This article first appeared in The Edge Malaysia Weekly on July 8, 2024 - July 14, 2024

JOHOR-based dairy product specialist Farm Fresh Bhd (KL:FFB), which has become a household name in the country, is now aiming to capture a larger share of the Horeca (hotel, restaurant and café) market by diversifying its product portfolio and expanding its range of offerings.

Co-founder and managing director Loi Tuan Ee points out that the Horeca market has grown significantly since the group launched Yarra by Farm Fresh, followed by Yarra Farm Master Barista Milk, which is slightly higher-end.

“Historically, we have been focusing on the B2C (business-to-consumer) market. But in recent years, Horeca has become an increasingly important space for us as it contributes about 30% to our Malaysian revenue. Today, we are very active in the hotel market as we supply to Shangri-la, YTL, Genting, Sunway and Marriott, to name a few,” he tells The Edge in an exclusive interview.

Apart from milk products, Farm Fresh is also working on developing whipping cream, cooking cream, cheese and butter products that are specifically designed for the business-to-business (B2B) market.

“Today, when you go for a breakfast buffet at a hotel, you would probably see our yogurt and milk. But we want to go beyond that. One day, you might see our small-pack 9g butter — nicely wrapped in paper, instead of in plastic tubs — at your breakfast table,” says Loi.

As part of the group’s strategy to reach a wider cross-section of Malaysians, in late 2022, it launched a range of ultra-high-temperature (UHT) products made from pure whole milk powder under the Yarra by Farm Fresh brand. Positioned at a lower price point to cater for price-sensitive consumers in the low- to middle-income bracket, the range has received positive response so far, says Loi.

“If you look at our competitors, their chilled milk is sold at RM7 and UHT milk at RM5 on average, so there was a big gap to fill. Now, with Yarra by Farm Fresh, we are using whole milk powder to produce UHT milk, whereas most of the products in the market are using skimmed milk powder and vegetable oil,” he adds.

According to Loi, the pricing of Yarra by Farm Fresh is also attractive and its UHT milk tastes “a lot better”, hence the huge traction in the Horeca market. At the same time, Yarra Farm Master Barista Milk, made from imported Australian fresh milk, is a popular café choice.

“Nowadays, if you look at the Horeca market, many hotels, restaurants and cafés are using our milk products. Even in rural areas, they like our UHT products because they are easier to distribute,” he says.

To Farm Fresh, the key strategy is to diversify its product portfolio to lower logistics cost.

“If we go to a hotel to drop off just a few cartons of milk, our logistics cost becomes very high. Our two-pronged strategy is to expand our sales channel and stock keeping unit (SKU). What this means is that I can drop off not only my fresh and UHT milk but also butter, cheese, yogurt and whipping cream,” he explains.

Loi says Farm Fresh will progressively add more product offerings to its SKU in order to be more efficient, so that the dairy firm can go back to its clients’ outlets more frequently to give them better products and services.

“Having said that, all these B2B products will be made available to the B2C market too when the time is right. For example, you would be able to use our cream to make pasta and soup. We are also planning to enter the butter category this year, focusing on both Horeca and modern trade,” he adds.

Farm Fresh currently does not have much exposure in the Sabah and Sarawak market. But this will change soon.

“We are already in Sabah and Sarawak, albeit on a small scale, with some chilled dairy products in Kuching and Kota Kinabalu. We are now in the process of getting a larger distributor on board to increase penetration of the Sabah and Sarawak market, especially with UHT and powder formats,” says Loi.

For a start, Farm Fresh will focus on children’s powdered milk before eventually introducing adult powdered milk.

“We will go to Sabah and Sarawak soon and we expect our business to grow rapidly there. Now is really the time for us to gain market share there,” he says.

Loi acknowledges that in the past, Farm Fresh had concentrated on ready-to-drink (RTD) fresh milk in the chilled category. The group then decided to venture into the UHT space to better serve a broader customer base, including the M40 and B40 (middle 40% and bottom 40% income groups) as well as the Sabah and Sarawak market.

“We have always wanted to penetrate those two markets but there were capacity constraints. We couldn’t meet the higher demand there because we had committed to a school milk programme and because the large volumes committed constrained our capacity to meet customer demand,” he says.

“This problem was addressed in the last six to seven months after we brought in new production and processing lines. With the additional capacity, we will continue on our growth trajectory.”

Farm Fresh currently operates five dairy farms in Malaysia and one in Greater Shepparton, Australia (see map). Across the two countries, the group has close to 5,000 milking cows, which the co-founder affectionately calls “our ladies”.

Loi, who grew up in a small town in Perak, purchased a small parcel of land in Johor in 2010 and imported 60 Holstein Jersey cows from Australia when he set up The Holstein Milk Company Sdn Bhd. The company was later renamed Farm Fresh. Through his family’s private vehicles, the farmer turned entrepreneur owns the lion’s share or 40.22% of Farm Fresh.

It is worth noting that the Employees Provident Fund (EPF) mopped up 47 million shares, or a 2.5% stake, in Farm Fresh on May 29 to raise its shareholding to about 11.2%.

“EPF recently approached me about increasing its stake in Farm Fresh as it sees us as an important and strategic part of its portfolio. Thus, I am happy to have divested about 47 million shares to the retirement fund,” he says.

Other institutional investors of Farm Fresh include Kumpulan Wang Persaraan (Diperbadankan) (KWAP), which owns 6.1%, and Abrdn Malaysia Sdn Bhd — formerly known as Aberdeen Standard Investments (M) Sdn Bhd, which holds 6.6%.

Farm Fresh posted a 27% rise in net profit to RM63.53 million in the financial year ended March 31, 2024 (FY2024), up from RM50.08 million in FY2023. Its net gearing increased to 0.54 times in FY2024 from 0.51 times in FY2023.

The increase in profitability was mainly driven by a reduction in the input cost of dairy raw materials and the positive impact of increases in the price of chilled RTD products and certain UHT products in Malaysia that took effect from mid-July 2023, as well as contributions from its newly acquired The Inside Scoop Sdn Bhd and Sin Wah Ice Cream Sdn Bhd.

“I think the last 12 months have indeed been a very interesting time, and there were a lot of challenges as well. Investor expectations of us were very high, and suddenly we were hit by the rising cost of raw materials and logistics, which caused a bit of a problem for us. Consequently, investors responded accordingly,” Loi says of the dip in Farm Fresh’s share price at the time.

“Nevertheless, our team continued to build our brand. We viewed these challenges as short-term unexpected disruptions. We were not overly worried and remained focused on achieving our long-term goals. To me, while all these disasters such as the pandemic and the wars can come and go, but the most important thing is not to lose our customers.”

He says Farm Fresh’s new manufacturing hub in Enstek, Negeri Sembilan, is slated for completion by the end of the first quarter next year.

“The external factors seem favourable to us now. You look at the prices of corn and grain, which are animal feeds, their prices have come down to a 10-year low. Meanwhile, the price of whole milk powder and freight cost have normalised. In the current situation, it looks like we are a lot more stable now compared to a year ago. Hopefully, it stays that way.”

Loi concedes that the only uncertain factor that might affect Farm Fresh’s financial performance is the weak ringgit, given that some of its raw materials, particularly whole milk powder, are imported from Australia and New Zealand. Cocoa powder and coffee powder are also imported.

“Our country is doing fine, our economy is all right, our people are okay. Despite that, the confidence level in our ringgit is low. Hopefully, our ringgit will strengthen. If the ringgit doesn’t weaken, I think we should be fine.”

Farm Fresh’s emphasis has not been solely on milk. It has also been busy on the ice cream front.

In February 2023, it acquired a 65% stake in ice cream chain store operator The Inside Scoop for RM83.9 million in a cash-plus-shares deal. The acquisition was completed about three months later.

Then in October last year, the group acquired a 70% stake in Sin Wah, a local aiskrim potong maker, for RM28.4 million. Loi explains that the strategic acquisition of the company allows Farm Fresh to gain access to more than 6,000 freezer drop-off points across Peninsular Malaysia, effectively enabling the group to speed up the rollout of its consumer-packaged goods (CPG) ice cream.

“We are getting another 2,000 new freezers to increase our drop-off points to 8,000 and ultimately, we want to achieve 10,000 drop-off points and beyond. Our team is already talking to petrol stations and convenience stores,” he says.

“We are now in the final stages of launching our CPG ice cream and we intend to start with the production of extruded ice cream at our Taiping plant. We should be able to launch sometime at end-July or in early August. Our price range is between RM1 and RM3. It will be affordable.”

Some of the products will use the Farm Fresh brand while others will continue to use the Sin Wah brand. As for the higher-end products, the Inside Scoop brand will prevail.

The group plans to kick-start its CPG ice cream business with milk chocolate ice cream and fruity ice cream, followed by Musang King durian ice cream at year end.

“Our Taiping plant will be used as a temporary factory for our ice cream business. Meanwhile, Sin Wah will continue to make ice cream at its Kepong plant. By October, we target to produce 250,000 pieces of ice cream a day in Taiping. Sin Wah’s Kepong factory is already producing 150,000 pieces a day. That gives us 400,000 pieces of ice cream a day,” says Loi.

“But once the Enstek plant is ready, we will consolidate and relocate our CPG ice cream operations there. Our Enstek plant is estimated to have the capacity to produce 720,000 pieces of ice cream a day. In other words, we will expand our capacity by 320,000 pieces a day.”

As at FY2024, Inside Scoop had 41 outlets, of which eight were launched after the completion of the acquisition in May 2023.

“In the next financial year [FY2025], [The Inside Scoop’s co-founders and husband and wife] Edmund Tan and Lim Shiew Li are planning to open another 10 to 11 outlets. That’s almost one outlet per month,” he notes.

“Beyond the Klang Valley, we are going to Kuantan, Kota Bharu, Kuala Terengganu and Alor Setar. We are trying to go further, but all this expansion is just in the retail artisanal ice cream business. What I really want is the CPG ice cream business, which will give us a good profit margin.”

Consolidating the 10 months’ financial performance of The Inside Scoop and five months of Sin Wah post-acquisition, the ice cream division contributed 6.2% to Farm Fresh’s group turnover for FY2024 and 8.1% to earnings. Loi says the ice cream division is projected to contribute about 10% to the group’s top line in the coming years and increase this to 15% when the ice cream plant in Enstek is fully utilised. The plant is expected to be commissioned next year.

As Farm Fresh, The Inside Scoop and Sin Wah are anticipated to complement each other, cost savings can be expected for all three companies. Also, the acquisition of The Inside Scoop allows Farm Fresh to tap the former’s expertise in developing ice cream and enables it to speed up and build its brand in the ice cream market.

“What I like about Sin Wah is its strong and established distribution network,” says Loi, adding that it would be futile to come up with good quality CPG ice cream products but not be able to get them to customers due to the lack of distribution penetration.

“Now imagine, Farm Fresh and The Inside Scoop do not have to specifically send our products all the way to different sundry shops in various locations because Sin Wah can take care of that for us.” 

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