Project: Managerial Economics Analysis of the Saudi Dairy Sector

This project provides a comprehensive analysis of the Saudi Arabian dairy industry, with a particular focus on Almarai Company. The study begins with an executive summary and an overview of the sector's significance within the Saudi economy, highlighting its growth and profitability. It delves into the company overview of Almarai, detailing its history, operations, and market position as the largest dairy producer in the Gulf region. The project examines the demand and supply dynamics driving the industry's expansion, including the impact of consumer behavior, government policies, and international trade. It analyzes the market structure, identifying key players and competitive forces. Furthermore, the project discusses the pros and cons of the Saudi dairy industry, including its challenges and opportunities. The analysis incorporates relevant economic concepts, such as demand and supply, market structure, and cost analysis, to provide a well-rounded understanding of the sector's performance. The project concludes with recommendations for future growth and sustainability within the industry, referencing key economic principles and industry best practices.

Running head: MANAGERIAL ECONOMICS
Managerial Economics
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Table of Contents
Executive Summary.........................................................................................................................2
Sector Overview in Saudi Arabia....................................................................................................3
Company Overview.........................................................................................................................5
The Demand and Supply Scenario (Growth Reasons)....................................................................7
Market Structure and various players..............................................................................................9
Pros and Cons of the milk-producing industry in Saudi Arabia....................................................11
Conclusion and Recommendations................................................................................................12
Reference List................................................................................................................................15

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Executive Summary
The aim of the paper is to study the growth of dairy industry in Saudi Arabia. Although, the
country has various sectors, yet the dairy is one of the most unique sectors in Saudi Arabia
because it is an automated industry that has been able to retain huge amounts of profits. Almarai
Company is the most effective company in the industry and that is why an analysis of the firm
has been done.

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Sector Overview in Saudi Arabia
The economy of Saudi Arabia lies among the top twenty economies in the world. The
country has several sectors that generates huge profits such as oil reserves. Oil serves as the most
effective sector in the country because of its availability of large number of oil refineries and
petroleum reserves. It is the largest exporter of petroleum in the world and generates most of its
income from the oil sector. The dairy sector is one of the largest sector in Saudi Arabia and is
efficient to generate positive profits from its supply in various economies. The country serves as
one of the largest dairy product market in the region of Persian Gulf. The market for dairy
product has been advancing at a faster pace in the economy. It is currently one of the most
successful businesses with positive growth margins. This sector is related to a wide set of
functions that is related to provision of dairy products.
The operations under the dairy sectors are production, consumption, export and import of
goods. The country serves as the home to one of the greatest producers in the area of Persian
Gulf. It is one of the most successful businesses due improvements in the daily product sector.
This sector implemented various key strategies that marked as the sale of the product.
Improvements has been made in packaging by making an attractive look with the indulgence of
social media. The sector uses social media to source the products and attract the customers for
buying the products because these commodities are necessary in everyday life. Moreover, the
sector uses progressive advertising as a tool to drive the growth of the firm.
The dairy industry of Saudi Arabia operated with a small number of few firms that were
scatter over the entire region of Saudi Arabia. With passing time, more firms started entering the
industry due to its growth margin, which increased the mass production and sale of the product.

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As a result, the dairy industry transitioned into a huge commercial dairy firms. The quality of the
products incorporated greater demand for the products. The aggregate expenditure on dairy
products grew overtime which allowed the firms to gain a greater margin of the food products.
Cereal is the highly consumed product in the country, net to which comes milk and the related
dairy products. The growth of the industry has been constant over the years due to rising demand
and expenditure on dairy commodities. A survey conducted by specialists say that the dairy
industry is predicted to earn USD XX billion by the end of 2021 at a CAGR of X percentage.
Milk is a daily consumed product in Saudi Arabia due to its high nutritional value and has
become an important part of people’s diet in the preceding years. The production and supply of
milk has increased over the years due to a change in the demand and consumption pattern of the
residents. The growth of the industry is marked by its innovative method suggested by the dairy
experts. The dairy sector contributes a part of its income in the Gross Domestic Product of the
country. The value of retail sales for the packaged dairy food items in Saudi Arabia has increased
in greater proportions. The country exports huge volumes of milk and its related products in
foreign countries especially in the countries of Australia, Germany, The Netherlands and New
Zealand.
Export earing from the industry fluctuates every year due to a change in the volume of
exported dairy products. The industry exported more than 1.4 million tons milk in 2017, which is
about 0.2 percent lower than the export value, earned in the previous year. It shipped about 1.39
million tons of milk in the year 2015, which shows how the export market fluctuates each year
and hampers the level of export earnings from the supply of dairy products in the without a
change in the real value of the products. The average price of the exportation of dairy items went
by 31 percent in 2017 in compared to its price in the previous year. However, the country

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imported over 3 million tons of milk in 2016, which made it the fourth largest buyer of dairy
products. The country imported about 55,000 tons of butter in 2016. Cheese is also imported in
bulk amounts due to the rise in aggregate consumption of cheese in Saudi Arabia. Cheese is not
only imported but also exported in huge volumes which marks it among the top six biggest
cheese exporters in the world. About 129,000 tons of cheese are sold to foreign countries which
generates a percentage of export earnings for the economy. The aggregate amount of dairy
ingredients consumed in Saudi Arabia sums to 253,000 tons during 2015. This consumption
value have gradually sloped upwards. The sector creates employment opportunities as well as
income earning for the people.
According to the dairy experts, each cow must be provided with three liters of water for
the provision of one liter of milk. If cattle firms produce at a high pace then they must be fed
with water of 150 liters. On the contrary, the annual rainfall of Saudi Arabia is only about 2.3
inches each year. The company imports huge water in order to feed the cows which enables it to
be among the top ten biggest producer of dairy products. Moreover, cows are milked about four
times each day, with the usage of a 75-unit parlor that enables to complete the entire rotation in
less than five minutes. The industry produces about 2.74 million metric tons of milk where an
average cow produce about 10,133 liters of milk every year. The largest dairy firm in the country
is Almarai, which is one of the biggest producer of dairy items in the entire Gulf of Persia. An
overview of the company is to be provided along with its market structure to understand the
effectiveness of the company in generating economic profits.
Company Overview
Almarai is a Saudi Arabian conglomerate that was found in 1977, which is head
quartered in the Kingdom. The firm has a good location that enables it be produce dairy

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products, feed the cows and export it to foreign countries. The dairy producing firm is situated at
Al Kharaj which is about 50 miles to the south of its capital, Riyadh. The company serves as the
world’s largest vertically integrated dairy firm. It deals in the manufacture and distribution of
food and beverage in Saudi Arabia. The company is the greatest food manufacturer in Saudi
Arabia. It ranks as the best FMGC (Fast Moving Consumer Goods) Brand in the regions of
Middle East and North Africa (MENA) and leads the company in all the categories across GCC
(Gulf Cooperation Council). The company was formed with the partnership of two Irish
Brothers.
The company has been operating for more than 40 years and generating huge profits over
the years of its operation (El-Gayar, Al Abboud & Essa, 2017). The sustainable practice of the
firm allows them to be the best in Saudi Arabia who believes in providing nutritious and healthy
products for its customers. The sustainable practice of the business lies in its bedrock principle,
“Quality you can trust”. The company has gracefully expanded its business sector in the
provision of various other goods apart from diary such as poultry, bakery, infant formula and
juices under the brand names of Alyoum, 7 Days, Almarai Nuralac and L’Usine respectively.
The dairy products consists of cheese, white milk, curd, yogurt, laban, butter and its clarified
substitutes. The firm initially started providing dairy products with only 350 cows and has
successfully grown its business ventures such that it operates with more than 200,000 cows
worldwide. The company has collaborated with PepsiCo in 2009, which enabled it to acquire a
number of large businesses.
It manly provides dairy liquids and fresh yogurts for is customers. The estimated annual
revenue of the firm is about 13.7 billion Saudi riyal (ALKahtani, 2015). It also has its joint
venture with Chipta that has helped in the growth of the firm in the successive years. The

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expansion of the production in provision various complementary commodities of dairy products,
have remarkably worked for the company that has helped to maximize its profits and increase its
area of operation. The dairy herd of Almarai comprise of more than 135,000 cattle over several
different firms. The firm face challenges of water imports and the maintenance of temperature in
the deserted regions. Water is imported from other countries which is used to feed the cattle for
the annual production. The temperature of deserts might reach to 50 degree Celsius and
accordingly the farms are mostly kept indoors in order to maintain a comforting temperature for
the cattle. The indoor temperature is half the outdoor temperature that enables to produce milk in
huge volumes. Almarai has over 1,000 refrigerated tankers that helps to supply dairy items
across six of Gulf nations in 55,000 stores.
Almarai provides employment opportunities for many workers with the provision of
annual pay of about 5,000 dollars, which is paid in tax free monthly instalments. The farm has
more than 700 employees working for the company from 14 different nationalities. The
employment package increases with experience and provides a good work culture for its
employees (Baig, & Straquadine, 2014). However, the workers mostly comprise of men and does
not hire women because of various social norms that prevail in the country. It uses advanced
techniques for providing huge amounts of milk product in the entire market. The usage of
modern technologies helps in the firm to maintain a sustained ambient temperature inside the
farm. They monitor the temperatures and humidity in computers and easily overcomes its
obstacles.
In the last six years, the company has been facing the issue of local debt. Almarai had
offered 5.3 billion as dividends to the investors in order to raise its funds in Islamic bonds or
susuks. However, the company had only about 530 billion dollars to provide the investors. The

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local banks did not agree with the deal which created a burden for the company. As a result, the
company resorted to international banks in order to resolve the matter. However, the banks
offered to operate under the condition of a high interest rate. The deal got delayed and the
company has to face a bigger debt burden. Overall, the performance of the firm has been very
efficient over the years.
The Demand and Supply Scenario (Growth Reasons)
The market demand for a product is determined by various factors, although the most
effective determinant of the product is its price. Generally price ad demand are inversely related
with each other, because a rise in price of a normal good lowers the demand for the product
unless the product has extensive brand value. The dairy industry in Saudi Arabia has successfully
grown over the years because of a rising demand for the dairy products that serves the sale of the
good. The country provides world class dairy products an affordable price that raises the demand
in the domestic and international markets. The growth of the sector is detrimental to the change
in government policies and advanced techniques that helped in faster delivery of fresh quality
dairy products.
The oil shock of 1970s have created a growing demand for nutritional food products in
order to maintain a healthy life style of the economy. The government pushed the economy
towards the need for self-sufficient food products. Health awareness became an essential factor
in the country that enabled the economy to drive towards the consumption of healthy dairy
products. This led to the growth of dairy industry in Saudi Arabia (Berekaa, 2015). The increased
concern for the consumption of low calorie products that has high nutritional value. People
stared shifting their demand for healthy dairy products from the consumption of high calorie and
fatty foods. The growth of the sector is marked from the usage of advanced innovative

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techniques that helps in the faster delivery of dairy and related products. New companies started
entering the industry and deriving huge revenues from the sale of the good.
The fastest growing company in the country is Almarai who has bought over 14,000
acres of land for the cultivating alfalfa in California that is used for feeding the cattle population.
The sectors also provide fresh milk for the people that has real nutritional value and is free from
added preservatives. Quality serves as the most efficient parameter in the growth of dairy sector
which has aroused demand in rising amounts for the people. Saudi Arabia does not have the best
environment for the production because the production might get affected at high temperatures
with the accumulation of bacteria (Moses, 2018). However, with the usage of advanced
techniques and technologies, the sector is able to develop and deliver milk products in the entire
world. Saudi Arabia is a country which is not suitable for milk products due to unavailability of
natural resources that is used as input in the production process. The production of milk has been
automated in the country with several techniques and sources that enabled it to become one of
the most important industries of Saudi Arabia. This acts as a positive output for the firm that
serves in the sale of the product in various industries.
The usage of modern techniques in the production process lowers the production cost
with maximum amount of production outputs. This enables the Almarai Company to charge low
price and extract super normal profits. This has increased the demand for the product in all parts
of Saudi Arabia and exported in four price countries The Netherlands, Germany, New Zealand
and Australia. The industry in the initial days produced mostly fresh milk and expanded their
business in the provision of various other goods like, butter, cheese, curd, yogurt that is highly
demanded by the people (Napoli & Garcia-Tellez, 2016). The government provides tax and other
cost incentives for developing the sector by reducing the per capita production cost. Dairy

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products are easily available in the retail stores that enables the consumers to buy the good and
use it daily.
Market Structure and various players
There are many companies who operates on the dairy sector of Saudi Arabia. The
production and consumption of dairy products has successfully increased in the market which
have led to a sharp increase in sale of the product in the country. Although Almarai Company is
the biggest producer in the country, there are large number of other firms who are engaged in the
production and manufacturing of food products which makes an oligopolistic market structure
with fewer banks (O’Connor & Keane, 2014). Almarai dominates most of the market with
provision of good quality nutritional products in various retail outlets and stores. However, there
are several other firms who operates in the market and retain successive growth margins due to
its oligolplistic market structure. Therefore, Almarai has many competitors namely, Rannam Al-
MAdinah Est, Taybat Al Olla, The National Agricultural Development Co., Saudia Plain Milk,
Alsafi Danone and Saudi Dairy and Foofstuff Company.
All of the mentioned firms are engaged in the supply of food products and not necessarily
just dairy products. They either produce dairy products or provide with the complementary
products of dairy farming. Rannam Al-MAdinah Est is a Saudi Arabian company that solely
produces goods that is used as complementary to milk and can be used as complements or
substitutes of the dairy items (Singh & Hagahmoodi, 2017). Taybat Al Olla is another renowned
dairy business company in Saudi Arabia who only produces dairy products. It deals in the trading
of dairy products to foreign countries and is a good competitor of Almarai Company who is
engaged in the same business. The aim of the firm is to provide the customers with healthy and
nutritional products that enables to generate supernormal profits. The products have huge

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demand in the international market and helps to maintain a healthy structure of dairy industry in
Saudi Arabia.
The National Agricultural Development Co. assists the customers with the supply of both
agricultural and dairy products. It has a huge domination in the country due to its quality and
brand value which is essential for generating additional profits for the people. The firm has big
diary plant and has a comparative advantage in the production of dairy goods with the usage of
capital intensive techniques. Alsafi Danone is another firm in the dairy industry who is engaged
in the manufacture of a range of dairy products to its suppliers. The company has rising sale of
the product in various stores and operates at Riyadh, near to Almarai. Saudia Plain Milk is a
pioneer in the production of fresh milk without any additive preservative. The milk provided by
the firm is rich in vitamins and minerals who serves wholesome nutrition to the people. The
Saudi Dairy and Foodstuff Company provides fresh drinking milk along with few beverages that
allows in the growth of the firm in retaining positive profits.
Pros and Cons of the milk-producing industry in Saudi Arabia
The dairy industry or milk-producing industry is relevant in almost all parts of the world.
Thus, the demand for dairy products is high and thus, producers implement necessary steps to
increase the productivity of this sector. The main input in the production process in the dairy
industry are cows and requires major attention to provide the required quantity of milk. The
health of a single cow and the total milk productivity depends on climatic conditions as well as
fluctuations and availability of water. Thus, countries are required to have stable climatic
conditions and greater availability of water to enhance productivity in the industry. Countries
such as Saudi Arabia with hot and humid climatic conditions possess threats in the production