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First of all, in order to better understand this industry, let’s look at how butter is made.
Butter is a solid dairy product considered as high-fat food, and usually made of cow milk, but
can also be made from sheep or buffalo milk. The butter manufacturing process is as follows:
the milk used for the butter is processed the same way as the milk we drink, by milking the cow
in dairy farms. The milk is transported into the factory in order to be analyzed and pasteurized
(heat at 72°) to destroy undesired micro-organisms that can affect humans. Afterwards, the milk
is separated from its cream thanks to a creaming process done by a centrifugal machine. This
cream goes on a maturation process, by adding lactic ferments to thicken it. Lastly, to create the
final butter, the cream is shaken strongly and then beaten.
Butter can be consumed by lactose-intolerant people, as it is very low in lactose, and
high in fat, unlike other dairy products available on the market. Thus, butter is usually
welcomed in lactose-free diets. Indeed, in 227 grams of butter, we can find only 0.1 gram of
Now that we know how butter is made, let’s look at the industry’s recent evolution.
First of all, it has to be said
that, in Europe, 96.8% of
the whole milk produced in
2016 was processed in
order to produce other
dairy products, which
represents 152.2 million
tons of whole milk. For
butter, 45.6 million tons of
whole milk (30% of the
whole milk produced). was
used in order to produce
2.4 million tons of butter
and other yellow products.
As we want to enter the French market, we analyze the butter production in France
compared to Europe, from 2011 to 2017 (in tons). The French butter production has been
overall stable from 2011 to 2016, always between 402,426 and 449,200 tons. In Europe, butter
production has continuously increased from 2011 to 2016, reaching 2,152,460 tons of butter in
2016. However, we can see drastic disparities between 2016 and 2017. Indeed, in 2017, the
butter production has decreased by 25.48 % compared to the previous year in Europe. The most
noticeable difference is in France, with a huge drop in production of 28.31% as of September
2017, compared to the previous year.
We can see hereby a major drop in
production of butter in France and in
Europe since 2016.
In 2016, butter represented 6% of the dairy
products obtained from milk, with a
production of 434 000 tons. As mentioned
previously, the dairy sector in France had
a 2016 turnover of nearly 30 billion euros,
and employed about 300 000
workers. As there was no
information released about the
profits of butter in France
(there are no details of the
profits generated by the butter
category specifically in the
financial statements of the
major leaders of dairy
production), we decided to
focus on the profitability of
the dairy sector (that includes
butter) in France. We know
that France’s butter production uses 19.5% of the whole milk produced (2015).
At Lactalis, butter and other creams is the 4th category in terms of production,
representing 11% of their dairy products. With a turnover of 17.3 billion euros turnover, we can
estimate butter to have generated 1.9 billion euros.
Savencia’s net profits increased from 2015 to 2016 by 41.2 %, reaching 122 022 000 euros.
We can see that the dairy industry has been profitable recently, and that butter remains one of
the revenue generator. However, cheese and drinking milk represent more of the production for
industrial dairy producers, and account for the majority of the turnover. Butter is not the main
Considering the importance of butter in this industry in France, as well as the recent
shortage observed, we want to understand how this recent price increase occurred, and on a
more general level, what has really caused this crisis.
Apart from the French and EU laws that deregulated the dairy market and favored industrial
groups compared to local producers, we have identified five main causes triggering a butter
shortage in French supermarkets:
• A decrease in French butter production: in 2015, the cold winter had a significant
negative impact on crop, which has also been the case for the year 2016. It must be said that a
cow, which can produce up to 30 liters of milk/day, needs to drink from 80 to 100 liters of
water per day while producing milk, and to eat 70 kg of cereals per day. Consequently, if this
basic food can’t be produced in sufficient quantities as it has been the case recently, French
cows are less productive which logically reduced the domestic butter consumption. According
to the “Etablissement national des produits de l’agriculture et de la mer”, 24,667,000 milk tons
have been collected in France, against 25,374,000 tons in 2015 (-2.8% y-to-y). As we know that
19.5% of the French whole milk production is used for butter and other yellow edible fats, the
difficult weather conditions have directly impacted the butter market. These conditions have
also been observed at a global scale, as countries like New Zealand (one of the biggest
worldwide butter producers) have decreased their production from 2015 to 2016.
• A growing worldwide demand: During years, countries like the US have considered
butter as a bad product for health. However, recent studies made by American researchers
highlighted its high vitamin A content (essential for bone growths and has antioxidant
properties), which leaded American producers and distributors to rehabilitate the butter at a
domestic level (+8% rise in butter consumption in 2016). Consequently, firms like McDonald’s,
which had some growth difficulties in the USA, immediately replaced margarine in its kitchens
with butter in order to attract consumers. As this country has approximately 320 million
inhabitants, it represents a huge increase of consumers, considering the important food
consumption per inhabitants and the growing part of bio food in the U.S. (which favors low-fat
butter producers). In Asia, pastries consumption has incredibly increased in the last months.
Even if countries like Japan have always considered pastries as part of their cultures, emerging
powers such as China and India, represent today an important part of foreign butter consumers.
As an example, India, whose inhabitants consumed 4,525 thousand tons of butter per year in
2012, consumed 5,194 thousand tons in 2016 (+14.78 % in 4 years). In China, butter is now
becoming a “sign of refinement and a social marker”, according to “Le Monde”.
• A price war between industrial groups producing milk and large retailers: while the
butter ton price increased by 56% in France (from 4,600 €/ton in February, to 7,200 €/ton in
October 2017), large retailers have refused to adjust their prices, in order to remain competitive.
Therefore, industrial groups such as Lactalis, Danone or Sodiaal, have decided to either lower
their deliveries to super and hypermarkets, or sustain French exports by selling butter in
growing foreign markets. Today, French consumers observe an “evaporation” of dairy products
to more profitable and favorable markets.
• The importance of cheese in France consumption habits: While a butter kilo requires 22
liters of milk, an identical weight of Emmental only requires 12 liters, and only 2 liters are
necessary to produce 250g of Camembert. Therefore, it is more profitable for producers to
supply cheese than butter to French and foreign food retailers (considering also the growing
interest for cheese in continents like Asia).
• Storage accelerates shortage: As domestic consumers have directly observed the butter
shortage in supermarkets, they tend to store more butter than needed which increases the
shortage phenomenon, and indirectly deregulate of the worldwide dairy sector.
• Speculation: Even if large retailers have not increased the butter price recently, the
sharp increase of the price per ton of butter sold by producers has triggered an important
speculation on financial markets, which is a major driver of instability and may cause a
potential risk as we wish to enter the French dairy sector.
Nowadays, the butter shortage in France is the result of a disequilibrium between the global
supply and demand of butter. However, this national supply issue in supermarkets reveals the
tensions in regard to business relationships between French butter distributors, producers and
As an example, producers such as Lactalis have faced milk suppliers, who accused them of
setting lower prices, in order to increase their profitability. It has been reported that between
2014 and 2016, the purchase price moved from 36 cents /liter of milk to 26 cents, according to
the Agence France Presse. Social movements have rapidly emerged, as 400 farmers obstructed
the highway near Lactalis’ head office in Laval, which reflects the huge price war between
farmers (who see their profit decrease through years), industrial producers and distributors to
final consumers. From a manager point of view, it is crucial to understand the role of all this
actors in order to be able to take appropriate decisions, especially regarding price negotiation.
When it comes to price negotiation, it must be said that they are set up once a year in
France, generally during the month of February. As the price of the ton of butter has increased
by 56% in 9 months, industrial groups had the opportunity to increase their profitability by
fixing high selling prices to supermarkets and artisans. Consequently, French artisans were
forced to go to French supermarkets in order to buy butter as prices were lower than relying on
the supply made by industrial groups.
Before launching our business, it is very important to define who are our consumers, and
what kind of purchases do they do. As we wish to become a well-established dairy producing
firm, we have identified two different types of household consumers: French people from all
age, and foreign mid upper-class customers from China and USA (mostly from the Chinese
East Coast & the US urban areas). Indeed, we will focus our exports on these two countries, as
the butter demand is strongly growing there, and their level of development will enable us to
develop a sustainable business in these countries. However, even if we want to launch first our
butter production channel first, we must know that the butter business may grow rapidly, while
the overall dairy production we wish to launch will be done little by little, especially
considering the strong competition for dairy products in countries like the US. Therefore, the
butter production will enable our producing company to gain visibility and a strong brand
image, in order to diversify our activities afterwards. Also, it is crucial to consider macroeconomic
factors, such as Mr. Trump’s presence in the US, whose protectionist policies may
prevent us from selling our production to US food retailers while he is still governing this
country. If protectionist policies are pursued in the US, we may consider launching our business
in another growing and butter-consuming country, such as India, while considering the
differences in consumption habits there in order to provide the best product possible.
Also, developing a business domestically and internationally requires us to evaluate if
exchange rates improve our price competitiveness compared to foreign countries. Looking at
the current exchange rates, it becomes more and more expensive to import French goods in the
US and China as the euro has appreciated compared to the dollar and compared to the yuan
(renminbi) over 2017. However, the real effective exchange rate of the Euro in France
compared to foreign currencies that France is trading with, shows that France has a high price
Regarding the demand side, we make the distinction between basic consumer goods (food,
clothes, furniture, medicine etc.), purchased on a regular basis by our target consumers and
specific products, purchased on particular occasions. As our main activity concerns a basic
consumer good (butter, before thinking about dairy products as a whole), we need to provide a
good quality product and service to our domestic and foreign customers, as they will be brought
to buy other dairy products in the future.
After explaining the main characteristics of our domestic and international demand for
butter (and potentially other dairy products), we must detail what will be our costs.
As the entire butter and milk will be produced in France, we will pay wages to French workers
employed in our producing factories. In addition, we have decided to master the entire
production process by buying back small French milk producers, which means that we will
need to invest important amounts of money to do so.
In addition, in order to understand the deeper trends concerning the changes in prices,
we must look at the core inflation index to analyze the evolution of the value of the wages as
well as the prices. We also know that dairy products prices are highly volatile, which is why we
must consider the inflation (and forecasted inflation) of France and every country where we
want to set up our activity.
Also, developing a business domestically and internationally requires us to evaluate if
exchange rates improve our price competitiveness compared to foreign countries.
Concerning the labor cost, the French agriculture ministry stated that in 2014 (lack of
information for the most recent years), 5.3 % of the revenues of companies of the butter
industry are dedicated to personnel costs, which slightly decreased from the 5.5% of 2013.
From this same report, it is stated that only 1.7% of these revenues represent the current profit
before tax in 2014.
This study of the dairy industry evolution, in regard to butter, has shown us that the
French market is dominated by industrial producers who try to maximize their profits by
putting pressure on local farmers (suppliers), artisans, and French supermarkets. Even if the
latter has a stronger negotiation power, this market remains highly competitive, as many
domestic and foreign actors are involved in the production, transformation, and distribution of
butter. More than a distributor, a French supermarket has the role of “butter regulator”, as
promising to sell butter at the lowest price possible would disrupt the butter retail price in
supermarkets. Supermarkets still earn 20-30% of the price for a kilo of butter sold in its selling
surface, which highlights the difficulties for local farmers to increase their margins, as most
profits will go to the industrial groups. In 2016, many French milk suppliers have switched
their production to bio milk or milk for AOP cheese production, to receive a decent
remuneration. The role of the main actors in the dairy industry will be detailed in the following
part of this report.
As local small producers tend to suffer from a war between these actors, we identify two
opposite behaviors: on one hand, huge milk farms face an intense competition and massively
supply the industrial groups in a global sector, and on the other hand, small milk farms
encourage direct selling through short distribution channels. This duality may enable the French
dairy sector to find a sustainable equilibrium.
That being said, it is essential to realize that the global dairy sector remains in strong
expansion in regard to the coming years, as the OECD forecasts that the milk production will
globally increase by 22% by 2026, which reflects the paradox between the current market
situation and the possible bright future for the actors of this sector. Considering the positive
macroeconomic forecasts in France by 2020, as well as the dairy sector forecasts, our group of
managers will undoubtedly consider launching our activity in this sector, without forgetting to
measure every risk involved in the project.
In addition, this study has shown us that the big French industrial groups have a diversified
product mix (butter, cream, cheese, other dairy products) which means that launching our
activity will lead us to provide all these types of products to consumers as they are the main
profit drivers.

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