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Combined Annual Report and Sustainability Report 2018

Business & Responsibility

With the completion of the “MOVE” change programme in the summer of 2018, DMK underwent a strategic realignment. The goal of the realignment initiated two years ago with MOVE was to set the company on course and position it as a modern, future-proof food manufacturer which puts value added before growth. Initial wins from the realignment already had a positive impact on the previous year’s figures. With a further slight increase in profit and stable equity ratio, the year under review shows that we have taken the right course.

Focus on the consumer

To achieve this successful corporate stabilisation, DMK rigorously further developed its portfolio in the year under review. At the same time, the company continued to work intensively on the essential culture change that followed the reorganisation and on designing its processes for increased efficiency. As the largest German dairy cooperative and one of the most important suppliers to German food retailers, DMK primarily focuses its attention on engaging very closely with consumer issues, adopting the latest trends and developments early and turning them into value-creating concepts for the company’s various markets.

Business trend affirms strategy

A look at the development of the individual business units in a year of volatile markets affirms that DMK has taken the right course in the past two years by restructuring, expanding its value-adding business activities and making its portfolio less commodity-heavy.

In the two Business Units Private Label and Brands, DMK focused in 2018 on a product range geared to the current needs of consumers and of customers in food retailing, thereby earning a positive contribution to profit. DMK brought its loss-making Business Unit Ice Cream back on track with targeted expansion of the branded products business, and expects further progress in this area in the current fiscal year. The Business Unit Baby successfully set the course for further growth with its new site in Strückhausen and the targeted marketing- and product-side alignment of the Humana brand with what mothers want, as they are the target group. The B2C Business Unit Industry succeeded in absorbing the impact of the lost milk volumes in the year under review, despite difficult market conditions. The Business Unit International successfully pursued its strategic thrust of focusing on key regions, and is continuing on this track in the current fiscal year.

 

Competitive milk price

Milkprice 2018 Cent/kg
Average DMK milk price 33,571
Average BLE milk price 33,712
Average milk price of comparable diaries 34,373
1 Incl. all average premiums (Milkmaster bonus, logistics bonus, GMO allowance and dividend).
2 Price comparison incl. premiums and deductions according to the German ordinance on reporting for conventional milk.
3 Average milk price of 11 comparable diaries incl. extra payments made, volume and quality premiums, dividend , annual delivery 500,00 kilos.

In this context, DMK was able to earn a regionally competitive farm gate price with a milk price of 33.57 cents per kilo including all average premiums and the dividend. This was a little under the average of the eleven dairy industry peers of 33.71 cents per kilo and, because of the significantly higher price in southern Germany, below the nationwide average of 34.37 cents per kilo estimated by the Federal Office for Agriculture and Food (BLE).

Following several challenging years for DMK’s dairy farmers and in view of a more challenging 2018 on the market side, the trend in the milk price in 2017 also affirms the course the company has taken.

Heterogeneous solutions for product and raw milk flows

Around 1 billion kilos of milk will be lost in the next year under review because of resignations tendered in 2016. DMK adapted to the situation with factory closures and by taking products with low value added out of the portfolio, and put the transition to higher-value products at the production sites in place over the 2018/2019 New Year period.

As a further response to the reduced milk volume and persistently volatile markets, DMK set up a flexible raw materials management system in the reporting period. This is fed from three sources and optimises capacity utilisation in the factories. First and foremost, DMK always uses the milk supplied by cooperative members, whose guarantee of acceptance is unaffected by the new raw milk planning. In addition, the company processes milk supplied by business partners at a fixed price to make products which are desired and subsequently marketed by the partner. This is done on the basis of toll production contracts. The third source consists of milk which DMK may purchase on the basis of temporary contracts if factory utilisation requires it or if it can be used to make and market high-margin products.

Flexibility of product flows is also needed. DMK has been faced with rising requirements in this area for some years now, particularly from retail and industry customers: topics such as tie-stall housing, GMO-free feeding, organic farming, regionality, meadow milk or lactose-free products often require the product flows to be separate from origin to packaging. At the same time, customers’ demands vary widely in the different business areas. Against this background, the company favours market-oriented implementation here as it does in other trend topics promoted by DMK, such as sustainable packaging or sugar reduction. This is coupled with different implementation speeds in the business units, leading to heterogeneous solutions. It presents a challenge not only for the dairy farmers, but also for the factories. They have to give consideration to differentiated product flows and find individual solutions. The individual business units benefit here from knowledge transfer within DMK, and may in certain cases opt to have certain products manufactured by partner companies.

Concentrating investments on essentials

The investments in factories and in international markets followed the value-creating strategy in the year under review. Investments were made, and are continuing to be made, up to the level of depreciation. They are mainly allocated to business areas of future strategic importance. Examples are the new baby food factory in Strückhausen or the expansion of the company’s presence in the attractive Russian target market through its holding in the RichArt Group, now increased to 100%.

Stabilising the operational business

Since completing its change process in the summer of 2018, DMK has been operating with six autonomous business units and a new management team. In addition, some 1,500 employees took on new roles. In the reporting period, the company concentrated its strategy on further stabilising the operational business and implementing a total of 80 defined strategic actions which will be put in place by 2020 and contribute to the company’s success.

Once the organisational prerequisites have been created, the success-related changes need to be implemented and the entire company thereby held on its new course. The year under review focused on achieving rigorous alignment with the market and on establishing the internal processes and systems which have resulted from the new structure. For example, DMK made useful additions and worked hard to make sales and marketing more customer-centred in the Private Label area.

DMK outperformed the market in almost every product category with the MILRAM brand in 2018. This is an additional successful outcome of the new alignment and, in particular, “MILRAMisation” - the successful emotionalisation of the brand. DMK is continuing to drive this development in the current fiscal year with innovations such as Kalder Kaffee cold brew coffee and the Friesen Drink (kefir), which particularly emphasise the north German origins of the products.

Undergoing a culture shift to secure the realignment’s long-term success

In the past two years, DMK has undergone a transformation that is unique in the Germany dairy cooperative landscape in terms of its scale and speed. Its goal is to position the company as a modern food manufacturer and employer. This implies not only the appropriate organisation, production and portfolio design, but also a contemporary corporate culture. This will ensure that every employee realises the significance and value of his or her task and is motivated to engage in the total process, to realise his or her potential and make a personal contribution to the success achieved for the company by everyone together. And therefore also to a competitive milk price for the dairy farmers.

This culture shift defines every employee’s and every manager’s understanding of his or her task and of the community as a consumer-oriented food manufacturer, keeps the company and its new alignment on course long term, and makes it an attractive employer - including for the next generation of employees, aspiring to a fulfilling environment. In aggregate, such a fundamental transformation process in a company with a history of growth by acquisition and a classically hierarchical organisation is a change that cannot be put in place overnight. For this reason, DMK initiated a large number of measures and formats on a very wide variety of levels in the year under review, for example the new “Brainfood” events. The revised vision also contributes to the company’s new alignment and inseparably linked new culture. In addition to the new vision statement “The first choice. For always.”, this also integrates the company’s values and mission.

Transformation into a process-based organisation

DMK’s cultural transformation also includes changing the long-established processes so as to identify trends earlier and adapt the product range faster and even more flexibly to markets and to consumers’ wishes. The company is rigorously driving the change from a functional to a more process-based organisation. With flexible project teams, agile sprints and iterative work processes, for example, enable shorter trial periods for new developments. To further emphasise quality and speed, factors of critical importance in food manufacturing, DMK is now working with clearly defined end-to-end processes in all its customer-related processes: all people and teams involved are assigned defined roles, tasks and procedures in set processes. These approaches have demonstrated success, for example, in innovation initiatives, where DMK actively deals with consumer topics such as sugar reduction or sustainable packaging, and in the digital transformation, which the company is driving forward with a variety of targeted digitisation projects.

Six areas for action in digitisation

For DMK, digitisation is here to stay as an all-embracing development which will not leave the dairy industry untouched. Digitisation has already changed the industry and will lead to further fundamental changes in the future. Industry 4.0, together with big data and the Internet of things, is creating new opportunities in production and will also change agriculture in the long term, for example through precision farming, a digital method which takes differences in the soil and productivity within a field. Logistics can be optimised using digital solutions, new providers and sales channels are altering the world of shopping and contact with consumers has even now completely changed compared to a few short years ago.

DMK feels it is crucial in this context to analyse existing and future opportunities in detail for ways to optimise the existing business and open up new business potentials.

Against this background, DMK has defined six concrete areas for action which will add value for the company and its customers. In addition to Industry 4.0, in which the company is already active with the digitisation of milk collection vehicle management and the “paperless factory” pilot project at Neubörger, DMK also sees potentials in agriculture, digital marketing, smart company, digital capabilities and new business.

“To us, digitisation is not an end in itself. We start by asking: how can we add value – for ourselves and our customers?“

In the period under review, DMK worked intensively on these areas to reap targeted benefit from the potentials offered by digitisation, particularly in production. The focus here is on Industry 4.0 topics such as improving efficiency and performance, optimising quality and introducing predictive maintenance. The last of these is of enormous interest in a production-heavy company like DMK: digital maintenance technologies help to identify the condition of the operating machinery, to assess when a service is needed. When man and machine “communicate” in this way, unscheduled maintenance down times can be reduced to a minimum.

DMK is adding digital capabilities to existing competences in a targeted way to improve the core business and open up new potentials.

Sustainability as an essential part of the framework

DMK also took up the challenge of embedding sustainability further in the supply chain in 2018. With its Milkmaster Programme and the DMK 2020 sustainability strategy, the company pursues a holistic approach that addresses key issues in the supply chain such as animal welfare, climate protection, sustainable feedstuffs and basic raw materials. In 2018, DMK initiated improvements both in the upstream supply chain at dairy farmers and other suppliers and through internal actions such as the waste management database or the recycling of mono APET. It also implemented joint projects with customers.

DMK also aims to continue developing this collaboration with customers and other key players, such as associations, in the future. In the year under review, for example, the company was a strong force behind the idea of a strategy for the dairy sector as a whole, which met with the approval of the Federal Ministry of Food and Agriculture (BMEL). DMK, together with other stakeholders, will continue to champion the further implementation of such a strategy in the current year.

The company’s future

DMK also used the year 2018 to create a picture of the future beyond 2020 and work out a clear vision for the company and its business units up to the year 2030. This is a further development of the existing strategy, supported by the Board of Management and Supervisory Board and adapted to future market developments. Against this background, the company gave detailed consideration in the reporting period to 15 developments with a major impact on the dairy industry which were identified as global megatrends. The aim was to obtain a framework for a long-term strategic corporate vision from these.

 

"Our most important day-to-day task in the coming months will continue to be the implementation of the actions defined for the period to 2020. We also have to start thinking beyond 2020 and preparing for the future. If we don't do that now, we needn’t bother to start doing it tomorrow”.

Ingo Müller, CEO DMK Group

One crucial point here is the corporate identity, based on six pillars: DMK sees itself as a cooperative-based company of northern origins, focusing on dairy products of the highest quality. In its activities, DMK gives high priority to close proximity to its customers in the European home market as well as selected international target markets, and acts in harmony with mankind and nature from the farm to the delivery of its products to retailers. Going forward, the company sees itself as a provider of dairy products of natural origin which develops the right products for consumers’ needs and will be with these consumers forever. As a preferred partner, DMK accepts its sustainable responsibility here and impresses by combining maximum value added with a deep understanding of the needs of customers and consumers.

More chapter topics

Business development