocompete againstLALAandavoid the monopolygiven that thecompany hasimplementedactionsconsolidated astheleader. B. In the assumption that Grupo Lala. Grupo Lala considers the strategy of promoting its products among its customers of Aeromexico. The customers have a preference for whole milk that is the segment to analyze because it provides greater benefits to the company LALA. It has the following as analysis of the same company: Four in ten Mexicans consume whole milk of Grupo Industrial Lala. Santa Clara hasaddedit Oxxo model, ithas the potential to convertthesuccessfulmilk business throughits distribution channel, and in addition to implementing the actioncouldonlysellmilkAlpuraand Santa Clara in the OXXO stores. Assuming promotionsbetween its products such as takingSantaClara1 literof milk anda Cokegift, thisas a reaction toLALAstrategies. In April 2014, Grupo Aeromexico transported one million 355 thousand passengers. In a group of 10 individuals, it has 135 500 passengers who according to statistics 33,875 have preferences for whole milk if it is sold at the average price of 12 pesos per liter which is what handles the public benefits of 406 500 pesos per month. This would equates equates to earnings per year of $ 4,878,000. Besides, being able to implement the strategy of air transport milk and Aeromexico is a consolidated company The structure ofthe milk marketis anoligopoly, characterized by a high degreeof concentration,significant barriers to entry and product differentiation dynamics. The industry is movingasa value network, 9 Int.J.Curr.Res.Aca.Rev.2014; 2(10):x-xx Secretaria de economía (2012) Análisis del sector lácteo en México. Frente Nacional de Productores y Consumidores de Leche A.C. CIGAL (2010) la producción de Leche en México. Tetra pack (2014) Leche de la larga vida. Recuperado el 05 de junio de 2014.http://www.tetrapak.com/mx/doc uments/ Nutrimentum07. pdf. Recuperado el 05 de junio de 2014. with an oligopolistic market structure for differentiation o rmarket segmentation. References Aeroméxico (2014). Informe mensual. Recuperado el 05 de junio de 2014, de http://aeromexico.com/mx/descarga/pd f/inversionistas/Abril_2014_Est_Opv. pdf. El Economista (2012).FEMSA va por mercado de Lala y Alpura. Recuperado el 20 de mayo de 2014. De http://eleconomista .com.mx/ industrias/2012/09/16/femsa-vamercado-lala-alpura Grant, R. (2006). Dirección Estratégica: Conceptos, Técnicas y Aplicaciones.Madrid: Civitas, (5ª ed.). Grupo LALA (2013) Informeanual. Recuperado el 18 de mayo de 2014, de http://www.grupolala.com/informe201 3/ Porter, M. (1991). Towards a Dynamic Theory of Strategy. In Strategic Management Journal, Vol. 12, Pp. 95117. SAGARPA (2013) Boletín de leche eneromarzo, recuperado el 01 de junio de 2014 de http://www.siap. gob.mx/ wpcontent/uploads/2013/BoletinLeche /LecheMar2013.pdf. SAGARPA (2010).Situación actual y perspectiva de la producción de leche de bovino en México 2010. Recuperadoel 13 de junio de 2014, de http://www.infoaserca.gob.mx/claridad es/revistas/207/ca207-34.pdf Salazar, N. & Vera, C. (2009) Tesis. Análisis de la Producción y comercialización de los productos lácteos de Indulac S. A y su participación en las ventas del Canton Portoviejo. Periodo 2004-2008, Universidad Técnica de Manabi, Ecuador 10